Economic Highlights

New Delhi, 8 February 2007

Emergence of Indian MNCs

RUSSIAN MARKET REMAINS UNTAPPED

By Dr. Vinod Mehta

About three years ago, I had stated in this column that the process of liberalization and the opening up of the economy in 1990 was now bearing fruits in the form of changed mindset of our business community. A large number of them, who rarely looked beyond India, were now looking outside India for more profits.

The acquisition of the Anglo-Dutch steel company Corus by the Tatas recently, is the result of that new mindset and the liberal business atmosphere that is prevailing in the country. The significance of the acquisition is that the Corus Steel is a much bigger company than Tata Steel and that Tatas were able to sign the deal despite competition from a Brazilian company. 

Skeptics are doubtful if the Tatas would be able to turn the Corus around because of the volatility in the international prices of steel. The Tatas might have factored all these while finalizing the deal; one has to wait and watch to answer the skeptics.  Incidentally, the skeptics had criticized the Tatas when they had decided to enter the car manufacturing sector a few years ago. Any way, the acquisition of Corus by the Tatas, have emboldened other Indian business houses to think of acquisitions abroad on similar lines.  It could be just that we are witnessing the emergence of Indian MNCs.

So long as the Indian industry was protected from foreign competition the Indian industrialist was not willing to look beyond the domestic market for earning profits. The system of licensing and controls coupled with high import tariffs assured them a very high rate of return on their investments, compared to the rate of return on equivalent investments in other parts of the world. Hence, it was natural for them to concentrate on the domestic market as it ensured them monopoly profits.

When the economic reforms were introduced and controlled regime gradually dismantled, a section of the business community was apprehensive that it would not be able to face competition from foreign companies and would be marginalized within their own country. They were opposed to economic liberalization. These fears were natural as they had been operating in a protected environment for almost half a century and were not confident enough to face competition.  Now the Corus acquisition should dispel all those fears once for all.

The trend for acquiring foreign firms was in fact started by an Indian pharmaceutical firm when it acquired a small pharmaceutical firm in USA. That was an important achievement for the Indian business in general and the pharmaceutical industry in particular, which had all along been dominated by American and European drug firms.

After this initial success of the pharmaceutical company many other big Indian companies started exploring opportunities outside. The Tatas acquired Tetley Tea and more recently truck manufacturing unit in South Korea. A number of other Indian companies are quietly acquiring businesses outside. One could cite many such instances but these are quite indicative enough to show the change that is occurring in the mindset of business community in India. They are not only venturing into the countries of South East Asia and China but also in the West Asian and European countries. Some of the old business houses which had some presence in Thailand and the Philippines prior to 1990 are also expanding their businesses in these countries.

The only country where Indian business has not yet ventured is Russia. Before disintegration the Soviet Union was the largest trading partner of India. At one point of time Russia was the biggest buyer of Indian tea, today it is Pakistan. But today Indo-Russian trade is very limited. Though there are many investment opportunities in Russia somehow the real investment climate is not conducive.

Apart from corruption, company laws, contract laws and labour laws are weak in Russia. Banking system is still primitive by World standard. The financial business in Russia is dominated by traders and not by industrialists or manufactures. As a result, interest on loans from banks for investment purposes is very high. At one point of time these traders were willing to pay a rate of interest ranging from 75% to 150% to banks for the loans. In such a climate no industrialist would venture to set up its business.

Lately things have been improving and Indian business should be on the lookout for important business and investment opportunities in Russia. The Russian market is very big and the consumers there are familiar with Indian goods. For analytical purposes one can say that there are two markets in Russia; one for the super rich who have lot of money and are willing to pay to buy any product. The top European and American firms are already catering to this market. The second market is the rapidly growing for middle class. Indian business can address the Russian middle class and establish itself in the coming years, provided it makes proper moves.

With the competitiveness of the Indian economy growing many of the multinational corporations are slowly shifting their manufacturing base to India. This is not only bringing in new technology but also a new work culture which is having salutary effect on the economy as a whole. The job opportunities as a result are also growing.

Besides, the Indian small-scale-sector, both in the consumer goods segment and non-consumer goods segment, is changing very fast. It is not only coming out with new products but is also improving its existing products. One reason for this has been that these small-scale units are now in a position to import second-hand machinery at very low rates for the production of their items.

Before the economic reforms they were not in a position to get new machines as they were not manufactured in India or the cost of importing machinery was so high that they could not afford it. It is now a thing of the past.  By importing second-hand machines they have improved their productivity. As a result, there is a sea change in the attitude of the small-scale-sector and many of them are giving good competition to even multinational corporations operating in India especially in the FMCG segment.

In the Tata-Corus deal the only losers have been the Indian banks, both State-owned and private. First, the Indian banking laws do not allow financing of foreign acquisitions and secondly, the Indian banks are not big enough to finance such deals.  This should be one important reason for carrying out financial sector reforms and for encouraging emergence of mega-banks.---INFA

 (Copyright, India News and Feature Alliance)