f o r    m a n a g i n g    t o m o r r o w
JANUARY 28, 2007
 Cover Story
 BT Special
 Back of the Book

Taxing Times
The phase-out of central sales tax is yet another move towards ushering in the national goods and services tax (GST). The compensation to the states, in lieu of CST phase-out, will include revenue proceeds from 33 services currently being taxed by the Centre as well as 44 new services of an intra-state nature that will be traded by the states. However, VAT is the way forward, though much needs to be done to iron out the anomalies in the current VAT regime.

India, Ahoy!
Indian investments overseas are growing and how. For instance, total Indian investment in Latin America and the Caribbean has topped $3 billion (Rs 13,500 crore) so far. The latest investment is by ONGC Videsh, which acquired an oilfield in Colombia for $425 million (Rs 1,912.5 crore). Earlier, ONGC bought an offshore oilfield in Brazil for $410 million (Rs 1,845 crore).
More Net Specials
Business Today,  January 14, 2007
The Telecom Lesson


Cell phone in villages: It's competition that did the trick

As business today went to press, some of the biggest global telecom operators were engaged in a battle to gain control of Hutchison Essar, India's fourth-largest mobile phone services provider. There was Britain's Vodafone, the world's #1 cellular phone company (if its proportionate share in partners and subsidiaries is included; otherwise China Mobile is the largest standalone operator), leading the pack of likely winners, but there were other serious contenders, including Anil Ambani's Reliance Communications, the Hindujas (who incidentally were telecom operators in India but sold out early on to Li Ka-shing's Hutch), and the Ruias, Hutch's one-third partner, who will want to extract the best possible price, one way or another, for themselves.

In this scramble for an 'Indian' telecom company, with more than 22 million subscribers, there's a lesson waiting to be learnt by marketers. That, when something looks like a chicken-and-egg situation (can't drop prices till volumes pick up and volumes won't pick up unless prices are dropped first), it often helps to do right by the consumer. And that invariably means giving the consumer a great deal on the product or service. That's what India's new private sector telecom operators did, when they steadily dropped cellular phone rates from nearly Rs 17 a minute to Re 1 or less now across India. With the result, millions of Indians-plumbers, farmers, casual labourers-are able to afford mobile phones, making India the fastest growing market in the world.

Now, it may not be possible for other industries to straightaway follow suit. Unlike telecom, where fixed or 'sunk' costs are very high and variable costs relatively low, manufacturing industries must incur additional variable cost every time they sell an extra bar of soap or a two-wheeler. Yes, there is something like the economies of scale in manufacturing, but it doesn't quite work like the use-it-or-lose-it 'capacity' in telecom or even aviation. For every second of talk time or seat in a flight that goes unsold, there's a loss to the bottom line. Ergo, there's a lot of sense in offering seats or long-distance calls for Re 1. In manufacturing, it actually makes more sense not to overproduce, since there's the issue of inventory cost and obsolescence.

That said, it's evident that there's only one way to unlock value in India's huge consumer base and that is by focussing as much on affordability as profits. Like the Hutch Essar episode reveals, when there's robust demand investors will follow (policymakers would also do well to draw a lesson from India's telecom experience and let competitive forces prevail). No doubt, in this particular case it's a foreign investor (Li) who'll laugh all his way to the bank, but if other investors figure out that there's money to be made in India, they will make a beeline too. So, extreme 'target pricing' is what marketers in India may need to succeed.

Policy Potholes

Infrastructure sector: A roadblock in India's growth story

Rarely does a public platform include the presence of the Union Finance Minister, Union Power Minister and a private developer. Equally rarely does the government broker a private power project at a competitive tariff. December 28, 2006 saw both happen, when the 4,000 mw Sasan and Mundhra power projects were awarded to private sector. Certainly good news for the infrastructure sector, where growth has been lacking and which has become a principal villain in the otherwise satisfactory economic growth story. But fact remains that such events might recur at the frequency of the Haley's comet unless reforms are undertaken through an institutional framework. Else delivery, efficacy, monitoring and scope suffer-the very problem facing the existing central power reform schemes.

There is no denying that the power sector reform programme is far more difficult to implement than that in the roads sector, since the former falls in the concurrent list-the State has an equal if not greater say in sector governance. That said, the roads sector programme has also suffered in the recent past and it is only now that the pace of award of contracts has gone up. Evidently, one of the main challenges is in tweaking the states' machinery. For that the Centre should initiate programmes with the state to ensure greater movement of civil servants across levels. Such a measure will offer greater resistance to the agenda of errant politicians, who often delay projects to shore up their vote bank.

Hastening the pace of infrastructure development is not enough-prioritisation across various segments based on merit is equally important. That, unfortunately, suffers on account of the populism measures that the Central policies reflect. Here's an example: The Central government is investing in both dedicated freight corridors and highways across the country. Fact remains that traffic flow in both these modes is determined by costs. While fuel costs (a significant part of the total transport cost) in the roads is subsidised by other sector (diesel is sold at below market prices, resulting in a subsidy of over Rs 20,000 crore per annum), the electricity used by locomotives to haul cargo, subsidises other segments of consumers. Such distortions need to be removed to ensure a healthy development of the infrastructure sector, especially since private participation is being encouraged in the sector.

Let's Do It Ourselves

Manmohan Singh (R) to NRI's: Invest as well as engage

Why is it that we, as a nation, always look abroad for help? Addressing the Pravasi Bharatiya Divas, Prime Minister Manmohan Singh asked non-resident Indians (NRIs) to invest not just money, but also engage with the country "intellectually, socially, culturally and emotionally". That is all very well and if people want to connect with the country of their origin in myriad ways, they are welcome, and should be encouraged, to do so. But we should bear in mind that such interventions can only add small doses of incremental ballast to efforts undertaken by Indians resident in this country. Also, why just NRIs? There's an urgent need for residents to also connect "intellectually, socially, culturally and emotionally" with their motherland.

That's because the heady growth figures are making urban India increasingly oblivious to the country's soft underbelly. India's social infrastructure is practically non-existent outside of the big cities-the poor do not have access to justice; public infrastructure in education and healthcare has broken down in most parts of the country; and a majority of Indians still do not have access to proper sanitation and safe drinking water. As India rapidly transitions from a Third World basket case to a First World wannabe, these are issues that need to be addressed on a war footing. And domestic initiative must be at the core of this programme.

Does that mean NRIs have no role to play in India's development? They do. The success of this community in the West-and particularly in Silicon Valley-has played a major role in changing the world's perception of India. Influential Indians, especially in the US, have successfully used their clout to sell their country of origin in their adopted country. The benefits of this should not be underestimated. When was the last time you heard of India and "begging bowl" being mentioned in the same context? Yet, this connection was actually a given even two decades ago. A large part of the credit for this transformation should go to the image that NRIs have been able to project for themselves and, by extension, India.

All these are issues that planners should keep in mind while wooing NRIs. Yes, many of them do feel an emotional bonding with India, but emotions cannot be a sound basis for making investment decisions. At the end of the day, it is not cultural connect but return on investment that drives the flow of investment dollars. Those will come in larger quantities only when India can provide a playing field that is at par with the best in the world. And that can only be done by people resident in this country.




Partners: BT-Mercer-TNS—The Best Companies To Work For In India