f o r    m a n a g i n g    t o m o r r o w
FEB. 25, 2007
 Cover Story
 BT Special
 Back of the Book

Trading with ASEAN
In the recent Indo-ASEAN summit, ASEAN was, for the first time, on the defensive. India has agreed to bring down its negative list of imports to 490 items in the free trade agreement with the 10 ASEAN nations. But India’s step towards free trade was not matched by the ASEAN nations, as more than 1,000 items still figure in the negative list of the ASEAN. In 2005-06, India’s total trade with ASEAN was at $22 billion (Rs 99,000 crore), against just $7 billion (Rs 31,500 crore) in 2000-01.

Exchange Deal
Indian markets are on a roll. Global stock exchanges and financial institutions’ interest in the Indian stock exchanges goes to show the long-term growth potential of India Inc. The year has started on a positive note. The NYSE and three global financial institutions have each picked up a 5 per cent stake in the NSE. The deal will open exciting vistas in global co-operation for the NSE, and at the same time could improve the fortune of smaller exchanges in the country.
More Net Specials
Business Today,  February 11, 2007
Banking Minnows
SBI's problem: It's big, but not by global standards
There must be a sense of sadness among Indian banks. Even as an Indian company creates M&A history by bagging an Anglo-Dutch steel maker for a staggering $12.1 billion (Rs 54,450 crore), not a single Indian bank will get a piece of the action. Don't feel sorry for them. While corporate ambitions in the country have pole-vaulted, Indian banks-state-owned as well as private-remain small and under-capitalised by global standards. The largest commercial bank in the country, the State Bank of India (SBI), ranks #57 on Fortune's (2006) global list of top banks by revenues. The second largest player, ICICI bank, which emerges as the #2 bank in the Business Today-KPMG study of Best Banks in India in 2006, doesn't even figure in Fortune's rankings. That's because, compared to SBI's revenue of Rs 43,183 crore in 2005-06, ICICI's is a mere Rs 13,784 crore.

The conclusion is simple: Indian banks have been caught off-guard by the sudden change in corporate environment in the country. To be sure, banking is strictly regulated, and the environment, by design, is not conducive to consolidation in India or acquisitions abroad. Financial resources of Indian banks are so limited that for many of them opening a branch abroad is a luxury; buying a bank abroad is, then, inconceivable. Therefore, these banks have been mute spectators to the wave of acquisitions by Indian companies overseas. Needless to say, not all such acquisitions have been as big ticket as Tata Steel's purchase of Corus. Most of them have been well below the $500-million mark, offering plenty of scope for participation by Indian banks.

As things stand today, it is expected that the pace (and size) of acquisitions won't just continue, but accelerate. A handful of the smarter banks have realised that it would be foolish for them to let other global banks eat their lunch. ICICI bank, which generates 18 per cent of its business through international operations, recently raised $2 billion to fund India Inc.'s global ambitions. HDFC bank has also lined up a 'globalisation' strategy that includes opening branches, representative offices and subsidiaries abroad in key international markets. These are important and necessary steps. But the fact is, organic growth isn't going to take banks such as ICICI and HDFC far. They need an aggressive acquisition-led strategy to become global banks.

One of the things that the government must do is to merge some of the big public sector banks to create an entity that looks respectable in size when compared with global banks. In fact, Finance Minister P. Chidambaram has been calling for such a merger, but his political bosses don't seem to be listening. Also, the government must also allow private Indian banks like HDFC and ICICI to acquire other Indian banks. Finally, being global is not just about size; there are several risks-business and macro-economic-that Indian banks have little experience in handling. They have a long way to go, and the time to get started was yesterday.

IT's Product Play

Road well travelled: IT firms need to tread a different path
The phenomenal success of the Indian IT industry in the last decade has primarily been driven by software services. The sector, which has grown at a rate of 30-40 per cent annually, has successfully mastered the art of remotely delivering high-quality, low-cost solutions. This success story has, however, masked the fact that there have been no major software product success stories from India except for iFlex. Why? For starters, Indian entrepreneurs, according to most venture investors, are inherently risk-averse, preferring to trod a well-beaten path in services, rather than play in the high-risk (but equally high-return) products space. Then, IT products require companies to make investments well ahead of the pay-back curve. Building a brand-a sine quo non for a branded product-is an expensive proposition. Mortality rate among product companies is several times higher than that of services companies. Indeed, even hugely successful services companies have had to struggle to make their products successful (Infosys and its banking product Finacle, for example). Also there was this belief that product companies have to be based in developed markets not just for access to talent, but several other things (like client relationship) that go into the making of a successful product.

That was the traditional thinking. A few Indian companies have bravely up-ended this. They have forayed where services companies have feared to tread. They have taken risks, invested money, and reinvented themselves. The good news is that a few have even succeeded. Part of their success is due to the change in the ecosystem. In areas like telecom, banking or retail, it is India that is at the cutting edge of global developments. Indian mobile industry, for instance, is the fastest growing in the world, adding 7 million subscribers a month. Some of the technology innovations in Indian banking by banks such as ICICI Bank and HDFC Bank would astound their global peers. In retail, new formats are being built here. This is a paradigm shift.

Some Indian companies such as Subex Azure have also found a way to rise to the top of the heap in certain market segments despite the presence of well-entrenched global players. The way: Acquire companies overseas. So, if you have a great software product idea and believe that you can convince someone to put money behind it, then this may just be the best time to try.

The Doomsday Clock

On slippery ground: Scenes like these may soon disappear
Are development and ecological responsibility mutually exclusive? The unfortunate answer to that, despite politically correct noises made by politicians across the world, seems to be: yes. The developed nations burn humungous amounts of fossil fuels to sustain their economies. Over the last few decades, others like the South East Asian tigers and then India and China have followed suit, with disastrous effects on the global climate. The world has become warmer by 0.3 to 0.6 per cent since 1860. Average temperatures are projected to rise by 1.4-5.8 degrees centigrade between now and 2100-greater than anything that our planet has experienced in the last 10,000 years.

It's a global problem, but its impact-both economic and social-on India will be particularly severe. It has been estimated that rising temperatures, and the consequent melting of polar ice, will cause ocean levels to rise by about 1 metre by 2040. This will result in largescale flooding along the country's 7,500-km coastline. The Sundarban delta, the low lying coastal areas of Orissa, Andhra Pradesh and Tamil Nadu and parts of India's west coast will be permanently inundated, resulting in massive dislocation of millions of people.

Besides, warming over land is projected to be higher than over the oceans; this will affect the land-sea thermal contrast and monsoons. Since Indian agriculture is critically dependent on rainfall, there will be widespread disruption of farming activity across the country, severely threatening the country's food security. Global warming and the resulting climate change is anthropogenic in origin, so it is theoretically possible to arrest and even reverse this trend, but there are limits to which any remedies will work in practice. That's because industrial activity the world over depends overwhelmingly on fossil fuels, which emit carbon dioxide, methane, nitrous oxide and chloroflurocarbons when burnt. And increasing levels of these greenhouse gases in the atmosphere lead to global warming.

Is there, then, no hope for the world? Well, let's put it this way: the future looks grim. It will be decades before the use of alternative energy sources, like nuclear power, solar energy and fuel cells, become widespread. This may be a good time to recall the legend of Atlantis. It is said that the people there were industrious; so God was bountiful in showering them with prosperity. But over time, Atlanteans became arrogant and started defying God's Law. God finally had his revenge when, on one cataclysmic night, he destroyed their civilisation with floods and volcanoes. This could well be our story. The clock is ticking; the time to start acting is now.