|CURRENT ISSUE DECEMBER 20, 2004|
|BUSINESS & ECONOMY: FOREIGN INVESTORS|
|Vote of Confidence |
India is finally on the international economic map. But why and for how long? Foreign investors, chief executive officers and financial experts give some answers.
|By Rohit Saran|
Is this the moment we were waiting for since at least 1991? For businessmen, venture capitalists and economists from the world over to come and tell us that they are ready to bet their money on India? That they believe India's future performance will be closer to its potential than it had been in the past? For the majority of foreign investors who attended the 20th annual India Economic Summit in Delhi, organised by CII and the Geneva-based World Economic Forum (WEF) last week, the answer to these questions was a definitive yes.
That was distinctly different from the past when most global conferences on the Indian economy began and ended with bemoaning how pathetically India had been performing compared to its potential. The optimism wasn't limited to the future of outsourcing-related businesses which had been in the global spotlight for at least a year. The investors were confident that India would perform well across industries. And that opportunities for investment span from industry to services to agriculture.
"In most countries the process of development is more evolutionary. In India's case it looks like revolutionary. It has the advantage of leapfrogging in the growth process without going through the growth pangs," says Richard L. Gelfond, co-chairman and co-CEO of IMAX Corporation. "I came. I saw. I am captured" is how C. Nigel Thompson, executive director of Merck explains his optimism. He believes India's investment attractiveness has improved dramatically in the past couple of years. That is at the micro (or company or industry) level. A similar faith was expressed in India's macro-level (economy) performance.
Why has the world become so gung-ho over India? After all, what has changed fundamentally in the Indian economy in the past 2-3 years? The answer lies in a combination of short- and long-term developments.
According to Augusto Lopez-Claros, chief economist with the WEF, the four basic factors global investors look for in a market are all present in India right now. First of them is the size. The kind of growth in sales most consumer products have witnessed in India in the past two years has finally demonstrated the strength of the country's large and growing middle class. In size, India's immediate competitors are China and central and east European countries. Low-cost skilled labour is another big draw. Wages in India have always been several times lower than most developed and many developing countries, but it is the skills of Indian workers-blue collar or white collar-that has now caught the global attention. "India's talent pool has come to the limelight in the past two-three years," says Vinod Khosla, one of the world's best-known venture capitalists and partner with Kleiner Perkins Caufield & Byers.
In addition to the size, the growth rate-present and future-of the economy and market also counts among global investors. This is where there has been a big change in perception on India in the past one year. Though the rate of growth of gross domestic product (GDP) in 2004-5 will not match the 8.2 per cent it recorded in 2003-4, there is a belief that India has entered a phase where it can sustain an annual economic growth of 6-8 per cent for a decade. Union Finance Minister P. Chidambaram, who inaugurated the summit, claimed that the key difference between India's economic performance in the past 14 years and in the coming 10 years would be the sustenance of growth. Unlike in the past decade when two-three years of high growth were followed by a year or two of big slowdown, he foresees the economy to maintain a high growth rate of over 6 per cent for at least a decade. "We are riding a wave of sustained high growth," he says.
If many in the conference believed Chidambaram, it is because of the good job he did of marketing India as the land of opportunity. He even stated his willingness to let businessmen speak to foreign investors on behalf of the Government. The Investment Commission he announced-with Ratan Tata as chairman and Deepak Parekh and Ashok Ganguly as members-is a step in that direction. Khosla finds the change in the Government's attitude refreshing. In the past investments were sought on India's own terms and the case the government usually made to the investor was that India is a better place to invest than before. Says Khosla: "Now the government is willing to have a dialogue with foreign investors. That is a big shift in attitude." Will actions match the attitudes? On the answer to that question depends what Lopez-Claros defines as the fourth factor of investment attractiveness: political and social stability. Sure, nobody was oblivious of the Left's long shadow over the Government, but hope stemmed from the belief that the "reform-trio" of Prime Minister Manmohan Singh, Chidambaram and Deputy Chairman of the Planning Commission Montek Singh Ahluwalia will be able to steer reforms despite opposition. Besides, even the Left's influence can slow down, but not sidetrack, reforms. Then, of course, is the inflection point of the 14 years of slow and steady reforms. Says Thompson: "Cumulatively, reforms have reached a level where India is more attractive to investors than it has ever been in the past." Luckily, the world economy has hit a rosy patch.
"It is good news that there are no major recessions and no major financial crises-a huge improvement over the crisis-ridden years of the 1990s," says John B. Taylor, undersecretary for International Affairs, US Treasury. That is big deal for the Indian economy which is getting more integrated and, therefore, more dependent, on the global economy.
But all this doesn't mean everything is hunky-dory. India's economy and industry are definitely more competitive and attractive than before, but their remaining so will depend on addressing some looming deficiencies. Ahluwalia listed three: insufficient infrastructure, social sector lacunae-especially in primary health and education-and low and fluctuating growth rate in agriculture. To that Lopez-Claros adds the high deficits of the Union and state governments, which, he says, are squeezing funds for small entrepreneurs. Both Chidambaram and Ahluwalia assured that the Government had the consensus, willingness and strategy to overcome these challenges. For India to cash in on the unparalleled confidence in its economy, these assurances will have to translate into action.