When a Nation Gets Rich it Gets Rich from the top: Aspects of Indian Business Development
A very good morning to all of you. Well, this is such an intimate group that I feel like just talking to you rather than making a presentation but nevertheless I will have a short presentation and if it is in agreement with you we shall have an interactive session thereafter. Because if you have interest in India I think you can field any question that you may want. I have walked the journey of India for the last 31 years as a young entrepreneur with almost no capital to build India's second-largest private sector company by market cap in that period, In particular the economic reforms that were ushered in 1992 was something that was led by young entrepreneurs like us and therefore I believe that an interactive session will be of great use to this audience today, especially our young students who may want to build their careers around Indian business, Indian investment and more importantly seeing how a very large nation of over a billion people is shaping its own destiny in the global arena.
As the Dean while introducing me mentioned, I am delighted to be here for several reasons. One, clearly that this is an illustrious institution, a university which is well recognized and more importantly I have been here several times dropping off my daughter several years back who graduated in modern languages, she did French and politics. And today one of my twin boys is here, who is also studying here in the management school who is off for a year doing his placement and will be back here to graduate next year. So it's my pleasure to be among the script today and let me talk about today’s theme of internationalization of India's business.
India has come from a very insular, very protected environment just a decade back. India's story is therefore a really a remarkable story from a point of view that a country with the size of India can also transform its own destiny within a matter of decade. When I came in to business almost everything was blocked. Very few opportunities were available to young entrepreneurs, capital was almost impossible to seek and especially if you didn't have tangible asset based lending, money was almost impossible to come by. India did not have the notion of lending for an idea, lending for a brand, lending for an intangible service. The banks were used to giving money against machinery, fixed assets like building and almost never for anything else. So it was very hard for young entrepreneurs to start off a business in that environment. In 1976 when I joined the business the only thing that was available to young entrepreneurs was to come into the small-scale sector which was enshrined in the Indian planning system where small companies could set up small tiny businesses to support the large businesses that had come out immediately after the independence. That was also the time when the government decided to in some form or the other, allow parts of foreign investments to come into India.
So let me just touch upon these four points. I think the significant shift that India did in the mid-80s was to allow foreign capital to come in and in most cases it was never more than 26 or 49% of the company that you set up. It has now moved to a point where FDI is practically allowed in every sector at almost hundred percent in most of the cases on automatic basis. There are only a handful of areas like insurance and retail where there is some resistance being built upon to FDI. Otherwise India is open to business and that to my mind was the starting point of India, to start saying how foreign companies work and how one can position Indian companies in the world.
Second part was regulatory regimes as some of you may know who have followed India for some years. India had a plethora of approval processes in place, almost everything had to be licensed, whether you're manufacturing pins or cars, everything had to go through a very detailed approval process to set up any manufacturing or service unit. That has been largely relaxed and more importantly for overseas firms as well.
Import duty was another barrier that India had built for many, many decades and most of the developing economies have done that, the good news there is that India has now aligned itself on the import duty structure to the ASEAN levels which are in the mid-14, 15, 16%’s or mid-10 to 20% levels and in the upcoming budget there seems to be a promise that India will completely align its duty structure to the ASEAN level which will be 10% or lower.
Just to give you a sample here – Telecom Kit, which is a very large import component to India, the telecom companies import over $10 billion of telecom hardware that can be imported into India at zero duty. So there is no duty element at all on many of the infrastructure areas of development in India.
And finally of course India has developed stronger trade relations. India's total trade today is at an impressive $330 - $340 billion of which about $145 billion is in export and about 180$-185$ billion in the form of imports of various goods and services.
I think, very clearly around the globe when you go the ‘India Inside’ story is everywhere now, whether it's the USA, the European Union or the Southeast Asian Nations, any board that has international presence around the globe, any company which has an international aspiration has to have India within their game plan. So the questions that are generally asked in the boards if they are not in India is - Why are you not in India? And for those who are in India - Why are you not doing more in India?
This is reflected and I’ll come to that it in a moment, on the amount of approvals, number of companies that are coming in and the amount of investment that is coming in, will clearly show you that India has become extremely important. And the reason for that is India is now putting out its global aspiration by aligning with the best of the best practices in the world. SEBI which is our equivalent to part of FSA in the U.K, has been acknowledged to have regulations and laws for listed companies, which are perhaps the best in the world today. The Section 49, which governs how companies are going to operate themselves to ensure small stakeholders are taken care of, how majority shareholders will operate, are to my mind best in class today.
Almost every company is required to now have audit committees, nomination committees, run committees and these committees have to be populated by a majority of independent directors. In fact in the case of Audit committee, I believe it’s more than 2/3rd of Independent directors which constitutes an Audit committee.
Now these are some of the steps which have given encouragement to overseas companies to come in to India because when they look at Indian set up in terms of regulatory environment they feel that they are seeing a similar environment. And equally Indian companies have trained themselves in this area and when they are moving out now to acquire companies they are ready because they are used to very transparent high levels of governance.
Private equity players have been coming in very big measures in India. Their deals are now in multi-billion dollars and they are also forcing very strong discipline in the companies in terms of minority rights protection, ethical practices, sustainable development of businesses which means you have got to be eco-friendly - so all these things are to my mind taking away the short term nature that was in India several years back to one of long term vision that Indian companies are now developing.
As I mentioned to you India is a favorite destination, if you look at the amount of money which came in a decade from 1991 to 2000 India had about $16.5 billion of FDI. In fact for a period of time we were always comparing ourselves to China. China had a typical 42-50 billion dollars of FDI in a year and India only until before this government came in 3 ½ to 4 years back used to have about $4 billion, so 1/10th of China. Last year India touched $20 billion of FDI and I can tell you even for some of us in the industry who are born optimists we never thought we will cross the double-digit mark during this government's tenure. But the momentum that has now moved towards India suggests that the $20 billion that we saw last year could well be $40 billion when this government ends its term in a year and a half from now. And that means we are really closing in on China and very large amounts of money when they come into the country doesn't necessarily mean development of the respective businesses. It means much more for a country like India poverty eradication programs, infrastructure development, a lot of other things start to happen. Also the signal that the Western world sends out by putting in such large amounts of money is that India is good for business and those who are on the fence on the periphery of the investment decisions then start to move in. And this becomes in effect which could take India to 60, 70 or $80 billion of investment in a single year in the not too distant future.
I personally believe that this has also ensured that India gets to a very large healthy foreign exchange reserves, which was a problem 15 years ago. Just to put this in context, in 1991 - 1992 when the Narasimha Rao government was formed after 2 to 3 years of coalition governments India had to go and pledge its gold at the Bank of England to raise $500 million and this was not a company which was floating a debenture or a bond in the international market, this was a country the size of India which had to go and pledge its gold, about 20 tons of gold with the Bank of England to borrow just $500 million. We had come to a point where there was a decision that we may have to sell the embassy, Indian Embassy in Tokyo, which was in a very prime location to raise more foreign capital. Because we had less than 15 days of foreign exchange to fulfill the import needs which included importing very vital elements of running the economy including food grains. From there to now having a foreign exchange reserve of $275 billion and rising all the time. In fact we are today having the embarrassment of so much flow into the country that it is hard for India to manage these flows and FDI is one such element. That is putting some pressure on exporters because the Rupee is strengthening; which is another matter and we can discuss it during the session - What implications does that have for India?
I had said that private equity investments in 2006 went up to $8 billion and this was something which was nonexistent in India till a few years ago. We didn't have the concept of private equity coming in. In fact, Bharti was one of the first recipients of the private equity of some significant size, when Warburg Pincus invested $65 million in Bharti and later on topped it up to $200 million. Warburg Pincus sold the estate a year and a half back and made than $2 billion in profits. These stories have gone across the world and private equity investors have now come in large numbers to India and almost all major private equity players including some start ups have presence in India today. 2007 will see this number go up even significantly more.
Dean spoke about India's outbound investment. This is new to us. India has made in the past some tiny small acquisitions. Lakshmi Mittal went many years back and set up a steel plant in Indonesia. But we are talking about small tiny investments. This was a country when you flew out from India you could take no more than $20 with you, that was the maximum limit for anyone traveling out of India and I'm not talking about 50 years back I am talking about 15 - 16 years back. Then it came up to a few hundred dollars that the business communities were allowed to take out. From then to now Tata acquiring Corus, one of the blue-chip steel companies here in the UK for $10 billion, it truly is a remarkable change that Indian companies have seen just in the last 15 years. There are many other stories. there is a company up in Manchester called Simon carves that has been picked up by a construction company called Punj Lloyd. Punj Lloyd has gone up and picked up a company in Singapore called Sembawang construction and then many other stories, Tata picked up Glacio in the USA which they later on flipped at a huge profit, many hotels around the world have been acquired by the Tata groups. Tulsi Tanti of Suzlon has picked up RE power, one of the largest windmill companies in Europe and there are many, many other companies which have been picked up by Indian pharmaceutical sector. In the telecom sector, companies like us are in hot pursuit of some opportunities in the world and I believe that there will be opportunities that will show themselves up in the coming years. So therefore be prepared to see more of India coming into countries in Europe and the Western world. India is truly moving out. The good news is there is generally a warm welcome to Indian companies when they come out based on their high levels of governance now as compared to for example Chinese who are still facing resistance from the Western world and I would say even in Europe.
So investments in 2006 out of India worth $15 billion and to my mind there could be some knockout deals in 2007 – 2008 period. We have our different financial periods - we do April 2008 - March 2009. We could see some deals in the market which singularly could be as high as $15 billion in one day.
The stock market has been growing at a rapid clip. In fact the Indian stock market has stunned the world players and as some of the world markets have slowed down including in consumption, Indian market is showing resilience in how it's growing. 1999, the total market cap was just at about $200 billion that has moved now to about $1.69 trillion and if you just take a breather there and look at May, we had crossed a one trillion dollar mark which was an amazing level of confidence that the world is showing in the Indian stock market and within no time within six months we are looking at that going up to $1.65 trillion. In fact, the data if you look at every day’s stock markets are continuously moving, there are predictions of course now that Indian market which has crossed 20,000 on the BSE Sensex may well be heading for another 20% rise but this doesn't suggest that I'm asking anyone of you to buy shares here. This is the general consensus coming out from the markets and I would always hesitate to take too much note or confidence of this because the world can change very quickly. But the fact is India’s growth story even if this was to correct by 10 to 20% is for real because… I will come to that in a moment.
Indian consumption patterns now suggest that we have gone on to a consuming pattern which is going to be there for the next 20 or 30 years and it is not going to slow down at all.
International brands are all now in India. it was just mentioned that Wal-Mart has come into India, yes they are there with our company to do the cash and carry because they are not allowed in the retail sector as yet. They will be in the back end, logistics, cold chain, cash and carry. Tesco is coming in, Metro is already there and they have got six or seven centers already established in India. CareFour is planning to come in. But more importantly now high Street brands are heading to India. There isn't a single brand which is not already in India or is in the process of coming to India. If you look at the large consumer electronics piece, almost everybody is in India, Sony, Samsung, Sony Ericsson, all the Japanese brands, all the Korean brands are here to stay. Whether it is in the area of white goods, brown goods, motor cars of course all vehicles - Honda, Toyota, BMW, Mercedes almost everybody is in India now.
There was a time, if you just go back into mid-80s a lot of foreign brands had to leave the country. In 1977, when the Janata party came into power, both Coca-Cola and IBM had to leave India because they were asked to reduce their holdings to less than 40% in compliance to the new regulations. India is never going to see that again because the amount of money that has come into India, the number of employment that has been generated in India suggests very clearly that the foreign brands, foreign companies positioned in India is absolutely intact and safe. IBM for example today employs over 50,000 people just in India and it is growing very rapidly.
I think this part I want to touch upon a little longer. India has 630 million people today in the working age. This number in 2016 will move to 830 million people. Now when you have 830 million people in the working age what does that mean for India? It is not going to be a force working just in India, it is a global workforce. Because the western world is aging and aging very fast and it is my own assessment that some of the countries, to some extent UK as well, is not as hard hit as Germany, for example France, it is in a denial mode in terms of what's happening to its ageing workforce and the number of dependent people - older people who are dependent on the younger population. India for the next several decades is going to stay young. This 830 million people to my mind will be able, willing, competent to work across the globe and that to my mind is the story of India because if these people can work and work they will because young people of India have a lot of aspiration now. They will generate a lot of sizable income for the country – offshore, onshore wherever they are going to work in whatever discipline they will work and that money then starts generating and firing up the economy. This would also mean that India will become a continent of consumers, if it is not already one because 830 million people when they start consuming and of course, I believe that the session later today sustainability or India's consumption patterns putting pressure on the ecology of the world and that I will leave it to that session when it comes, to discuss the factors. Yes, India will start consuming a lot and those issues will need to be taken into account as well.
Three million college graduates are coming out every year. With the education reforms that we are likely to witness in the next year and half, this number is going to go up because there is still a capacity problem in India. We need much more capacity at the primary, at the tertiary level, we are expecting the University bill to come through which will ensure that a lot more people will have access to good formal education. India of course is the third-largest scientific pool anywhere in the world.
Busy slide (pointing to slide) but I will just mention that if you look at 2025 which is an important year and that's a year when India is predicted to be third-largest economy in the world, we will have a population median age of 31 and if you look at China that's a time when China will get to 39. That is the biggest difference between the median age of India and China will be in 2025. Of course by 2050 India will also start moving up on that median but it will still be a very, very young country. But I think what is important to see here is this chart. 17 million jobs in 2025 in USA will need to be filled up by foreign workers. Where will they come from?
The only other parts of the world which have some younger population will not be able to spare people. Saudi Arabia will have some, English-speaking will be a problem; acceptance of the Arab world into Western world is going to be increasingly more, more of a problem. It's my guess that every second hand that would be required anywhere in the world would be an Indian. And if Indians at the levels of remuneration that they can generate every hour –a million people can add about $25 billion of foreign exchange earnings to India every year. Just a million people and India will have tens of millions of people wanting to do that and if they can't do it on shore in those countries because of immigration problems they will use offshore mechanism in the BPO’s, in the call centers, in the back offices, in the area of clinical research, in the area of other research, entertainment development, a lot of that has already started to happen.
Japan is going to age, in fact Japan will have 9 million short of people. UK itself will have ‘minus two’ so that's two million people that will require to be brought in, yes some of them will come from East Europe and larger EU. But most of the European nation will not be able to bring out the global workforce that is required and therefore I'm very confident that this one piece is very important for India.
It's already giving us some advantage; we are now number 10 in services exports in the last year data. India already has a $40 billion of software revenues. This was predicted about six or seven years back and almost everybody doubted this number did the fact is that India has come to this point and this is growing in big measure. And of course, as I mentioned, there are over a million people employed in the back offices. This is going to get traction and this is going to get to 8 to 10 million in the coming decade.
This also possesses some challenges and I'm going to reverse the demographic dividend of India which is being talked about into also it's one of its biggest challenges.
India has 300 million children in the age of 6 to 16. These are young children, most of them in the rural areas. In 10 years time they will move to an age of 16-26. This is the time when they are going to start knocking on the doors of the society in a very hard dramatic way. If we can make them employable they are going to be a global workforce, they are going to be an asset for India, which will be unparalleled anywhere in the world. Equally if you will not be able to harness that energy, India could well be in strife, India could have crime rates going up, it could have social disorder and I must also give you another marker here. Out of these 300 million children, 270 million will never go to a school. And if some of the lucky ones out of the 270 will go to a school they will drop out in the first or second year. And I am giving you this data based on the evidence that we have. They don't necessarily need to go to a school. They need to do some primary education but can they be skilled in one form or the other?
Skilling in India is not there. Today a mason’s son becomes a mason because he watches his father do it. An electrician’s son becomes an electrician. Some others may join in - a carpenter, plumber, drivers, chefs, nurses; you can keep on naming many of these areas of not very high skills to the highest levels of skills and India needs to catch up in a very big way. The good news here is the prime minister is acutely aware of the failure of the state to provide education and more importantly to provide skills to the country. India also has this perception in its society that the people must be engineers, doctors, lawyers, professionals, accountant, and therefore a skilled labor, a plumber or an electrician doesn't have the same social value in the society. That needs to change as well. India's mindset needs to change where a mother can still be proud or happy if the son or a daughter who is good with their hands and skills can go out of the regular education stream because she or he can't make it there into being in the skilled area. Because India will really need to ensure that these 300 million people become employable - for India and for the globe.
A lot of work is going on, CII in fact that this year has had major thrust to advise the government in this area. CII’s theme this year is ‘Building People, Building India’ and skills therefore is a very important area. City and Guilds of the UK has been brought into India to start a process of certification but we will need hundreds of such initiatives to manage the large amount of people that we are discussing here today.
Second part is infrastructure development. India has not been able to catch up. Rather we are in a catch-up mode constantly on infrastructure. The good news here - $490 billion have been identified to be spent in the infrastructure area. Roads, ports, airports, railway stations, energy, pollution control areas, very large amounts of money are going to be spent in the next five years. In the next 10 years, which is the next five-year plan beyond the upcoming one, India will spend $1.4 trillion in infrastructure. But that will just be about catching up because India is growing at 8.5 to 9%. It is going to put pressure on infrastructure.
One area where we are currently under siege and failing is urban infrastructure because you are seeing a lot of migration from rural areas into cities and cities are crumbling. We will need to do a lot of work in this area. I can assure the audience here and the world at large that India is focused on to this area.
We still are having the last remnants of bureaucratic mindset, you still see people who will create hurdles rather than assisting businesses and the projects to go through. Change is happening there but the change is slow. I hope that the next generation of bureaucrats when they take pole position in the next 10-15 years, this younger lot will have a different mindset to move the country forward. There has been issues around direct and indirect tax rationalisation. India is moving towards a GST (goods and services tax) from 2010 and the next two or three years we will see most of the states converging on to this one. But this is one area which is still work under progress. Today when you move material or commodity from one state to another, there are still a lot of taxes and hurdles to do that. For India to become one unified market we are waiting for the last pieces of the tax structures to be settled.
I think I must end my talk about India's potential. Our GDP today is over $1 trillion or just about $1 trillion and that's a very large economy by any standards. It is today is the fourth largest economy by the purchasing power of parity, after USA, Japan and China. In 2025, it will start becoming in real terms the fourth or fifth largest economy as per the BRIC report of Goldman Sachs and the Economist magazine. In 2040, India will be the third largest economy in the world in real terms not in PPP terms. That would mean India’s economy will be at about $35 trillion. So every Indian pocket on an average will have 35 times more spending power and that's my confidence that India will become increasingly a continent of consumers, firing up the demand of world's goods and services. It is already the second-largest two wheeler market, fourth largest commercial vehicle market, Eleventh largest passenger car market in the world and of course it is now the third-largest telecom base in the world. It will become the second largest by 2010 after China, India already has over 200 million mobile phones, 40 to 50 million fixed line phones, more importantly now growing at 8 million a month which is the largest growth seen anywhere in the world including China.
As I mentioned India would be the third-largest economy by the year 2035. So some challenges but a lot of opportunities. And India to my mind is committing itself in the area of global warming, climate change agenda, it is trying to move the WTO agenda forward to ensure that there are equities around the globe. Of course India sometimes seems to be taking a rigid position in the area of agricultural settlement in WTO. There are genuine issues in India; 600 million people are engaged in the rural areas. No politician will be able to compromise their interests. If America can't reduce subsidies even by a dollar from where they are today, it is only I would say in order that India will have to fight for the economic inequities of the last 20, 30, 40 years or maybe a century to be therefore addressed to the WTO round, Doha round that is going on. But India is committed to be a partner to the globe, partner in the world and you should see a lot of Indian companies out in the globe in the next 10 years.
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