Globalization – making India competitive

Financial Services:

In 1990 the Bombay Stock Exchange was a den of thieves, where crooked brokers and companies rigged prices and duped small investors. Once foreign investors entered the Indian market, they paid high prices for companies with good standards. For the first time, honesty actually paid. Indian companies have been forced to maintain clear financial books. We have, in the process, created one of the most efficient capital markets in the world.

Automobiles:

In the old days of self-sufficiency, the Indian auto industry emitted massive pollutants without a second thought. But competition with global auto majors, both in the domestic and export markets, have forced them to adopt Euro emission norms. Today Indian engineers are rapidly churning out new models more cheaply than their US counterparts.

Pharmaceuticals:

To cope up in a globally competitive environment, Indian drug companies have been forced to identify their core competencies. Today Indian pharmaceutical organizations are rapidly evolving into major global players with strengths ranging from reverse engineering to contract R&D, contract ingredient production, clinical trials and most interestingly new drugs research.

Virtual MBA for the Indian corporate sector

Our economic past, characterized by scarcity, has been the driver for today's success. It forced us to be more efficient and do more with less. Not only did we get free lessons in optimizing our resources, but it also challenged us to find creative solutions and then test these in a tough operating environment. It was virtually like getting a free MBA!

If Indian IT learnt to walk in the west, it is now learning to run in India. Technology is helping bridge the rich-poor divide. We are creating innovative products aimed at the bottom of the economic pyramid. Products like Rs. 10,000 PC, a refrigerator immune to voltage fluctuations and a Rs. 100,000 car are all unique, indigenous and cost-effective solutions that could be exported. We are deploying technology to ensure that citizens can avail government services remotely and are manufacturing the cheapest mobile phones with low call rates of just Re 1/ minute. India is also innovating technology products for MNCs like Intel, Texas Instruments, Siemens – for the global consumer market. Take the case of the automobile revolution in India. If about three decades back all we could see we hoards of Ambassadors and Fiat Padminis, today global auto majors are queuing up in India, not only to sell their products, but setup large manufacturing bases. The story is being repeated in almost every other sector.

Our years of hard work, perseverance and innovativeness have forced the world to look to us for both quality and cost effective products and services, catapulting India into a major sourcing destination for a range of products and services. With the global market place shrinking, the need for trained human resources who can operate across economies and geographical boundaries is on the rise. Just think how many Indians today are leading global corporations.

Indian middle class: Origin and Relevance to India Inc.

A lot has been said and written about the great Indian middle class. The sheer number of people that is the source of India’s enormous domestic demand and thereby the promise of a large market for a mind boggling array of products and services.

If one were to characterize and predict the behavior of this middle class, it would be important to understand how it emerged in the first place.

The seeds of emergence of the middle class lay in the one time behemoth public sector units run by the government. A vast number of people enjoyed a government position, with its permanent employment contract, guaranteed pensions and health care and a host of other fringe benefits that translated to security and predictability of income in the absence of any other social security mechanisms. This gave rise to a class of people with its own set of behavior and attitudes which went on to shape what we term as ‘middle class today.

The emergence of the private sector and the rapid decline of public enterprises coupled with a drastic reduction in the annual intake of people proved to be a watershed in the evolution of the middle class – both in its composition and outlook. During the end of the last century, IT services created a rich and wide employment channel for technology graduates and concepts like upper middle class and nuclear family emerged from this cauldron of events. We have seen the emergence of an educated young generation coming out from smaller pocket towns and cities, settling down and acclimatizing to life in the metros. The last few years have witnessed multiple industry verticals creating employment opportunities for this middle-income group, vis-à-vis Insurance, Telecom, Retail banking, Retail, ITES, BPO, Aviation to name a few. This has in turn created a confident young generation with high spending power and life on credit, as in the more developed western world.

Thus a new generation of middle class now straddles India’s social map and almost swamps it by their sheer numbers. The diversity in employment opportunities combined with the absence of a single dominant monolith like the public sector, suggests that the emerging middle class is going to be a lot more heterogeneous in its behavior than its earlier evolutionary avatar. This heterogeneity in consumer demand and expectations will provide shape and direction to future products and services coming out of India.

Financial Hurricane brewing in US market……Lets understand how does it work

Ten years ago, the Asian financial crisis smashed markets and economies globally. Today, another financial crisis is brewing in the US mortgage market.

History repeats itself. An economic boom for several years creates the illusion that business risks have been lowered permanently, that big loans on easy terms can be made to people earlier viewed as non-credit worthy. Imprudent lending booms to Thailand and Korea sparked the Asian financial crisis. Another imprudent boom is now roiling sub-prime mortgages in the US.

A 10-year housing boom in the US lulled mortgage lenders into satisfaction. They started lending 100% of the value of a house to people with poor credit histories, often inducing them with teaser low interest rates, which later rose sharply. Today, house prices are falling, effective interest rates are rising, and sub-prime borrowers are defaulting. Lenders can repossess the houses, but these are now worth less than the outstanding loans. A modest rise in defaults can break a lender. Housing loans no longer stay on the books of the mortgage lender. They are sliced into small pieces, clubbed together with medium and high quality loans, and sold to investors as high-interest packages. These have been bought by hedge funds, private equity funds, and many other specialist funds. This spreads default risks among more financiers, and lowers the danger to the original lender.

In theory, all financial products are supposed to be valued at market price, and so a falling market price is supposed to give advance warning of troubles ahead. But many new financial products are hardly traded at all, and so are valued at face value. When a fund in distress tries to sell, it suddenly finds it can get only half the face value. So, huge losses can arise without warning, and can kill a fund.

The problem is worse in the case of derivatives and other complex financial instruments that are now traded in trillions. In similar situation, panic sets in and everybody tries to sell at the same time. So asset prices crash, causing the serial bankruptcy of many huge funds. Millions lose their savings, investment and consumption shrink, and this causes a global recession.

Similar situation has created the SE Asian crisis in nineties. India has saved itself with low FII exposure. Now India has huge Foreign Investment in all its sectors. At the same time, RBI has safeguarded Indian interest against a sudden fund pull by FII.

An Indian shield in a globalized economy.

Margin Vs Volume

Historically, MNCs have had high profit margins arising from monopolies in technology and finance, and political influence translating into protectionism. In the US, trade unions fought for a bigger share of the surpluses, and obtained the highest wages in the world. In effect, MNCs and the trade unions shared monopoly profits at consumer expense in developed countries.

Wal-Mart has redefined this model.

Far from seeking high margins, it has relentlessly cut prices and kept profit margins so low that competitors give up. Its profit margin is just 3% of sales. Prices at Wal-Mart can be half or less than at major department stores. So, unlike historical Numero Unos, Wal-Mart has risen by cutting instead of raising prices, by reducing instead of increasing profit margins, by catering to the masses rather than the well-heeled, and by using the cheapest rather than the most expensive workers. Harvard University estimates that Wal-Mart's lower prices benefit US consumers directly by $18 billion a year. Besides, Wal-Mart obliges rivals to cut prices.

Wal-Mart aims at scale economies of every sort. By buying massively, it pays least to suppliers. It has massive stores with acres of parking space to accommodate hordes who drive in. This strategy needs cheap land, so Wal-Mart stores are typically in urban peripheries, small towns and rural areas. Petrol is cheap in the US, so Americans happily drive an hour or more to a Wal-Mart store 30-40 miles away.

Conditions are totally different abroad, so Wal-Mart has often failed in other countries. The farther Wal-Mart goes from the US the worse is its performance. It shut down in Germany after losing hundreds of millions of dollars, and sold out in Korea too. It now accepts the need to adapt to local conditions, but adaptation erodes the power of its US model.

Land prices have skyrocketed in India, so a US-style superstore would have to be situated miles outside a big city. We simply cannot see well-heeled Indians driving for hours to a big store on the outskirts of Delhi or Mumbai. Unlike in the US, the poor and lower middle-class in India do not have cars or cheap petrol to facilitate long-distance shopping. So, small shopkeepers will easily compete. They typically evade sales tax. Many pay low rents because of rent control. They are located close to consumers, and provide home delivery at no extra cost. Some even provide credit. Even if Wal-Mart is cheaper, many consumers will opt for the convenience of local shopkeepers.

Rs. vs $

The Indian Rupee hit a 9-year high (39.91) against the mighty dollar on September 21, 2007. It was Rs. 44 a few years back.

Among many other factors, the major boost was the US Federal Reserve’s 50 basis point cut in the Fed rates. As interest rates of any economy decrease, the value of its currency against other currencies also decreases. This is the general principle of economics. Drop in interest rates makes a currency less sought after as the returns decrease. Hence investors move out of that particular country in search of higher returns. Importantly, for India as more and more foreign institutional investors (FIIs) started pumping dollars into the Indian economy the value of the Indian rupee soared.

Tough Time: The appreciating rupee will hurt every exporter having a major part of his income in dollar receivables. A loss of Rs 2 for every dollar earned. Imagine the condition of exporters having millions of dollars in receivables. Indian IT companies (those who have not hedged their dollar receivables adequately or efficiently), textile companies, auto component manufacturers, Indian BPOs will all have a tough time if the Indian rupee continues with its upward journey.

Happy Hours: For travellers and students happy days are here again. They will have to spend lesser rupees for every dollar that they purchase for their vacation or stay abroad. The rates of international tickets will come down as the cost of aviation turbine fuel drops. India imports 70-75 percent of its oil requirement. Even if the cost of oil per barrel has hit a record high of $84 in recent times, the appreciating rupee definitely helps to soothen the harshness of oil price increase. The rupee rise also helps to tame inflation.