Naushad Forbes is one of my best friends; we have known each other since he came across something I had written on technology while he was doing his Ph D in economics in Stanford in the 1980s. He is normally too busy running, together with his brother Farhad, Forbes Marshall, an engineering firm set up by his father Darius in the 1960s. But once in a while, he takes some time off to think about economics; when he does, he always has something interesting to say. This column in Business Standard of 29 June 2000 reflects on a survey of Indian corporate R&D Naushad had done.
WHAT DID THE REFORMS CHANGE?
The reforms of 1991 are almost ten years old; it is now time to start taking stock. A project in NCAER to do so was funded by Asian Development Bank in 1996; its results will with luck see the light of day some time this year. In the meanwhile, however, Naushad Forbes has done a quick exercise whose results are of great interest.
I was myself not aware of some of the changes that have occurred. For instance, India overtook China in car output in 1999, with an output of 600,000, and became Asia’s third largest car market after Japan and South Korea. India has one of the world’s most efficient cable systems with a daily cable audience of 100 million people paying an average of under $4 for about 40 channels, thanks to the defeat of Doordarshan’s monopoly – and has one of the world’s least developed telephonic systems, thanks to DoT’s success in maintaining its market dominance. Wipro’s market value rose 800-fold in eight years, and made Azim Premji, a Stanford alumnus, one of the world’s richest men. Foreign direct investment in 1998 was 2.7 per cent of total domestic investment, up from 0.1 per cent in 1991 – and compared to 12.7 per cent in China and 16.5 per cent in Malaysia.
The liberalization of foreign investment has changed the relationship between Indian and foreign firms. Earlier, foreign firms needed Indian partners to enter the Indian market; conversely, Indian firms needed foreign technology to make abnormal profits in the Indian market. Now that foreign firms can enter the Indian market directly, Indian firms have either to be able to compete with them, or offer them something other than market access. The best run Indian companies have invested in marketing and distribution systems or in production efficiency as equity they can offer to foreign partners; a handful like Reliance have aspired to do everything that foreign firms can do, only better. Those that could do neither – and amongst them are politically influential ones like Bajaj – have lobbied the government to restrict foreign investment.
Despite this lobbying, and despite its swadeshi (make it in India) rhetoric, the BJP government has been not greatly restricted foreign investment. It has made government decisions more arbitrary and given more discretion to ministers and bureaucrats, but it has not really stopped foreign investment where it was allowed before. This is attributed within the BJP to the Prime Minister’s shameful “liberal” predilections. The party zealots are all wrong; what has prevented government policy from adjusting to the BJP’s preferences is pressures from its own benefactor industrialists. For every industrialist who wants to keep foreign companies out, there are five who want them in – as partners, but more often as buyers of their bankrupt businesses. For the intense competition after 1996 has made many big industrialists indigent and keen to sell off parts of their empires. Those fragments have been mainly bought by other Indian industrialists – for instance, Reliance has bought the synthetics businesses of a number of other business houses. But foreign companies have taken part in this churning – sometimes buying fragments from Indian houses, sometimes selling them to Indian companies – for instance, Tetley to Tata Tea.
Liberalization of foreign trade has made new brands of consumer durables – television sets, cellphones, two-in-ones etc – available in India. The prices of consumer durables have risen least rapidly in the past ten years; their ownership has gone up manifold, as evidenced by the NCAER surveys. Everyone bemoans the fact that the Indian middle class is small. But what distinguishes the middle class is not dollar income but the ownership of durables; on that criterion it is expanding by leaps and bounds – and will continue to do so if competition in the markets for refrigerators and air conditioners continues.
But the poor would abandon their class and join the middle class in millions if the goods they consume became cheaper. So they have; the prices of clothes, plastic goods and soap have risen much less than of other things in the 1990s. But they would lose their poverty much faster if cowdung, jowar or chicken became cheaper. Hitherto the government has kept out imports of these necessities. Five years ago, a Dutch company wanted to export animal dung to India; the government stopped it in its tracks. Jowar cannot be imported to this day. Chicken became importable in the last trade policy, and promptly the government slapped a 100 per cent duty on it, so that the benefactors of the ruling parties may not suffer.
Naushad Forbes finds two major changes in corporate R&D. One is the emergence of new companies as substantial spenders on R&D. Leaders amongst them are pharmaceutical firms. These firms used to make money by copying drugs patented abroad and selling them in India and other countries with poor patent protection. Now that India has recognized foreign product patents, Indian companies have begun rapidly to acquire innovation capacity. Ranbaxy and Dr Reddy’s have licensed out their discoveries to multinational corporations. Ranbaxy bought up the generics business of Bayer to enter the German market. Nicholas Piramal bought the R&D laboratory of Hoechst Marion Roussel.
It is not just the pharmaceutical firms. Reliance had no faith in R&D; it used to buy good technology, and operate it efficiently. But in 1998-99 it spent Rs 750 million on R&D – 31 times the amount in 1992-93. Mahindra and Mahindra raised its R&D expenditure 12-fold, Eicher 5-fold, TELCO tripled it, Ashok Leyland and Bajaj Auto doubled it.
But more important than the rise in the quantum of R&D is the change in its character. When I surveyed Indian corporate R&D twenty years ago, Indian companies focussed R&D on two things – import substitution and diversification. They coped with import restrictions by finding and developing domestic substitutes; and they imported technology for a small range of products and then expanded the range by means of R&D. Today, at least some of them are spending to reach the international technological frontier. This is certainly the case with the pharmaceutical firms. But the auto companies are also now developing cars and two-wheelers that can match international products. Not just they; foreign companies are setting up R&D laboratories in India. GE Plastics, for instance, is recruiting 5000 chemistry graduates in Bangalore.
Finally, India’s industrial structure has begun to change. Commodity industries – textiles, jute, cement, dyes, cement, steel – are falling behind; information technology, pharmaceuticals and vehicles have forged ahead. These industrial changes are reflected in the fortunes of business houses. But there are changes in their pecking order which are not explained by industrial ups-and-downs. Prominent amongst the losing houses are the Birlas other than the Aditya Birla group, the Modis, the Goenkas and the Mafatlals. No old business house is prominent amongst the winners. The newcomers are mostly companies not belonging to old houses.
And the multinationals? Their fortunes have been distinctly mixed. ABB and Castrol have entered the top 100; Levers, ITC, Glaxo Nestle and Novartis have increased their profits manifold. But then, ICI, Hoechst, Siemens, Philips, Hoechst, SKF and Madura Coats have dropped more than 50 places. The reforms have been politically neutral, but economically they have shaken up industry.