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.
