Saturday, October 18, 2014


[There was much insecurity amongst Indian industrialists around 2001: they were suffering from the government's trade liberalization, ,and did not know how much worse things would get. I wrote this column in Business Standard of 25 September 2001 to encourage them to face the new realities.]


Expansion of production is always risky; producers invest in expansion either when they expect demand to rise or they feel that not expanding would be even riskier. Both factors coincided in the early 1990s. Demand was growing strongly; and because of the abolition of licensing, industrialists feared that if they did not grow, their competitors would leave them behind.

The second factor has not disappeared; in fact, fear of competition is greater now, if ever. But industry is not investing. Why? To economists, this may seem a question of doctrine. If one were a Keynesian, one would believe that industrialists were not expecting demand to rise. If one were a monetarist, one would believe that interest rates are too high. But only an economist would take such doctrinal schism seriously. It is really a question of fact: what do industrialists think? And it can be settled by asking them. I have been doing some asking. The answers I have received can be summed up in a short phrase: uncertainty about the future. This does not mean that interest rates would matter to none. But interest costs are important in capital-intensive industries – power, basic telephonic services, metals – and those are still mainly in government hands in this country. Managing directors do not decide on expansion by ringing up their bankers and asking them what the interest rate is; they go and sit in ministers’ private secretaries’ rooms to find out what the government desires.
What, then, are industrialists uncertain about? For many, trade policy looms large. They do not know what imports will come in, and at what price. They see Chinese imports coming in at a fraction of domestic costs of production, and wonder if it will be their turn next. Some of them get very indignant with the government for having dismantled the defences in the form of import licensing.
Liberal economists tend to be very impatient with industrialists. They say, our industrialists had protection for 50 years; and since the reforms they have had ten years to adjust. That is enough time for industry to grow up.
Argument at this level is naïve. But while our industry was defended for decades, industry in many countries was not defended at all. In industrial countries, import licensing is rare, and import duties are low. They have also reduced or abolished duties within wide areas like NAFTA and the European Union. How does industry manage in these countries? It prepares for adversity. Here are a few ways it does.
It is continuously in search of ways to lower costs and expand markets. Complacency is a producer’s worst enemy. Even in good times, good companies are always examining their facilities and scanning the markets to see how they can squeeze out more profit. There are no full stops, there is no relaxing and resting on one’s oars. The successful companies are in a constant flux.
They try to create strong bonds with customers, so that their markets cannot be easily taken away. Jack Welch has just retired as the CEO of GE. When he took over, GE was General Electric, producer of power equipment. The first thing he told his employees was that they were not selling power equipment, but they were to help their customers get the best out of that equipment, all the time, as if the customers were a part of GE. In other words, he turned his marketing staff into advisers and consultants to the clients. Later he did other things as well, but this is important: good companies try to make themselves preferred, if not the favourite suppliers of their clients.
But not all markets grow at the same pace; it is also necessary to jettison some markets and cultivate others. For this, quick reactions and closeness to the markets are important. So increasingly, large companies work like an army of small companies, each in touch with its own market and owing its success to how fast reacts to its environment; the centre of the company backs success, encourages initiative, distributes scarce resources like managerial manpower and finance, and mentors. This is straight out of the theory of war; as transport improved and armies could move faster, military formations became smaller, command was increasingly delegated downwards from divisions to corps, and seemingly unrelated units like infantry, artillery and air formations were tied together.
This is not to say that managerial ingenuity is all; it is also possible for the government to make producers’ environment less uncertain and risky. That is what economic reforms should ideally do. My advocacy of zero tariffs and active exchange rate management is an example. As long as there are high tariffs, they can come down; industry can never be sure of them. Abolishing tariffs removes this uncertainty, and concentrates it on the exchange rate. The exchange rate should be managed to as to keep the bulk of industry solvent. Without good management, my system would be as bad as a high-tariff system. But a high-tariff system will always engender great uncertainty.
But uncertainty about trade is not the only uncertainty. Today, industrialists are worried about two other things. First, they feel they cannot react fast enough to changes in markets because they are not allowed to hire and release workers quickly and cheaply. This is why labour law reforms are important. But what sorts of reforms? If industry does not like uncertainty, surely it can understand that employees do not like it either. If employees feel vulnerable to unexpected dismissal, they will not invest effort in the interest of the employer. To reduce that fear is as important as addressing industrial uncertainty. There are three ways of addressing it. One is to have a general safety net – unemployment insurance European style. It is very expensive; the greater the unemployment, the more expensive it is. Another is a generalized golden handshake. All employers together can set up a fund which would compensate workers that lose jobs. The third is more managerial: producers should train their workers to be as versatile as possible, there should be as few caste and speciality barriers as possible, and firms should look at their workers’ abilities when deciding what to diversify into.

And industrialists are worried about who may come tomorrow and start competing with them. There is a wrong way of dealing with this worry, and that is the swadeshi way. As it is, we are a quite parochial and insular people; if you protect homespun industrialists against foreigners, they will become as dependent and limp as our small-scale industry. The right way is to expose our producers to information and education about the outside world. Trade is a good way to do this; but it is only one way. Far more important is familiarity with the ways of the world. Our people must be helped to travel across the world, to learn other languages, to live with other people – in other words, to learn to exploit the myriad opportunities the world offers.