From Business World of 9 October 2004.
The critical
handicap
As the end of the multifibre agreement
comes closer, the general consensus is that China and India will gain from it.
Garment shops set up in little countries to take advantage of quotas will die;
India and China, with their investment capacity, production of cotton and
synthetic fibres, and economies of scale, will sweep the board.
However, a
consensus also seems to be emerging that between the two countries, China will
grab the lion’s share of the market. This is partly based on the current market
shares of the two countries; China’s exports are many times India’s. But it is
also based on the investments being made by Indian firms. They are certainly
expanding capacity; some are building new plants. But the sum total of such new
capacities is nevertheless modest. It may lead to a rise in exports, but it
will not double or triple them. It will come nowhere near exploiting the vast
new market that will become available.
The impression
is also difficult to avoid that most of the new investment is going into big
firms. They are already large, they are substantially mechanized, they sell to
large buyers abroad and are building capacity on the basis of the buyers’ firm
orders. Of them there are at most a couple of dozen. But there are hundreds of
other small firms; they do not seem to be on the threshold of a big expansion.
This impression
may well be due to lack of information. But it is difficult to shake. The truth
is that a great many firms in India were set up simply to appropriate quotas.
There was a new entrants’ quota, which encouraged entrepreneurs to set up new
firms – often the same old entrepreneurs divided up their production between a
large number of small firms. All this fragmentation will go; just as production
is going to be concentrated globally, it will be concentrated within India as
well.
So five years
from now we will get a stream of articles bemoaning the fact that India missed
a golden chance and lost out to China. They will blame Indian firms and entrepreneurs
– their unwillingness to grab the chance when it came. That diagnosis, when it
comes, will be entirely mistaken – although then it will not matter, for the
opportunity will already have been lost.
The sorry
outcome, if it arises, will owe itself to two factors. First, banks – mostly
owned by the government – are the only substantial source of institutional
finance in this country. There used to be government financial institutions at
one time. But they ceased to get automatic finance from the banks and their
investments turned sour; they are no longer in a position to lend or invest.
There are a handful of new merchant banks; but they prefer to finance big boys
such as the new telecommunications companies.
Second, banks
have earlier lent heavily to textile firms, during previous export booms. A
large proportion of their loans turned sour, and they have been turned off
textiles. The government may think textile exports have a great future,
economists may see a great opportunity, even textile exporters can see it. But
it will make no difference. The banks will no longer expose themselves
substantially to textiles.
That leaves the
stock market. It did finance thousands of small firms in the early 1990s. But
in the slump of 1997-2002, most of them turned turtle. Now we have a regulator,
SEBI, which is determined to ensure that that will never happen again. If an
entrepreneur plans a big expansion, and tries to raise more than five times his
pre-issue net worth, he has to find Qualified Institutional Buyers (QIBs) for
60% of the issue. These QIBs are a modern edition of the old government
financial institutions; they are conservative, and do not put too many eggs in
one basket. Above all, they are mainly Bombay-based. An entrepreneur who does
not know the big shots of south Bombay is unlikely to be able to find QIBs to
back him. So SEBI has effectively shut out small and new entrepreneurs out of
the equity market – and that includes textile exporters. The reason why we will
fail to seize the opportunity in textiles is that the “reforms” have created a
financial system that is closed to enterprise and competition.
