When India's commerce minister stormed out of the World Trade Organization's global trade talks in Doha, Qatar, last week, it was a reminder of the difficulties that the G-8 leaders must face when they assemble this weekend in St. Petersburg, Russia, for their annual summit. India, a booming democracy where socialist ideologies can still dictate government policy, wants to join the G-8, but the Doha round comes first.
The ironies are plenty. In the very cities where companies like IBM, Microsoft, Motorola and Hewlett-Packard have set up offices, professionals and students have staged rallies and fasts to the death to protest the government's role in educational institutes.
With the barriers to retail investment falling away, most of the big-name global brands can now be found in India. Yet the voices in favor of protectionism to help local industries are unlikely to be silenced soon (though that holds true for India as well as Western nations).
Over the past few years, foreigners have invested in more than 1,000 Indian companies, and now more than 100 corporations in the country have a market value exceeding $1 billion. In the last decade, India has averaged a growth rate of more than 6 per cent annually. Last year, that jumped to 7.5 per cent.
But business groups in India are already warning of a shortage of highly skilled labor. Western companies are grappling with infrastructure problems and changing government regulations in key sectors, as a coalition government attempts to cater to populist demands, often at the cost of growth and global trade.
India has for decades been accused of economic protectionism, but as the country opens its doors wider to foreign investment, the cries for a level playing field are becoming louder.
Economist Raghuram Rajan--who served as adviser to the regulator of the country's capital markets, the Securities and Exchange Board of India--has followed India's growth trajectory over the last decade. Rajan, who grew up in India and is now economic counselor and director of Research at the International Monetary Fund, says India still has several hurdles to foreign investment.
In an interview with Forbes, Rajan spoke about India's desire to join the G-8, what it will take to strengthen India's stock markets, where China continues to score over the country, and the boom industries of the future.
How has India benefited from the World Trade Organization? After Indian minister Kamal Nath walked out of the Doha round talks, what lies ahead?
My sense is that India has benefited generally from trade liberalization. Indian industry is competitive enough for tariffs to be lowered further. Even if certain areas are uncompetitive, measured further opening will do them good--as we have repeatedly seen in India.
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If Indian farmers could be assured of a more level playing field, including the reduction of farm support elsewhere, agriculture would also benefit from further opening, as well as from the opening of markets elsewhere. So all in all, India should benefit from a successful and ambitious Doha round, even if it does not get its wish list. The talks are too important for any country to give up on them.
A report released recently said companies in Britain are lagging behind the US, Europe and the Far East in investing in India. Apple Computers dropped plans for its call center there. What are the barriers to foreign investment in India?
Infrastructure is certainly a deterrent. Public investment in infrastructure has been fairly low, and part of the reason is a large fiscal deficit. The way to remedy that is to cut fiscal subsidies, not increase them over time [as the government is doing], and reorient the national budget spending. There may not be private-sector interest in developing rural roads or small-scale irrigation, so the Indian government has to be willing to pay for it.
There's no reason to rule out investment in infrastructure by foreign companies, but the government first needs to clear the bottlenecks. In the power sector, a big bottleneck has been dealing with distribution--how to ensure that companies who generate power get paid for it. I think investors will want to see whether the government has a roadmap that is clear and assures them that they can make profits.
In any investment in India, an important prerequisite is land acquisition. The government should help in that process and ensure land is given to developers.
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Another issue will be wages. If it becomes overly expensive to hire in India, companies will begin to lose interest in hiring there. The wage rate has gone up quite fast, but so far, productivity has kept pace.
Also, I think it's quite important that government policy in areas where investors are coming in should be stable. It's important for investors to know that the government isn't going to keep changing its policies. In the telecom sector, for instance, particularly cellphones, it took a while for regulatory laws to become stable. But when that happened, India saw a rapid takeoff in investment.
China and India are inevitably going to be compared. What does India need to do to ensure the country is as competitive in the global market?
India is not as competitive in certain aspects of manufacturing--certainly the low-skilled, labor-intensive manufacturing that China has tapped into. Labor laws are another issue. In India, it's much harder to lay off workers because of labor laws that make it seem like when you hire, you hire for life.
The culture of increasing your labor force and decreasing it when you don't need it is much harder for a big company to follow there. It's important that these laws be modified. You have to bring in other measures to ensure workers get some protection, but not through such rigid regulations.
China also has a fairly good educational system at the primary and secondary level.
US companies, especially, can't seem to get enough of India. Are investments made there sustainable in the long term? Or will the country see large-scale outsourcing in the coming years?
There is a lot of human capital in India. Businesses have discovered this and are trying to take advantage of it. But highly skilled workers aren't so many, and over time, India has to produce more of them. Certainly, there will be some movement to other countries.
Within India itself, there is a wave toward smaller towns--Coimbatore, Pune and places like that. Abroad, there is talk of hiring people in China, Vietnam and other countries.
There's fierce competition to hire talent in India right now. Will this lead to professionals from other nations, especially in Asia, moving there?
Possibly, but I don't think salaries in India have yet reached the levels of what people may get in Singapore, Hong Kong or even Bangkok. The salary differential has to be enough to compensate people for making the move. And Indian cities do not yet have the required infrastructure and living conditions to make the move appealing.
Do you see the Bombay Stock Exchange emerging as a strong contender with the exchanges in Hong Kong and Tokyo?
There is an underlying strength to Indian industry and the investments that are taking place now. I don't think we're betting on emerging technologies here. As for the recent drop in exchanges across the world and in India, I don't see it as an indictment of the underlying fundamentals; it's more a case of investors getting a little over-enthusiastic for a while.
I think Mumbai has many of the requisites for being a financial center, including a variety of financial institutions and markets. On the human capital side, it's very strong. But India still doesn't have full capital account convertibility.
To become a regional center, you need that. Because of the fiscal deficit, we can't get such convertibility now, but there's no reason why India can't get there. A government taskforce has been set up to explore ways to make it possible.
We've heard all about software and services. What are the future boom industries in India?
Finance, as you suggested earlier, is one potential boom industry, India's strengths lie in industries that are skill-intensive. Industries like pharmaceuticals, consulting, [and] down the line, medicine, education--these are places where the country can do very well.
Also, I think there's enough entrepreneurial zeal in India that pretty much any industry can do well down the line. Who can predict what will take off?
India's government recently made it mandatory for educational institutes to reserve an allotment of seats for certain sectors of the population. It has recommended that the private sector follow suit. How much could this hurt competitiveness?
That depends, to a large extent, on how it's implemented. India needs more people who have skills. If you don't add new facilities and just increase numbers, you're decreasing the quality of education. It also depends on how people are selected.
In general, reservations in terms of outcomes are not a particularly good thing. You typically want to see how you can expand access to opportunities, instead of enforcing reservations.
It's better to create quality, which means giving every Indian child far better access right through the education system--though reservation in education is less harmful than reservation in the corporate sector.
