India 2025: What kind of superpower?

Citings
GOOD MANAGEMENT
IS NOT FIREFIGHTING
Thanks to its functional institutions of democracy, India will become a very desirable kind of superpower, Joel Quass
free of corruption; entrepreneurial and resource and energy efficient, says Anil K Gupta
SATURDAY 8 JANUARY 2011
M ANAGERS who cannot
set boundaries between

W
ITHIN two decades or lean manufacturing. Given very high their professional and person-
Follow through, please less, a rapidly rising In-
dia will very likely be-
population density and thus scarcity of
land, companies such as Toyota could
al lives risk early burn out. The
point is, you are responsible for
Hiking Employment Guarantee Wages come the world’s third
largest economy — after China and the
not afford to build Detroit-style auto-
mobile plants. In response, what Toyota
the mood in your area. When
the situation is grim, finding

T HE government’s decision to link wages under the

National Rural Employment Guarantee Scheme to
the consumer price index is welcome. This will protect the
real consumption of people at the lowest deciles of income
in the country — as prices go up, so would their income, at
least for 100 days of the year, so that inflation would not
eat into whatever little they consume. However, it is not
sufficient for the government to improve distributive jus-
tice by raising the earnings of the rural poor, it must follow
through with measures to address the necessary conse-
quences of its decision. It must curb its own expenditure
elsewhere and enforce better tax compliance to absorb
the impact of the cost of wages under the scheme that will
go up 17%-30% — the government cannot allow the
course of fiscal correction to be altered. Subsidies on petro
fuels and fertiliser should be the first to be pruned. More
importantly, the government must take concerted mea-
sures to raise aggregate farm output. As the real incomes
of those at the bottom of the social pyramid and those in
the organised sector at the top get insulated from inflation,
inflation would squeeze the real consumption of the rest
all the more, producing a sharp outcry of protest. Their re-
action would be politically inimical to the ruling dispensa-
tion, apart from other things.
Global food prices are 30% higher today than a year
ago. But blaming the foreign hand will not satisfy the hurt
consumer. For that, intelligent strategies are needed, to
raise output and make it available at the retail level with
minimal supply-chain costs and mark-up. Policy needs to
go beyond raising support prices. Deployment of newer
technologies, inputs and better agronomy practices,
achieving economies of scale, adding value at levels of
production that facilitate value accrual to farmers and or-
ganised retail — all of these are vital. We need a new Oper-
ation Flood for vegetables and fruits. This calls for engag-
ing with people, that too real people who sweat on the
farm, the kind who go out and vote politicians to power.
This calls for political leadership, not pushing files in some
Bhawan or the other.
US. It would be appropriate to start
speculating now on what kind of a su-
perpower India will be or could be
when it becomes one.
Complex adaptive systems cannot
change their stripes once they have
evolved. How a system evolves deter-
mines its end-state. In short, how India
becomes a superpower will predefine its
structure, its mindset and its behaviour.
First, India’s emergence as a super-
power will show that it is possible to lift
millions of people out of poverty within
one generation while embracing plural-
ism, a free press and a vibrant multiparty
democracy. Most analysts predict that,
over the next two decades, India’s GDP
will grow at a faster pace than China’s.
As the world’s fastest-growing large
economy on a sustained basis, India’s
rise will put to rest the idea that a com-
mand-and-control political system is
the only viable route to rapid economic
growth and that democracy is somehow
antithetical to rapid economic growth.
Second, India has the potential to
serve as a leading example of how to
combine rapid economic growth with
fairness towards and inclusion of those
at the bottom rungs of the ladder. In a
democratic system such as India’s
where even the poorest people exercise
their political rights actively, fairness
and inclusion will be even more critical
for social stability than in China. As it
becomes a great power, these values
will likely become an enduring part of
the country’s DNA.
Third, the prospects are high that, by
2025, India will likely emerge as one of
the world’s least corrupt developing
economies. While widespread corrup-
tion is a reality in almost all developing
economies (as well as some of the devel-
oped ones), India is one of the very few
developing economies with a free press
that continues to be vigilant and merci-
less in exposing the corruption. It is very
likely that a vigilant and free press will
ensure that the likelihood of getting
away with corruption will decline rap-
idly — with salutary deterrent effects.
Fourth, India will likely emerge as
one of the world’s leaders in leveraging
information technology (IT) to boost
the effectiveness and efficiency of its in-
stitutions — the corporations, the gov-
ernment and as well as civil society or-
ganisations. As 3G and 4G wireless
connectivity becomes widespread over
the next five years, it is a near-certainty
that we’ll see a rapid diffusion of low-
cost tablet computers along with free or
near-free applications aimed at self-
learning, mobile banking as well as
commercial productivity. India in 2025
could well emerge as one of the world’s
most connected and IT-savvy societies.
Fifth, India will almost certainly be-
come a leading example of efficient re-
source utilisation, especially in energy.
India relies on imports for a bigger pro-
GEETANJALI
portion of its oil & gas needs than any
other large emerging economy. The sit-
uation is likely to get worse, with sus-
tained growth. The consequences are
clear. One possible outcome is that India
hits a resource-scarcity wall and eco-
nomic growth comes to a screeching
halt. An alternative scenario is that the
country’s industry, government and
consumers will respond vigorously to
the imperative for ever-greater resource
efficiency and the development of re-
newable energy sources. Given the am-
bitions and ingenuity of its people, I am
inclined to bet on the latter scenario. In
the process, efficient resource utilisation
is likely to become an embedded part of
the country’s psyche and behaviour.
S IXTH, India is likely to emerge as
one of the world’s leaders in mar-
ket-driven innovation. Adversity com-
bined with ingenuity has always been
the mother of innovation. Think of how
Japan emerged as the world’s leader in
did was to invent just-in-time invento-
ry management, total quality manage-
ment, long-term partnerships with
suppliers and other complementary
processes that enabled the near-com-
plete elimination of wasteful space.
Think now about the fact that even as
India grows to become the world’s third
largest economy, it will still be one of
the world’s poorest countries (in per
capita terms) for the next two to three
decades. Low income levels will contin-
ue to provide a very large opportunity
to India’s entrepreneurs to emerge as
the world’s leaders in frugal innovation
i.e., the design, production, and deliv-
ery of products and services that are ul-
tra low-cost. Virtually all of this innova-
tion will be market- rather than
technology-driven and is likely to be-
come an integral part of the country’s
corporate DNA.
Last but not least, India in 2025 is also
likely to emerge as one of the world’s
most entrepreneurial societies. Given a
culture of individualism, Indians are
“born” entrepreneurs. They also bene-
fit from the fact that, relative to China,
India’s economy depends far more on
pure private sector enterprises than on
state-led ones. These entrepreneurs
will not only serve as the engines for the
country’s rapid economic growth but
will also benefit from the vast new op-
portunities that a larger economy will
open up for them – domestically within
India as well as globally.
India will not emerge as a superpow-
er unless it is smart about managing the
evolutionary process of getting from
here to there. The seeds for the tree that
India as a superpower will be are being
planted right now.
(The author is Michael Dingman Chair in
Global Strategy & Entrepreneurship, Smith
Schoolof Business,
University of Maryland)
ways to lighten the mood and
focus on what can be done re-
duces the stress level. Most
people work so that they can
have a life outside of work.
Even for the most organised
person, there is always some-
thing else that could be done.
But for many people work be-
comes their life, and the life
they wanted outside of work
never happens, at least not in
the way they had imagined.
I’m not telling you not to
climb the ladder. I’m just tell-
ing you that there is a cost in
doing so and that you need to
use every tool available to
keep your physical and emo-
tional expenses low. Thinking
of it purely in business terms,
you need to maximize your re-
turn on investment by cutting
expenses where you can.
Keeping your mind clear of
clutter and your body sound
can pay off in many ways
while climbing. You are better
able to separate home from
work and make the real deci-
sions when the extra effort is
needed, those times where the
actual payoff results in promo-
tion or your extra effort results
in increased sales or saved ex-
penses. Putting in extra hours
just to put in doesn’t earn you
anything and fuels your burn
out. Guard against this and
maybe eat an apple instead of
that honey bun in the employ-
ee break room vending ma-
chine. Remember what John
Lennon said: “Life is what hap-
pens to you while you’re busy
making other plans.”

Textile modernisation C H AT R O O M
Japan To Help Telangana rationale However, the case may be that
funding for development comes
‘We are open to more acquisitions’
I M ARSH & McLennan Companies ven- er, the proportion of corporate insurance

T IS notable that Japanese textile and apparel majors
are now actively seeking trade and investment oppor-
tunities in India. With the two countries set to sign a free
trade agreement early this year, it should provide ample
scope for zero-duty exports of textile and apparel on both
sides. Besides, on sourcing yarn, fabrics and other textile
products, the Japanese now see India as a natural alterna-
tive to China, whose domination they want to reduce so
as to de-risk and aim at better balance. The gameplan
seems to be to amplify imports from India, boost exports of
Japanese textiles and seek out technological tie-ups with
Indian manufacturers. It would be ‘win-win’ for both.
The Indian textile industry is an important sector for for-
eign exchange earnings, employment and output. But
there’s much obsolete technology in use in production,
and other rigidities galore, such as infrastructure bottle-
necks, the lack of functional labour markets thanks to the
colonial-era laws still in force and low productivity levels
across the board in the industry.
However, lately the Indian textile and apparel industry
has proved that it can adopt and adapt to the latest tech-
nology and, in the process, produce world-class products.
The amounts sanctioned under the multi-year Technolo-
gy Upgradation Fund Schemes add up to $18.9 billion, of
which $16.4 billion had been disbursed till the end of April
2010. The Indian industry is the second largest, after Chi-
na’s, in terms of spindleage, and accounts for about a
fourth of global spindle capacity. It also has access to abun-
dant raw materials such as cotton, so as to reduce costs and
lead times. However, the industry in India is highly frag-
mented, which lowers scale economies and productivity
across various segments. The way ahead is the need for
proactive policy to develop a large number of textile clus-
ters, so as to reduce overhead costs. In parallel, we need
better diffusion of skills in fashion and apparel design for
the industry to improve its international profile. The pro-
jection is that annual exports of textile and apparel could
triple to $210 billion over the text 10 years. It may make
better sense to target a quadrupling of the exports, which
would be in line with the increase in overall output.
Bring the oldies back
To Save Australian Cricket
■THIS refers to the article
'Telangana state: Is there an
economic rationale?' (ET, Jan 3).
While the author makes a strong
case for the non-segregation of
Andhra Pradesh, perhaps the
reason why politicians and
activists are asking for separation
is based on how money is
distributed for development
within the state. As per the
author's own data, there is no
doubt that Telangana without
Hyderabad has been performing
better in almost all given
socio-economic indicators.
BLINKERS OFF
SALAM
Let Mumbai compete with Mauritius!
P OLICY needs to enable foreign capi-
tal investment in domestic funds and
abandon policies that export the
fund management industry to Mauritius.
The Mauritius Fund industry primarily
comprises alternative funds (AFs). Unlike
mutual funds (MFs), AFs are privately
raised ones targeting only qualified inves-
from within the region, rather
than from Delhi or Hyderabad.
People may be spending their own
savings on development of own
families, rather than the state. The
state may be sending most of the
money to the non-Telangana
districts that are developing
slower than those in Telangana.
So, the people of Telangana feel
cheated. Perhaps, there is a need
to look at government
expenditure data as well.
SHIRIN M TEJANI
PUNE, JANUARY 6
Inflation hits all
■POLICY-MAKERS are in a tizzy
as food inflation hits 18.3% (ET,
Jan 7). This inflation is at the
macro level. Inflation at the
grassroots level is much higher.
The home minister's statement
that inflation is a tax and affects
only the upper income people
because of their increasing
income levels is not correct.
Inflation affects the aam admi
and the poor more. They do not
pay income tax, but they have to
pay indirect tax in the form of
higher prices. Black-marketeers
are making filthy profits and the
disparity between the rich and
the poor is ever widening.
AL AGARWAL
NEW DELHI, JANUARY 7
Letters to the editor may be addressed to
editet@timesgroup.com
GU EST COLU M N
P R SRINIVASAN
ET
tured into the insurance business after policies placed through brokers is on the rise
the great Chicago fire that killed hun- in India and has accelerated after detariffing
dreds and virtually destroyed the US city in 1871. of the general insurance business.
Today, the group has an annual revenue of over “However, factors such as restricted free-
$11 billion. Marsh, its risk and insurance services dom of wording, restrictions on offering
arm, started operations in India in 2003, three claims advisory services by broking firms,
years after the sector opened to private insurers. not allowing brokers to handle premium
Two years later, the company was mired in an in- collection and claim collection, uncertainty
surance scandal in the US, though that did not on renewal of licences, and lack of availabili-
impact its operations here. Sanjay Kedia, CEO ty of skilled manpower are the major stum-
and country manager, Marsh India, says the bling blocks for the sector,” says Kedia.
business has gained momentum after the freeing He also reckons that the broking indus-
of price controls in general insurance. INTERACTIVE try in India will soon see consolidation.
“Mergers and acquisitions will bring in size
“Marsh India has been the fastest grow-
SANJAY KEDIA and scale to the benefit of customers in
ing entity in the group over the last two Kedia says that the recession did not have terms of price discovery and solutions
years. We have doubled our revenues in much of an impact on the company’s oper- benchmark. At the same time, India is a
the last two years and the total number of ations here. It offers corporate risk and in- large country, with distinct customer seg-
corporate clients in India has grown from surance solutions and the thrust areas in- ments and we see the strengthening of
450 in 2008 to 1,300 in 2010. We have al- clude group health insurance, aviation, many specialist brokers for products such
ready placed around .̀ 1,000 crore of direct energy, infrastructure, liability insurance, as health, liability and emergence of strong
broking premium this fiscal,” says Kedia. trade credit and political risk and micro in- regional brokers. However, there is not
The company’s takeover of HSBC’s insur- surance. enough clarity on regulations on mergers
ance broking arm in India has also helped “The rising complexity of risk and insur- and acquisitions, which may delay this
fuel its growth. “HSBC Insurance Brokers ance environment has enhanced the need consolidation for some time”.
was a global acquisition. In the process, we for corporate clients to have professional The general insurance sector is expected
acquired its Indian business. We are already risk and insurance advisers to protect their to grow, driven largely by health and motor
seeing good organic growth. Besides, we are interests. Marsh India expects growth to covers. “Property or fire insurance rates
particularly keen to grow through team ac- continue in the coming years. It plans to have dropped by over 80% on an average
quisitions and open to business acquisitions more than double its revenue in the next in the last few years and the rate wars have
as well. Additionally, we are constantly three years. “The commitment is to deepen ended. On the property front, we expect
looking at expanding our range of service the risk advisory services in emerging risk is- pressures of rise in deductibles before major
offerings in the area of risk management sues — supply chain/business interruption, rate increases as the levels of deductibles in
consulting,” says Kedia. corporate governance, pandemics, envi- India are very low. They do not create the
An alumnus of the Harvard Business ronment — and bring in best global practices appropriate incentive for risk management
School, Kedia led speciality practices in in managing total cost of risk for local and and risk participation by corporates.” The
Marsh, including energy, infrastructure global companies operating here,” he says. growth in the sector is likely to spur as the
and aviation. Prior to that, he was in the Although there are a large number of in- economy grows and there will be huge op-
project finance advisory and debt syndica- surance brokers registered with insurance portunities to tap, says Kedia.
tion team with IDBI. regulator Irda, only a few are active. Howev- DEBJOY SENGUPTA
Free lunches,
poused in the first draft but adopt a low
capital gains tax regime. Reverting also
provides the platform for an AF industry
freebooters
framework that would add depth to the
domestic fund industry.
AFs secure long-term capital —10-year
closed-end funds or open-ended funds
with negotiated lock-ins up to three years
L OTTERY tickets strewn
near the vendor’s stall tell
the story of hope betrayed
by chance. Every day brings in
fresh litter. This only means
be to reflect on the hidden costs
of hitting the jackpot. A Boston
Globe report on those who won
the Bay State Lottery warns po-
tential mega million winners

S QUARING the series 2-2 is a lot better than losing it

3-1,” Australian cricket captain Ricky Ponting said
after England retained the Ashes in the Melbourne Test.
For the Australians, the failure to regain the Ashes was a
bitter pill to swallow. Now that England has beaten them
by an innings for the third time in four weeks, the Aus-
sies have been divided into two camps: the angry and
downright furious. Andrew Strauss's men showed im-
mense character and skill throughout the series, but
they were duly aided by an utterly disappointing per-
formance from Australia. Australia's sixth defeat in its
last eight Tests marks the crumbling of a once-fearsome
reputation for invincibility. Now, the joke is: What do
you call a world-class Australian cricketer? Retired!
According to Ian Chappell, if Australia had only been
just beaten, there would have been a temptation to do a
Band-aid job. “But having been beaten so heavily, Crick-
et Australia will hopefully look at the whole system, as
I'm not sure it's still producing the required standard of
players.” Among the current players, Mike Hussey has
been excellent but he's more to be admired than feared.
Michael Clarke has been struggling for runs since mov-
ing to number four. Not long ago, the sight of Ponting at
the crease was enough to evoke thoughts of a match-
winning feast of runs, but not any longer. In the whole
series, he averaged just 13. Shane Watson makes runs,
but seldom the big ones. Australia’s three spinners be-
tween them took just four wickets for 556 runs. Mitchell
Johnson has lost his bowling edge so completely that he
has become the delight of rival batsmen. With Australian
newspaper headlines declaring them ‘Our worst XI’, it
seems only bringing back legends like Warne, McGrath,
Hayden and Langer can save Australia. But then, how
long can one cling to past greatness?
tors. AF mandates are diverse — invest in
infrastructure, start-ups, listed or unlisted
companies, create hedged portfolios or bet
on market direction.
The only Indian AF industry, with a few
domestic funds, is the small, policy-hob-
bled VC fund (VCF) industry. Sebi-regis-
tered VCFs are tax ‘pass through vehicles’,
uncompetitive vis-à-vis ‘tax-exempt’ MFs.
Policymakers fail to grasp the key chal-
lenge facing VCFs — they have to compete
with MFs for raising domestic capital and
with FIIs for raising foreign capital. Eco-
nomic rationale to invest in a VCF (a con-
centrated portfolio of illiquid, unlisted
businesses) exists only if post-tax risk ad-
justed returns are superior to a MF or FII.
Unlike VCFs, Indian MF investors enjoy
tax arbitrage. Firstly, tax liability arises only
when units are sold while in international
regimes tax liability arises when the fund
makes NAV gains. Secondly, NAV may in-
crease through short-term capital gains
(STCG) or interest income but can become
long-term capital gains (LTCG) for the MF in-
vestor. Thirdly, tax differentials are high,
jeopardising investment in VCFs: zero LTCG
taxes on sale of equity MF units vs 22% LTCG
taxes on sale of unlisted VCF investments.
Mauritius Funds gain marketshare due
to two factors. One, asset side regulations
on VCFs: one licence raj-style regulation
restricts VCFs to nine sectors to qualify for
the ‘privilege’ of a tax pass through. Other
sectors (including infrastructure!) are off-
limits but can be accessed as FDI by Mauri-
tius Funds! Two, the world’s biggest inves-
tors i.e., pensions and endowments, find
economic rationale only for Mauritius
Funds compared to investments at home
where they enjoy tax-exempt status.
● Policy in India has kept out all alternate
funds other than venture funds, and
gifted them to Mauritius
● Sebi should create a framework for
alternative funds, targeted only at
‘qualified investors’
● Tax policy should not favour mutual
funds over alternate funds, nor punish
routing investment through a fund
Policymakers need to recognise that in-
vesting in unlisted and listed businesses
are two sides of the same coin and treat
them on par. Innovative unlisted busi-
nesses are job creators. Mega infrastruc-
ture projects are done in unlisted startups.
Unlisted investing — in all sectors —
needs a competitive framework.
The new Direct Taxes Code incorporated
two sterling provisions in the first draft — all
equity funds will be tax pass through vehi-
cles sans distinction between unlisted and
listed investing. But, the draft was justifiably
criticised for taxing capital gains at income-
tax rates. The latest draft is proposing a half-
right solution that takes us back to square
one — low tax regime for listed equities only
and tax-exempt status for MFs. While tax
arbitrage on debt MFs remains plugged, it is
illogical that LTCG taxes on unlisted invest-
ments have increased to 30% of gains.
We need to revert to the principles es-
— which can only be good in today’s world
of hot capital flows. Wouldn’t it be better
that foreign capital comes into a domestic
“hope springs eternal in the hu-
man breast”, quips the wag qu-
oting the proverbial phrase
AF, subject to Sebi inspection, instead of P from Alexander Pope’s famed
Notes? Creating an AF industry frame- Essay on Man: for aren’t we hu-
work will require several steps but the fol- mans “born but to die, (and)
lowing two are essential. reasoning but to err?” So we
Sebi should create a framework for AFs, dream on daily, about jackpots
targeted only at ‘qualified investors’ — de- struck and riches
fined by a high subscription threshold per won without
investor. Regulations for AFs should focus much effort.
on the liability side — KYC norms and fund So why don’t we
marketing. There should be no asset side think as much abo-
regulation and AFs should be free to struc- ut the odds stacked
ture asset side activity as desired by inves- against someone
tors. VC regulations should be scrapped becoming an acci-
and VC funds should be registered as AFs. dental crorepati?
Secondly, tax policy should be framed Blame it on evolu-
on equitable principles: Tax liability tion or on beha-
COSMIC
should be the same for investing directly vioural economics.
or through a fund; funds should be tax
pass through vehicles; listing status should
Unlike standard
economics, beha-
UPLINK
have no impact on tax liability; STT be le- vioural economics does not as-
vied on all transactions in equity and units sume that people are rational. In
of funds (include IPOs/FPOs and open of- such a scheme of things, we are
fers). LTCG tax has to be zero; STCG tax to more like Homer Simpson than
be 5% and profits of equity funds should Superman, writes Duke Univer-
be capital gains (not business income). sity don Dan Ariely in his blog.
Funds could pay STCG tax and issue tax This means we may be biased
credits to investors. However, caution by evolution towards grabbing
needs to be exercised and the low capital all those free lunches. The good
gains tax regime should be restricted to news is that Homer Simpsons
only companies engaged in business. are not beyond redemption: of
Rules to ensure that asset transfers don’t course, when he sees some-
masquerade as share transfers will need to thing that's free, he almost au-
be formulated. Tax collections will in- tomatically goes for it even if it's
crease as funds pay STCG tax and AF man- not good for him. But as is
agers pay tax on their fee income. shown in episode after episode,
Let Mumbai compete with Mauritius! even Homer can be taught to
(The author is a private equity professional. over-ride his grossest instincts.
Views are personal.) One way of doing that would
against “greedy ex-spouses,
mooching relatives and leeches
masquerading as long-lost pals
coming out of the woodwork to
put the bite on you”.
It goes on to advise the poten-
tial winner to “brace for òld frie-
nds’ who come looking for a
share of the loot; it
also advises the as-
pirant to finalise
any divorce or sep-
aration arrange-
ments, ostensibly
even before one
has bought the tick-
et, so one doesn’t
have to fork over
half the winnings
to the former love
of their life!
It also seems im-
perative to hire a good account-
ant, lawyer or a financial planner
“even before cashing in the tick-
et” and one should certainly not
be in a hurry to grab that lump
sum payment before considering
the tax liabilities. Beyond these
nitty gritties is this nugget which
says money does not bring hap-
piness, it brings a lot of bullying.
A winner laments that there’s
a lot of jealousy; although she
loves the idea of winning, she al-
so feels a lot of pressure. “Be
careful who you trust,” she adds.
“Know who your real friends
are. It’s complicated.” This is ex-
actly what Panchatantra says.
■ VITHAL C NADKARNI