Sunday, 19 December 2010

What can India sell China? And how?

Premier Wen Jiabao’s visit this week, predictably, raised a lot of political heat when it should have raised as much or more economic heat. An only achievement for India is its excluding any reference to Tibet or One China in the joint statement, in retaliation for China’s issuing stapled visas to travelers from Jammu and Kashmir.

Other than that, India failed to nudge its larger, and more powerful, neighbor on all political issues including the stapled visas, festering border disputes and newly emerging Chinese support to rebuilding of Pakistan-occupied Kashmir. In fact, days before Wen’s visit, Chinese ambassador Zhang Yan termed bilateral ties “very fragile,” pushing India firmly on the back foot. That remark caused the normally unflappable foreign secretary, Nirupama Rao, to lose her cool, and wits, and ended India’s strangely persistent bid to put a positive spin on ties with China.

But could India have achieved more on the economic front? It should have.

Trade between the two fastest-growing countries in the world is vital in itself and on account of the leverage it provides for political ties. China is happy to keep hot-button political issues on the backburner while winning Indian markets, and even pushing Indian business into dependency. Obviously, this is not in India’s interest.

Trade between the two is hopelessly lop-sided and India is no closer to addressing it than it was five years ago. In 2005, when India first sought to address the issue, its trade deficit was $1.5 billion on trade of $18 billion. This year, the deficit is an estimated $26 billion on trade of $60 billion, double the targeted trade level as trade grew 10-fold over the past decade.

India’s trade deficit is going to get a lot worse. On top of consumer greed for cheap Chinese goods, Indian businessmen are hungry for cheap Chinese capital equipment, especially in power and telecom. In fact, two of the $16 billion deals (both were announced much earlier) signed during Wen’s visit were for power equipment and finance by Anil Ambani’s Reliance group.

Given the record of the past decade and the potential for further expansion, the trade target of $100 billion for 2015 might be easily attained by the two countries. But the risk, from India’s perspective, is that the trade deficit may further balloon and its businesses would become more dependent on Chinese suppliers.

India exports mostly raw material (iron ore, for example) but not significant value-added goods. IT and pharmaceuticals are often cited as potential sectors with potential in Chinese markets. There is obviously a huge market for generic drugs but I am not so sure IT is there as yet. This is because our significant IT offering is services, not hardware or software with high-yielding royalty; and China is not such a well-developed market for IT services like the United States or Europe.

While we continue to agonize over the border issues with China, and the security threat from it, we need to focus on what else we can sell China and how.

Monday, 18 October 2010

The microfinance conundrum

It looks as if microfinance is facing its first major crisis. Even though the crisis has been linked to recent farm suicides in Andhra Pradesh, it may not be far-fetched to connect it to the hugely successful IPO of SKS Microfinance, the nation’s biggest micro-lender, and the prospect of lucrative profits.

Readers of this blog might recall my blogs on the subject. In one, I posed the question: Do we need better regulation of the microfinance lenders? In another, days after the SKS IPO, I expressed my reluctant, but eventual, capitulation to the concept of for-profit microfinance, as opposed to Mohammed Yunus’ original philanthropic microfinance. Still, I never resolved one of the biggest questions in my mind: What is society to do if for-profit microfinance, in its quest for ever-higher profits, pushes the boundaries of usury and becomes exploitative?

The trigger for Andhra Pradesh’s ordinance to regulate microfinance organizations in the state was not only the suicides but also complaints of abuse by some borrowers. The ordinance’s details are not entirely clear and SKS has, in a filing with the securities watchdog SEBI, said it is seeking legal clarification to understand if the ordinance even applies to it.

One thing, though, is clear. The ordinance does not cap interest rates at which microfinance groups can lend. But that is a regulation separately being considered at multiple levels – by banks that lend money to microfinance groups and by governments.

Capping interest rates, many economists and editorials say, is a bad idea. But this is a simple free market idea that may or may not be desirable in the context of our society. Besides, the reasoning is not entirely persuasive. SKS founder Vikram Akula, for example, will only say that interest rates will eventually be driven down not by regulation but by competition. This is self-serving and maybe facetious, too. Given the extent of India’s financial exclusion, serious competition that can lower interest rates will be a long time in coming. This should not mean usurious rates for the poor. It would be sad if what began as a revolutionary philanthropic movement is allowed to become exploitative.

I still believe for-profit microfinance can be a greater catalyst to society, compared with the philanthropic model, but will Akula and his big-name investors like Vinod Khosla and George Soros, not to mention other microfinance groups and investors, voluntarily accept lower margins, and not seek to maximize gains? If SKS does anything of the kind, could it be sued by shareholders for breach of fiduciary duties?

Akula has built the largest and most efficient microfinance company in India and he, more than anybody else, may have answers to these questions.

Wednesday, 6 October 2010

Does the Nano need a makeover?

In the glorious hype ahead of Nano’s rollout, it gave rise to many fancy notions. Two years since the car was unveiled, and a year since the first Nano hit the India road, many are turning out to be mere myths.

First, it was believed that the Tatas could never roll out enough numbers of the pint-sized car to meet insatiable domestic demand. Such would be the appeal of the Rs. 1 lakh car, it was thought. Hardly so. The bookings are drying out and over the past month, Tatas have said buyers in at least five states can now walk into a showroom and buy the Nano, just like they can do with most other cars in the Indian market.

Two, everybody down from Ratan Tata thought the car would be bought by first-time car buyers, predominantly families that can’t afford to buy a four-wheeler and consequently, precariously ride on two-wheelers. Some even thought Nanos could replace the three-wheeled auto-rickshaws. Nothing of the sort has happened. Ratan Tata’s dream will remain a dream. Clearly, people are equally conscious of the costs of running a car, not merely the cost of buying one.

If you go by anecdotal evidence, in the form of multiple articles in the press, most Nanos are bought by existing car owners, primarily as second or even third cars. This is, clearly, a perverted outcome of Tata’s sincere belief to bring greater comfort and safety to lower middle-class families. But, apparently, existing car owners – for ease of analysis, let’s assume this is the upper middle class – see the Nano as a cheap second or third car to, for example, pick up a child from school or drop a pet off at the vet. As you can imagine, to this class Rs. 1 lakh and a little more is something they can charge to their credit card.

Thirdly, the Nano easily could lose its other call to fame – the tag of the world’s cheapest car. Even when the first Nano hit the road, the Rs. 1 lakh price tag was only a notional one. The actual cost of upwards of Rs. 150,000, making it not very cheap compared with the Maruti 800. Today, it is closer to Rs. 200,000 and sometimes more, if you add the many comforts most drivers seek. Many cars are being planned in this price segment and the Nano would be challenged both on price and quality by newer cars.

In any case, the Tatas should voluntarily relinquish the cheapest car tag. The reason: the Nano is bought mostly by the well-heeled and there is no reason why the Tatas, or anybody else, should bear a subsidy. If anything, market dynamics for the luxury class suggest higher margins. It also will avoid a rise in environmental pollution caused by perverted low pricing.

All in all, Nano probably needs a makeover.

Monday, 13 September 2010

Do we need the government to foster innovation?

Over the past several weeks, an exaggerated importance has been brought to bear on jugaad, or simple human ingenuity that Indians have historically used to overcome life’s little, and peculiar, adversities.

First, The New York Times featured a long article by Anand Giridharadas on what it called “frugal innovation;” Swaminathan Anklesaria Aiyar of The Economic Times glorified the “phenomenon” and believed it was behind many of the nation’s recent corporate successes, not to mention its utility in socialist India; and then management professors (Peter Cappelli, Harbir Singh, Jitendra Singh and Mike Useem) from the Wharton school of business, writing in The Wall Street Journal, concluded that jugaad, reflected in “the capacity of Indian firms to adapt quickly and improvise creatively to deal with limited resources,” was a legitimate subject of management study.

Also, it must be mentioned that two business dailies (The Economic Times and Mint) have been running series of articles on Made in India innovations for the past several months, making it a media orgy of innovation. Only Swapan Dasgupta, a columnist wearing political glasses, saw jugaad as negative, saying examples of such ingenuity have “scarred India,” (preparation of the Commonwealth Games, for example) and was dismayed by the “celebration of expediency, shortcuts and shoddiness.”

In any case, the government last week set up a National Innovation Council. It is headed by 1980s telecom czar Sam Pitroda and includes a wealth of minds. Former Boston Consulting Group chief Arun Maira, former ISRO chief K. Kasturirangan, former Nasscom chief Kiran Karnik, Tata Sons Executive Director R. Gopalakrishnan and film-maker Shekhar Kapur are among its 17 members. The U.S.-based Pitroda said the council would foster innovation and would have at its command Rs. 1,000 crore to start with. Kapur sounded out a television reality show that would identify and reward innovation.

Unlike Dasgupta, I think there is much to laud about jugaad, especially in a country like India, but does that need to be fostered by an external agency such as the council? That such an agency should be a government initiative makes it even more troubling. If you consider the examples cited by the Wharton professors (Cappelli, Harbir Singh, Jitendra Singh and Useem) jugaad may not even have been studied adequately. The authors cite Bharti Airtel, Hindustan Unilever and ICICI Bank as examples when jugaad of far higher magnitude has been engineered by smaller companies and indeed by “every housewife, farmer, transporter, trader and industrialist,” as Aiyar says.

Innovation, as we can understand it, is something that emerges from a certain context, and even a certain need. For example, jugaad in socialist India meant creatively getting around archaic regulations and red tape. In today’s world, it might mean competing with large global corporations. I doubt the National Innovation Council or any such agency could have created a company like Micromax, for example, whose jugaad lay in an intense desire to outdo market leaders like Nokia.

What did Micromax do? It gave Nokia and the likes a run for their money by coming up with bargain basement prices (think bottom of the pyramid) and by designing products innovation labs at Nokia or for that matter all other global players, couldn’t even dream of. The global players couldn’t understand why on earth Indians would demand, or even buy, phones with dual SIM cards. It was unheard of anywhere else in the world. But Micromax better understood the Indian consumer and was first on to it. Similarly, it recognized the huge importance of longer battery life in a nation whose many villages never get power and whose towns are perennially short of power. Having fashioned its products, Micromax worked with cheap hardware and made-to-order software from nondescript Taiwanese manufacturers to trump its bigger rivals. That was jugaad too.

To my mind, Jugaad is too well and thriving in this country for the government to have stepped in.

Thursday, 2 September 2010

India, ICC should learn from match-fixing scandal

The early 1990s, when I used to write about cricket for a living, seems in hindsight to have been the last age of innocence for the sport. Young Indian cricketers on tours spent their time, and energies, hunting down a cheap Indian meal, or an obliging NRI who could do their laundry. That was because Indian cricketers, even though paid handsomely by Indian standards, lived on dollar allowances that were barely enough, and both Indian meals and laundry (for all those whites) could be expensive.

Of course, the 1987 World Cup in the subcontinent gave rise to sensational allegations, notably by Pakistani fast bowler Sarfraz Nawaz that Pakistan deliberately threw its semi-final against Australia. Even on this side of the border, a rumor was that Sunil Gavaskar had thrown his wicket (he was bowled by a beauty of a delivery by Phil DeFreitas in the first over of the semi-final against England). Even though Pakistan and India went on to lose the matches, the allegations seemed wild at the time and few, if any, took them seriously.

We also had at least two cricket reporters in the press box who not only placed bets but also provided information, mostly about the wicket and the weather, to bookies. Still, none of us – and I mean not just the reporters but also the reporters-punters, bookies and cricketers – believed match-fixing was possible. It was never even considered. How on earth could it be orchestrated?

What existed then was a simple underground betting ring, presumably because of a latent demand from Indian punters unable to bet on sporting events bar horse racing. It was an honest operation based on trust. Bets could be placed on the phone if you were in the ‘inner circle’ and could be trusted to pay up. Similarly, bookies honored the bets. Today, the honor-based underground betting ring has been replaced by an underworld system in which several bookies, and large punters, seek to manipulate outcomes by simply fixing matches, rather than by showing a keen understanding of the game’s nuances.

As the match-fixing revelations, or allegations, rage on, Pakistan’s ‘cricketing culture’ has faced intense, and deserved, scrutiny but both India and the International Cricket Council, the sport’s ruling body, have lessons to learn.

India needs to consider legalized betting on cricket, just as England, Australia and even South Africa already have. A legal system may not end match-fixing but could, most certainly, reduce the likelihood of match-fixing attempts, and probably make policing by the ICC’s Anti Corruption Unit more effective. Of course, this will require action by the Indian government, and not just the Board of Control for Cricket in India. But in this age of reforms, it’s something that should get a fair hearing.

From the ICC’s point of view, it must be disappointing to find out that its Anti Corruption Unit couldn’t prevent the recent scandal. The failure raises a lot of questions that only the ICC can answer. For example, did it act on the claims of at least five Australian cricketers that they had been approached by bookies in the past one year? If so, why was such action ineffective? Or, even more significant, does its program extend to protecting young, uneducated and vulnerable cricketers like Pakistan’s Mohammed Ameer? If not, should the ICC run an induction program for young cricketers like Ameer, or any newcomer who enters international cricket? In these and other answers might lie cricket’s ability to avert another embarrassing match-fixing scandal.