No longer sui generis

Democracy has taken deep roots in the corporate world in the 20 years since liberalisation.

There is an interesting piece of statistics, about the leading mutual funds, which captures the essence of the change that has taken place in the Indian economy in the last 20 years. In every five-year period from then till now, the leading fund managers have delivered better returns than the market’s indices, but — and this is the point — the margin by which they have bettered the index has shrunk dramatically from each five-year period to the next. In the most recent five-year period, they have barely kept pace with the market, in terms of delivering returns.

What does this tell us? That the market — the flow of relevant information, the opportunity to make money — has got democratised and normalised. Democratised to the extent that the market now works by and large for the majority, not a privileged or insider minority. And normalised in that the reality here matches what prevails in most other markets, where fund managers find it difficult to do better than the market, and often do worse. The advantage that leading fund managers might have had in India at a certain stage, either in terms of privileged access to information (and who doesn’t believe that insider trading was rampant?) or in terms of a better understanding of the market and which stocks to pick, has slowly evaporated, or all but.

What is true of the stock market is substantially true of the Indian economy as a whole. Business magazine cover stories in the mid-1990s were quite often about the businessmen who seemed slightly larger than life at the time: Tata, Birla, Ambani, Goenka and the rest. Today, the story is more often about markets, products and innovation — 3G, the Nano and the iPad.

To be sure, business journalism has a penchant for focusing on personalities; look at the number of times Fortune in the US ran cover stories on Jack Welch when he was the head of General Electric. The difference is that, then the stories in the Indian business press were told about businessmen, now the story is more often told through businessmen.

Consider, then, the spread of managerial competence through the corporate sector — another feature of the normalisation of the Indian economy. Back in the early 1990s, a company like Hindustan Lever — which makes everyday products for middle-class homes — was the darling of the stock market, with outsize valuations reflected in stratospheric price-earnings ratios. In part, this was because of the advantage conferred by the brightest graduates from the management institutes wanting to make their careers with the company. Today, the renamed Hindustan Unilever is on its way to becoming the staid and boring company that Unilever firms are in most other markets. If anything, a clutch of Indian ventures (think Marico, Emami, even Wipro and Godrej) has been able to challenge Unilever in different corners of the FMCG (fast-moving consumer goods) market. And, coincidentally, top rung B-school graduates go off to the financial sector or to consultancies, or some tech companies, as they do elsewhere in the world.

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The democratisation of the economy is also reflected in the shift of market power from producer to consumer. This is the key because, in theory if not always in practice, policy now seeks to benefit not 75 leading business families but 750 million consumers. One way to look at the power shift is to see how many of the leading or news-making ‘business houses’ of 1991 are still around as significant business entities, and how many have become also-rans in the corporate world — Mafatlal, Sarabhai, Modi, Shriram, Bangur, Walchand, Lalbhai, Wadia, Nanda… the list can go on.

Next, check how many new players have come into market segments, to contest the positions of established players. And lastly, check how inflation in manufactured products is much lower than general inflation — companies are mostly absorbing higher input costs in an effort to win the battle for customers, and they have been able to do so because of improved productivity and economies of scale.

The efficiency gains are of course an important component of the story of the past two decades. In the 1990s, the majority of Indian companies were not earning a return that was greater than the weighted average cost of capital. In other words, they were destroying capital — one feature of a hothouse economy where competition was restricted and even successful companies were in fact quite inefficient. That situation has changed dramatically, in part because of the transformation that many companies achieved under the pressure of the slow-down and mini-recessions that pockmarked the period from 1996 to about 2004. Most companies now use capital efficiently, and have better technology and higher worker productivity. The superior returns that resulted have translated into the boom that the stock market has seen in the last few years. Bear in mind that the Sensex in 2004 was at the same level as in 1994; the pay-off for all the productivity gains achieved in the recession-cum-transition years of 1996-2004 has come in the last seven years.

These transitions have changed India from an economy that looked and felt strange (and whose rules of business were stranger still, from the viewpoint of international observers) to one that is more “normal”, in that its rules, brands and dynamics reflect those that prevail in other markets. You don’t see Ambassadors and Fiats ruling the roads, with senior managers going around in Contessas and NE-118s that have been phased out in their home markets; nor do you see unbranded air-conditioners accounting for the bulk of the market because cottage assemblers get huge tax breaks; nor, for that matter, are our best highways and airports of the kind that even sub-Saharan Africa would be embarrassed about.

It used to be argued quite frequently in the days when the Ambassador car ruled that India was sui generis, in a class of its own. In other words, the rules that applied elsewhere would not work here, and we had to have our own peculiar laws and controls of all kinds. Well, what we have learnt in the last two decades is that we are not sui generis. What works elsewhere will work here; businessmen will respond to opportunities, and given a choice consumers will value quality and low price. There can be such a thing as over-regulation, and markets can be made to work. Most of the time, we simply have to learn from other economies that have travelled the road before us. In short, we can be a normal economy.

To the extent that the Indian economy has got normalised, the opportunities for rapid wealth accretion are also no longer abnormal. The past two decades have provided a window for the accumulation of overnight riches, because the smart guys have been able to exploit imperfections in markets, and the discontinuities that economic reform introduced into the system. Think Sunil Mittal, who walked into the telecom market at just the right time and built a hugely successful business out of nothing. His US counterparts would be the Vanderbilts, Carnegies, Mellons and Rockefellers of late 19th century America. But there comes a time when individual ability yields to corporate clout.

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India’s large number of billionaires has drawn negative comment from people who juxtapose it with the continuance of large-scale poverty. But the bulk of the rupee-billionaires in India (some 600 of them) are first-generation entrepreneurs, not inheritors. This is to be expected in an emerging market where entrepreneurs can spot and exploit opportunities — as happened earlier in the US, China, South Korea and elsewhere, when those economies were at a comparable stage of development.

Eventually, though, the system gets driven more by the large companies that have established leadership in key markets. The scope for new entrepreneurship then lies mostly in the disruption that new technologies cause — as in the US where new wealth has gone mostly to those who have ridden the infotech wave. Think Bill Gates and Steve Jobs.

It may be premature to talk of the Indian market maturing in this fashion when per capita income is still barely $1,600, a figure that could rise to $4,000 by 2020. Indeed, India can be considered a “median” economy only when per capita income reaches $4,000 or $5,000—about half the countries will then have higher per capita incomes, and half lower. Indian society will then be characterised by a broad middle class, a substantial number of wealthy people, and (more important) not that many really poor people. The country will have ceased to look and feel and smell “different”. The Indian village may still not have joined the global village, but the Indian market will have aligned with the global market.

In 2011, we are probably two-thirds of the way to “normalcy”. Many market segments will continue to see explosive growth in the coming decade, as the size and spending power of the burgeoning middle class continues to spell opportunity in capital letters. But it is likely that growth from now on will be driven by the large companies more than by individual entrepreneurs — though new entrepreneurs will doubtless continue to surface, not least because the environment is still ripe for crony capitalists to flourish.