Building Sustainable Competitive Strength

We are living in a new age, the age of globalised economy. In the feudal age, the position of a person in the social hierarchy was determined by the area of land held by him. In the industrial age, machines and factories were a measure of greatness. Military strength became the determining indicator of a nation's standing in the age of empires. In this new age, economic strength is the defining measure of greatness.

Powerful ideologies have crumbled before the inexorable power of this potent force. The Chinese used to raise the slogan: 'politics is in command'. Events have forced them to discard it. They have now embraced the belief that 'economy must be in command'. They have done this with the objective of assuming a position of leadership in today's world.

By setting the goal of global leadership before us, we are committing ourselves to climb the Everest of global economy. The task is hazardous, but not impossible to achieve. In my view, competitiveness is critical for a successful assault on this high peak. Our attitude to competitiveness is a barometer of our self-confidence, and efficiency is the most crucial component of competitiveness. Faced with ruthless global competition, we have to worship the goddess of efficiency with unflinching dedication.

Efficiency has always been important. But the new age is more demanding. It insists on maximum efficiency. Then hangover of attitudes of the colonial era makes us somewhat sloth in recognising the overriding significance of this crucial factor. This is because administration was the backbone of colonialism. Management is the hallmark of the age of independence. There is a qualitative difference between the two approaches. Administration preserves the status quo. Management seeks to change. Administration commands. Management motivates. Administration overpowers. Management empowers.

The transition from an administrator to a manager is a revolution in attitude. And attitudes are important, because attitudes produce behaviour and behaviour determines results. In the ultimate analysis, sound management is synonymous with sound leadership.

The Indian economy today is splintered into innumerable sectors: government and private, large, medium and small-scale, PSUs and cooperatives, and farm sector, industrial sector, and infrastructure sector. Financial and services sectors are viewed as units divorced from each other. Consequently, managers in each sector are preoccupied with problems in their specific area, unconcerned with the negative impact of their efforts on other areas. This compartmentalisation denudes the economic system of its harmony and vitality. I am convinced that the more integrated we are, the more productive we can be.

We cannot any more think of only the corporate sector and our own companies. We have to think of the economy as a whole where all sectors are interconnected, working in a systematic sustainable manner. Similarly, the political system, the legislature and the executive, the judicial and the legal systems, the economy and technology, and the education and health systems must be viewed as components of a single interconnected entity.

We need to integrate them to optimise results. We should not remain preoccupied with the increases in the subsystems at the cost of the whole. Creative leadership is nothing but a sum total of efficient managing of processes in each of these areas. As managers, this is our challenge "" to provide the right processes and people so that we can aim at global leadership.

How do we address these challenges? I do not have readymade answers to all questions. But I will venture to outline a framework and indicate a direction.

A nation's place on the high table of global economic leadership can be measured by several parameters. The simplest and perhaps the most reliable indicators are gross domestic product and per capita income. Global GDP currently is US$30 trillion. GDP of high-income countries is $23 trillion. Global population is six billion. Population in high income countries is 0.9 billion. In other words, just one billion people in the developed world create an output of US$23 trillion. At the end of the day, five billion people are out of the race, of which one billion are in India. What do these figures tell us?

That, in the first instance, India must catch up with the global average and achieve a per capita income of $5,000. This means a 10-fold increase from present levels. But that is not "" and should not be "" our final destination. We will have to continue to march and target the per capita income of high-income countries. This will take our GDP to US$7 trillion in the first phase and to $20 trillion when we achieve a per capita income close to that of high-income countries. As of now, this task may appear to be daunting. However, it is not impossible to accomplish this goal.

My optimism stems mainly from India's enormous human potential. Two factors stand out: (1) the proven capability of our managers and, (2) the ability of our young men and women to absorb and master new technologies.

As for India's management talent, it is already gaining global recognition. Our premier management institutes are rated among the best in Asia. Foreign companies are recruiting on the campuses of these institutes for international positions. A large number of Indians are being seconded to overseas positions in transnational corporations. Numerous Indians are in leadership positions in global enterprises. This global recognition of Indian management talent is a tribute to India's professional managers. It is also a tribute to the All ]ndia Management Association and other organisations dedicated to raising management standards in India.

As for India's pool of young talent, we should not be oblivious of the fact that India has a stock of 5.5 million professionals. They include engineers, doctors, lawyers, chartered accountants, and practitioners of innumerable other disciplines. No other country has this enormous stock of human capital.

FOSTERING LEADERSHIP

All this naturally makes us feel good. But beyond this feel-good factor, lurk several nagging questions. Why do Indians bloom abroad and tend to fade and shrink in their own country? Why do efficient pilots and ailing national airlines, highly rated doctors and a dismal national health system co-exist in our country? Why does an intelligent bureaucracy bear with an archaic governance system'? Why do our world-renowned scientists and research teams suffocate in frustration in national laboratories? Why, as a nation, do we fall in the lowest quadrant in global competitiveness. Why are our exports as a percentage of GDP just 11 per cent as compared to over 50 per cent in other emerging economies?

We can radically alter this scene. Technology has come to be the most important driver of economic growth and development. Already computer engineers are caught up with designing complex engineered systems. Genetic engineers are galvanised by the promise of designing organisms to carry out industrial processes. Cell biologists are concerned with regeneration of tissues.

Medical biologists are motivated by tbe prospects of controlling aging and making life immortal. Tissue engineers are thrilled by the prospect of reconstructing human beings. Astronauts are assiduous about expeditions beyond the solar system. Physicists are passionate about building molecular computers and neural networks. India cannot remain captive to mediocrity when the world is setting out to capture new waves of disruptive technologies.

The world is changing so fast that if India remains where it is, the disconnect will soon become an unbridgeable gulf. We lost out on the industrial age. We should not be left behind in the knowledge age. Catching up with the world and then attaining eminence calls for creative leadership. I am not referring only to economic leadership, though this is critical in a globalised international order. But economic leadership does not grow in a vacuum. It can flourish only in an ambience of competent and inspiring leadership in all walks of life.

This is missing today because of the absence of an environment that builds leaders. There is too much of negativism in our attitude. There is more regulation than freedom, more suppression than autonomy, and more suspicion than trust. We need leadership for change, for purposeful change, and not for status quo. The challenge for all managers is to create an environment where such leadership can flourish in every area. The process must start with a commitment by each one of us to provide efficient stewardship in the fields to which we belong, to ensure global leadership for the country.

What does it take to be a global leader? you may ask. In my view, international competitiveness is an essential precondition for global leadership. The world has no time for those who are weak and complaining. The world respects those who are strong and confident. And today, strength comes from being competitive in all spheres of life. Power no longer flows from the barrel of a gun, as Mao used to say. Power now flows from the level of competitiveness a nation has achieved.

To my mind, there are three broad areas that we would have to focus to be globally competitive:

* Physical competitiveness

* Intellectual competitiveness, and

* Systemic competitiveness

Let me address each of these areas in some detail.

Physical competitiveness comes from building competitive advantages. Competitive advantages are built in an environment that fosters competition, embraces complex engineered systems and has the enabling infrastructure that improves capital productivity.

As of now, India's basis for competition is built around her comparative advantage based on natural resources and labour. But the fact remains that India's participation in globa1 trade is a miniscule 0.6 per cent. A bulk of this is in primary commodities. Only 5 per cent of our exports can be termed to be based on high technology. The so-called comparative advantage is not reflected in India's share in world trade.

Similarly, our often-repeated belief in labour-based advantages is fallacious because of extremely low productivity of labour. To give an example, wages in India are about 15 per cent of that in the USA. But, productivity of labour in India is just 14 per cent of that of the USA. As a result, labour costs per unit of output in India are 4 per cent more than in the USA. Value added per worker in India is about US$1,000. This is just one-fiftieth of that of the USA.

In agriculture, our labour productivity, as measured by value added per worker, is about US$ 400. This is only one-hundredth of that of the USA. Could we call this an advantage'? We must realise that in the organised sector we are employing only 40 million of the 400 million workforce. We must follow a labour policy that creates employment for all our workforce and not protect our existing organised sector workers.

A large proportion of our cost of production emanates from labour, transportation services, power and water. Power in Shanghai sells at Rs 1.75 per unit as against Rs 4 in India. Port turnaround at Shenzen is 24 hrs as against 7 days at Nhava Sheva. Funds in China are sourced at 6 per cent as against 12 per cent in India. These non-tradable inputs cannot be imported. Thus, a concerted effort is necessary to shift gears from comparative advantage to competitive advantage.

INFRASTRUCTURE

To address non-tradable input-related costs in the context of physical competitiveness, an enabling infrastructure must be created. Critical are power and energy, transportation, communications and financial markets. Let us take power, as an example. Per capita power consumption in India is 363 kwh, which is half of China's 714 kwh and compares poorly with the world average of 2,054 kwh. Transmission and distribution losses in India are 18 per cent of output. The world average is 8 per cent. Deregulation across the sector is the answer.

The government should neither act as a profit guarantor in the power sector, nor should it subsidise all the users. Consumers must learn to pay for goods and services. For those who cannot afford, the government must put in place a policy of targeted subsidies. Finally, after many years, the government is moving in this direction.

In regard to roads, some commendable initiatives have already been taken. We should see results in the next few years.

Deregulation with unrestricted entry is leading to next generation communication infrastructure. By all projections, the number of voice lines in the next five years will increase by the same amount as in the last 50 years and costs will be more than halved. This will benefit consumers, improve capital productivity and help enterprises participate in market opportunities, specially in the developed wodd.

For achieving and sustaining India's global competitiveness the energy sector is of crucial strategic importance. Our energy import dependence has increased from 7 per cent in 1990 to 12 per cent today. It is likely to double over the next 10 years. This is not a happy situation. An aggressive energy strategy must be at the centre of our national agenda. Recent initiatives in encouraging investments in upstream oil exploration and production are in the right direction and give hopes of new discoveries in the next few years.

Our quest for energy will create new economic and strategic challenges. From the challenge of mobilising capital to diplomacy. We must put aside outmoded attitudes, notions and prejudices in the interest of economic integration, cooperation and regional economic security. We must link up electricity grids, build pipelines, promote regional hydroelectric projects, stockpile oil on a cooperative basis and pursue nuclear energy projects. We must rely on building meaningful alliances to subserve our national interests.

On financial markets, we have not fully harnessed the high rate of household savings in India. We have a high cost and inefficient financial intermediation system. We are one of the few countries globally to have double-digit interest rates. We have to completely delicence the financial sector and have better regulation. This will bring down the cost of financial intermediation from 4 or 5 per cent to 2 per cent, which is the global norm.

Thus, we need to cover a lot of ground, particularly in power, energy and financial markets, if capital productivity has to be improved and India has to achieve physical competitiveness.

COMPETITION POLICY

I must emphasise that a country cannot become physically competitive unless its productive instruments individually achieve a high level of competitiveness. Every one of our companies has to be competitive at the micro level. Government must promote competition not only in industry, but also in infrastructure and knowledge sectors. A free, unlimited entry, market-based pricing in all areas will foster capital and operational productivity in all sectors.

Benefits to consumers from a competitive environment are already heing seen. For example, prices of consumer durables or white goods have come down. TVs, washing machines and video players are cheaper than before. Airtime rates of mobile phone service providers are down from Rs 16 per minute to less than Rs 2 a minute. Benefits to consumers in other sectors are also on the cards. Prospects of competition in petroleum products are giving rise to superior fuel quality and improved services.

ORGANIC IVESTMENTS

To create a competitive environment, greenfield or organic investments that achieve capital productivity must also he encouraged.

Unfortunately, our investment policies have done exactly the opposite. There is evidence to show that withdrawal of investment allowance has stymied new investments. That 40 to 60 per cent of foreign direct investment flows since the year 1990 were by multinationals and related to mergers and acquisitions, which does not enhance capital stock.

Greenfield investments have a multiplier effect. Reliance Petroleum's investment of Rs 25,000 crore at Jamnagar is a classic example. Because of a greenfield investment, about Rs 75,000 crore of additional economic output every year has been catalysed, 100,000 construction personnel engaged for about three years, 5,000 engineers found productive employment and 120,000 jobs created in the transportation sector. A whole new node for development in Saurashtra has been created.

The infrastructure bottleneck was overcome by creating ports, roads and pipelines at world-class costs. The entire investment is also highly competitive, having been built at two-thirds the capital cost of similar investments in other parts of the world. Had the government given control of public sector undertakings in the petroleum sector to foreign companies, it would have led to marginal increases only in distribution-related investments, higher levels of imports of petroleum products and competitiveness compromised.

Complex engineering systems with end-to-end systems engineering capabilities are now becoming the hallmark of globally competitive companies in the knowledge age. Indian industry must graduate from unidimensional manufacturing to complex engineered systems.

In the future, a doctor in the operation theatre will no longer use just a surgical instrument or tool. He will be part of a surgical system that encompasses telemedicine, remote surgery and robotic surgery. A soldier on the battlefront will no longer use just a weapon. He will be part of an assault system that uses wearable computers, global positioning systems and remote activated devices.

A farmer in the field will no longer use just farm equipment. He will be part of a precision farming system that leverages the power of global positioning systems, sensors for root, leaf and produce growth and computerised control of plant growth environment. Therefore, to attain leadership, all existing industrial investments, instead of offering discrete products or services, must integrate knowledge-based complex engineered systems.

CREATIVE DESTRUCTION

Creative destruction is an essential ingredient of competitiveness. The spirit of creative destruction is imbibed in our epics. The trinity of Brahma, the creator, Vishnu, the preserver and Shiva, the destroyer, epitomise this. We see the process of universal creation and destruction in a complementary cyclical relationship. Just like day and night and inhalation and exhalation.

Hyderabad is a good example. At one time it was considered to be a city for public sector units such as IDPL and ECIL. Today these organisations are in troubled times. In their place many healthcare and IT companies have come up. Hyderabad is getting to be one of India's knowledge capitals. I urge you to look at the positive aspects of the phenomena of creative destruction, so necessary to create a competitive environment.

Inefficient, old enterprises must be allowed to disappear and new ones that are strong and competitive encouraged to take their place. Weak units, whether they are in the public or the private sectors must ring out to ring in the new. I must hasten to add that my view is not an advocacy of careless and callous destruction.

Thus, competitive advantages fostered in an environment of competition, enabling infrastructure, organic investments, complex engineered systems and creative destruction are crucial to building physical competitiveness.

INTELLECTUAL COMPETITIVENESS'

Let me now turn to intellectual competitiveness. In essence, it means that every Indian manager, technician and worker must be better than his or her counterpart in the world. Intellectual competitiveness comes from investing in education and supporting innovation. To build intellectual competitiveness, investment in education is an imperative. Education is like a cradle to global leadership because knowledge has become the single most important economic resource today.

Progressive nations are investing heavily in education in order to be at the forefront. Sweden leads with an investment of 8.2 per cent of GDP in education. In contrast, India spends just 3.2 per cent of GDP on education. This is not only lower than the world average of 4.8 per cent, it is also below those of low-income countries whose average is 3.3 per cent. When it comes to higher education, the picture is worse. We spend only 0.1 per cent of GDP on higher education, not to speak of science and technology education, where we spend just 0.05 per cent of GDP.

The greatest economic returns in development come from investment in education, that too primary education. We must fundamentally reform our education sector and open up higher educatton in science and technology to the private sector. We must create a significant resource base of professional knowledge workers. This is an essential precondition for attaining and retaining global leadership.

Education is to the knowledge economy what limestone quarries are for cement plants. Knowledge industries will be built on an education system that creates a talented professional workforce.

This is important because the developed world will see significant shortage of talent. Aging in the developed world is making skilled workers hard to come by. The USA is already facing a shortage of skilled professionals. Over the next 10 to 15 years, the USA will see a professional workforce shortage peak to 15 million. Germany, Japan and Australia are forecasting large shortages of professional talent.

Thus, developed countries will compete to attract the right kind of skillsets either through immigration or by oursourcing. India is uniquely placed to capitalise on this opportunity. Let me illustrate. India has workforce of 400 million. With an emphasis on technical and professional education, we can create several million people with domain knowledge. Let us train just one million of them every year in marketable world class skills in diverse sectors that would be in demand.

If they work for 200 hours per year earning US$ 20 an hour, which is about half the average salary, it means we are creating a sustainable income of $40 billion per year. This $40 billion in income, in turn, can catalyse an output of at least $120 billion and provide employment for several million in other sectors. In other words, we are talking of a basis for a 30 per cent growth in economic output each year purely on the strength of our professional talent. The additional benefits will be in improving current account balances aud external debt. Growth based on export of talent is sustainable, unlike exports of physical assets that are opportunistic to market conditions.

This single strategic move of harnessing India's professional resource will unleash a self-sustaining economic revolution.

Of course, we cannot remain satisfled with the present resource base of about 5.5 million professional managers, engineers, scientists and doctors. To meet the demands of internal economy and external markets,

India will require to create a pool of 53 million professionals This is ten times our current professional resource base and about 10 per cent of the workforce.

Obviously. our current system of higher professional education is ill-prepared to achieve this, in terms of infrastructure, teaching resources, and funds. It is here that the private sector has to step in with the government to create a conducive environment. As enlightened managers, we have to ensure that we have the professional talent not only for our business needs but also to address opportunities that will emerge in the developed world.

Let me repeat "" it is worth repetition "" that even with the present pool of talent, we can have an unprecedented self-sustaining economic revolution. It is one area where we have a real advantage.

This is a once-in-a-lifetime opportunity. With the combination of two factors "" the stock of 5.5 million trained professionals and world class communications in place "" India has a window of opportunity to leapfrog into world economic leadership.

This window of opportunity is open today. It will not remain available eternally. The English language was imposed on us. But it was perhaps a boon in disguise because we can now settle the scores by using the knowledge of English to bring wealth from abroad into India.

Other nations, not so endowed with knowledge of English in such numbers, have launched a massive campaign to overcome this deficiency.

We must act now and leverage our advantage. Not merely the IT workers, but millions of other professionals need to be deployed to use the communication revolution to serve the needs of their respective areas in Europe, US and elsewhere. Already an India brand exists in the US.

The great success of overseas Indians and Indian professionals in the technology sector has generated an India wave. We need to build on this. This intellectual competitiveness of ours, at this time, is unmatched in the world. If we launch a war-like effort to create skills, match them with the requirement in the developed world, and deliver them in a high quality and low-cost framework consistently, nothing can stop us.

I strongly urge that the creation of a professional resource base in India must be pursued as a national mission. This is the key to intellectual competitiveness. It is the surest route for India to carve out a dominant position in the knowledge economy.

SYSTEMIC COMETITIVENESS

I would now like to focus my thoughts on systemic competitiveness. By systemic competitiveness, I am referring to issues, attitudes and mindsets that are necessary to fostering a competitive instinct.

Since independence we have been trained to think in terms of self-reliance. It was important at that point of time. We needed to build a fortress around us till we gathered strength to stand on our own feet and compete with others. In today's context, that fortress is likely to become a prison. An introvert attitude is against our own interests. It is limiting our perspective to the Indian market.

We fail to see opportunities beyond our borders, in the region and in the world. We need, therefore, to redefine self-reliance. This is the time to extend our area of influence and see the world as our marketplace.

Let us not be afraid of international efficiency. Let us not shy away from global competitiveness. To protect low quality and high cost would induce consumers to procure foreign products in a clandestine manner. A strong Indian economy is the most dependable defence of our national interests. We should be satisfied only when it is ready to withstand global competition. When it makes inroads in foreign markets on its own merit and develops global brands.

For example, in Chcnnai, Sundaram Fasteners has global acceptance for product quality. Jet Airways has won international acclaim for in-flight service. NDTV has established itself as a world class news and current affairs organisation. IIM, Ahmedabad, is rated as the best management institution in Asia. The Indian Institutes of Technology have left an indelible imprint on technical education.

GOVERNMENT AS SAVIOUR

There are several components of attitudinal changes that are needed to move India significantly towards global leadership. On top of the list is the attitude that looks at the government as saviour. At the drop of a hat we run to the government for succour, whether it is for tariff protection, anti-dumping provisions or level playing field. We demand greater government expenditure as a solution to most problems "" from employment increase to demand generation.

In fact, thoughtless increase in government expenditure in an effort to stimulate the economy results in schemes that are inefficient and wasteful. Some industries may get temporary reprieve from such measures. Ultimately, bureaucracy or political systems, which tender the work, are the primary beneficiaries of such wasteful expenditure. Each such scheme is like opium for both groups that cannot compete or generate consumer value.

I believe that all good ideas should be funded by the market and not by the government. Capital productivity can only be achieved by market forces and not by external support. The onus thus falls on individual companies to take the rough and tumble of global competition in their stride and have the conviction and courage to get out of the goverrnment's shadow. As management, this is our challenge "" to provide the right people, who are at par with the best in the world, and right processes, which are benchmarked with the best in the world, so that we can aim at global leadership.

At Reliance, we are working on international competitiveness with a passion. In petrochemicals, we lead the world in cost competitiveness based on capital and operating productivity. In energy, Reliance is investing significantly in the upstream area. Reliance Infocom is investing several billion US dollars to build an information and communications infrastructure that will change the way India communicates.

In education, the Dhirubhai Ambani Institute of Information and Communicatinos Technology in Gandhinagar, that commenced its first academic year this August, will nurture world class skill-sets and add to the professional resource base in our economy.

In biotechnology, Reliance Life Sciences is building intellectual capital in cutting edge areas of medical, industrial and plant biotechnology and has been recognised by the National Institutes of Health, USA, among 10 research institutes worldwide in stem cells. In our own limited way, we have tried to pursue the principles of competitiveness in global leadership.

To conclude, I would like to submit that we need a new strategy for economic growth and development. A strategy that does not enumerate economic reforms into first and second generations. There are no generations in reforms. Either we reform or we deform. We regenerate or we degenerate.

FOCUS ON 3 SECTORS

India has to focus on three sectors simultaneously: agricultural economy, industrial economy and knowledge economy. In all the three areas we have to develop strategies and management skills to attain world class efficiency and global competitiveness. We must:

* Create large scale employment in the agricultural sector

* Improve productivity in the manufacturing sector and considerably upgrade skills, products and service offerings.

* Be dominant in the knowledge sector.

As a country, as communities, corporates and individuals, our convictions must be rooted in the belief that we can take on the world. We must internalise values that benchmark with the world. We must adapt new practices that embrace the world. This will require creating a whole new ecosystem that supports efficiency, competitiveness, and accountability. This will mean that government will have to shift from administration to management and leadership.

LEARNING FROM THE PAST

I believe we can do it. We have done it in the past. We led the world in thought, word and deed. We had the world's first university at Takshashila in 700BC. We had a global university in Nalanda in the fourth century. We were far ahead of other civilisations in medicine and surgery 2,500 years ago. We led the world in astronomy and mathemetics. We showed the world how to navigate. We created footprints across the world through merchandise and trade. Our textile industry was a world leader in the 17th and 18th centuries.

We must seek inspiration from our past, stride opportunities of the present and secure a glorious future "" in the global economic order. As India marches on the road to global leadership in a competitive environment, we will encounter numerous problems, no doubt. We must have the confidence that we can solve any problem that arises. There will be setbacks. We must have the knowhow to turn adversities into opportunity. As managers it is our responsibility to discover what can be done instead of lamenting what cannot be done.

We must not be satisfied with what everyone else is doing. We need to do better than the others. We need major breakthroughs in all areas and for that we must go beyond the obvious.

Last, but not least, we must stick to our goals till they are realised.

If we set challenging goals and discipline ourselves to realise them, we will turn dreams into reality. India looks up to her managers to take the country to the summit of global economy. As one of you, I have the fullest confidence in our collective wisdom and innate creativity. With our feet on the ground and the eyes riveted to the peak, let us scale the heights. I am sure we will succeed and do India proud.

(This article was published in the April 2002 issue of Indian Management)