'If utilities are privatised, global firms will come to India'

Q&A/ALEC JONES

Is the India Shining campaign all hype or is it real? Is there a future for the Indian economy beyond IT and IT-enabled services? Is the sound economic performance sustainable?

Alec Jones, the Edinburgh-based member of the Global Leadership Team of PriceWaterhouseCoopers, with responsibility for the global industries programme, spoke to Business Standard on a range of issues.

Excerpts from the interview:

The BJP-led National Democratic Alliance says India is booming like never before. Its opponents say it's all hype. What do you think?

The Indian economy seems to be growing very strongly. Sectors like outsourcing and so on are growing at over 70 per cent. It is an amazing success story, a phenomenal growth rate by any standards.

There is a well-developed financial sector that is adequate for the funding requirements of the country. Most important, there is a well-educated population in the country, which ensures there is a huge supply of talent. This is of tremendous significance for western economies.

That might be true but the backlash in the West, especially in the United States, threatens to end the outsourcing honeymoon.

The global trend is to go wherever the costs are the lowest. This does cause some pain. Farmers in western Europe are complaining they are losing their jobs. People make political noises.

It will be interesting to see if the US can ban companies from positioning themselves the way they want to and source technology from wherever they want to. The lesson we have learnt from the Communist regime is that you cannot build such barriers.

Is the interest of your client companies in India restricted to business process outsourcing?

Global clients are interested in India's domestic market, which is large and attractive. Large international clients are also looking at low-cost, good quality manufacturing in India. Our financial services clients want to be here.

Of course, all clients across all sectors are looking at outsourcing and doing back-office work here. The key driver in each case is the large pool of well-educated, English-speaking people. You can access workforce in India at 20 per cent of the cost in the US. Relocating to India makes sense if your business is labour-intensive.

However, there is a problem with the infrastructure. You have to incur more costs in power back-up, higher freight costs and so on. The net impact will depend on the scale of your operations in India.

The experience so far has been that savings are good enough to justify relocation to India. GE saves $ 500 million every year by getting work done out of India. This is not small.

There is also a lot of interest amongst clients in the utilities that the government wants to privatise. There is a lot of capital in the world looking for such avenues.

If these utilities are privatised, global companies will all come to India. Apart from that, I think the key interest areas in India are in financial services, automotives and pharmaceuticals.

Do you foresee Big Pharma carrying out its R&D in India in the near future? Almost 15 per cent of people doing pharmaceutical R&D in the US are Indians. Still, multinationals have not shown any significant initiative in outsourcing R&D from India, though they face the problem of spiralling R&D costs and falling productivity.

Why shouldn't they? Their R&D will cost a fraction of their current costs if they move to India. It is getting more and more difficult to get people in the West. India could soon figure in their plans.

Again, this is business driven by people. But it must be realised that the pharmaceutical industry requires a good legal framework around patents.

Otherwise, there will be no return on investments in R&D. Global manufacturing is bound to move to Asia. It is a nightmare for the West. But what can you do? When you come to China or India and see the scale of operations, you get worried about the West.

You have been in India for some days now and have had the time to interact with some local businessmen. Many of them have plans to expand overseas. How do you rate their chances?

That's true. Most of them have ambitious plans. Interestingly, all of them told me that finance was available for these plans.

How are valuations of companies and assets moving in the West?

Valuations across the board are up, but nowhere near 1999-2000 levels, when everybody wanted to buy and sell. M&A activities are still slow. As business confidence goes down, the interest in M&A also reduces.

Companies have now become a little more risk-averse. The sentiment is against M&A. Our experience says that 60 per cent of M&As destroy shareholders' value. Companies end up paying more for an asset than its earnings.

So we see that whenever a bid is announced, the share prices of the companies involved fall. The lesson for Indians is, add value and not just top-line.

What is your advice to Indian companies looking at overseas acquisitions?

Test the waters by acquiring a small facility. Do a proper due diligence. Understand the marketplace and the legal issues. I know a lot of companies here are looking at small and mid-sized companies abroad. But I want them to be cautious.

We have seen a huge wave of entrepreneurship in India. What does it mean to the West?

The spirit of enterprise is gone in many countries in the West. There are times when people become very secure in their jobs and the spirit just goes. In European countries, the entrepreneurial spirit is much less, though not completely dead.

What is your assessment of the quality of management in India?

The people I have met in India are very good. They have a global perspective. Though these are still early days, I have been struck by the quality of Indian management. It is very high by any standard. I won't bet against India becoming the top five economies of the world by 2050.

Most of the people I met in India said that they have access to easy funding. This is important because most of them have expansions in mind and are not highly geared.

From my interaction with companies in the West, I know that many asset managers are looking at India as a destination for their investments.

In the past four years, I have been told, companies here have become confident that they can access funds at a very low cost. The country's capital market is very stable. Any company with expansion in mind will not feel constrained.