Kanika Datta: A vote of confidence

SWOT

If elements within the United Progressive Alliance are confused about the direction economic policy should take, here is a strong hint from the 2004 Special Edition of the McKinsey Quarterly.

In its second Global Survey of Business Executives, conducted just after the widely unexpected defeat of the ruling National Democratic Alliance, a remarkable 84 per cent of the 5,500 corporate leaders polled throughout the world indicated that they were very or somewhat confident that the new government would continue to liberalise the economy and manage growth effectively.

At the time, only 7 per cent of the respondents expressed doubt that the reforms would continue. Significantly, too, North American executives expressed more confidence in India's government than in China's.

There is no doubt that expectations about India are running high and that is principally owed to the perception of India as a source of talent. Fully 58 per cent of the respondents from large businesses (that is, businesses with revenues of more than $1 billion) see India as a significant source of technical and other talent, compared to 48 per cent for China.

Disaggregated by region, India commands more confidence than China on this head from North America (57 per cent and 40 per cent) and Europe (56 per cent and 50 per cent).

Were these respondents putting their money where their votes were? Partly: 31 per cent of the respondents from $1 billion-plus companies said their companies were investing in R&D facilities in China, compared to 27 per cent in China.

Disaggregated, again, it was North America (29 per cent vs 24 per cent) and Europe (32 per cent vs 25 per cent) that gave India the stronger vote of confidence over China.

The significant point about the positive sentiment towards India is that it is no longer limited to IT and BPO. The outlook was "shared uniformly by respondents in heavy industry, banking, finance, and consumer goods," write Shirish Sankhe and Pramath Sinha, Principals in McKinsey's Mumbai and Delhi offices, respectively, in a sidebar to the main survey.

None of this, however, should be a source of major self-congratulation or complacency. The big point is that global executives' confidence in India is still largely disproportionate to their investments in the country. As the survey points out, "Even with the North Americans' lack of enthusiasm for China factored in, it still wins the race for foreign direct investment."

Thus, where more than half the executives from big corporations said they would increase their investments in China, the percentage for India was 44""not bad, but not great, considering how far India lags its eastern neighbour in the FDI stakes.

The broad message is that more than ever, this is an opportune time for the Indian government to synchronise perception and action. As Sankhe and Sinha write, "This stamp of approval raises expectations for India's new government ... This confidence should encourage India's new leaders, since in the past the country received only one-tenth as much foreign direct investment as China did. The message to them is obvious: now is the time to make a strong push."

Indeed, it would be interesting to see what the same executives think now, some 70 days later, when signs of a "strong push" are hard to detect. The political uncertainties over raising foreign direct investment (FDI) limits in aviation, telecom and insurance, and the high, skewed tariff structures contrast sharply with the Chinese government's concurrent authoritarian ability to cool its overheated economy.

The policy prescriptions are hardly novel. Elsewhere in this Quarterly issue, in an article entitled "A richer future for India," Diana Farrell and Adil Zainulbhai show how openness in automobiles and IT has transformed these two businesses into India's "shining stars".

Interestingly, they take the consumer electronics industry as one example of growth-stifling protectionism and regulation. Between 1996 and 2001, Farrell and Zainulbhai write, FDI in the sector averaged $300 million annually, and boosted local productivity and consumer choice. Yet, "consumer electronics still can't compete internationally, and the country's consumers pay unduly high prices for them."

It is no secret that high tariffs on inputs and indirect taxes increase costs of finished goods, as the authors have demonstrated. For example, the import duty on colour picture tubes is 30 per cent in India, compared to 10 per cent in China. This translates into a 30 per cent price difference and a 10 per cent increase in the final cost of goods in India.

Farrell and Zainulbhai list out the usual suspects such as red-tapism, rigid labour laws, and so on as other investment-spurning factors. None of these can be novel to the current incumbents on Raisina Hill. The point, though, is how far they will be able to counter domestic lobbies""whether leftist or industrial""and take hard decisions.

The decision to override vociferous union objections and cut EPF rates raises some hope. But then again, rollbacks are not an alien concept to this government either.