Shyam Ponappa: Breaking the mould

Letting markets set prices in affluent countries is different from doing so in developing countries.

Some pundits rue that services have grown in India while manufacturing lags, and that manufacturing has been more capital-intensive than not. The facts are that a confluence of events and circumstances over decades""capital-intensive manufacturing, high-end education, a flair for creative problem solving, an impending millennium bug, and the gradual build-up of a critical mass of successful Indian immigrants elsewhere, especially in America, and the gradual, cumulative effects of steady growth by stealth of a potentially large economy""have made for a transformation in India's positioning.

Instead of ruing the facts, perhaps we could learn to capitalise on them. Make necessity a virtue, as in two other examples of unconventional development: China's air transportation, and Brazil's production and use of ethanol.

Services vis-à-vis manufacturing: Two vignettes and a deduction

One "false note" in a post-budget interview on NDTV: Asked why he did not focus on strengthening services (i.e. strengthen the champions instead of trying to turn weaklings into pahelwans), Finance Minister Chidambaram said services were doing well enough, so the government did not need to do any more for them.

A recent IMF report on the different paces of development in the advancing versus lagging areas in India concludes that the latter "will have to follow a more traditional path of growth, focusing on labor-intensive manufacturing."*

This is where India must break the mould. Services need not be only for external markets/outsourcing. Services for hospitality, biofuels/floriculture/ "smart" agriculture and logistics could provide excellent employment. With adequate infrastructure, there could be far higher volumes of local and foreign tourism (little Thailand gets 12 million!) and travel, generating immense local services demand. India needs infrastructure that enables and facilitates learning and work, whether for services""in IT, hospitality, floriculture or logistics, or for manufacturing. There could be much more productive uses of land and people, e.g. travel and leisure facilities, as well as biofuels, floriculture, vegetables, etc. All these need infrastructure just as much as manufacturing. Once they are there, with appropriate training and organisation, there could be growth in services as well as better manufacturing.

Make necessity a virtue: China's airlines, Brazil's ethanol
China's airlines, operating primarily in domestic markets, have the kind of problem we might wish for. They carried 138 million passengers in 2005 (India had about 40 million), and expect to double that in five years. China has 130 airports, handling over a million passengers each annually, with another 55 international airports planned by 2020. Airbus and Boeing are gleeful at prospects for aircraft sales over the foreseeable future. The Economist, however, finds a worm in the apple: despite impressive growth, many airlines show negligible profits.**

The article cites rapid growth as one reason for this, and also cites administered pricing for depriving them of "the sophisticated yield management of their western peers". Also, like India, China's government exercises a jet-fuel monopoly, and so fuel costs comprise an average 40 per cent instead of the 24 per cent for airlines worldwide.

Is this really so bad, considering China's gains? After all, where has sophisticated yield management led western airlines besides overcapacity, unsustainable price-cutting, and bankruptcy (see "Competition, open skies ...and bust?", Business Standard, August 4, 2005).

The Economist compares China's airlines with Cathay Pacific and Singapore Airlines. This is inappropriate because the latter operate internationally, while the Chinese airlines operate primarily in domestic markets. Second, we are left with the question in China's context: is profitability the sole criterion? Put differently, would China benefit more from airlines making impressive profits, or from their maximising passenger- and freight-miles while maintaining viability and quality? A cost-benefit analysis could provide some answers.

The article acknowledges that "China has done wonders to mobilise the country", praising its airport infrastructure. Yet its overall assessment is negative because of its bottom line preoccupation. Assessed by benefits, however, China has broken the mould. As India, much of Asia and the rest of the developing world must do, as they seek prosperity. Just as Brazil, desperate in the mid-70s to be less dependent on then-imported fossil fuels, succeeded after years of effort at ethanol production and use. Production costs are now down to $7.50/Giga Joule, competitive with oil at $35 a barrel.*** Brazil is less dependent on fossil fuels and less polluted, and exports ethanol to North America and Europe. Impossible, if Brazil had focused on profitability, instead of policies such as compulsory blending, support prices, user subsidies, and cheap, easy credit despite inflation. (Much we could learn and adapt, supplemented by initiatives such as Teri's jatropha project with BP in Andhra, given India's land/water constraints for sugarcane.)

Letting markets set prices in affluent countries is different from doing so in developing countries. In China's case, the benefits of mobilisation, the efficiencies in production and delivery, could not have happened so quickly if the airlines were essentially profit-driven. China's policies have resulted in cheap transport with the headlong growth of travel and productivity through efficient logistics. These gains are not reflected in any one airline's profits; nor is another significant benefit, the convenience for users and their beneficiaries.

Services: The locomotive for growth
India's precocious services growth with limited manufacturing has likewise stumped orthodox expectations. While we must certainly strive to build productive activities of every sort""manufacturing, surely, but also more efficient agriculture and horticulture, extending to oilseeds and biofuels, fruit, vegetables and flowers, wood products, greening the land in strategic ways to yield net social, environmental and economic benefits ... But most emphatically, we must build services as a locomotive for the Indian economy. IT/BPO/KPO services, already doing well, would benefit tremendously from better infrastructure, as would manufacturing. And hospitality services in India are like gold waiting to be mined, provided the infrastructure facilitates millions of tourists, and the training and capability of service providers. Not everyone can be trained to manufacture, whereas many more people can be trained to provide services for tourism and travel than can become skilled machinists, welders, IT jocks, or biochemists. Broadband Internet as a multiplier and delivery mechanism for training and facilitation is a no-brainer; it just needs to be done effectively, not merely claimed to be available. (How to achieve that requires a combination of planning-and-execution that we apparently haven't quite figured out.)

* "India's Pattern of Development: What Happened, What Follows?" IMF Working Paper WP/06/22 of January 2006, Kalpana Kochhar, Utsav Kumar, Raghuram Rajan, Arvind Subramanian, and Ioannis Tokatlidis.
** "Chinese aviation: On a wing and a prayer", The Economist, February 23, 2006.
*** Seminar: An International Market for Biofuels? "The Brazilian Perspective", December 9, 2005: http://www.clingendael.nl/ciep/events/
20051209/20051209_CIEP_Moreira.pdf