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Saturday, September 20, 2003

What really happened at Cancun?

Since the breadown of talks last week in Mexico, economics commentators around the globe have been all asking themselves the same question: what happened and why. The economist, whilst blaming the EU for not being sufficiently prepared to give ground, and the ONG's for firing unreasonable expectations amongst the poorest countries, seems to have little doubt where the responsibility should be placed for the proximate cause of the breakdown: the problem of cotton subsidies.

While the fight between Europe, America and the G21 received most attention, another alliance of poor countries, most of them from Africa, was also worried about agriculture, but for different reasons. They feared that freeing farm trade would mean losing their special preferences. (Europe's former colonies, for instance, get special access to the EU's markets for their bananas.) They were even more worried about cutting tariffs than India, fretting that imports would ruin their small farmers. And many, particularly a small group of countries in West Africa, worried most of all about cotton.

Prodded and encouraged by non-governmental organisations (NGOs), especially Oxfam, a group of four West African countries - Benin, Burkina Faso, Chad and Mali - managed to get cotton included as an explicit item on the Cancun agenda. Their grievances were simple, and justified. West African cotton farmers are being crushed by rich-country subsidies, particularly the $3 billion-plus a year that America lavishes on its 25,000 cotton farmers, helping to make it the world's biggest exporter, depressing prices and wrecking the global market.

The West African four wanted a speedy end to these subsidies and compensation for the damage that they had caused. Though small fry compared with the overall size of farm subsidies, the cotton issue (like an earlier struggle over poor-country access to cheap drugs) came to be seen as the test of whether the Doha round was indeed focused on the poor.

But the draft text that emerged halfway through the Cancun meeting was a huge disappointment. The promises on cotton were vague, pledging a WTO review of the textiles sector, but with no mention of eliminating subsidies or of compensation. Worse, it suggested that the West African countries should be encouraged to diversify out of cotton altogether.

This hardline stance had American fingerprints all over it. Political realities in Congress (the chairman of the Senate agriculture committee is a close ally of the cotton farmers) made American negotiators fiercely defensive of their outrageous subsidies. For the Africans, the vague text was a big blow. It caused "anger and bitterness" said one delegate. As a result, the poorest countries dug in their heels when it came to the other big controversial area: that of extending trade negotiations into the four new Singapore issues. Along with many other poor countries, the Africans had long been leery about expanding the remit of the trade talks at all.
Source: The Economist

Now what the Economist seems to be suggesting here is quite important. They are suggesting that the US allowed a draft text to emerge halfway through the meeting in the full knowledge that it would be resisted by the four 'agrieved' west African countries, who would then proceed to become more obstructive on other matters, like the Singapore issues, and thus place any possibility of worthwhile agreement greatly in jeopardy. If the passage of time allows more credence to be placed on this version, it will certainly be worth while asking what has caused the United States to act in this way? Certainly it cannot be the issue of cotton subsidies alone. Possibly the whole problem of another round of trade expansion is just too much for the US to handle in election year. Or again, we might ask ourselves the question: are we witnessing the beginings of a turn in the tide of globalisation itself?

Thursday, September 18, 2003

I have never been a great believer in government disinvestment in industry just for the sake of disinvestment. Wholesale disinvestment, without any coherent strategy behind it , adds very little. The biggest example of such practice is probably that of Russian privatization of the last decade where it simply privatized inefficencies and created a new generation of robber barons). In India, things are better. But short term thinking is in abundance. The government has a disinvestment target, but not always a disinvestment strategy.

Privatization of oil industry is a hot button issue. The Supreme court had recently ruled that the government can not privatize HPCL without first passing a motion in parliament. The election is round the corner. In the fractured parliament, there is very little chance of this measure being passed. Faced with the danger of its privatization target going awry, the ministry of Petroleum has hit upon the brilliant idea of disinvesting HPCL into ONGC . ( ONGC is India's largest Oil and Gas exploration company).

The bureacrats must be feeling very pleased with themselves. They have hit two birds with one stone. It helps them towards meeting their disinvestment target for this year and also meets the Supreme Court directive.

There is a certain business logic to this. ONGC and HPCL bring complimentary strengths and have a strong synergy. But there are also a lot of things wrong with such a course of action. Firstly, the whole idea of privatization is to get government out of industry. ONGC is, for all practical purposes, a public sector company. Considering the size of its footprint, there is also very little likelihood of its getting completely privatized in near future. By merging HPCL with ONGC, the government is creating an even bigger beast, which will no doubt have an even bigger bureacracy.

Secondly, As ET noted in its editorial, there is the cost of funding it. The government is highly likely to pass the buck to ONGC. ONGC is finding its feet in the deregularizing environment. Why mess it up?

Thirdly, mergers and acquisitions are incredibly difficult to pull off; a public sector enterprise will have neither the skill set, nor the stomach, to make it happen.

It is much better not to do it, rather than do it wrongly. I think the better idea would have been to wait and to do it properly after the election, rather than to botch it up in order to meet some stupid target.

The Agricultural Connundrum

Now for a plea of ignorance. I started blogging about India for a number of reasons, most of these will become apparent as time goes by, but one fact should become apparent: I do not set out on this as an 'expert' on the Indian economy. I am here to learn. If I want to learn, well it is obvious, this is because India is one important part of the future. But as to the present, I am sorely lacking. In particular, engagement with India involves engagement with agriculture. As in the article which follows, for example. I like this article, it seems reasonable, but is it? The industrialisation of agriculture is a fine objective, but in the here and now we need practical policies. I am not at all opposed to the WTO, quite the contrary, but I am also capable of realising that what looks fine on paper, or stuck in the middle of a cute model, may well be turn out very different when applied to a complex reality. We all (or at least more or less all of us) know where we want to go, it's how we get there that's the hard bit. If you have an opinion, and would like to help me better understand, then by all means please mail me.

Last week, on a visit to the cold desert of Ladakh, I learnt to see the agricultural negotiations at the World Trade Organisation's meet in Cancun, Mexico in a light that was a little different from Commerce Minister Arun Jaitley and his team.

I learnt that what the industrialised world is doing to our agriculture, Punjab and Haryana and the Indian government combined are doing to Ladakh's agriculture. Therefore, even as our commerce minister, rightly, pitches for justice in the name of small farmers at Cancun, the agriculture minister must seriously review policies and practices at home so that agriculture in marginal and diverse environments can survive. So that the real small farmers can, indeed, thrive.

The key to survival in Ladakh is the intelligent use of water -- only 0.6 per cent of its land area is inhabited; of this, only 28 per cent is under cultivation. Crops have a short growing period, after glaciers melt and before the snow descends. Still, the harvest is rich, for people do make the best use of their environment. The water from melting glaciers is diverted in the evening into small storage tanks called zings; from here it is distributed to fields. The network is managed by a village appointed water official, churpun, so that water-sharing fights of the Cauvery-kind are avoided. These village "officials" allocate water by timings to all in the stream basin; they keep careful account of the water distributed and adjudicate disputes. Further, people grow crops -- barley, millet and wheat -- that use less water but provide nutrition and livelihoods in this heaven-on-earth region of the country.

But things could change in the coming years. Today, rice and wheat from Punjab and Haryana, or from the bulging godowns of the Food Corporation of India, is beginning to swamp the food markets and tables of this mountainous area. People are beginning to eat water-guzzling rice as against water-frugal barley. This is because this (imported) food is cheap and subsidised. The government procures rice and wheat at minimum support prices, which are often higher than international prices. Under the public distribution scheme, it then transports, again with price concessions, food across this region. I asked: how will Ladakhi agriculture compete? Will the homegrown system -- built on self-sufficiency and sustainability -- last for very long in the face of such poor public policy?

Investment is, after all, a key variable in pricing. But in areas like Ladakh, the investment of labour spent in improving productivity, through building irrigation systems and maintaining fertility in harsh and difficult lands, is never accounted for.In fact, public policy actively discounts it and destroys incentives. Here people use dry toilets to collect human excreta, which is mixed with sand and straw, thoroughly decomposed and then transported to manure fields. Clearly the system is the only sensible one for this water-starved region because it minimises water use and disposes human waste without leading to pollution and waste. But equally, it is clear that this system can only survive if policy learns to value its role and underwrites the ecological cost of production.

If the value of agriculture declines, as it is beginning to happen today, so will investment in agriculture. The point is: how do we break this vicious cycle? How do we begin to value the agriculture of these marginal lands so that it can compete in this unfair internal market? The need is to shake up a mentality and challenge a policy myth: that agriculture is only about improving productivity and moving food. We will have to change our priorities to think, not only as Mahatma Gandhi said, of the last person, but to think of the last foodgrain. We will have to re-think how we disburse public money so that we invest, not just in a slogan called food security, but in securing the local styles by which people can actually become food-secure.

And to begin to value the "good", we must discard or at least devalue the "bad". So, for instance, in Ladakh, we would begin to value investment in organic manure and water-minimising crops. Policy would provide incentives -- positive domestic support -- for local agriculture and promote a way of growing food that is both sustainable and rewarding. In other words, even as we ask the obdurate Northern countries to reduce their mind-boggling agricultural subsidies, we must begin to get our own local act together. We know -- and vociferously holler about – the callous indifference of Northern countries to poor farmers living in poor lands. Now we must come to grips with the equally callous indifference -- holler about it equally loudly, if needed -- that haunts our domestic agricultural policy. Only then can the road to the future be one on which everyone can journey, in their own ways, with full stomachs.
Source: Sunita Narain, Rediff

IMF Growth Forecast

The IMF are forecasting 5.6 per cent growth for the Indian economy next year, a number which, in comparison with the OECD group, looks healthy enough, but one which will surely dissapoint in comparison with the numbers being generated by that 'other' Asian economy: China. There is much that could be said about this, suffice it to say there is sufficient debate about the validity of the respective numbers to lead the prudent person not to want to get too excited about this 'growth differential' at this stage. Not that this is an argument for complacency, far from it, it is one for reform and more endeavour.

Projecting a 5.6 per cent economic growth for India in 2003, the International Monetary Fund today said the GDP growth would go up to 5.9 per cent in 2004, but the targeted 8.0 per cent will remain elusive without reforms and check on fiscal deficit. India is expected to register 'strong' growth at 5.6 per cent in 2003 and 5.9 per cent next year in the face good monsoon, IMF Research Department director Kenneth Rogoff said releasing the latest 'World Economic Outlook' in Dubai. Referring to the report, he said that rising public debt and fiscal deficit were a matter of concern. Rogoff, however, said China would grow faster at 7.5 per cent in 2003 and 2004, as against less than 6.0 per cent growth in India. "In India, while growth is expected to pick up later this year on the back of a recovery in the agricultural sector following last year's drought, the expansion remains well below the 8 per cent rate targeted by the authorities, undermining official goals for reducing poverty and regional disparities," the report said. A key issue which remained for India was the slow pace of fiscal and structural reforms, it said. "With the general government deficit set to reach about 10 per cent of the GDP for a fifth year, and debt plus recorded contingent liabilities nearing 100 per cent of GDP, fiscal policy is clearly on an unsustainable path," IMF noted. It regretted the 'absence of consolidation efforts in this year's budget and delay in introducing value-added tax.'
Source: Rediff

Tuesday, September 16, 2003

As Edward mentioned, I am very glad that we finally have a weblog on Indian Economy. I am not an economist. My expertise is more on the business of technology, rather than on the economy. But like many other Indians living away from home, I do like to keep a wary eye on the Indian economy, keeping expectations within the bounds of cynicism and at the same time hoping that it would take finally take off.

It is an interesting moment for the Indian economy. The services sector, which has been gathering steam for the last decade or so, has taken off spectacularly, fueled by the outsourcing revenue from USA and Western Europe. A combination of easy availability of a trained pool of resources, adequate infrastructure, domain knowledge about the west and comfort with the English language coincided with the need for cheaper service sector alternatives in the West. We were ready and we were there.

It is also a 'fleeting moment'. We have an opportunity to capture this moment, keep a forgotten pledge an old man once made so eloquently and bootstrap our rickety infrastructures to ride into the twenty first century. It requires able leadership and strong discipline. Both are sorely lacking in India. But as I am fond of saying, successive generations of Indians have a made a success of their lives in spite of their politicians.

I am interested in exploring how our infrastructure copes with the exponentially increasing demands of the services sector, if and how can we extend our success in services into the over all economy, into improvement of basic infrastructure and the over all quality of living. I am interested in following how it all pans out for us.

I am grateful to Edward for starting this weblog and inviting me to participate!

Monday, September 15, 2003

Crisil's Abheek Barua looks at the macro advantages of trade and an open economy:

India's domestic macroeconomic gains from trade and investments have become quite visible over the last three or four years. The case for a more participative long-term stance for India in the WTO would perhaps get a leg-up if these macroeconomic payoffs were highlighted more often.

What are these gains? The first and perhaps the most tangible pay-off from opening up has been tamer domestic inflation. Much of the drop in average inflation levels from 8-9 per cent just a few years ago to the current average of 3-4 per cent stems from greater integration with the global economic system. This claim needs some elaboration. The bulk of the decline in the overall inflation rate stems from a drop in manufacturing inflation (averaging just 3.6 per cent in the last 12 months). If one looks at its spread across sectors, the largest declines in inflation rates (or even negative inflation) has been in two categories. The first category includes sectors that have seen the largest inflows of foreign direct investment and consequently have the largest foreign market shares. Consumer durables are the classic example. In colour televisions, for instance, the market share of foreign entrants rose from zero in 1994-95 to 31 per cent in 2000-01. Prices of CTVs actually dropped 4.5 per cent on an average each year in this period. Thus, opening up the economy has increased competition in these industries and has whittled down excess pricing power in the hands of domestic incumbents. Lower inflation has been the corollary.

The second category of products that have seen a large drop in inflation is where opening up has led to 'contestability' or simply the threat of entry. Most commodity sectors like man-made fibres or plastics fall in this slot. These are goods for which quantitative import restrictions were removed the earliest and cuts in import tariffs were the sharpest. Inflation in these industry groups has been dampened through a two-stage process, both related to freer trade. The removal of quantitative restrictions has meant that domestic prices have become aligned with international prices, the only wedge between them being driven by the import duty. Thus in any sector where quantitative restrictions were removed, there is no evidence of sustained deviation of domestic prices from landed cost (defined as international price plus import tariff). The second stage of the process has come from a cut in tariffs. Thus, not only have local prices aligned themselves with international prices in terms of direction, but also with a cut in tariff, local prices have moved down and closer to international prices. Sharper the cut, the greater has been the equalisation with global price. The result has been a drop in local inflation.

The second tangible gain from transacting more with the international economy should be clear in the wake of the current industrial recovery. In 2002-03, the first year of the current upswing, GDP grew by roughly Rs 163,000 crore Rs 1,630 billion). In the same year, exports grew by Rs 41,112 crore (Rs 411.12 billion). That is, about 25 per cent of the incremental output in that year was absorbed by exports. The bottom line is that exports can no longer be dismissed as a peripheral activity. It is an important contributor to aggregate demand and can be a powerful engine of growth if India is to get on a long-term trajectory of 7 per cent GDP growth or more. There is a critical advantage for India that other Asian economies (barring China) do not have when it comes to exports. The large size of India's domestic market provides a buffer against a downturn in the export cycle. To put it in simple terms, the large domestic market ensures that the downside in case of a global down-cycle is a growth rate of 5 per cent in GDP, not contraction.

However, just tinkering with the exchange rate or giving a few sops to exporters is unlikely to ramp exports up by the kind of scale that a seven per cent growth entails. A rise in domestic productivity and enhanced market access are critical. Both follow from greater opening up and integration. If trade and integration do lead to tangible domestic gains, how much are current levels of trade below the 'best case' or the optimum? A way to answer this question (and thus define an optimum) is to benchmark India against other Asian economies.

This has to be done through a model that makes the necessary adjustments for the size of the exporting and importing economies, distance with trading partners etc. Crisil's 'gravity' model of nine Asian markets does precisely this. It concludes that our 'optimal' trade (that is if we were trading as intensely as our Asian cohorts) volume with our top 30 trading partners is $ 240 bn -- our actual trade with them in 2002-03 was just $ 70 bn. Can we get to this optimum by bypassing the WTO process? The answer is a categorical 'no', essentially for two reasons. The current trend internationally is towards regionalism and bilateralism largely through the mechanism of preferential agreements or trade-blocs. These are the exclusive clubs like the NAFTA in North America, MERCOSUR in Latin America or the Asean in Asia whose members give each other all kinds of concessions like preferential access and lower tariffs.

At last count there were roughly about 250 such preferential agreements. India unfortunately is not a member of any significant bloc, nor is it likely to align itself with a major bloc in the near future. Its survival in the international trading arena depends on its ability to push a multilateral line. The second role of the WTO in India's trade policy is to enable the government to 'sell' trade and investment related reforms to its domestic constituency. Past experience clearly shows that any significant reform in India, or for that matter, any developing economy needs an external trigger. India finds itself in the somewhat ironic situation of having run out of the possibility of external crises, given its vast forex reserves and a stable domestic situation. If the Indian political establishment is interested in pushing through trade and investment reform, it can use the need to comply with the WTO to make its case. This is exactly the tack China followed to keep its reform programme on track. The Indian economy could be better off if our policy makers took China's cue.
Source: Rediff.com

Call Centre India

Rediff has an instructive little guide today on the call centre, Indian style. It comes complete with photos. This work is obviously not especially fulfilling, whatever the blurb. The attrition rate of 40% speaks for itself. However, it shouldn't be forgotten, that these jobs provide the opportunity to 'work yourself through college' and things like that, so there may be some purpose to the participation.

Rekha Malhotra (extreme left) is tall, slim and extremely self-assured. She has never been to America. Yet for the last five months, she has spent 10 hours every day as ‘Candy,' a resident of Orange County, California, talking about the weather there and selling satellite television packages to North Americans. She works at Infowavz, a call center in Mumbai that is among the hundreds that have mushroomed in India in the last three years. In her first two months as a sales agent, as ‘Candy’ she made 300 calls a day. Now as the team coach she has moved from selling packages herself to monitoring calls, motivating and disciplining her eight-member team. Living as Candy -- her ‘floor name’ -- at work does not bother her. "At work I am Candy. Outside I am Rekha. That’s how I see it. There’s nothing more to it, It is like with actors. They play a part every time. They don’t have problems because they are acting out a new identity every few months," she says. At 23, yet to graduate, Rekha started working at 16, first in public relations, then in an event management company, now in a call center. She says there is nothing more challenging than her current job.
Source: Rediff.com

Where is Gurgaon?

Gurgaon is a little village outside Delhi. It has no special significance, except for the fact that Indian journalist Arindam Banerji's sister lives there, and she likes to talk on the phone:

Three weeks ago, inappropriately early on a Wednesday morning, my sister called me. She lives in Gurgaon. She filled up most of the 45 minute call, with rants and complaints about the sad state of life in Gurgaon. Rampant construction of office buildings, traffic gone amuck and endless commutes were on her mind. Office space was at a premium and land was four times as expensive (some exaggeration, here) as a few years ago and worst of all, the new hires these days were making outrageous demands. Too many jobs and not enough qualified people and every day a new company, seemed to sprout up to hire away office workers. Worst of all, it seems the US returned guppies -- Gurgaon-yuppies, for those not in the know, were kicking the cost of living and prices through the veritable roof. So, these were the problems in Gurgaon, a little village outside Delhi, till recently.

All in one's stride till you consider what happened, later that afternoon. At about 1:30 pm that same day, I was supposed to pick up an old friend of mine for a quick lunch catch-up session. So, I drove up to his office in North First Street, San Jose. North First Street in San Jose is one of those mini-hubs of technology nirvana in Silicon Valley, much like Page Mill Road, in Palo Alto. The street and its immediate environs house the Who's Who of global technology companies. So, it struck me as odd, that when I walked into this office-space complex of about 14 large office buildings -- everything was eerily quiet. Countably few cars in the parking lot, no crowds of people milling between the offices, large signs of rent/lease lying around somewhat disinterestedly and that silence, again.

Remember, this was the same office complex that would have charged you $12.50 per square foot as rent till three years ago; where parking on the premises was impossible and in fact you had to walk almost a mile from alternate parking spaces. And the noise of people, traffic and endless construction would have driven a sane man batty. But, today there was just this eeriness about the place that I could not explain and office space was being given away for $0.50 per square foot.

The stark difference between my sister's picture of present-day Gurgaon and the forlorn presence of those office buildings in North First, can hardly be described. Then, it hit me. North First Street of '99 had given way to Gurgaon of 2003. The boom-town spirit of Silicon Valley had suddenly got up and moved from Northern California to a town in Northern India. The 'Gurgaon boom' had finally settled in. And, I haven't even started talking about Bangalore, Mohali, Kochi or Mangalore. The Gurgaon boom is today's snapshot of India, Inc. In fact, it's a good name for what's happening throughout corporate India, today. Ok! Ok! call it the Bangalore boom if you want -- but, the explosive nature of the boom, especially when compared to what's happening in Europe and the US, is cause enough to celebrate.
Source: Rediff.com

All of which prompts Arindam to an even more profound reflection about the future of India's Silicon Valleys. India needs good governance, sound infrastructure, a reigning-in of corruption, and diversification. One small quibble with the line he's pushing: the North First Street boom ocurred in the first flushes of a huge bubble associated with the infancy stage of a new technology, the ICT/Netscape cold fushion process. This technology is no longer in it's infancy. India's IT outsourcing boom is not speculative in the way the earlier NASDAQ was (which doesn't mean it is in no way speculative). India is now reaping the benefits which the US industry would have realised in a non-globalised age. This doesn't mean it cannot be undercut from below - as the Chinese outsourcing example shows - but it is on more solid ground. Also effective human capital attracts work like a magnet. Wage differentials are secondary. It is not like moving a garment factory out of China and into Vietnam to save wages. Skills are difficult to replicate. Of course, if you get as far out of line as the US differential then you're going to pay the price. But meantime, the guarantee of India's IT industry is quality, experience and the value placed on its precious human capital.

The warning signs in the Indian context may be different than what they were for the Silicon Valley boom, but they are there and are portents of things to come. In itself, this is not a death-knell, but just a sign of things India has to manage well. India's ability to manage this boom into the next phase will decide the long-term success of the economy.

The Next phase is coming: That this phase of unlimited growth will at some point end and will perhaps be replaced by one with intense competition perhaps from the Chinese, is already being seen. Business Week reports:

'India is a powerhouse in high-end IT services, latecomers these days must pay higher wages for experienced engineers. That's one reason Bearing Point chose Shanghai for its new software-development center, says the company's Greater China President, Bryan Huang. Bearing Point pays $500 a month for engineers in Shanghai. In India, he says, the pay would be $700, and $4,000 in the U.S. "Where can we sustain our cost advantage for the next 40 years?" Huang asks. "We're convinced that China is the only place."'

This trend is visible in manufacturing too. Once again, Business Week tells us:

'American manufacturing companies are discovering that cost advantage, too. Sweetheart Cup Co, an Owings Mills (Md) maker of plastic plates, cups, and utensils for customers such as McDonald's and Wendy's International, hired consultancy E5 Systems of Waltham, Mass, to develop a system to track production processes at its 14 North American factories. E5 is doing the job in Shenzhen, where it has a joint venture. Sweetheart figures it saves 40% by sourcing in China rather than India. In a business where pennies matter, "cost is a consideration in everything we do," says John McGregor.'

Nonetheless, most businesses, especially the large ones realize that the next phase will be here within the next 24 to 36 months, but are they taking the steps necessary to navigate it. Cost-cutting by moving to second tier cities in India and China is making India, Inc more competitive, but is it enough for survival when outsourcing gets far more competitive? Poor Decision Making and Investments: For burgeoning segments of the Indian industry, such as pharmaceuticals, a crippled reputation can be the death knell. The fact that 35% of the world's spurious drugs are made in India, is beginning to do serious damage to our reputation. But, consider what our decision makers have done in the last few weeks -- they've endlessly argued about Ayodhya, but cannot fit into their priorities, any discussion on economic catalysts or sink-holes. Ever hear of a parliament adjournment for the lack of infrastructure for our industries. Nope. But, truth is that the risks and inefficiencies in the path of India Inc are rarely the focus of our national decision makers. Risks, which can only be controlled through appropriate legislation and enforcement, are creeping into the system..............

This poor decision making is not limited to our political decision makers. Consider the leaders of some of our large conglomerates -- almost none of them have setup the kind of research facilities, that say, GE has built up in Bangalore. The result -- little forward thinking on creating high business value inventions gets done. Most of these conglomerates, you'll notice, have spent oodles of money on lavish campuses or office buildings, though. Priorities and decision making, once again.

The Gurgaon boom in a certain sense is an example of how India, Inc, or at least the IT and computer technology part, has put almost all its eggs in the basket of services outsourcing, where price differentials give it an edge. '"India's growth is being limited by one drug and that is the service drug," said Tushar Dave, co-founder and managing director of New Path Ventures LLC …India's IT industry must wean itself away from the "service drug" and seize the opportunity to design semiconductor chips with its large, talented and cheap labor pool, analysts said.'

Much like the dot-com-boom threw caution to the wind and relied only jazzy idea with no care for operational efficiencies, the Gurgaon boom seems to focus solely on operational efficiencies. Leaning too far on the other side, aren't we? Vinod Dham, the leader of Intel's Pentium team in the early 1990s, seems to recognize the need for Indian companies, to go beyond playing only the price-point or the low-cost engineering service games and getting into producing real Intellectual property. Dham puts his thoughts forward through a comparison: 'A company like Infosys was valued at six billion to $10 billion, compared to the 60 billion to 80 billion dollar price tag on Oracle. If we deliver a solution to the world instead of being told to deliver a particular solution then there will be a dramatic difference in the way we are being perceived.'

Now coming to governance -- in India, the issue is an acute decider of success. After all, for the most part, all that the GoI is supposed to do is to remove the shackles that have weighed down the Indian economy and then just get out of the way; letting the Indian citizens lead achieve true economic success. But, even in Karnataka, probably the best governed state in India, poor governance and infrastructure is slowly throttling growth. Indian Express reports:

'Bangalore is creaking under its own weight. Bangalore Metropolitan Transport Corporation buses move at a stately pace of 9 kmph through the city. In a city of 60 lakh (18 lakh of which is the floating population), there are 17 lakh vehicles, 11 lakh of them two-wheelers … 'For the past one year, he (Narayana Murthy) has been trying to convince the government to allow more Lufthansa flights out of Bangalore to promote business ties with Western Europe. ''But no one has bothered to reply. No one has even heard me as yet,'' he says ruefully. …

'"Firms in Karnataka are reported to face, on an average, daily power cuts of 2.4 hours. The average industrial production losses per unit outage is reported to be Rs 5, imposing substantial costs on the firms,'' says a World Bank report on Karnataka's power sector. Premji (of Wipro) recounts facing four black-outs in an hour-long meeting with a client. Clemons, the Wharton professor, saw 10 power cuts in a span of 35 minutes.' If these road bumps to growth are impeding Bangalore, think of the poor entrepreneur who is in the grasp of the state government of Bihar or perhaps, West Bengal. Scary, indeed!!

All this does not even talk about the high deficits that various state governments and the central government have racked up -- oh! yes, the same deficits that the World Bank keeps warning us about. So, the Gurgaon boom will have to demonstrate that it can handle the business innovation of outsourcing better than North First Street managed the innovation of the web. After all, our economic future depends upon it.
Source: Rediff.com