Air, Marshal Roy, Rear Admiral Iyer and members of the 51st Course on National Security and Strategic Studies,

Good morning gentlemen.  I have heard a great deal about this institution.  It’s my privilege to be here today.  I thank Air Marshal Roy and Rear Admiral Iyer for inviting me.

I would focus on providing you an overview of Indian Industry’s past, present and its likely opportunities and challenges for the future.  The more  important part would be the interaction we would have after the talk.  This talk is more in the nature of an appetizer.

Indian industry has seen very significant and rapid changes since our independence.  Pre-independence industry was miniscule, dominated by British companies, which were largely in the Jute and Plantation sectors.  Post independence, the foundations of our industrial development were laid.  Between 1950-69 a broad based industrial base was created.  But, due to a shortage of foreign exchange and the government’s left leaning world view and industry-politics nexus; a high tariffs and tight controls on technology and material import regime, was established.  This throttled change and innovation.  This gave rise to an economy of shortages, further slowing innovation and productivity and quality improvements.

Nevertheless, the emphasis on developing a manufacturing sector at that time was the right one.  If we compare ourselves with Pakistan and some other countries today we should tank our founding fathers for nurturing Indian industry, whatever the critics might now say.  In the early years of industrialization, every country, be it the US, Germany, Japan, Korea or China have followed similar policies of facilitating development of local industry. However, this policy should have changed from, say, 1970 but, unfortunately, continued till 1985.  For Indian industry, the ‘70s was a lost decade.  China started liberalizing from 1979.

Let me add that my definition of local is whoever manufactures, provides employment and adds value in the country, not the color of someone’s skin.  This leads to skill development and revenue generation, for individuals and through taxes for the government.

The other major factor in assisting our industrial development was the setting up of good institutions of higher learning like the IITs, IIMs and Regional Engineering Colleges.  We did have a few institutions even from the 1850s but their capacity was limited, and their focus was not industry.  Ultimately, development of a nation rests on talented, well trained individuals.  The National Defence Academy too was set up in the 1950s.

From the mid-1980s we started to liberalise.  New technology was allowed, as were new entrants, though largely as joint ventures between Indian and foreign companies.  But, major and more significant liberalisation started from 1991, when industrial and import licensing essentially ended, foreigners were allowed 100% equity in most sectors, and imports tariffs were brought down steeply.  The exchange rate was also corrected substantially.

What has been the outcome of these policies and their implementation?

During 1950-1980 we were moving at what came to be known as the Hindu rate of GDP growth of about 3% p.a.  This barely moved the per capita income growth as population was increasing at around 2% p.a.  In the 1980s we grew at around 5% p.a. This moved marginally to 5.5% between 1991-2003.  However, from 2004 the economy has grown by 8-9% p.a..  In 2008-09, when the world economy almost shrank, our growth was 6.7%.  Industrial growth has always been higher than that of the economy, but the two move in tandem.

Thus, we are now in a qualitatively different situation.

Global Overview:
Before we discuss the national scene, we need to place ourselves in a global context.  With import tariffs generally below 10%, we are subject to forces of the global economy.  The share of trade in GDP in our economy is now 46%, which is much higher than the 27% of the US.  In most sectors, foreigners are permitted 100% owned companies and thus in may sectors Indian companies are competing head on with the global majors.

How does global industry operate?

First and foremost, it exists in a competitive market and is therefore geared towards change.  Essentially, competition is based on technological innovation and continuous improvement.  Also, cost competitiveness, based on productivity and employee cost, is important.  Furthermore, major companies operate globally for both production and sales.  They source goods, technology and even employees from where it is most advantageous to do so and sell their products and services all over the world.

This industrial world has come into being, driven by the ambitions of large global firms.  It has been aided by the lowering of shipping costs due to containerisation, development of cheap and reliable communication through phones and computers, and the lowering of tariffs and other barriers to trade under the Uruguay round of 1994.  It is now an open and connected world that we live in.  Tom Friedman called it flat.

Under these conditions, manufacturing is gradually moving from high cost developed countries to emerging markets ever since the 1960s.  First it was South Korea, Taiwan, Hong Kong and Singapore; then, Malaysia and Thailand and, since 1979, China.

According to the Harvard Historian, Niall Ferguson, there is a virtuous positive correlation between economic freedom and political freedom.  In his recent book, “Civilization: The West and the Rest”, he has said that “For 500 years the West patented six killer applications that set it apart.  The first to down-load them was Japan.  Over the last century, one Asian country after another has down-loaded these killer apps – competition, modern science, the rule of law and private property rights, modern medicine, the consumer society and the work ethic.  Those six things are the secret sauce of Western civilization.”.

Size of populations matter.  Of the 7 Billion people in the world, only 1.5 Billion are in the developed countries.  So, ultimately, markets will also move to emerging markets.  It was because developing countries were mismanaging, largely due to undue reliance on the government and stifling of the private sector, that their growth and share of the global economy was low.  Since the 1980s this has changed almost everywhere.  In 1989 in Eastern Europe and we are now seeing a massive change in WANA countries.  Thus, growth is now in emerging markets of Asia, Africa and Latin America.  In 2010 almost half (46%) of global growth was in these regions.  This is likely to continue to be the pattern.

Also, the developed world faces challenges in maintaining its current high incomes, especially for its ordinary citizens.  Till recently there was supposedly a division of labor, wherein high-tech goods were made in the west to support higher incomes.  However, now the situation has become more complex.  Technology flows are unstoppable and ultimately technology resides in people.  The productivity and capability of people in the developed world is not 40 times better, which is the income differential, than in India.  It may be 2-5 times better, and in some areas like IT even this is debatable.  So, a period of readjustment, wherein incomes increase in the east and stagnation, if not decline, in the west, seems inevitable for a new equilibrium to be established.  Its implications remain to be seen.

The world faces issues of sustainability, of climate change, but the history of man tells us that new solutions emerge given human ingenuity and proper incentives.  I remain hopeful that the end is not near.  In 1972 the Club of Rome, of which for some time I was a member, issued dire warnings of the end of resources.  The world has largely dealt with these.

However, the “Triumph of the Market” or the “Washington Consensus” phase that lasted broadly between 1980 and 2008 is over.  The financial crisis in the US and Europe since 2008 has exposed the risks and limits of free markets and, in the final analysis, highlighted the responsibility and power of the nation state.  Nation states matter.  To decide on the rules which govern markets and within which companies and nations operate.

This is the globalised world we operate in.  We have to understand how it operates and impacts us.  Grab the opportunities it throws up and be mindful of its threats.  On the balance it has offered us opportunities.

Let me come back to our situation.

We can see what has happened in our country since 1991 as a process of adapting to this globalised world.

Three major things happened in Indian industry in the 1990s which have propelled our country on to a different trajectory.

1. Many existing companies successfully transformed themselves.
2. Many new companies came in to being.
3. Off-shore outsourcing industry developed to create a large number of well paid jobs in the country.  Though this began with IT and BPO companies, it has now broadened itself in to IT Enabled Services and KPOs.

Many large Indian companies went through gut wrenching change in the 1990s and the last decade and have come out stronger.  Some fell by the way side.  Of the private companies in the top 20 in 1991, 16 were still in the top 50 in 2010.  This indicates that the issue till 1991 was essentially of government policy and not company capabilities.  It is also a sign of vitality of our entrepreneurs that new business groups and new industries like IT, Pharma are now in the top 20.

The World Economic Forum of Geneva produces a very respected global competitiveness ranking.  For decades, on issues within the control of companies we scored a significantly higher ranking in the world, under 30, compared to our overall ranking of around 50.

Let me illustrate this process of change with the experience at Bajaj Auto.  In 1997-98, a little over a decade ago, we sold 1.33 Million vehicles of which barely 3.5% were exported.  In the year ending tomorrow we would have sold 3.9 Million vehicles of which  30% were exported.  We have become much bigger and more competitive, locally and globally.  We have competed in India and abroad with the best in the world, since 2000.

By whatever parameter one can assess performance, ours has shown a quantum improvement.  We used to make about 1 Million vehicles per year with 18,000 people.  Now we do 4 times the volume with less than half the people, a 800% improvement in productivity.  Our R&D manpower has increased from 195 in 1990 to over 800 now.  Our profitability or operating margin is the best in the automotive industry – not only in India but world-wide.

One would find a similar process in almost all companies that have prospered in the new environment, be it Tata Motors or Mahindra & Mahindra or the Aditya Birla group.  Not that there were no casualties.  Premier Automobiles, LML, Kinetic, DCM Motors and many others either folded up or were taken over.

At the same time, there has been a flowering of Indian entrepreneurship.  At 7,000 we have the largest number of listed companies in the world.

Many new companies and sectors have bloomed, most notably in IT, Telecommunications and Pharma.  Private sector Banks and Insurance companies have given both PSUs and foreign companies a run for their money.  IT and ITES companies have become the largest employers of educated people in the country.

While serious difficulties remain in starting and running a business, notably the lack of venture capital, poor infrastructure, inflexible labor laws, a plethora of regulations and rampant corruption, it is easier than before. (Of course, inflation, fiscal deficit and to some extend CAD continue to be concerns).  In ‘Ease of doing Business’, which is an annual survey done by the World Bank, we rank a poor 134th out of 183 countries.  But, due to the entrepreneurial depth in our country, despite the constraints, new businesses are multiplying.  I believe that the 9% growth rate that we are achieving is because of the efforts of our entrepreneurs in every nook and corner of our country.  And these include our farmers.  This growth is not because of but almost despite the government.

Another big change is that Indian companies are internationalizing themselves, not only by selling abroad, but by acquiring companies there.  A decade ago no one spoke of outward FDI.  Now it is a significant figure.  It was USD 27 Billion in 2009.  We have Tatas taking over Jaguar and Land Rover and Corus, Mahindra taking over Ssangyong, Birla’s taking over Novelis, Bharti Airtel acquiring Zain in Africa.  Bajaj Auto owns 38% of the Austrian motorcycle maker KTM.

This takes our companies to the next level.  A whole new mindset, new skills, new culture, is required to run such an operation.  I believe more and more companies, even medium sized ones, will move in this direction. And this provides the basis for continued optimism about our country’s growth. 

The steady growth of our economy, in a world where growth in developed markets was lower anyway, and badly hit after 2008, has meant heightened interest of foreign companies in our markets.  Inward FDI has gone up from USD 4 Billion in 2000 to over USD 34 Billion in 2010.  IBM has over 100,000 employees in India.  Many companies including Mercedes Benz have opened up their R&D centres in India, even in non-IT sectors.  GE employs 600 Ph.Ds in India.

Decisions are taken by companies, not countries, and they will do what they think is in their own long term interest.

Industry is the engine of a nation’s development.  Not just in terms of taxes and employment, to which it contributes handsomely, but because it is the activity that drives an economy.  It, along with agriculture, is the only activity that creates a surplus.  The industrial mentality, which is based on an effort to create something,  then conserving and further developing it, is central to the functioning of the modern world.  It is interesting that we find this concept in the writings of Manu, in Arthshastra and in Panchtantra.

So is everything hunky dory in our country?  Far from it.

Even 63 years after independence our per capita income is very low.  About USD 1,000 per annum.  (Developed world US$ 35,000/-).  The level of poverty in our country is unacceptable.  (40% live on $1 per day).  We need to move many of our people out of agriculture, so that agricultural holdings increase to a viable size and yield per acre increases.  (Industry and services to absorb such persons).  Our industrial and social development is uneven leading to large pockets of our country being ripe for disaffection.  The extent of spread of Naxalism/Maoism reflects this.  Our quality of governance is abysmal.  We have an electoral democracy which is increasingly being captured by goons and money bags.

The tragedy is that we have so much potential.  If we get our government right, we can fly.  On the balance, I continue to remain optimistic.  We are seeing that better governance at the state level in Gujarat and Bihar is delivering both on the economic side as well as on the social and political.  Our people are good.  It is our leadership in politics, bureaucracy and industry, which has let us down.  Unfortunately, Indian industry, especially large companies, have been timid politically.  In the UK I have heard a PM being called “stupid” by an industry person and recently the head of 3M, a US multinational, upbraided President Obama for his wrong headed policies towards business.  Indian business has unfortunately still not earned a stature and credibility to frankly speak its mind.  Also, the Indian state can still be vindictive and unlawful if it so chooses.  But, as the streets of Tunisia, Egypt and Libya show, ideas and raw courage can still move mountains.

The core reform we need is in the government seeing itself as an enabler rather than as a controller.  When dealing with developed countries, one is struck by the unison with which industry and government speak, especially when dealing with other countries and multilateral organizations.  In our case we still suffer from a colonial mentality, with the government keeping industry at an arms length.  Despite improvement, it is still not a satisfactory situation.

The recent Bihar assembly elections, exposures by the electronic and print media and the assertiveness of the judiciary under the new Chief Justice of the Supreme Court, provide hope that fairly soon, correct policies in the national interest will be followed by our central and state governments to promote growth, development and ensure law and order.  Also, attractiveness of corruption would gradually reduce.

The governance agenda is constantly evolving and there is high awareness of the need for a more responsive, effective and transparent process.  India’s growth process under a democratic government is a sustainable, humane and just path to development.

We should recognize the importance of India being strong, based on two pillars.  Economic strength and military strength.  This strength is crucial for global respect and credibility.  A weak India is not good either for India or the world.  But a strong India, a balanced, mature India, a non-threatening India, is critical.

Some of the key reforms we need are:

1. Availability of key physical infrastructure. Power, roads, airports.  And, also social infrastructure including education and health.
2. Improved governance – A significant reduction of wasteful or misdirected expenditure by the government, specially on non-merit subsidies.
3. Improving delivery of services by reducing inefficiency and corruption.
4. Bringing down inflation and fiscal deficit.
5. A flexible labor policy with adequate safeguards for labor
6. Dispersal of industry.
7. Electoral reforms: a) State funding of elections b) Concurrent elections to Parliament and State assemblies and once every five years,  c) Political parties not giving tickets to anti-social elements to stand for elections.

The challenge for Indian industry is to develop size and technological capability.  For this it needs management capability.  Most private sector Indian companies are family managed and in the second, third or fourth generation. The probability of family firms being managed well can decline across generations.  But in our country there is still a strong desire within children of business families to work for their companies.  So, in Bajaj Auto the fourth generation is managing and each generation has been trained better than the previous one.  And, such companies, are essentially run by owners with commitment and continuity who are also competent professionals.

While technology is changing fast, I believe that in most businesses it is possible to judiciously buy technology and have internal capability to develop it further and convert it into products.  This is how Bajaj Auto, Mahindra, Tata Motors have evolved.  Even in newer sectors, companies like Suzlon in Windmills have taken the route.

Business schools tell us that the key requirement is the front end which deals with the customers.  This is the issue of distribution, of brands, of skilled assessment of customer desires.  The back end of  productivity, technology are easier to handle in all but the very high technology areas.

In the corporate sector, doing a quality job and meeting commitments is a necessary way of life.  Or the enterprise will not survive.  Achieving this requires certain habits of thought and behavior.  Some of these are a commitment to the idea of merit and creating an atmosphere conductive for it to flower, a focus on constant improvement and a desire to learn continuously.  The corporate sector spreads these habits to those it associates with.  This itself, in our ‘chalta hai’ country is a very important contribution to nation building.  It is our IT sector which reshaped the world’s and our own view of ourselves, from being second raters to first raters.

Indian industry now has the track record of competing with the best in the World.  We have the intelligence, the commitment and the drive and, most importantly, the entrepreneurial depth.

Of course, businessmen are motivated by profit.  But the desire to satisfactorily meet the needs of customers and to compete with the best and come out a winner, is a deeper and a more enduring source of motivation for most industrialists.

Over a century ago, Swami Vivekananda said something that still resonates remarkably.  He said, “Let us all work hard, my brethren. On our work depends the coming of India of the future.  She is there ready, waiting.  Arise and awake and see her rejuvenated, more glorious than she ever was-this motherland of ours.” If there can be a thought that drives us in India it is this.  And, if such a thought drives a country, what can stop it from realizing its dreams?

Jai Hind.