Underachieving in a land of plenty

Investing in India
May 14, 1999

One Indian paradox is that of poverty amidst plenty. In the industrial sector it is one of available capabilities versus appalling economic performance. On average, India is perhaps one-eighth to one-sixth as productive as the countries in the Organisation for Economic Cooperation and Development. Yet, India beckons as a set of marvellous opportunities. Therefore, a book that tells one what to do about India might be very useful.

Investing in India comprises six chapters highlighting the overall context within which investment decisions are taken in India, including those by investors outside India who wish to invest there. These chapters primarily deal with topics such as the role of the external sector, exchange-rate management issues, the government's fiscal position, inflation and money supply, interest rates, the role of domestic savings and the role of foreign savings. All grist for the macro-economist's mill.

The book reports a great deal of analysis. The author highlights the failings of past and present governments in their inability to define an appropriate context within which firms can thrive. Consequently, Indian industry is saddled with costs way out of line with those found elsewhere in the developed world. The lessons are sobering, when one realises that Indian productivity is so low that it will take several decades at present rates of productivity growth to catch up to where the rest of the developed world is today. The author does well to highlight the pitfalls in meeting this challenge: for example, one is the meagre privatisation carried out.

My overall impression is that the book is a top-down analysis of the Indian economy. It is an analysis that will appeal to a central banker delighting in aggregates. This sort of analysis will also be useful for a fund manager in the West with a bag full of cash evaluating India among other investment opportunities. The book will appeal to a narrow group of specialists who are seasoned investors, to use the author's own words, rather than to an informed layman. Yet the book should be read by all interested in India's economic policy, and by those who might have a hand in influencing policy. An investor putting a few hundred million pounds into the Indian economy via a project does have the wherewithal, one hopes, to influence policy decisions, if armed with the sort of arguments that this book indeed provides.

Nevertheless, the macro-economy is a collection of myriad micro-economic agents doing their business and this aspect of the Indian economy is also fascinating. Little attention is given to the micro-economic aspects one might consider when investing in India. Investors, after all, invest in firms and industries. Pertinent questions include: what are India's sunrise industries? What is the role of industrial targeting for specific sectors if targeting ought to be done? What are the ways to build capabilities in attractive industry settings? And if Indian managers and industrialists are not to be blamed for their high-cost structures because it is the government's fault, then why is Indian product quality so low?

In other words, what are the incentives that define the motivation of Indian industrialists and managers? Are these incentives in tune with what is optimal in a developed economy, or are they ones harking back to an institutional structure inherited from the British, based on the needs of colonial governance when feudalism was the Indian social ethos? These are some critical questions that need to be addressed in future research.

Sumit K. Majumdar is professor of strategic management, Imperial College, London.

Investing in India

Author - Shanta Acharya
ISBN - 0 333 68691 8
Publisher - Macmillan
Price - £47.50
Pages - 258

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