| Beyond difficulties
Chatham House is the headquarters of the Royal Institute of International Affairs and is like its American counterpart, Brookings, a very influential policy think-tank in the United Kingdom. After many years of preoccupation with China, it helped organize, along with the Rajiv Gandhi Institute of Contemporary Studies and the Federation of Indian Chambers of Commerce and Industry, a two-day conference in London on the decade ahead for India. All participants, Indian and British (including some of Indian origin), were unanimous that India had become an influential economic power and would be more so in the coming decade. Jack Straw, the UK foreign secretary, strongly supported India for a permanent seat in the security council and, along with K. Natwar Singh, said that the relations between the two countries had never been better.
There were many strongly positive comments on the sea change that had occurred in India's economic policies and situation in the Nineties. Karan Billimoria, the founder-CEO of Cobra Beer, recounted how he had first set up in India, exported to the UK, and then closed his operations in India because of all the hassles, to set up in the UK where he has been outstandingly successful. Now he has set up again in India and is very happy with the calibre of his employees and the potential for his business to grow, while emphasizing his actions to be environmentally friendly. He did, however, warn about the continuing red tape and bureaucratic meddling.
The director-general of the Confederation of British Industry was also very upbeat about the economic relationship but was strident about India not opening itself to British professional services like lawyers and others. Neither he nor other participants had any response to the issue of reciprocity. There was mention that British lawyers could help improve the quality of judgments on intellectual property issues. But this ignored the need for training judges on such issues and the quality of the policing and prosecution. The model of buying into Indian legal firms and using Indian lawyers (as is done by the international accountancy firms practising in India who use locally qualified accountants) with British guidance where necessary did not seem to them as an adequate substitute for free entry (without reciprocity).
There was similar comment by participating British bankers who wanted much greater freedom for foreign entry, opening new branches, and presumably taking over of local banks. They did not see themselves as being able to participate in agricultural credit or in financing self-help groups, as for example has ICICI. The demand seems to be for freedom to operate in large urban centres and focus on industry, trade, stock markets, and so on, apart from helping raise overseas debt. There was similar demand for greater freedom to enter retail and for reductions in the discriminatory duties and taxes on Scotch whisky.
The excitement resulting from the spectacular growth of the telecommunications industry was vividly brought out by the young Bharti Mittal. In his moderate style, he pointed out how foreign investment had been allowed to rise to 74 per cent and expressed his confidence that this would happen over time in other restricted sectors as well. Like Billimoria, he counselled patience for prospective (and present) investors in India. All the 'right and good' things ultimately happen in India, but one has to wait while the climate is prepared for it. The best example was the continuity in policies despite the many changes in governments since the Nineties.
Dr Ella did some plain speaking on the relatively poor progress of biotechnology despite its enormous potential and the available skills. The annual output of engineers, science graduates, and so on from India was high. The numbers caused some consternation, being higher than the whole of Europe in some cases, especially when it was pointed out that they were set to rise sharply to allow for the large overseas demand for these skilled people from India. However, the need to improve the quality of science education was stressed.
The negative role in India of European, especially German, environmental groups in slowing or even halting the progress of genetically modified seeds, came in for critical mention. In this connection, the recent decision of the Orissa government to rein in the negative influence of such groups on legitimate and benign industrial development should have been mentioned.
A live example of the years taken before Gillette could invest in India and then raise its equity holding was given by its former chief for Asia who is now head of Rothschild in India. Today, it is among the most important markets for Gillette in the world. He counselled patience and yet more patience since the rewards would be very worthwhile. He sees similar potential for his investment-banking firm, though it might take more years to be realized.
It was in the area of energy that the conference got its taste of the principal bottleneck to growth (apart from the bureaucracy) in India. The dilemma was in contradictory tariff policies: the principal input prices of coal, oil and gas were relatively free while that for their principal users namely, electricity and fertilizers, were capped. This capping was related to the near-monopoly of state governments in distribution and supply, the gross inefficiencies in the power system especially under state government ownership, tolerance of high levels of theft of electricity and the untargeted supplies below costs for electricity use in agriculture and domestic households.
It was pointed out that the legislative and regulatory frameworks were in place for electricity (and have been under discussion for many years for coal and gas) to permit the energy and power systems to develop rapidly. These frameworks also provided new and relatively risk-free opportunities for private investment. It was also recognized that significant growth in electricity availability was dependent on an adequate return on investment. Changes in ownership structures in distribution were expected to happen more rapidly on the lines of the successful Delhi model. Electricity supplies and their costs were the most critical factors in a sector whose growth was vital. However, the future was more in promises than in performance.
The significant new discoveries of oil and gas in India and the effort in ensuring overseas supplies through purchase of production centres and investments in pipelines were discussed. It was clear that the investments were likely to be huge. Risks had to be minimized. The principal user industry, electricity, could not pay market prices for gas. This was a big risk. But private gas fields were more free to make good returns based on market prices than government-owned ones. New uses for gas in transport and for domestic household use had yet to develop. The prospects for gas pose a serious dilemma and if the user industries could not afford the cost they would focus on coal as the raw material. This would have severe environmental consequences unless huge investments were made to reduce ash content. That would again affect electricity tariffs. Electricity reform was therefore, under any circumstances, of paramount urgency.
The other area for urgent reform was the bureaucracy. While it was accepted that the Indian bureaucracy was a bastion against misuse of political power, this role had become diluted in recent years. The conference could only hope that economic growth and the administrative experience of the present prime minister might bring about improvement in its functioning.
Vijay Kelkar traced the declining dependence on customs duties since the Nineties, the gradual introduction of value-added taxation leading to India becoming truly a common market, the rise of new taxes as on services and the introduction of information technology in tax collection leading to wider reach and improved collection. The challenge was to considerably improve the tax to GDP ratio and improve the efficiencies of government expenditures so that public savings could be used for investment.
The conference educated British investors by being open both about opportunities and the difficulties.