Mr. Kumar Mangalam Birla
The Smart Manager
September-October 2011 Issue
In his article 'Redefining Entrepreneurship' for the Nov-Dec 09 issue of The Smart Manager, Kumar Mangalam Birla had pointed out that in today's world, “entrepreneurship is about leveraging opportunities within a much larger ecosystem.” That year, Grasim's pulp and fibre division was conferred the prestigious Asian CSR Award by the Manila-based Asian Institute of Management, even as the (Aditya Birla) Group's asset management and cellular telephony businesses boomed. In the following year, 2010, it was Ultratech's turn to win top honors at the Asian level for its CSR activities, while Hindalco made it to the top 10 on the Forbes 'Asia's Fab 50' list. Fittingly, the Group saw these achievements too as part of “a much larger ecosystem”: Amid a series of highs, 2010 also saw the formation of the Columbia Global Centers' Earth Institute in partnership with the Aditya Birla Centre for Community Initiatives and Rural Development. The institute's agenda is to expand “people's understanding of the earth as one integrated system.”
Two years after his last article for us, Kumar Mangalam Birla remains among those Indian managers most qualified to talk about integration and how it can help responsible corporates spread social equity. After all, over 60% of his Group's revenues flow from overseas operations. The Group continues to surge forward with a six-figure workforce featuring people of 42 nationalities, but it is now more than ever before that global integration is as much a hurdle as an aid. With every economic shockwave, integration results in global uncertainties, and unsuspecting economies are washed away, often with scant notice. Is India truly globalization-proof?
An unmistakable phenomenon of our times has been the sharp accentuation of uncertainty about the future course of the global economy. The events of the recent past say it all – the impasse in the US Congress in agreeing to debt-reduction measures, the consequent downgrading of long-term US Treasuries by S&P, followed by a global stock market crash and a 15% collapse in oil prices. The sharp rise in gold prices further underlines the element of fear and uncertainty.
Governments appear to be struggling to respond appropriately to this uncertainty.
This uncertainty inevitably spills over into the world of business. This is more than evident in terms of volatile financial markets, uncertain growth, uneven trade, high unemployment and intractable inflation. Clearly, such pronounced volatility is highly disruptive, for both the global economy and business. The choppy waters are not likely to calm down anytime soon. And we will have to learn to live with it, and thrive nonetheless. It is two decades since India embarked on the high seas of globalization. Today, we are in the middle of a vast and turbulent global ocean. India has to get its reflexes and responses right. It has to adapt deftly. It has to be able to navigate through this and come out on top. That is the challenge before India.
Through the working lives of all of us here, we have assumed that never again would the world undergo such widespread economic trauma, as was experienced in the late 1920s and early 1930s. Much has been done since then to prevent the recurrence of an event such as the Great Depression. A network of institutional arrangements have been put in place in the post-War period to address global economic issues. We have the IMF, World Bank, the Bank for International Settlements and the WTO, the G8 and the G20, along with closer coordination between central banks.
| The prospects of a double-dip recession now seem very real. |
However, in the last three years, that comfortable post-War economic equilibrium and relative stability have been rudely jolted. The financial crisis that struck late in 2008 has shaken the sense of complacency. We are no longer sure about our sound global economic foundations. The crisis that hit in 2008 was largely a financial market crisis, but it quickly transformed itself into a full-blown economic one. Its impact is still reverberating throughout the globe. Apparently, it seemed as if economic growth had been put back on track in most parts of the world. But it now appears that it could just as quickly unravel. The prospects of a double-dip recession now seem very real. The quick-fixes, the massive stimulus packages, quantitative easing (QE), QE2 and now perhaps a QE3 are beginning to seem more like band-aids used to fix a leaking roof in a tropical storm.
The fiscal measures that were needed and were appropriate to resolve the problems in 2008, suddenly seem either unsustainable, or just not up to the task. The fiscal position of a host of countries has been stretched to the breaking point. The queue behind Greece grows longer...Portugal, Spain, Italy, Ireland. The US debt situation has also escalated into a new zone of danger. Japan is entering a third decade of low growth.
No doubt there are many countries and regions experiencing high economic growth. Among them are China, India, Brazil, Russia and South East Asia. But even here growth could be halted if there is renewed recession in the West. Or if the exchange rates become very volatile. Or if there are more strains on the banking systems. Most certainly, the financial floodwaters would flow very quickly into areas such as interest rates, joblessness, and, perhaps, [create] greater protectionism.
The financial crisis of 2008 revealed many cracks in the system. This is because although the world has globalized, unfortunately, governments still tend to think parochially, in terms of political parties or in terms of their constituencies. Totally out of sync with a world where the crisis can have global origins as well as global repercussions.
| Although the world has globalized, unfortunately, governments still tend to think parochially. |
For example, take the crisis in Greece. It will require a wide and coordinated response. Any solution will have to be worked out in close coordination with the Greek political parties, the Greek Government, the European Central Bank and the IMF. It doesn’t end there. The Greek Government will face pressure from its voters. The European Central Bank (ECB) will have to garner support from the German Government of the day. And the German Government will have to take note of the fact that a large section of its population does not want its taxes to be used to bail out Greece. It is indeed a complex web of relationships, entangling voters, political parties, governments, central banks and global multilateral institutions. Each of them will need to agree on a unified and consistent course of action, and then take timely action. The fact is that while the world has advanced far in globalization, the structures that can solve these kinds of complex, cross-border problems are not yet robust enough to act decisively and effectively.
So, the key takeaway is this: We have to face the fact that the great global edifice of institutions that have been built over the years seem unable to come up with an effective response. They are unable to do so for a relatively small economy such as Greece. What if the falling of the dominoes were to extend to a larger economy?
Some prominent features of the global economy
Next, let me point out some of the prominent features of today’s global economic landscape:
| 1 |
This is a schizophrenic economic world. The developed economies are mired in high unemployment, slow growth and high fiscal deficits. Asia and other emerging economies are experiencing high growth and a relatively better fiscal situation. |
| 2 |
While one part of the world is trying to induce growth with loose money, another part of the world is fighting inflation with tight money. |
| 3 |
In today’s world, capital moves quickly and effortlessly. But labor is much less mobile. Consequently, there are countries that face a shortage of labor, whilst elsewhere there is a surplus of labor. |
| 4 |
Capital mobility often exacerbates volatility and plays havoc, more so when the capital flows are short-term. Therefore, many countries have begun going back to a world of capital controls. |
| 5 |
Exchange rates are becoming a weapon of choice in economic policy, what the Finance Minister of Brazil called a "currency war". China, for instance, has benefited greatly from an undervalued Yuan. Similarly, German exports are booming on the back of a weak Euro. |
| 6 |
Today’s colonists chase natural resources. China is the most conspicuous example of a country that is deploying its foreign exchange reserves to secure access to oil and mineral resources in many parts of the world. China has also been generous with its dollar wealth in buying geo-political clout in places such as Africa and South East Asia. |
| 7 |
Agriculture is back in focus. The most troubling and visible component of inflation today and the component that decides votes - is food prices. Decades of dwindling farming population, widespread drought conditions in many countries, and the growing [overall] population have all resulted in record food grain prices. In addition to these secular factors, there is a perception that commodity price speculation has also contributed in a major way to pushing food prices higher globally. The FAO estimated that in 2009, about 1 billion of the world’s population was undernourished, a number that has risen over the decade. The world needs yet another Green Revolution. |
| I believe we will have to reckon with sub-par growth in most developed economies. Currency fluctuations will likely become more pronounced. |
Outlook: Next 3-5 years
Moving on, let me paint a broad-brush scenario of what the next three to five years could look like. I believe we will have to reckon with sub-par growth in most developed economies. Currency fluctuations will likely become more pronounced. The US Dollar will cede some ground to a mix of the Yuan and the Euro. Commodity prices will broadly continue to be volatile. Oil prices can be expected to fluctuate around a range that is around 20% higher than it is now.
Furthermore, in energy, the role of nuclear power will wind down; many feel that the future is one for natural gas, with coal also coming back into prominence. China’s growth will remain impressive, but will be well below the 10+% pace of the past decade. China will perhaps also move toward a more balanced mix between exports and domestic consumption. Given its natural resource endowments and the sheer catching up that is required, the region most likely to surprise on the positive side is Africa. More protectionism? Perhaps the enthusiasm for freer trade will diminish considerably. This holds true especially in the case of agriculture. In terms of movement of people, I am inclined to think that President Obama would rather have US companies hire people from Chicago, than from Bengaluru.
I believe that the broad direction of global policy will be to address the disruptions of extreme and unfettered free markets, particularly financial markets. Overall, global economic conditions will be cloudy over the next half decade, with some sunny patches.
What global economic choppiness means for India
So what does this mean for India? We do have enormous advantages which are well recognized.
However, despite India’s considerable achievements over the past two decades, we must admit that we are pushing far, far below our potential. The economic thrust given by the earlier rounds of economic and regulatory reforms needs to be bolstered with a fresh impetus. This is the time. This is the moment. We cannot be complacent. Particularly, when the world around us is so turbulent and uncertain. True, we need consensus. But it’s also a fact that we need real action. The nation’s economic batteries have to be re-energized and rejuvenated.
| Despite India's considerable achievements over the past two decades, we must admit that we are pushing far, far below our potential. |
India’s response to a choppy world
So, what should India’s response be?
Boldness, speed and experimentation
For India, the message is clear. First, surviving and thriving in such a turbulent and uncertain world will call for a certain degree of caution. But more importantly, it will also call for a greater orientation towards creativity, agility, and quick responses. The inability to change course would be fatal. It demands speed in making decisions. Above all, it calls for a lot of experimentation. New ideas often need to be implemented quickly, even if on a pilot scale. If they don’t work, they can be abandoned. If they work, they can be implemented. For example, this was what China did with the free trade zones. They went all out in only one area – Shenzhen. When it worked, the idea was extended to other parts of China. If it hadn’t worked they would have killed the idea or tweaked it. This is surely a more pragmatic approach than studying and analyzing an idea endlessly.
Back to basics on domestic development agenda
A second aspect is a renewed focus on the basics of domestic development. The Western world is grappling with slow growth. But India’s own development need offers big growth opportunities in basics such as drinking water, healthcare, sanitation, transportation, urban infrastructure and education. The gap in these sectors is so huge that they alone can keep India’s economy in high gear for at least two decades.
Rural and farm sector
Third, one cannot over-emphasize the criticality of the rural and farm sector. Agriculture’s share in India's GDP is less than 15%, but more half of our population depends on it for their livelihood. Hence, we need to implement reforms in agriculture with a sense of urgency. A robust farming sector is an essential part of our national development strategy.
Facilitate domestic investment
Fourth, we must extend the same attention, priority and courtesy that we give to FDI, to investment by Indian entrepreneurs. The government needs to ask and introspect on why Indians are not investing more in India. The fact is, and as we know it, large projects need a plethora of approvals from different bodies. The policies and the rules of the game are not clear, and change far too often. It can takes years.
Let me contrast the situation here in India with our Group’s positive experience in other parts of the world. Whilst some of these would seem ‘obvious’, we fail to meet these basic requirements.
In Thailand, where we have a significant presence for the past four decades, I find the Board of Investments (BoI), a remarkable institution. The BoI is a nodal body responsible for investment promotion. It provides stability in policy making, determines fixed incentives and has a distinctive problem-solving approach. The BoI genuinely provides single-window services. These include investment approvals, related clearances, policy clarity, even employee visa facilitation for investor companies. Operating in such an economy gives complete clarity and leaves no space for ambiguity.
Take the example of another emerging economy like ours -- Brazil, which too has several of the problems that we face. Novelis, one of our Group companies, has set up an aluminium rolling and recycling plant at Pinda. This facility is the largest of its kind in South America in terms of shipments. We are now further investing US$300m to expand our aluminium rolling capacity by more than 50%. The decision to implement this project was made in 2010. The project is expected to come on stream by late-2013, right on time. Once all the necessary permissions were received, there have been no delays whatsoever because of policy flip flop, procedural issues, problems in getting clearances or any other government intervention.
| We must extend the same attention, priority and courtesy that we give to FDI, to investment by Indian entrepreneurs. |
We experienced firsthand how the policymakers in the developed world view industrial restructuring in a constructive manner, and accord flexibility to businesses. In December 2008, we decided to close down Novelis’s Rogerstone facility in UK, as it had become unviable. We decided to relocate the assets to India to our Hirakud smelter in Odisha, to cater to the strong Asian demand. In line with the UK government’s guidelines, the closure of the Plant and its shift to India, happened without a hitch. Politicians and officials in the UK appreciated the business imperatives and viewed the entire exercise constructively. The plant is now close to commissioning here in India.
In Canada, when we acquired two pulp mills seven years ago, we entered into a 20-year long-term agreement with the government for the supply of timber – which is the feedstock – and a related subsidy. For the past seven years we have had no change in the government’s commitment, nor have we faced any delays in their supply, and not a day’s delay in receiving the subsidy every month.
There are many lessons from our international experience. We could plan our investments carefully, and there was a high degree of predictability. Regulations facilitated rather than hindered our projects. Policy clarity was high. It would augur well for our nation if our policies were clear, transparent, consistent and not reversed. It is this kind of streamlining that will stoke the fires of entrepreneurship.
We must bear in mind that it is only the unbridled actions of its people, its entrepreneurs, its dreamers, its visionaries, its risk takers, its job creators and its wealth creators, that can lift a country to an altogether new level of prosperity and well-being.
Making India a manufacturing hub
Fifth, we must go on an overdrive to develop India as a global manufacturing hub. We are already world leaders in certain sectors like two wheelers, small cars, generic drugs, laminated tubes or diamond polishing. We have many Deming Prize winners, which is the equivalent of a Nobel in manufacturing excellence. We have achieved the lowest-cost production in a variety of products and materials. For example, our Group has developed global manufacturing scale and competencies across industries like copper, aluminum, cement and viscose fiber. And yet, manufacturing makes up merely 15% of our GDP. It needs to be raised to at least 25%. Each manufacturing job supports several service-sector jobs and leads to genuine increase in productivity and standard of living. If we are to reap a dividend from our demographic advantage, a strong manufacturing base would have a large role to play.
Energy and resource security
Sixth, let’s address on a war footing the issues related to achieving energy and raw material security. That means speeding up domestic exploration and drilling, intensifying and kick-starting mining activity within India, and acquiring energy and raw material assets overseas.
Playing a larger global role
Finally, let me assert that India needs to do much more to pull its weight globally and voice its interest and concerns. India today undoubtedly commands respect. In term of purchasing power parity, it is among the top four economies of the world. India’s voice needs to be louder, yet constructive. As the US Secretary of State, Hillary Clinton, said recently, India has to assume and assert more vigorously its voice and leadership. India’s contribution at fora such as the G20, WTO and IMF increasingly counts. India needs to be seen as a leader, a facilitator, a constructive team member of the global community.
If India subscribes to free trade – as it should – then it must, from its position of strength, question the visa restrictions imposed on Indian software companies. If the world subscribes to free trade, India must come down forcefully on the pork-barrel subsidy systems prevalent in the developed economies. If food inflation is a burning global issue, India must point out that that is partly so because food grains are among the least globalized of products.
And a major reason why trade in these critical commodities is so low is the structure of tariffs, subsidies and quotas put in place by the developed countries. This is an area where India can forcefully put the free trade mantra back on the table of those who have long been extolling the virtues of free markets.
| Many global problems exist in a no-man's land, as it were. India has a useful role to play in shaping appropriate responses to these problems. |
Conclusion
India’s forceful assertion becomes even more critical in a world where many problems – pollution, environment, migration, for instance–are global. At the same time, unfortunately, decision-making on these issues is dispersed and fragmented. Many global problems exist in a no-man’s land, as it were. India has a useful role to play in shaping the appropriate responses to these problems.
In conclusion I want to say that India launched its last big reforms drive in 1991. That single push worked magnificently. And now, it’s time to hit the accelerator again, with double the vigor.
This article is based on the 2011 JRD Tata Memorial Lecture. |
