Wednesday, October 15, 2008

Indian Economy, MNCs and Foreign Products: A Reflection

Logic of International Trade

A long time ago, the world was a simpler place. Almost each country or kingdom used to depend upon whatever it could produce. Then some brave people started exploring and many countries discovered each other. During their exploration, they also discovered that many of the new places they had discovered had goods which they had never seen or heard of before. Imagine how Alexander the great must have felt like when he tasted a Banana for the first time at the banks of river             Satluj! Many of the explorers also saw that there were many things that were very difficult to produce in their own country but was available in abundance in the new lands they had discovered. I saw the reactions of some students from Punjab when they first visited Kerala and saw that cashew and black pepper growing in abundance in our backyard! The explorers took some of the new and exotic stuff back home and earned a lot of money from selling that. All countries understood that it is better to procure what was difficult to produce and export what was easy to produce as somewhere else, it is difficult to produce the same thing and that the are willing to pay for it. In technical language we call it the “Theory of Comparative Advantage”. Soon international trade was born. Long before these debates on globalisation, MNCs etc. began, India like many other countries was actively involved in trade. We used to import a lot of stuff and we used to export a lot of stuff too. Imagine, we had so many kings and all of them had so many queens, now we needed to import a lot of silk from China to dress all those beautiful ladies! Similarly, we had lot cotton, spices, gold, diamonds etc. and many countries in the west and east paid a lot to traders to get them the material from India.

The East India Company and the British Rule

My father is a communist at heart and contrary to what it may seem, I too am a socialist, if not a communist (Yes, communism is different from socialism!!). Most of the Left oriented people and most of the uneducated masses look upon the modern multinational and transnational companies (yes, they are different) as modern reincarnations of the East India Company! Any foreign company is viewed with suspicion and ethnocentric (be Indian buy Indian type attitude) orientation is common.

It is correct that companies like East India Company who came to trade often had the invaders in tow and soon a business deal would become something more serious. If you look at history, everybody without exceptions was doing the same thing at that time. Do you really think that the kingdoms in India were very people friendly and were helping the people? Then why do we single out the British or the East India Company? Simple….. Because they could do it and we could not.  Then the question arises, why were we conquered? The answer is again pretty simple; while most of the western countries were busy utilizing science and to build boats, ships, print books, use the compass and travel, we were busy doing something else. We were busy discussing how it was against the religion to cross seven seas! We were busy building and strengthening feudal and casteist social systems. We were busy because India had more that a 1000 kingdoms and each was busy fighting the other! So the British came, they saw and they conquered. We never had a strong leadership to counter them. See…. So Simple! The revolt of 1857 and names like Rani Jhansi are very romantic, but it is truth that most kingdoms were fighting for their freedom, freedom to keep doing what they had been doing in the past. In fact you should know that India as we know it today came under one flag only after 1857, when Queen Victoria was proclaimed the empress. Till then were small principalities fighting each other.

Even though the British did rule us for 200 years or more, we need not curse them for that. Yes they took away diamonds from the Taj Mahal, they took away the Koh-i-Noor. But I really don’t think those diamonds would have helped us in any way. Instead look at what they gave us. They gave us great dams, roads, bridges, medical technology, education system, civil services, the postal system, the railways and most importantly, they gave us English! Of course you can debate that they hurt us by partitioning us, but I will say thank God they did! Otherwise whatever is happening in the NWFP and the tribal areas in Pakistan would have been happening to us! Yes, you can debate that the education system they gave us is inferior, I say prove it. In my opinion the educations system in India is very good but the sheer number of people means that there are so many failures to see around us and far few success stories. But you see, the population is our own gift to ourselves!

The Indian Economy: A Brief Flashback

When India got free, the government was left with a huge nation with a huge population to take care of. The economic policy our leaders designed was heavily influenced by the colonial experience (which was seen by Indian leaders as exploitative in nature) and by those leaders' exposure to Fabian socialism (look up Fabian society). Unsurprisingly the government policies were protectionist in nature to give maximum encouragement to the domestic industry. The main emphasis was on reducing the import bill and ensuring food security by driving agricultural growth. The planning and regulatory functions were centralized and a huge public sector came up. Obviously, we needed the PSUs as the private sector at that time did not have the money or the will to participate in nation building exercises! 


I can bore you wit the details of how the socialist model in India was different from the more radical model in Russia (USSR at that time) and how Friedman disagreed with the policies of how McNamara made fun of us!! But the fact remains that even though the government policies were borne out of necessity and were (we assume) designed with national interest in mind, it failed to offer India anything more than the ever so shameful Hindu rate of growth (3-4%... by the way why is it called so??)

We stagnated. Protectionism bred incompetence and state monopoly gave birth to a socially accepted “corruption-incompetence” complex.

The so called process of liberalization actually began way back in the 1980s, but the real concerted, overt and public effort began in 1991. Successive governments have tried to do whatever they could to liberalise in the face of coalition politics, powerful lobbies, vote banks and a massive inefficient aged public system. Overall the efforts at liberalization, privatization and globalisation (LPG) have been in spurts and often as compromise formulas even then, since 1990 India has emerged as one of the wealthiest economies in the developing world; during this period, the economy has grown constantly, but with a few major setbacks. This has been accompanied by increases in life expectancy, literacy rates and food security. I guess that is a fairly good outcome considering the point of start and the magnitude of the task!

Are Not Using Foreign Products the Answer?

The mail that made me do this write prescribes the use of products made in India by companies that are purely Indian as a panacea for all the troubles our country is facing. Unfortunately this is wrong. The multinational companies are a result of the obvious advantages we disussed in the very beginning of this article. The impact of MNCs on host countries is very much open to debate. In many cases many MNCs have acted as villains (eg of Union Carbide) comes to mind and in most cases, MNCs have provided growth in employment, income and standard of living to the host countries. Yes….. you should always remember, globalisation like any other business strategy without consideration for the local community or a “human face” will always result in trouble. Of course the mere size of multinationals in developing marketslike India makes them very powerful. There is this concept called “Threat of Market Withdrawal” where a big MNC can hold a country to ransom by threatening to pull out and thus collapse the market. But in a fairly mature democracy like India with so many checks and regulators in place, the probability of any company resorting to that is remote. Moreover, modern multinational understand one simple truth: Do not cut the branch you sit on and do not kill the goose laying the golden eggs. The size of the Indian market for any product is so huge that right from auto to IT and now even nuclear MNCs would love to be in India. What do they bring? Great products, excellent services, competition (which ultimately helps you…. The consumer) and of course great jobs! Again you can debate that the MNCs are spoiling the culture etc. but I am sure most of the readers of this piece are mature enough to stay away from such meaningless rhetoric.


·         I will take an example and let it be Coke. According to the mail, if you drink Jaljeera instead of Coke, the money you send stays in India and all will be well!


Coke is manufactured by Coca Cola India Ltd. and yes the parent company is a foreign company. They came to us as they like the massive thirst of the massive population of India. Now imagine the number of people who are directly employed by Coca Cola India and imagine the kind of money they earn. Now compare the money they earn to what they would have earned in a “pure” Indian company. Imagine the number of businesses, big and small, that use Coke to earn money.

Where do you think an MBA like you working with Coca Cola or a dhabawala serving coke wil spend the money the earn I am sure a very large percentage in the Indian market. So the economy of which country is benefitted? I am sure you are logical enough to say: India! So what if the parent company earns money after providing money making opportunity to so many Indians?

Yes…. You can argue that they used unclean water for production. Again, they use the water that is available and if they are going out of their way for clean water in EU, that is because clean water is there and the strict EU regulations makes it mandatory not a matter of choice. Now ask yourself, why cannot we make a law that explicitly forces them to use clean water? And why the hell do we not keep our lakes, rivers and ground water clean. By the way do you know that traces of pesticides are commonly found in mother’s milk in Indian women??? Imagine the stuff we eat and the stuff we drink. Why blame the MNCs for this? So how would you saving Rs. 10 and drinking Jaljeera help the economy. In fact if you save rather than spend it is trouble for the economy (remember leakages??). It is your spending that runs the economy. Now consider this: Instead of drinking the Jaljeera, why not package it, brand it and export it as an exotic Asian drink and earn foreign exchange for the country. Doesn’t it make sense?

The troubles facing India are far more complicated to be solved with such simple solutions. Our economy is doing fine! We are looked upon with respect now. Yes……. there are minor hiccups on the way but they are not serious. Ok……… at the way the Indian economy held its own during the current global meltdown.

Not using foreign products is not the answer. Hell…. We are not even asking the right questions. I personally am not worried about the Indian economy one bit. What worries me is the rising fundamentalism and extremism, the rising example of lawlessness, corruption, the politicians…… I can go on and on….

But I am sure I have made my point…… Let us not spread myopic ideas. There is no foreign” market now. I own products that are made in Japan, Germany, USA, Malaysia, Taiwan and India and I live in a city. LG and Samsung have huge markets in rural India. These days you do not buy a TV only because it is “Phoren”, you buy it because it is good and yet cheap. Remember now each customer anywhere in the world is equidistant from sellers anywhere. So if Sony can come to India to sell TVs, Videocon is free to go Japan too. But have you ever wondered where Japan buys iron ore from to make such magnificent products and sell them in India??? 


Arunesh Garg said...

Dear Ashish, I have not seen the original mail that prompted u to write this piece. However, I sincerely believe that in todays era of globalisation, the very thought that using Indian products will save Indian economy is quite astonishing. What is actually an Indian product??? - something being produced in India...??, something being produced by using Indian money...??, something being produced by Indians..??, or something being owned by Indians..?? I sincerely fail to understand. Ranbaxy is an Indian company. But, it will be taken over by a Japanese company Daiichi Sankyo very soon. Ranbaxy has overseas production bases also and it is not that only Indians are working there. Is it the medicines produced by Ranbaxy are Indian in nature and if so will they stop being Indian after complete take over of Ranbaxy by Daiichi Sankyo?? Steel tycoon Laxmi Mittal is an Indian by birth. Swaraj Paul is an Indian by birth. Are the steel products produced by them Indian or what...?? Both the Ambani brothers are expanding in a big way and establishing themselves overseas. Will it be that synthetic yarn produced by RIL in USA will no longer be Indian?? Tata Motors recently acquired Jaguar and Land Rover. Is it that these two iconic brands are no longer British, but have become Indian..?? Can we call Santro car avilable in India a Korean product, when production plant is in India, engineers and workers are Indians, and the company is using Indian resources. The company is also planning to make India a production hub for producing Santro cars for export to European and middle-east countries. I think we should stop worrying what is an Indian product and what is not an Indian product. The concern of an Indian should be whether products of high quality, of reasonable prices, with customized features and after sales services are being made available to him or not. Ashish you will agree that our generation has seen the transition from Fiat to maruti to santro to.....from rarely avialble landline to GSM, CDMA, 2G and soon to be launched 3G services.... from B&W TV sets to coloured to TV with remote and soon to be launched iPTV.... the list may go on and on. And, all these products have done wonders to Indian economy, the way business is being transacted in india, and the way we are leading our lives now-a-days. The presence of so called MNCs in India has contributed to improve the job scenario in India and rise in the income of an average Indian. These companies have braught in superior technologies and production processes. Indian companies have also learnt to be more competitive. The market in general has expanded which is for the overall good of the Indian economy. I think there is no point in spreading the bigoted ideas. However, you cant stop human beings from spreading meaningless rhetorics. You know once Isaaac Newton said "I can calculate the motion of heavenly bodies, but not the madness of people." And, how right he was.

Ashish Pillai said...

Actually sir, the problem is quite simple..... there is reality... and there are multiple interpretations of reality. Wht you have commented is lucid crosssection of what we know is the "globalisation"... But you faculty at B Schools Sir.... Ata pata kucchh hota nahin hai, myn utha ke forward kar dete hain. What hurt me most was that they sent it to students too!!