The Hindu Business Line : The post-election economy

IF A choice between changing global mindsets towards outsourcing from India and changing Indian mindsets towards markets has to be exercised, the latter is the more valuable option.

Changing Indian mindsets towards domestic trade — wholesale and retail — would lead to the smashing of innumerable bottlenecks.

This will create large-scale value in the farm, manufacturing and services sectors. India's reinvigorated domestic trade will add $60 billion in purchasing power each year, more than three times the value of business processes outsourced to India.

The impact on gross domestic product (GDP) of the changed mindsets towards domestic trade would be enormous.

The economy could grow at over 10 per cent annually by paying attention to how domestic trade is conducted and by reinvigorating it to suit the economic convenience of farmers, processors, wholesalers, manufacturing industries, retailers and consumers. Thereby, the economy would grow to over $780 billion by 2008.

This big impact would be the result of positive mindsets that unlock enormous value by changing the manner in which the economy buys inputs, sells output, and stores and transports raw materials, intermediates and finished goods.

Three mindset factors will have to undergo purposeful changes: the business environment, legal and policy environment, and social and cultural environment. India will create prodigious value by making its market mindset work for its economy.

Not market ready

The mindset factors are drawn from a list of six used by the Economist Intelligence Unit and the IBM Institute for Business Value for the computation of the 2004 "e-readiness" rankings.

The other factors are connectivity and technology infrastructure, consumer and business adoption, and supporting e-services. These factors involve large investments.

A country's e-readiness measures how amenable its market is to Internet-based opportunities. India's has been ranked 46th in a list of 64 countries.

The low overall rank could be explained away as the result of its low ranks in connectivity, business adoption and supporting e-services — 51, 46 and 42.

India has yet to make significant investments in connectivity and supporting e-services. But there are deeper problems that India faces, and these show up in its overall rank.

India's ranks in the three mindset factors — business environment, legal and policy environment, and social and cultural environment — are 44, 51 and 44. The three factors together measure how amenable an economy is to deriving value from its markets.

India's poor ranks in the market factors show that it has yet to make earnest efforts towards evolving into a market-ready (m-ready) economy.

For example, its rank of 51 in legal and policy environment trails those of South Africa, Brazil, Malaysia, Poland, Latvia, Lithuania, Romania, Bulgaria, Egypt, Turkey and Sri Lanka.

Some of them are former communist countries, but they are all India's deadly rivals in the business process outsourcing (BPO) and information-technology-enabled services (ITES).

Shaky e-readiness

Market-oriented economies score high in e-readiness. For example, Britain's ranks in business environment, legal and policy environment, and social and cultural environment are remarkably high: 3, 5 and 3.

Its rank in connectivity is 6, and trails Hong Kong and South Korea. But Britain's overall rank is 2, behind Denmark, because of its m-readiness. Its m-readiness will soon unsettle India's BPO and ITES aspirations.

Britain's Department of Trade and Industry says its call centre industry will grow four times more than India's. It will gain more than 200,000 jobs by 2007. And, more threateningly, it will employ over 1 million people by 2007, four times more than India in the same year. That is, Britain will reap a whole lot from its m-readiness.

India has ceded advantage to countries that do not have as much experience as it has in deriving the most from the markets. It is likely that four decades of legislation have blunted four centuries of market evolution.

Without improving its m-readiness, India would continue to trail its rivals in the e-readiness rankings. Its share of the global BPO and ITES revenues will be in jeopardy.

Small joy

India has become an emblem of the borderless global economy. Its software, BPO and ITES activities are worth an estimated $17 billion or 3 per cent of GDP. But others have replicated India's success story.

The call-centre industry is booming in Malaysia, the Philippines, Brazil, Mexico and Latvia. A combination of back-office facilities and competent, cost-competitive workers has sucked many rivals into the BPO and ITES space.

India's strengths in BPO and ITES are being tested by at least a dozen big rivals. The biggest of them is Britain.

It will insource a large part of the global BPO industry. It hopes to employ 1 million people from a population of 65 million.

By contrast, India will employ about 260,000 from 1.12 billion. The BPO and ITES sectors will mean little to the aggregate economy. The influence of the BPO and ITES sectors on India's aggregate purchasing power will be negligible.

The big play

Too much noise is being made about the future of India beyond outsourcing and too little about how domestic markets and trade can make an enormous impact. Domestic trade permeates many segments, sectors and locales of the total economy.

A rigorous analysis by the Business Intelligence Unit (BIU) shows that domestic trade explains and influences almost 86 per cent of total purchasing power.

No other component of economic activity has such a significant influence on the economy. BIU's India 500 Plus adds that agriculture and industry explain 79 per cent and 77 per cent of purchasing power.

The influence of domestic trade surpasses that of agriculture and industry because domestic trade and its aggregate capabilities and efficiency determine how much value can be derived from agriculture and industry.

There is so much buying, selling, storing and moving in the total economy that few sectors of the economy can ignore the importance of being m-ready.

The BPO and ITES sectors can afford to ignore domestic trade. They produce too few jobs and wield too little influence on aggregate purchasing power.

Big, basic stakes

India's aggregate purchasing power is spent on basic goods, simple branded goods, high-end branded goods and luxury goods (see Table). Basic goods such as cereals, milk, fruits, vegetables, meat and eggs, cloth, and paper and notebooks constituted 48 per cent of India's purchasing power in 2003.

Though basic goods constitute the largest part of the total consumption economy, they grew by merely 9 per cent over a four-year period since 1999. Other classes grew by at least 29 per cent annually.

The low rate of growth of basic goods — presumably the staple of the poorer households — has justifiably raised questions regarding how well the India economy has performed, and if all sections of society have reaped the benefits of growth.

Basic goods are typically high-volume, low-unit-value goods that produce a small profit per unit of sale. But they require considerable buying, selling, storing and moving.

The production of basic goods, unlike luxury goods, involves high variable costs and the domestic trade incurs a large part of these variable costs while buying, selling, storing and moving. These components set a ceiling on the wages that can be paid by producers and marketers of basic goods.

The basic goods sector, including the farm sector, employs more than 70 per cent of the total workforce. Hence, low wages in the basic goods sector limit the purchasing power of more than 70 per cent of the total workforce. The result is a vicious cycle that has unsurprisingly caused the low growth rate of 9 per cent in basic goods.

India's domestic markets and trade that serve basic goods require immediate reform. Reform of the business, legal and policy environment will cut costs borne by the domestic trade. The room for reform is best indicated by the influence of domestic trade on basic goods: 82 per cent.

Cost savings can then be translated into higher wages at higher levels of productivity. Higher purchasing power and faster growth will be the certain results. India can add $250 billion to its annual purchasing power by improving its m-readiness.

(The author is a financial analyst. Feedback may be sent to indiagrow@sify.com)