The Hindu Business Line : The art of the possible

Much of the discourse on economic development and management in India these days eddies around phrases such as privatisation, free markets, globalisation and so on. The impression seems to be that if we allow the market mechanism to determine allocation of resources, then we would all be better off. Examples are cited from other countries to illustrate the benefits of such actions.

But markets and the private sector operate within an institutional context and are significantly influenced by this environment. Mainstream economics, especially in the West, started to recognise this only fairly recently. Ronald H. Coase, the 1991 Nobel Laureate in economics stated in his acceptance lecture: "It makes little sense for economists to discuss the process of exchange without specifying the institutional setting within which the trading takes place, since this affects the incentives to produce and the costs of transacting."

It is important that all players in the process, especially managers, understand the interplay of institutional factors with economic transactions in determining outcomes. An attempt is made in this article to examine the environment in which managers have to function in India and the range of responses open to them in order to ensure that business goals are achieved.

Problem 1— Dysfunctional markets

Since 1991, the thrust of policy making in India has been a process of dismantling the gigantic edifice of governmental controls that had been constructed over the previous 40 years. This complex structure had resulted in retarded economic growth and a dysfunctional market mechanism. Governance suffered, with the focus of those in government being on making money instead of ensuring that the laws were enforced. Business and industry had to function in such an environment. The inevitable results were there for all to see: inefficient manufacturers pushing poor quality products on a public that had little choice but to buy these offerings in what was essentially a seller's market with widespread scarcity being its most distinguishing feature.

Contracts were difficult to enforce, with the result that businesses had to resort to extra legal devices to enforce contracts. Delays in payments became the norm and, in fact, the ability to delay payment beyond the due date has come to be seen as a sign of managerial capacity! This has led to a mistaken belief that in order to survive, a business has to give unlimited credit and that contracts have little value.

Managerial response

This is more a matter of mistaken priorities and weak internal processes. The emphasis should be on cash flow and not on profitability as seen in terms of the price charged. This, together with a robust order processing mechanism will ensure that bad debts are avoided and delays minimised. Markets must be segmented and those segments that are suitable to operate in identified and focused on. Make an effort to involve the top management of the institution you deal with. Chances are that they are unaware of the goings-on at the operative levels and their implications on the performance of the entire organisation.

Problem 2 — Poor quality of public services

The poor quality of governance had a massive impact on the quality of public services which are essential for business and industry. Power, roads, transportation, ports, airports, water, gas — all these were of poor quality and wholly inadequate. The outcome of all this was the higher transaction costs of doing business in India, estimated by the CII to be as high as 12 per cent of total costs. This swiftly nullifies any imagined advantage that India may have in terms of lower wages and other costs.

Managerial response

The starting point to change the system would therefore be to insist on the need for things to work. This should be done relentlessly and with persistence. Those in authority should not be allowed to get away with mere assurances or symbolic gestures. Hartals and bandhs are illegal restraints on your and my right to carry on our work and business. If we do not take a stand, things will never change.

Government should be compelled to improve the quality and efficiency of public services. They will be forced to act when they know that their constituents are not going to go away unless things change. They should understand that voters are going to check their record in this respect before casting their votes. Recent developments like the emergence of independent regulators have curtailed the capacity of public utilities to transfer the burden of their inefficiency on to the hapless consumer through price/rate increases.

In all economies, there is a need to constantly seek ways of reducing costs. This is more so in India, with the weight of corruption and inefficient public services all adding to the transaction costs.

Problem 3 — Corruption

As C. K. Prahalad provocatively puts it: "We are not corrupt because we are poor; we are poor because we are corrupt." Our human development index (HDI) is not low because we are poor; we are poor because our HDI is low! There is no known instance in history of a country or region hauling itself out of poverty to rapid progress without addressing these core issues: corruption and HDI. The educated class owes it to the country in general, and the poor in particular, to insist on transparency in governance, good governance, rule of law, speedy justice and opportunity for all.

Managerial response

Strong internal processes and planning will ensure that the need for resorting to underhand methods is reduced by ensuring that permissions, licences and so on are applied for and obtained well in time. It is important to remember that many times, we put ourselves in a position where we need to find a way around a rule because we failed to do something in the prescribed time. Do not treat corruption as an inevitable and unavoidable reality. You have a choice. That would no doubt be a difficult alternative, but it is there.

It's a matter of choice

For a society that will foster entrepreneurship and will enable a thousand flowers to bloom to emerge, it is important for each one of us to understand our responsibilities in bringing about the changes needed. We cannot afford to become cynical, to say that politics is a dirty game and that we will have none of it and so on. Otherwise, as the saying goes `we will get the leaders we deserve'. If we are passive, we will get leaders who take us for granted and will look after their narrow interests. If we are active about seeing that our interests are looked after, the leaders will have no choice but to do their job.

Politics is defined as the activities connected with the governance of a country or region. We as citizens and managers should definitely consider politics thus defined, as an important activity meriting our full attention. We as individuals will be able to realise our potential only if the environment is an enabling one, conducive to and, indeed, promoting entrepreneurial activity. It is up to us to create such an environment.

To conclude, the point is to emphasise that we cannot wait for the correct conditions to emerge before we can start to function better. The first change that has to take place is inside us. How is it that some of us manage to be punctual, whereas others have a hundred reasons for being late? The answer lies in the fact that for the punctual ones, it is important for them that they are on time every time. Hence they plan their work to ensure that this outcome is achieved.

Similarly, we can point to the environment and justify everything we do in the name of necessity. Or, we can adopt strong policies that help us to be the kind of organisation we want to be and evolve robust processes to ensure that those policies are implemented.

(The writer is MD, Terumo Penpol Ltd, a Kerala-based maker of medical equipment)