THE INDIAN BUSINESS MODEL -- SWARDESHI
India has been a socialist country for the past five decades. India has always practiced Swardeshi (self-reliance) for much of its independence. This was no accident. India’s colonial past had deeply scarred India’s leaders and caused them to regard the outside world with fear and suspicion. Hence India developed a policy of export pessimism. This meant in practice that India did not encourage trade at all, except for imports of capital goods. As a result by 1991, India faced a severe foreign exchange crisis. With only one billion American dollars left in foreign reserves, India had no choice but to liberalize her economy.
Indian Business Model
The Indian business model that emerged was based largely on the Indian political aversion to foreign trade and investment. Such a business model profited from the high tariff barriers and licensing restrictions on foreign imports and investments. Domestic competition was also limited. This was partly because of local licensing restrictions. Hence, the Indian business model was based on political distortion of the Indian economy.
Strengths
High Tariffs and Licenses required for Imports
To discourage foreign trade India erected extremely high tariffs on imports. Licenses were also required to import foreign goods. This policy of protectionism meant that local industries did not have to compete against foreign competitors. The rationale offered by India was that local industries were at an infant industry stage and hence needed protection. By protecting local industries, India hoped that eventually these industries would eventually gain economies of scale and efficiency. Economic policies aimed at protecting infant industries especially in developing countries were extremely popular. Many developing countries were just newly independent and resentful of perceived colonial exploitation, and determined to prevent further foreign exploitation.
Local Licensing and Quotas Schemes
India was not just suspicious of the outside world. Even local enterprises that were too powerful were regarded with fear and suspicion. Hence to ensure that no local enterprise in India grew too powerful, licenses were required to produce any product and even so, the government set quotas on the quantity produced. As usual, bureaucratic good intentions backfired. Instead of ensuring free competition in goods, the licenses granted became monopoly devices. The reason was that since limited licenses and quotas were issued, demand could never be fully satisfied. The companies that obtained the licenses could not produce more goods to satisfy demand, so they just raised prices or provided poor services and products. This meant that the Indian business model guaranteed profits to Indian businesses that were nimble enough to gain licenses to produce goods.
Guaranteed Profits
This meant that the Indian business model guaranteed profits to Indian businesses that were nimble enough to gain licenses to produce goods. Hence the domestic licensing scheme became a cash cow for companies to milk. This was because obtaining a license guaranteed profits, with no risks. Indian businessmen have been taking an interesting position recently. When blamed for being inefficient, some of them argue that the government encouraged them to be inefficient by guaranteeing profits. And the businessmen do have a point there.
Rent Seeking
Rent seeking behaviour was probably the worst problem caused by Indian socialist policies. By setting up License Rajs (King of Licenses), companies that wanted to make money only had to obtain a license from the License Rajs. Rent is an economic term, which means excess profits to be gained. Profits were much easier to obtain by getting licenses to trade or to produce the good than being more efficient or innovating. Such rent seeking enabled Indian businesses to gain supernormal profits. An example is Reliance Industries Limited in India, for the past twenty years they have been growing at more than twenty percent annually.
Institutional Framework
Also compared to other developing countries, India has a more developed institutional framework and Indian businesses are more familiar with them than any other developing country like Vietnam or China. India benefited from inheriting the common-law system of justice from Britain, which is similar to that of many major trading partners. This is important in improving communications with customers and suppliers.
Weaknesses
Inefficient
Such a policy had a disastrous impact on Indian competitiveness in domestic industries. India has exported textiles for the past two thousand years. But with the advent of the tariffs, which protected the local textile industry, Indian textiles gradually became uncompetitive for exports. This was an unsurprising result. Without foreign competition, there was no need for productivity, efficiency or beautiful designs, as consumers no longer had any other choice. Hence, one major feature of Indian industry was its inefficiency.
Lack of Innovation
Innovation was another victim of India’s drive to shield herself from the world. For thirty years, the Ambassador was the only car available in India and you could have a choice of colours as long as it was cream colour. Without any competitors either local or foreign, there was no need to give consumers any choice or new designs. This was clearly shown to be the case in 1982. In 1982, Suzuki started to produce the Maruti in India and it was the only new car available in India for the past thirty years. Facing competition, the makers of the Ambassador finally added new features to the car.
Corruption
Finally, the Indian business model has developed a serious problem. Corruption has become entrenched in the Indian civil service partly because businessmen in their urgency to acquire licenses routinely bribe bureaucrats. India and China are ranked near the bottom in the tables measuring corruption. That is an indication of the severity of the situation. Corruption has become an entry barrier to new businesses seeking to enter new industries. This is an advantage to existing firms, since new firms are faced with high entry costs. SIA recently tried to enter into a joint venture with Tata Industries in India to form a new Indian airline, however they have been delayed for the past three years. The Civil Aviation Ministry of India has given its agreement to SIA and Tata many times only to retract it days later. Part of the reasons for the delay was that local Indian airlines lobbied the aviation ministry very effectively.
The problem with corruption is not just the insidious moral decay that it
causes. Corruption above all is a very expensive business cost. Some analysts
have estimated that corruption can add about 15% to the cost of doing business.
When low cost is a very important business advantage, there is a need to reduce
business costs at all costs. To compete with foreign rivals, such as Vietnam
and China, India will need to overall its business model and encourage businessmen
to refuse bribes demanded.
Labour Laws and Unions
Outdated labour laws are another source of contention in the Indian business model. India's bad experiences with the British and the wealthy in general led the country to legislate laws that made it almost impossible to fire workers. Even companies that were going bankrupt were given loans to continue in business. In fact such draconian laws made illegal behaviour by employers even more blatant and worsened employer-employee relations. Since it is "illegal" to close down, employers just close down all the same by stripping the company of any movable assets. Such labour problems make it difficult for Indian businesses to react to changing business conditions, by changing the number of workers.
Unions play a prominent role in India's labour market. Presently, there are
difficulties terminating employment and closing down an establishment. This
creates great disincentives to the company to hire workers, which prevents
millions of potential workers from gaining the higher paid, more secure jobs
that would allow them to escape a low-wage existence. The low-wage trend is
caused primarily by a larger supply of labour force to a small demand for
labour. In addition, little education and training envisaged by the government
will result in a labour force, which is low skilled and has low productivity.
Conclusion
Such behavior has had terrible effects on the productivity of Indian businesses. This is especially because India had been liberalizing at an accelerating pace before the BJP government. The reason is because companies make money by getting a license and not by being good at the business. The problem is that Indian businesses are not as good at running the companies as foreign competitors. The problem is aggravated by fact that most successful Indian companies typically have dozens of licenses in as many different industries. This makes it difficult for Indian companies to become really good at a particular business by developing core competencies. However conglomerates have an advantage in developing markets which have not developed an efficient capital market system for channelling capital. This means that while India's economy remains under-developed, India's conglomerates remain in a strong position. But as India's economy develops, such conglomerates need to develop core competencies.
