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Friday, 22 February 2013

One Billion People, One Billion Opportunitie

One Billion People, One Billion Opportunitie

Indian economy has been rapidly growing over the past decade or so, and along with those of other BRICS nations, is poised to account for a significant share of global economic growth going forward
aintaining a heady growth rate in one of the world’s three largest economies is proving to be a formidable challenge. This author describes the forces that have powered India’s economy over the last 20 years, and as readers will learn, he also explains how a new business model and innovative thinking can re-charge what appears to be an economy that has plateaued.
It is a well-known fact that the growth of an organization is closely linked not only with the life cycle of the industry in which it operates but also with its economic environment. However, more than the “quantum” of growth, it becomes imperative to understand the “context” of growth. The context of growth extends beyond the economic domain to the social environment and is directly related to the lifecycle of the economy. Only when the latter is understood and factored into the “crystal ball gazing” process can an organization create a roadmap for it’s future.
This is especially true for India. It is generally well known that the Indian economy has been rapidly growing over the past decade or so, and along with those of other BRICS nations, is poised to account for a significant share of global economic growth going forward. Two questions, however, have been relatively under-explored: Just what is the context of this growth, and what does it mean for your particular industry? This article will seek to answer these questions.

India’s two phases of growth
India’s growth since independence can be divided into two distinct phases, the pre 90’s era and the post 90’s era.

The Pre 90’s
During this phase the Indian economy was highly controlled, and wealth and power were concentrated in the hands of a few large family-business houses. We lived in a socially restrictive society governed by the license Raj, which was characterized by excessive bureaucracy and demanded that an organization obtain several licenses and approvals before it could do business. Any import that entailed an outflow of foreign exchange was intensely scrutinized, which in turn lead to a huge focus on self-reliance and import substitution. There was a shortage of even basic necessities such as food and routine activities such as getting a telephone connection or cooking gas; even buying a car was considered a “luxury” that involved a waiting period that could run into years. Moreover, consumerism was an alien concept for Indian society.

Such was the context in which corporate India operated for decades. The economy witnessed what is commonly called the “Hindu” rate of annual GDP growth of ~ 3.5 percent. The rate of growth of organizations was determined not by skill, opportunity, risk taking or resources, but by relationships and connections, which were the most important currencies for conducting business.

The result was inevitable. Per-capita income growth averaged 1.3 percent. In 1991, just before the dismantling of the Raj regime, India faced a balance of payments crisis. It was on the verge of defaulting on its loans and had to sell 67 tons of gold to the International Monetary Fund (IMF) as part of a bailout deal.

Post 90’s
This period saw a rebirth of sound, dynamic Indian economic policy. The Licence Raj was eliminated, the government initiated reforms and the concepts of Glasnost and Perestroika were no longer frowned upon. The primary focus shifted from import substitution to export promotion, as India adopted liberal and free-market- oriented policies and opened its doors to international trade. Interest rates were reduced and public monopolies were ended, allowing Foreign Direct Investment in many sectors. A process for Single Window Clearance was set up and though not comparable to international standards, it was a far cry from the days of the Licence Raj.

Suddenly, it seemed, having a population of one million went from being a liability to being seen as a huge market. As of 2009, an estimated 390 million Indians belonged to the middle class, all of the major brands of consumer goods began setting up shop. There was a huge focus on improving education, which enabled almost two-thirds of the population to become literate.

In this context, growing an organization took on a completely different meaning. Now it was all about opportunity, resources, first-mover advantage and risk-taking capability. New industries were started and companies began following new business models, something that was unthinkable even a decade back. Globally competitive organizations emerged and there were several success stories of organizations moving beyond their core competence and making it big.

Let us look at a few examples of industries that saw explosive growth post 90’s.

India IT and ITES Industry
From almost nothing in 1990, revenue for the Indian IT and ITES (Information Technology Enabled Services) industries has grown to more than $US100 B in 2011. As is well known, India has been a major driver and “the largest player” in the offshore delivery world.

The context of this growth was the huge labour cost advantage between India and the developed world. India always had a talented pool of human resources and when global markets opened, it provided the human capital for IT / ITES. Indian organizations went ahead and pro-actively pitched global corporations on the inherent cost savings in outsourcing their IT needs to India. The industry grew rapidly for over a decade and achieved scale, as can be seen from the chart below.

Source – CII and Indian Brand Equity.

Today, as the industry reaches maturity, the context of growth has changed again. As wage rates have been steadily increasing in India, the labour cost advantage has steadily been eroding. From plain-vanilla outsourcing of basic voice or work (for BPO space) and back-office type of work, many of the IT majors are moving up the value chain to offer higher-margin services. Recent acquisitions by Indian majors signal their intent to get into consulting and niche service offerings, wherein the labour arbitrage can be maintained.

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