Posted by: John Elliott | September 7, 2007

On the Road: Why India can win on some points against China

 While I was in Mumbai and Pune last week, I talked to engineering companies about how they can sometimes compete successfully with China – and why. One strong theme about “why” was that India’s openness, its democracy, and its people’s flexibility enables companies to be entrepreneurially better.

Put another way, those aspects of India that frequently drive investors crazy – especially its chaotic democracy, general confusion, and lack of discipline – can be turned into advantages that encourage the entrepreneurship and flexibility needed to be successful.

No one is of course claiming that India can beat China overall, but the views I heard are interesting because they show the growing confidence in some Indian companies that India has some special advantages.

M.V. Kotwal, a director of Larsen & Toubro (L&T), India’s largest and most international heavy engineering group, said that China is a “regulated economy which means suppression of independent thinking, and that limits entrepreneurial activity.” Kotwal knows the market – L&T has sold ten coal gasification plants totaling $350 million to China in the past three years. By contrast, in India “there is a lot of freedom of thought which means that talent is available, and people come out with solutions whenever they are given a chance.”

A similar view came from someone else with direct China experience – Anand Mahindra, managing director of Mahindra & Mahindra, a tractors-to-cars company that has bought a tractor plant there. He said that though Chinese workers on machine tools could beat deadlines, they did not have the flexibility to switch instantly to a different machine. “The Indian mind is not fazed by confusion and apparent disorder,” he said, “If there is a wrinkle on a dye, an Indian engineer will sort it, but a Chinese will want to fly in an expert.”

Baba Kalyani, chairman of Pune-based Bharat Forge, the world’s second largest forgings company which has a joint venture in China, made the same point when he told me that India won in manufacturing in “areas with multi-technological touch-points such as high grade metal castings.” But he warned that this was “the only advantage that we have” and that it “wouldn’t last long.” China would catch up fast.

I discussed this with Nandan Nilekani, a founder and co-chairman of Infosys, one of India’s top three IT companies, at a Delhi party this week, and he said that “for genuine innovation, you need an open society.” When I scribbled that down on the back of my invitation card, he said it wasn’t that profound a remark. Maybe he was right, but it’s interesting that it’s now being cited by engineering entrepreneurs to explain why they can beat China.

A different point came from Rajiv Bajaj, who I talked about in my last post. He said that “China does not have the same incentive to innovate because someone down the road copies you.” He cited as an example that, while Bajaj Auto is the only company producing its Pulsar motorbike in India, “there are six copies of Pulsars in China.” (Ironically, two days after he told me this, Bajaj became embroiled in a legal patent battle over motor bike ignition technology with another Indian autos company, TVS of Chennai).

Mahindra also made the point that China beats India massively with its vast and efficient network of highways and ports that enable raw materials and components to be delivered to factories, and products to be taken on to other destinations.

That India lacks such infrastructure was apparent when I was being driven last week to Bharat Forge’s Pune headquarters. Twenty minutes before my appointment with Kalyani, we were only moments away from the factory gates, but then we hit a traffic jam at a railway crossing. Twenty five minutes later we hadn’t moved as many yards so, after agonized phone calls between the driver and Kalyani’s office, Indian innovation came into play. I walked through the worsening gridlock of cars, dilapidated trucks, motorcycles, and bikes to the other side of the jam, where I was picked up in a motorized auto-rickshaw and chugged along to my interview, twenty minutes late.

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Posted in India, India China, India industry, India infrastructure, India innovation | Tags: , , , , , , , , , , , , , , , , , , , , ,

Posted by: John Elliott | August 30, 2007

On The Road: Bajaj pays employees to stay home

I’ve been traveling in Maharashtra this week, talking to engineering companies about how they have become internationally competitive, modernizing their manufacturing processes and turning out products that people want to buy – things that they didn’t need to worry about before the economic reforms of the 1990s, and that have begun to come good in the past few years.

Yesterday I went to Pune, which is re-emerging as a major engineering center, and met Rajiv Bajaj, the 40-year old managing director of Bajaj Auto, once a fantastically profitable scooter company and now being rebuilt as a leading and profitable motor bike business.

Rebuilding is precisely the right word to use because Bajaj has built two new factories in recent years and this week produced the surprising news that he is stopping manufacture of two-wheelers at a massive old plant adjacent to the group’s headquarters in Akurdi, outside Pune. Akurdi has been the home of the group since it started producing two-wheelers in 1960, so this is an emotional event. It will continue to house the headquarters and produce components, but it will no longer be the manufacturing and assembly base.

To achieve this with as little pain as possible, Bajaj has come up with an unusual solution. From this weekend, 2,200 employees are being told to stay at home and not report for work – on full pay, which will continue till their normal retirement. Many of them are in their 40s, so that is quite a long time to go on paying: but Rajiv Bajaj says it is no more expensive for the company, and may indeed be cheaper than a redundancy scheme that would involve lengthy and probably bitter trade union negotiations.

“This is the first time in India that someone has tried to do this – what is right for the company with no loss to the workers,” he says. Legally, if the employees find a new job, they should resign from Bajaj, but in India’s uncontrolled labor market, with many people holding more than one job, that seems unlikely to happen.

For the company, it makes sense because producing the two-wheelers at another factory saves it $25 per vehicle, which roughly covers the cost of paying the home-bound employees at the current production rate of 300,000 vehicles a year. Profits will be made when production increases – the two-year target is 500,000.

Bajaj says the plan is also better for the employees than a humiliating solution that is favored by some companies: making employees clock in each day but giving them no work to do. Bajaj’s trade unions are however threatening legal action.

The closure is tough on those involved because Bajaj admits that it is “not being done because of any failure on the part of the workmen or the management”. It is largely due to “the impact of government policies on capacity rationalization, chiefly the regional distortions created by inconsistent tax benefits and the continuing evil of octroi in the state of Maharashtra”.

Bajaj estimates that a third of his 1,000-rupee saving per vehicle will come from tax concessions elsewhere, a third from not paying octroi (an ancient form of state-level taxation collected on the borders of individual municipalities) and a third from rationalized production. The tax benefits refer to breaks available in under-developed areas, and both Bajaj’s new factories are in such locations.

Octroi has now been abolished in most Indian states and is not applied in special development areas, but it does operate for most of Maharashtra. It is levied at a rate of 4% on all goods brought into the area, and is not refundable when products leave. It causes massive traffic jams on highways, where trucks queue up at boundary collection points, delaying deliveries and leading to massive corruption.

“Octroi is nothing but an excuse to sustain corruption – lorry drivers pay bribes every day to the collectors,” says Bajaj. The problem is widespread. Jamshyd Godrej, chairman of Godrej & Boyce Manufacturing, a leading engineering products company, says his refrigerator and other appliance factories have been moved away from the headquarters site on the outskirts of Mumbai. The empty buildings have been leased to software companies such as Tata Consultancy Services, which escape octroi payments because they do not bring in hardware.

It is a pity to finish this post, which was supposed to be about modernizing engineering companies, with the perennial subject of corruption – but this is India.

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Posted by: John Elliott | August 23, 2007

India’s government risks being nuked

It is odd how political crises erupt, almost without warning. After just over three years of uneasy co-operation, India’s Congress-led coalition is suddenly vulnerable because friendly Leftist parties are objecting to a nuclear deal that has been struck with America. The government depends on these parties’ 59 parliamentary seats for its majority in the Lok Sabha (the lower house of parliament), so it would become a minority administration if it lost their support. We have got so used to the Left holding up a whole range of economic reforms and other government initiatives that we should of course have foreseen this crisis, instead of assuming that everyone would muddle along on the nuclear deal, as they have done on other issues, with the Left’s known opposition somehow being accommodated.

The Left is challenging the government because the deal dramatically changes India’s foreign policy not just on America, but also potentially on other countries such as Iran. Notionally the deal is about allowing India to have access to nuclear fuel and equipment from America and other countries for the first time in over 30 years, without having to sign the Nuclear Non-Proliferation Treaty. The idea is that nuclear energy should provide 20,000 MW of power by 2020, up from 4,000MW now – if of course India managed radically to improve its project construction capabilities and actually built the nuclear plants.

The Left, partly reflecting widespread reservations (and some opposition) in India about close relations with America, is objecting and wants the deal examined and possibly changed (which the government says is impossible). It is concerned that India’s freedom to stage nuclear weapon tests would be curtailed because America could then stop implementing the agreement, albeit only after lengthy consultations. But the Left and others argue, on a broader front, that India is putting itself in a position where it would have to toe America’s line on foreign policy – for example on Iran, with which India wants to continue years’ of friendly relations and build a gas pipeline. The government’s reply is, basically, that these fears are groundless.

Curiously, India’s constitution does not require governments to have international treaties approved by parliament, so there is no need for this highly significant foreign policy deal to be put to a vote when a parliamentary debate takes place, maybe next week after attempts to hold it this week ended in uproar. Meanwhile, there is a risk that the crisis could lead to the government falling. None of the parties in the coalition, nor the Left which is led by the CPI-M (India’s biggest Communist party), wants this to happen. A general election is not due till the first half of 2009, and members of parliament hate having their five years of power and patronage halted by mid-term polls, so they are urging their leaders not to allow the government to fall. That leaves several potential scenarios:

1. The government agrees to go slow on operationalising the deal with international nuclear authorities and America, while the details are analyzed, buying time with the Left.

–  CURRENT SHORT-TERM tactic which has already begun. It avoids an immediate crisis, but it could appear to go against what Manmohan Singh, the prime minister, has said about pressing ahead with implementation and might provoke his resignation if it endangered the deal.

2. The Left withdraws support. Sonia Gandhi, the Congress Party and coalition leader, and Singh tell India’s president that they will continue with a minority government. They move ahead on finalizing the deal with international nuclear agencies and America, which causes continual political friction and uncertainty. This continues until they are defeated in a parliamentary vote on a political issue or controversial policy or other political issue – maybe on next year’s budget (due February 28), if not before – which triggers a general election.

– LIKELY MEDIUM-TERM outcome, unless Option One produces an unexpected compromise.

3. Gandhi and Singh override the wishes of Congress’s coalition allies and Congress MPs and call a snap general election soon.

– POSSIBLE BUT HIGH RISK because Congress can only lead the next government if allies pick up sufficient parliamentary seats, which might not happen, especially if it does not have (or want) the Left as allies.

4. Gandhi decides to defuse the crisis and asks Manmohan Singh to resign, probably replacing him with Pranab Mukherjee, the politically astute external affairs minister. The nuclear deal is shelved, ending the confrontation with the Left.

– UNLIKELY because Gandhi has stood behind Singh and the deal so far. She also trusts Singh more than Mukherjee to hold the prime ministerial fort, without developing independent political ambitions, till her son Rahul Gandhi is ready to take over (though that take-over looks ever more distant, the more time goes by).

5. The Bharatiya Janata Party, which leads the parliamentary opposition, co-operates with the Left to defeat the government in parliament, forcing a confidence vote which the government loses.

– VERY UNLIKELY, even though it looks logical, because the Left cannot be seen to be co-operating with the Hindu-nationalist BJP.

6. The Left withdraws its opposition, or waters it down to such an extent that the deal can go ahead. The crisis ends, leaving an uneasy and sour relationship between Congress and the Left, but the government survives.

– MOST UNLIKELY because it would be too much of a climb-down for the Left.  

So where does that leave us? Simply saying that politicians are brilliant at solving political problems when they want to – which is what the government and the Left are trying to do now – but it’s hard to see how Singh and his government can last till 2009.

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Posted by: John Elliott | August 20, 2007

Democracy is not an end in itself

Hey folks – I’ve enjoyed your comments on my India 60th post, but there are some misunderstandings.

First, I don’t live in America, as some of you imagine, and I am not even American. I’m a British journalist and have lived in India for 18 of the past 24 or so years, first for the Financial Times in the 1980s and then, from 1995, back in Delhi and writing primarily for Fortune magazine and The Economist, plus the New Statesman.

And yes, I have traveled extensively – to all states in India, apart from the North East (which I’ve never written about in Riding the Elephant). In the past two or three years, my city visits have included Mumbai, Chennai, Hyderabad, Ahmedabad, Jaipur, Cochin, Agra, Jaipur, Varanasi, Lucknow, Jalandhar and Kolkata, plus elsewhere in areas such as Madhya Pradesh, Uttar Pradesh, Rajasthan, Orissa, Pondicherry and the Himalayan foothills.

So I’ve seen a lot of the country, not enough maybe, because nothing is ever enough in such a massive, varied and rapidly changing place. But I have to wonder, without wanting to be too confrontational, how my journeys compare with those of some distant comment writers.

I rarely, if ever, criticize the Indian people or the country. My targets are almost always corrupt indolent self-serving politicians, bureaucrats and others who slow the country down for their own benefit.

I first came here in 1982, when I was the London-based industrial editor of the Financial Times, to write articles on India. I’d spent 15 years or so reporting Britain’s economic decline and was fascinated by what I sensed was a country just beginning to grow and expand – extremely slowly, but nevertheless on the move.

I came back a year later to open the FT bureau in New Delhi, and reported events such as the Sikh troubles in Punjab, Indira Gandhi’s army take-over of the Golden Temple and her subsequent assassination, as well as the Union Carbide gas disaster in Bhopal. Then Rajiv Gandhi came to power and sowed seeds of modernization that have come good in the past few years – his contribution to modern India is frequently under-recognized.

In 1988, I was posted to Hong Kong, but came back in 1995, four years after the 1991 liberalization had started.

That was when I became aware of, and was horrified by, the appalling waste that I often write about today. Corruption was on the rise as the well-connected and powerful seized opportunities to amass enormous wealth, and the poor were being ignored.

These are the failings that lay behind my India 60th post. The country has done brilliantly, but could do so much better if public servants performed in the interests of the country and the desperately poor. Sure, the article was broad brush – the idea here is not to write more than about 700 words – but I covered the major points, and we will have a much broader and longer look in a special FORTUNE magazine spread of India articles at the end of October.

Most of the comments on my post praised India for the 60 years, despite China’s greater advances, while others disliked my criticisms. There frequently seemed to be a reluctance to accept that it is the job of a foreign reporter impartially to watch, learn, analyze and report what he or she sees. And some comments have been wrong – of course businessmen have changed, for example, since liberalization reformed the rules.
 
I knew my Uttar Pradesh-Bihar comparison with Pakistan would be attacked. The detailed situation in those two Indian states is of course quite different from Pakistan, but corrupt self-serving politicians in both those states and Pakistan have worked for themselves and their cronies, not for the benefit of the population. My main point was that both have lacked stable governance because democratic institutions have failed. The good news is that UP and Bihar now seem to be improving under their present chief ministers.

On the same day that my post appeared, Amartya Sen, the Nobel Laureate, wrote in the FT about how poverty rates had not come down as fast as they should have done and said:

“Some failures are huge, such as continuing undernourishment, particularly of children, and of course the scandal of a quarter of the population (including half of all women) remaining illiterate……A democratic country can hardly want to maintain a divisiveness that makes it part California and part sub-Saharan Africa”.

That may be a bit harsh, but few of the comments sent to this blog seemed willing to face up to India’s problems of poverty and dramatically widening gaps between the very rich and the desperately poor.

Of course democracy is great, but it is not an end in itself, which some writers seem blandly to suggest. It should only be a means to an end – governing a country well in the interests of all its people – and that sadly is not happening enough in India. OK, other countries have their problems too and are not perfect (including America according to several of you who live there) but this blog is not about those places. It’s about India.

Please keep the comments rolling – je

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Posted by: John Elliott | August 14, 2007

India at 60: A Nehru dream comes true

India knows it has something to celebrate Wednesday, the 60th anniversary of its independence from Britain.  That may sound obvious, but it isn’t, because 10 years ago many people said they were not sure what there was to be proud of on the 50th anniversary.

People bemoaned the country’s failure to get to grips with endemic social and infrastructure problems, especially poverty, education, health, roads, and power. There had been a spate of economic reforms after a humiliating international financial crisis in 1991, but they had sputtered to a virtual halt. Business was not doing anything very dramatic, and there were only glimmerings of the information technology-led boom and more recent manufacturing renaissance.

Today, many of the problems — especially social — are little improved. Vast proportions of the country’s 1.1 billion people are undernourished and hungry, as well as poorly educated and illiterate. Blighted by a lack of drinking water and proper sanitation, many are plagued with poorly-treated ill health.

But the country’s overall self-confidence, and its economic performance, is being transformed. In the past four or five years, a spirit of “can-do” has inspired businesspeople — big and small, ranging from names like Ratan Tata, Mukesh Ambani, Azim Premji and the Infosys founders to small niche players — who invest, manage, deliver, and grow both at home and abroad. Funds are more often than not raised legitimately, rather than via a friendly politician’s influence on a pliant public sector bank.

Companies operate in a mostly open market, knowing that they must manage efficiently and deliver quality or fail. Many of the names at the top of the business league tables have changed in the 10 years from old Marwari trading caste families, which thrived in a controlled economy, to new entrepreneurs. Family control of companies is still widespread, but the newcomers have an ambition to succeed in India and abroad that was previously often lacking.

That has been shown most dramatically by the recent surge of takeovers overseas, spearheaded by the Tata group and by IT and pharmaceutical companies. Similarly, the growth in the number of executives from abroad who are prepared to work in India — foreign as well as of Indian origin and not just on lucrative postings — reflects both the availability of internationally competitive salaries and a more conducive working environment.

Consequently, economic growth has risen in the 10 years from around 6% to almost 10%. The Mumbai stock market’s Sensex index has gone from under 3,500 to a peak last month of over 15,800. The rupee has recovered a decades-long slide and is now strengthening against world currencies (not just because of the declining dollar), and foreign exchange reserves have rocketed from $26 billion to around $230 billion.

India is also earning new respect as an international player, not least with the United States, which is on the brink of signing a nuclear deal that will transform the two countries’ diplomatic and business relationship

One the flip side, some things are getting worse. The quality of governance is declining, especially in the states, because many politicians and bureaucrats are becoming more corrupt and self-serving. Parts of the country are appallingly run, especially Uttar Pradesh and Bihar, which for years have been almost as bad as Pakistan in terms of political failure — and their economies are worse. Maoist Naxalite rebels control vast areas of other states.

There is little urban planning or respect for regulations: construction of new buildings takes little account of environmental standards or the need, for example, for adequate drainage and other services.

Even more seriously, the economic boom is leading to intense pressure on land in a country where 70% of the population relies on it for its living. In the next ten years, it is quite possible that social unrest will be caused more frequently by land disputes than by traditional religious and ethnic differences.

Despite these problems, India is on the move. When Jawaharlal Nehru, the first prime minister, made his famous “midnight hour” independence speech on August 15, 1947, he referred to India’s “tryst with destiny,” and called on people “to work and work hard, to give reality to our dreams.”

Ten years ago that work ethic had not materialized. Today it is operating in the private sector, generating most of the successes.

Think what could be achieved if the politicians, bureaucrats and public sector did the same.

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Posted in India, India independence, India politicians, Nehru-Gandhi dynasty, Ratan Tata | Tags: , , , , , , , , , , , , , , , ,

Posted by: John Elliott | August 10, 2007

Wal-Mart plans a slow ‘hockey stick’ curve in India

Wal-Mart is going slow in India. Its executives of course won’t admit this, but it is showing no hurry to begin selling in a country where its every move seems to meet opposition.

This was not the scenario envisaged by its Indian partner, Sunil Mittal of Bharti Enterprisers, when he decided to link up with Wal-Mart (WMT) at the end of last year in preference to Britain’s Tesco. Mittal switched from Tesco because he hoped to move ahead faster with Wal-Mart, chasing Reliance Retail – part of one of India’s biggest groups that is headed by Mukesh Ambani.

Reliance has now opened about 230 smallish neighborhood supermarkets and plans to open more than 30 hypermarkets by next March and 500 by 2010, so the Wal-Mart/Bharti combine has no chance of catching up this decade, if at all.

Wal-Mart does not seem unduly worried. Raj Jain, its president for emerging markets who has just been appointed to head the India operations, told me earlier this week that it would grow in India with a “hockey stick curve” – slow at first and then accelerating.

On August 6, it announced that it had formally signed its joint venture agreement with Bharti to develop wholesale cash-and-carry stores but – and here came the signal of going slow – these stores would not open until the end of next year and there would only be 10 to 15 in the following six years.

I chided Jain over the speed, saying 10 or 15 stores was minuscule over so many years for the world’s largest retailer, and was much slower than had seemed likely when the initial MOU was signed with Bharti last November. Replying, he produced his hockey stick curve and said there “could be three times as many” outlets in that period, once they’ve gotten the first ones right. He could have added, I suppose, that at least he will be ahead of Tesco and France’s Carrefour, which have backed off until the potential for opening up in India’s expanding retail market is clearer.

So why the go-slow? Jain listed three reasons (though he didn’t like the word slow). First, of course, there is India’s current regulatory regime that bans Wal-Mart from retailing, but allows it to do wholesale activities and advise Bharti on retail stores planned for opening early next year. The chances of that ban being relaxed have reduced significantly since last year, and there is no discernible chance of it being removed before India’s next general election that is due by 2009.

Next is the current state of India’s escalating real estate market, with record prices being achieved in all areas, including the sort of shopping sites that Reliance and others are taking and that Wal-Mart and Bharti will want. Jain believes (probably over-optimistically) that current “prohibitive” prices will “have to correct and stabilize in the next two to three years”. He said they will “wait and see, rather than rush in”, adding that real estate developers are only now learning what retailers need. Until now, he said, many had unrealistically assumed that they only had to build a mall and wait for it to fill up.

Third, India currently has few established supply chains, and few cold stores or refrigerated vehicles to preserve produce on its way to market. Farmers and small manufacturers are not geared up to supply stores, and there are few food processing companies. All that has to be developed.

In addition of course, there have been the street protests against Wal-Mart and Reliance. (Other expanding retail chains with less emotive names such as Pantaloon’s Food Bazaar, Spencers, Birla’s Trinethra, and Subhiksha seem to generate less heat). Jain says the opposition, led by traders and other middle-men, is cashing in on a “lack of understanding” among owners of small mom-and-pop shops (called kirana stores in India) because Wal-Mart will be offering better quality and lower prices than are available now. “Any change will always require a certain reaction,” he says.

Yesterday, the reaction was evident when several hundred protesters staged demonstrations in Delhi and elsewhere, burning effigies of demons whose heads carried the names of international retail groups. The demonstrations were far smaller than the organizers had hoped – but that is not surprising, given that Wal-Mart is being so inactive. Wal-Mart is focusing far more on China, where Jain was working. Here in India, it looks to me as if it has no intention of speeding up the hockey stick curve until the regulatory regime allows it to open retail stores. I wonder if Sunil Mittal is wishing he’d stayed with Tesco.

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Posted by: John Elliott | August 7, 2007

Smart money for India’s rural poor

India’s Finance Ministry and Planning Commission are looking into ways of using electronic smart cards to transform the distribution of relatively small amounts of government money to India’s 220 million people who live below the poverty line, and maybe to 200-300 million more who are only marginally better off. This would make it much more difficult for bureaucrats, politicians and middlemen to siphon off the funds as they move down the distribution chain.

“We already have the technology today to do this and it would be feasible to use it for putting money in the pockets of the rural poor within 18 to 24 months,” K.V.Kamath, managing director of ICICI Bank, a leading Indian financial institution, said in Delhi last week.

The Smart card system would not have been possible a few years ago because there was not sufficient telecom connectivity. But India now has 190 million cell phone users – rising by more than six million a month – plus 40 million fixed lines. This increased connectivity to remote areas opens up various possibilities for smart card use.

In a parallel technological development, ICICI is introducing biometric smart cards that enable people to identify themselves by their thumbprints at ATM and other terminals. It expects to have 220,000 cards in use by next March (justifying a claim Kamath sometimes makes about ICICI really being a technology company that’s into banking).

Other banks, including Citibank, are experimenting, but are not so far advanced. Adding to the potential network, state governments are opening 100,000 internet kiosks in rural areas, often linked by cell phone circuits, by the end of this year. India’s electorate, totaling 650 million, voted electronically in the 2004 general election, which demonstrated the practical potential of information technology, and national identity and social security numbers are being progressively issued, which could be used to access digitized data.

Put all that together, and India is on its way to transforming banking for the 70% of its 1.1 billion population who live in rural areas, once ways of ensuring security for mobile phone and smart card transactions have been worked out. Ideas about how the government could use the technology to improve what the experts call the “social delivery mechanisms” of poverty programs emerged in Delhi last week, when the debate at the launch of a book on economic reforms switched to India’s most crucial problem – how to deliver hand-outs and development aid without a large proportion leaking.

Lord Meghnad Desai, a professor at the London School of Economics, suggested a dollar a day could be delivered via smart cards – he later amended that to a more modest dollar a week, which would add about 14% to low-paid laborers’ weekly wages. N.K.Singh, a former top bureaucrat, whose collection of Indian Express newspaper articles was being launched as a book called “The Politics of Change,” later suggested that the cards should not just be used for the odd dollar, but for all government payments to the poor.

Currently billions of dollars a year are distributed by elected village officials and low level bureaucrats, who routinely take some of the money for themselves, sometimes denying money to authorized recipients. In some states, as an experiment, 200-rupee monthly payments are being credited to destitute old age pensioners’ post office accounts, reducing the opportunity for leakage. The idea now is that aid recipients would be allocated smart cards credited with the handouts. The cards would be swiped through small electronics terminals and authorized officials would hand out the money. That would still leave room for the officials to bully recipients and deny them their full allocations, maybe demanding a commission, but it would be simpler to administer than post office accounts and far less leakage-prone than the current system.

Palaniappan Chidambaram, the Finance Minister, agreed at last week’s meeting that smart cards could be used in this way. Yesterday he told me that a good starting point could be to issue smart cards for the government’s popular Rural Employment Guarantee Scheme, which has been allocated a minimum of $3 billion this year. “The technology is proven. We should quickly move to implementation,” he said. Some senior officials are concerned about how to persuade tens of thousands of bureaucrats, who gain by administering current programs, to give up their lucrative work. Chidambaram is not sure that this is a problem, but some of his officials tell me the process could take several years. The technology, it seems, is almost ready, but the bureaucrats may not be so keen.

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Posted by: John Elliott | July 19, 2007

Hastening slowly on India’s highways

 

Writing about India’s 15,500-mile highways program is an exercise in portraying a glass that is half full and half empty. It is half full because, after decades of inactivity, real progress has been made in the last eight years. But it is half empty because that progress is far less than it should have been, especially in the last three years – mainly as a result of government lethargy.

A couple of years ago I wrote an article in Fortune that basically praised the improvements to India’s highway system. Though far from perfect, there had been far more progress than anyone would have thought possible a few years earlier. Some 3,750 miles (6,000 kms) of highways had been built between 1999 and the end of 2005 at a cost of about $7 billion, mostly on the Golden Quadrilateral highway that links India’s four biggest cities of Delhi, Mumbai, Chennai and Kolkata.

My New York editors were slightly more skeptical and headed the piece “On The Road To Repair,” which was fair because progress had been bumpy, like the roads (an inevitable pun). Massive delays had been caused by slow land acquisition.

Corruption and bureaucratic lethargy were widespread, as was extortion by gangsters and Naxalite (Maoist) rebels in some areas. Foreign companies had generally stayed away, and not all those (mostly from Asia) that had won contracts were successful – a Chinese contractor had its contract terminated for lack of progress, and Russian firms had problems.

Little has changed in the two years since my article appeared, though new roads have been built (more on this below). My foreign friends are unimpressed, complaining about muddle and jams on the Delhi road to Agra and life-threatening drivers (and animals) on both that road and the highway to Jaipur and beyond. Many Indian friends typically refuse to believe that anything good could be done by the government, and it is fashionable for the Indian media (justifiably) to draw attention to the problems, while usually ignoring the achievements.

But India’s highway program has been a success, especially in the early years when the energetic Minister of Highways, Maj. Gen. B.C. Khanduri, a (then 71-year-old) retired army engineer who is now chief minister of the state of Uttarakhand, was in charge. He had enthusiastic backing from Atal Bihari Vajpayee, the Prime Minister, whose pictures were plastered in banners across completed and partially completed highways proclaiming, rightly, a success by his Bharatiya Janata Party (BJP) government.

Ironically, here is where a new set of problems emerged. When the BJP unexpectedly lost the 2004 general election, Sonia Gandhi, who heads the Congress-led coalition government, and her ministers did not want to draw attention to their predecessor’s successes.

Manmohan Singh, the prime minister, is an enthusiast and has ordered widespread six-laning of four-lane highways, but T.R. Baalu, his Minister of Road Transport Shipping and Highways, seems more interested in promoting a shipping canal between his home state of Tamil Nadu and Sri Lanka than in building highways elsewhere.

The National Highways Authority of India (NHAI) is an outpost of stifling bureaucracy and its press relations are virtually non-existent – statistics on progress are handled by a well-meaning librarian who has to consult his finance department for values of contracts.

There has also been extensive infighting between the NHAI and the Planning Commission, which has been trying to transfer funding from the public to the private sector. The Vajpayee government was arguably over-generous in its use of public funds.

That has led to battles over new public private partnership (ppp) terms and a model concession agreement is now in use that lays down new requirements on early land acquisition and other conditions. The size of contracts has been enlarged to an average of 60 miles, with several up to 120 miles, many times previous levels.

The hope is that this will attract more foreign firms, which would add expertise and speed up construction, though Indian companies counter that foreigners are not needed. Most non-Asian firms are mainly interested in handling specific tasks like toll road management or acting as minority partners, and that will not bring in the necessary funding.

As a result, the general impression is that the National Highways Development Project is doing badly because progress on the final 200 miles of the Golden Quadrilateral, started in 1999, has been very slow.

Only 760 miles have been completed on 4,500 miles of highways that will run from north-to-south down the length of India and east-west across the country. Even so, the total length of contract awards and finished projects are at last increasing: the number of new contracts awarded and miles of completed roadwork are expected to double, to 8,700 miles and 4,350 miles, respectively, in the next four years.

I still argue that the project is an overall success, but most of the credit for that goes to the old BJP government. The current administration needs to show more Ministerial enthusiasm, attract more foreign investors and contractors, cut the bureaucratic squabbling and push for completions on time.

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Posted by: John Elliott | July 13, 2007

India’s crowded skies get more chaotic

“We’re always on time” said the airline attendant. “You’ll be okay for your connection,” I had been told an hour or so earlier when I had phoned to see if 25 minutes was a sufficient layover between flights. Amazingly, the check-in desk information was reassuringly the same.

Where was I? Obviously not India, where flight delays of anything from 30 minutes to two hours have been common this year. I was in South Africa, and the super-confident (low-cost) airline was Mango.com. It was flying me from Cape Town to Johannesburg, where I had a 35-minute gap between the arrival time and the check-in desk closing for my South African Airways flight to Mumbai. And yes, the flight was on time.

It’s a pity it is not like that in India, where debilitating delays have been caused by the Aviation Ministry. In three years the government agency has allowed an excessive number of new airlines and let existing carriers expand their fleets without improving airport facilities. Last year, India’s airports handled 90 million passengers, a third more than the prior year. Currently there are 300 to 320 aircraft in use and orders for new planes will double that figure by 2012.

But there has been little improvement in airports’ ground handling, or the space available for aircraft to park. This is causing major delays in landings and takeoffs, which frustrates passengers and pushes up airline losses. (Unlike in the United States and elsewhere, the Indian government and the airlines don’t release data about airport delays, but the problem is apparent to almost any visitor.)

Praful Patel, the urbane Minister of Aviation, wowed journalists about three years ago with a fast-talking video presentation of how airports around the country would look when they were rapidly modernized. Delhi and Mumbai airports were handed last year to private sector contractors, but progress has been slow and there’s been little improvement elsewhere.

Patel now says the extra flights and lower ticket prices that have been generated by the airline growth are worth the pain. That’s typical of old India – you have to struggle for your achievements!

Patel’s next dream is to transform India’s two inefficient and unpopular airlines – Air India and Indian (formerly Indian Airlines) – by merging them later this month into a new National Aviation Company.

I (like many other people) don’t understand how merging two failures without changing the ownership or top management can achieve anything except compound failure, but Patel is confident – and he isn’t yet talking about pain. Fortunately, there are enough private-sector airlines, like Jet and semi-merged Kingfisher-Deccan, to use instead. But, sadly, airports are a monopoly and there is no choice – apart from traveling by rail.

India could pay a steep price if it doesn’t fix its air transportation soon. Last month the Financial Times reported that the Lord Mayor of London warned Gordon Brown, now Britain’s prime minister, that “business executives will only do business with us if they find it easy to use our airports – and at the moment it is not.” He was especially critical of Heathrow airport which, as I discovered again last week, is even worse on its bad days than Delhi or Mumbai. But Britain’s regional airports are relatively good: India’s are not.

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Posted by: John Elliott | July 6, 2007

HSBC hit by Delhi real estate prices

HSBC seems to be finding it hard to survive in India’s increasingly costly bazaars. Almost unbelievably, the world’s fourth-largest bank has closed its ATM booth in central Delhi’s prestigious Khan Market because, senior executives tell me, it does not consider it economically viable to pay the admittedly astronomical six lakhs of rupees ($15,000) rent a month that its landlord wants for the 150 square feet of potential (now shuttered – see pic below) retail space.

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It is moving its money machine, and its usually sleepy guard, to cheaper location, possibly in a nearby gas station that will be far less accessible for local shoppers and tourists who used the old ATM. The bank’s customers can still use their cards to withdraw cash at a (rather luxurious) Citibank ATM just a few yards away from the former HSBC location, at no extra cost.

Despite a strong business strategy that led to its Indian operations declaring a 67% increase in annual profits two weeks ago, the bank is losing high visibility in one of Delhi’s leading middle class and expatriate markets.

That struck me as odd when I flew into London’s Heathrow airport this morning and saw HSBC logos plastered all over the docking gates, where (as in other airports) they have been for years. That cannot be cheap advertising, even compared to Khan Market, and I have never understood why HSBC associates itself with the hassle and misery of arriving at such airports – though I guess HSBC’s senior executives are pleased to see the name displayed so prominently.

But coming back to Khan Market, HSBC’s experience is the result of India’s real estate boom, which is hitting prime sites in Delhi and elsewhere. Cushman & Wakefield, a real estate consultancy, said late last year that Khan Market was India’s costliest retail location and the 24th highest in the world.

A survey by Richard Ellis, another consultancy firm, found in April that office space in Connaught Circus, at the heart of central Delhi, was the seventh highest priced internationally after locations in London, Tokyo, Moscow and Mumbai, India’s commercial capital. Office rental values for prime Delhi sites have risen 80-130% over the past year, largely because of a lack of quality real estate.

Ironically, the property boom means that HSBC is being hit harder than mom-and-pop shops in the parallel boom that is hitting India’s current rapid retail developments. (An article I have written in Fortune’s current international edition suggests there is room for both the moms and pops and big retailers for years to come).

While HSBC has allowed itself to be driven out, owners of other small shops are getting rich by leasing their sites out to foreign and Indian brand names that seem to care little how much they pay for the location. The old owners find they can make far more money leasing their sites to names such as Zeiss, Adidas and Levi than they could ever do selling, for example, medicines and electrical goods.

The high rents are bad news for regular shoppers who value the friendly service of the old style shops. It is also bad news for the image of HSBC.

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