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Economic freedom...

Sep 28, 2001

According to the McKinsey prescription, removing regulations governing the product markets would add 2.3% growth to GDP, doing away with the distortions in the land market would add another 1.3% and divestment by the government 0.7%. The land markets reforms and divestments are certainly something that we agree with. Land market reforms would make one the most important input for businesses cheaper and thus, reduce the break-even point. On the other hand, the divestment process would take the burden of managing businesses off the government's back. Though the incumbent government has agreed in principle to this, it has not been able to do much on this. But the comforting thought is that the government sees the point.

When it comes to product market reforms, McKinsey's argument is that regulations protect Indian organisations from competition and thus, productivity suffers. This undoubtedly is a very valid argument. To support its point the company has put forward the case of the automotive sector. The Indian government, as part of its 1991 economic reforms, relaxed licensing requirements for carmakers and restrictions on foreign entrants into the industry. Competition increased dramatically, and the old dominant players (Fiat and Ambassador) lost substantial market share.

The government rules
(April to July FY02) Sales Market share
Daewoo Motors 6,436 3.3%
Hyundai Motor India 30,772 15.7%
Maruti Udyog 114,916 58.5%
Telco 17,082 8.7%
Hind Motors 5,719 2.9%
Ind Auto 2,127 1.1%
Honda Siel 2,939 1.5%
General Motors 2,435 1.2%
Ford India 13,467 6.9%
Mercedez Benz 583 0.3%
Total Cars 196,476 -

Makes sense, but let us look at the players who have gained here - Telco, a part of the Tata group that is one of the oldest corporates in the country, Maruti that is semi-government, Daewoo and Hyundai that are multi-nationals. The point that we are trying to make is that all had resources, enormous amount of wealth for technology, marketing and for taking on competition. But it is not that this effort did not take its toll. Telco in its 56-year history reported losses for the first time.

Small but so many
Rs bn FY99 FY00 (Projected)
No of units (m) 3.1 3.2
Total production 5,275.0 5,784.7
Average Turnover (Rs m) 1.7 1.8
GDP 17,626.0 19,446.0
% of GDP 29.9% 29.7%
Exports 489.8 539.7
% of total production 9.3% 9.3%
Employment (m) 17.1 17.8

Thus, the transition to a free market economy is not going to be an easy one. Only agile, alert and resilient organisations are going to survive. Thus, the onus is on the government to set the stage for the entry of the foreign competition. If the Indian industry, especially the SSI (small scale industry), is going to take on foreign competition, the least the government can do is create a level playing field. The government needs to be very careful. Considering that the contribution of the SSI to the GDP is almost 30% and provides employment to 61% of the non-agricultural work force of the population. If this segment cannot compete because of structural inefficiencies, this will have a negative impact on the economy. It's about time the government got its own act together.

The problem that hurts these industries the most is structural inefficiencies. Capital has to be available easily and to the right kind of projects and people. There were 0.3 m (10% of total units) sick SSI units as on 31st March, 1999. Interestingly these units were those, which had obtained loans from banks. An amount of Rs 43 bn was blocked in these units. Of this only 6% (18,692 units) were considered potentially viable by the banks with their outstanding credit of Rs 3.7 bn.

The second issue that the government needs to do is to address the issue of corruption. Due to the small size of these industries they are at the mercy of inspectors and various government officials. The money they would have to pay to keep these officials happy would have to be passed on to their consumers. This would make them less competitive. Also, technology has become central to business strategy. The government has to handhold these industries to move quickly from obsolete technologies, to those essential to survive competition today.

While the government can only set the playing field right, it is the industry that has to play. It is not a question of 'if', but rather it is 'when' the regulations will go. The writing on the wall is very clear, there is no sense complaining when you got a job to do. And that job is ensuring India's economic freedom by being the best against global competition.

"The time is ripe for people of India to embark on an economic freedom movement with the same fervour and the same intensity as we did on a different kind of freedom movement about 50 years ago. This movement must be led by entrepreneurs who create jobs and companies."

Dr. Suhas Patil, is the founder and chairman emeritus of Cirrus Logic

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