In an interview with Equitymaster recently, Dr. Rafiq Dossani provided insights into the India growth story, the state of the economy and what will it take for the country to grow strongly and sustainably into the future. While Part I of this interview carried Dr. Dossani's views on the changing nature of the country, Part II (the concluding part) contains his views on the Indian economic growth, commodity prices and his favourite books. Let us see what he has to say on these wide ranging topics.
Eqtm: What sectors do you see leading the economic growth over the next 5-10 years?
Dr. Dossani: IT is a very interesting sector. I did a conference last week in Stanford University on the outsourcing industry. And it was a global conference. So I had companies from India – TCS, Infosys, Wipro, Satyam and Cognizant – and I had companies from the US (like IBM, Google, Adobe and Cisco) and Europe (Cap Gemini). We were talking about where is the IT industry going? Although I had not designed the conference as being India-centric, it turned out one on its own. Because the large IT firms like IBM, Cap Gemini, Accenture, EDS and so on, they are getting so much competition now from the Indian firms who are doing a very good job that their client base is really taking account of this fact. We see that in the recent Nielsen deal that TCS got. It is a very significant deal as it cuts across the value chain. TCS has been working for years to achieve this deal and it is a very important deal for setting the trend of the industry. It indicates the company’s ability to mature very fast and manage scale. IBM is not doing a very good job managing scale. Today, it has 200,000 people in global services but it is running wild trying to manage all these things. TCS has been global from day one, and it is doing a very good job. So that is one sector where I can say that Indian firms are very competent and are going to be world-beaters.
Eqtm: Are these companies really moving up the value chain as has been talked about?
Dr. Dossani: Till about 3-4 years ago, I would have said maybe not. But what you see now is that the big ones have started moving ahead. So, I think they are moving up very fast. Look at Wipro – around 17,000 people in contract R&D – it’s high quality work. When you talk to their clients in Silicon Valley, Wipro is viewed as a cut above the rest. They do not see Accenture or IBM as competitive for such kinds of work. Of course, there are many niche firms, much smaller than Wipro, which are doing very good work in contract R&D, but to manage scale and offer contract R&D of that size, Wipro is the world’s best. If you want to do trading platforms for stock markets, it is TCS one turns to. So there are many niches, where Indians are the preferred vendors. It is a cost issue, no doubt. But it is now also an expertise issue.
Eqtm: What is your view on the impact in these companies of the rupee’s appreciation against the US dollar?
Dr. Dossani: If the rupee continues to strengthen against the dollar, it’s going to have a big impact on their bottomline. So, that’s not so good for investors. Will this have an impact on their getting business? No! At this current rupee-dollar rate, their operating margins are already over 20%. So, there is plenty of slack. Accenture is operating with margins of 8% to 10%. So, the Indian firms can halve their margins and still do well. I think if the rupee still appreciates by 10%, it won’t affect their topline growth. It will have an effect on their bottomline for sure.
Eqtm: Is there any other sector that you would like to talk about with respect to the India story?
Dr. Dossani: I think education is a very good sector to be in. I think there is an interest in that but it is not an investible sector. The financial and real estate are two other sectors that I would like to talk about. And that’s because these are domestic demand-driven sectors. Banking, retail and real estate are areas that are leveraging the growth of the Indian economy. I think the area of concern to me is that we still do not have good enough skill sets in manufacturing at the basic level. One thing that people compare is what is the difference between India and China. A big difference is in the quality of the workforce, not in terms of systems or anything else. China also took off when politics was localised and they gave power in 1990s to the local government. The same thing has happened in India as I was trying to explain. But the difference was that by 1980, even before they begun reforms, China had universal access to healthcare and atleast 75% literacy at the level of post-primary and 90% literacy at the level of primary. That is an important fact because that then gave them a workforce which was healthy enough and educated enough to work long hours in the industry. India is not anywhere near that. My opinion is that till 2050, you cannot compete with China. Hopefully we will use this next 40 years to give to the new generation the basic social services that they need. And then you will see the progress in manufacturing. What China showed is that when the world was growing at 5%, they could grow at 10%. I think India should easily be able to show that it can grow at 20%. There is lot of catching up to be done. So, I am not saying growth rate will be low. I am saying we are still a very-very poor country. And it will start to hit against this constraint of human capital.
Eqtm: Do you think India can remain insulated from the effects of a possible US recession?
Dr. Dossani: If the US goes into recession, many countries and sectors that are dependent on global demand will be affected. But, to an extent, India is still a locally driven economy. As such, I do not see a huge impact. If you look back and see world recessions, India was not much affected. Even the oil shocks did not affect India. And I think that character of the economy is still not changed. It is still not that much globalised.
Eqtm: What is your view on commodity prices, oil prices and interest rates?
Dr. Dossani: See, interest rates in India will be much affected by the US interest rates. As such, these are certainly going to fall over the next six months. I don’t think anyone knows the extent of this problem of the subprime crisis. It’s much deeper than the popular press is aware of. And besides that the Fed is cutting rates, it is freezing rates on subprime loans – unthinkable for a conservative administration. There is a rot in there that people are not talking about. That is not to say that the US economy is not fundamentally strong – in terms of technology, finance, management, education – it’s like unbeatable. But there will be a process of readjustment over the next year or so.
So, what affect will that have on commodity prices? I think the big drivers of commodity prices are the western economies, which are consumers, and China, which is a producer. So a slowdown in the American and other western economies and Japan, which will all move together, will keep a lid on commodity prices. Now, will China be able to offset that or not is a question. China is still very much an export driven economy. So, I cannot see it being unaffected. I expect Chinese growth rates to slow and to fall below 10%. When that happens, you will see a big fall in commodity prices. I am not a commodity bull at this stage at all. I would be a bear.
Eqtm: Which are your favourite books and who are your favourite authors?
Dr. Dossani: One of my favourite books is “Maximum City- Bombay Lost and Found” by Suketu Mehta. Amartya Sen is also amazing and he continues to write very insightful books. William Dalrymple is also one of my favourites (City of Djinns, The Last Mughal). People like him, Amartya Sen and Suketu Mehta show both the opportunity and the tragedy. The opportunity they show is that people who understand India well can turn out to be superb scholars, as India is such a rich country in terms of its history and plurality and in terms of what’s going on. The tragedy is that all these three people are located outside India. They should be from here. I am doing all these research projects and I have always thought why am I doing it sitting in Stanford? I am doing projects and I am looking at the quality of education in India. Why is this not being looked at by my peers in Indian universities? So that’s the tragedy!