The Economic Times: Indian businesses have to become competitive at home, to compete for markets globally

The Economic Times: Indian businesses have to become competitive at home, to compete for markets globally
September 19, 2013
By: Pankaj Ghemawat

I won’t recap all the gloomy news and gnashing of teeth about the Indian economy and the government over the last few weeks. But I do agree with at least one of the utterances of the finance minister, “What is needed now is…not a closed economy but a more open economy.”

It may seem strange to call for more openness at a time when the falling value of the rupee and the outflow of money are the challenges facing the Indian economy. It is worth remembering, though, that fear flies across borders faster than fundamentals — and has a large effect on financial flows. Despite the lessons from the global financial crisis, the Indian government effectively assumed that external finance would always continue to be available to fund current consumption and roll over existing debts at reasonable terms. The bill is now (past) due.


Apart from fluctuating short-run capital flows, however, more globalisation is generally good. And in regard to these other dimensions of globalisation, India’s performance is, well, nothing to write home about. Consider India’s rankings on the DHL Global Connectedness Index, an index that takes into account 12 types of trade, (long-term) capital, information and people flows for 140 countries. In the most recent version of the index, India ranked 119th out of 140 countries in terms of the depth of its global integration across trade, capital, people and information flows. More than 20 years after the reform process began, we still have to break out of the bottom 20%!

Visualisations provide even more powerful evidence of how closed India still is. Consider the accompanying map, which scales India in proportion to its GDP minus its exports —roughly approximating economic output that stays in India — while foreign countries are sized according to India’s exports to them.

Indian businesses have to become competitive at home, to compete for markets globally


While there are many reasons for India’s low levels of global connectedness, the most actionable ones are those having to do with policies that are still autarchic. Thus, India ranks 100th out of 132 countries on the World Economic Forum’s Enabling Trade Index — and 130th on the market access component of that index — and 52nd out of 56 countries in the OECD’s FDI Regulatory Friendliness Index. Ministerial cajoling of foreign investors, no matter how masterful, is unlikely to work when these are the facts on the ground.

The usual response to such data in India seems to be to Wait Around for the Government — the WAG syndrome — although the G might be updated for present purposes to stand for the governor of the RBI. But it would be a triumph of hope over experience to expect too much from this spectator sport in the run-up to the parliamentary elections. And, in India, there is always some “important” election around the corner.

Ratan Tata recently said, “The government has issued policy [sic] which vested interests, quite often in the private sector, have changed, delayed or manipulated.”



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