The debate on global meltdown is more focused on the possibility of revival in the US/Europe economies rather than on the Indian situations. It is assumed that the revival in the US will lead to revival in India and sometimes it is argued that the US revival is a pre-requisite for the revival in India. This pre-supposes that the Indian economy is a residual segment of the global economy and completely ignores the reality of the Indian economy.
One of the major growth drivers’ of our economy is the service sector and the largest segments of the service sector are construction, retail trade, transport, hotels and restaurant and all other self-employed activities like carpenter/plumber/mason/priest etc. They constitute nearly 60% of our GDP and many of these sectors have been growing at more than 8% real growth rate in the last decade.
The growth and the capital formation for this growth have been financed primarily from domestic savings and large part of that is due to household savings. In other words, at no point of time the combined impact of FDI and FII was more than 8% of our investments.
Still there is so much song and dance about the revival in US economy because the primary discussion is on IT companies who have significant exposure to US and European markets.
Crisis in the West
Many indicators suggests that the revival in the western markets is going to take place over a long period of time may be 40-50 quarters since the crisis is not just economic but is demographic and coupled with terrorism issues. The latter two were not present in the depression of the twenties in the last century. That Great Depression was purely economic and the steps to overcome that cannot be replicated in the current scenario.
The demographic crisis is aggravating their social security burden and the war on terrorism is entailing huge outlay in faraway places without any possible end game. The largest selling items in the US in the last quarter were hand guns and rifles and it shows how desperate the society has become.
Actually, the US is sitting on a powder keg and it could go out of control any time in terms of the social cohesion. It may take say at least ten years for that economy to recover since it has to re-imbibe the virtues of domestic savings and living within means.
It has to go back to its protestant puritan work ethics and it has to recognise that the axis of economic power has shifted to Asia and it has to accept alternative currency to dollar and it has to do hundred different things to get its fourth position -after China Japan and India—in the world.
What India Inc should do?
The current crisis offers opportunities for our companies to look at the vast domestic market. There is a crying need to look at our large organisations like EPFO, ESIC, Ports, Posts, Election Commission, Income Tax, Passport, Customs, etc. They all require software solutions and Net-based speed and efficiency. The implementation of the software packages in railways for bookings etc has reduced corruption phenomenally and also introduced hassle-free travel and enhanced efficiency.
This was not due to our top four IT firms but due to a then government owned IT Company. Large number of state government departments/corporations requires IT solutions. They claim they are web-enabled. Their offices have cobwebs and that is the only enabling feature of these government departments. Introduction of IT apart from increasing efficiency and speed also reduces the corruption due rule based transactions and moving away from relationship based transactions.
For instance if there is an accident involving say two cars in a city this information is not available to insurance companies unless it is reported by one of the parties. In many western countries the traffic police is inter-linked with the insurance companies and immediately the information is passed -including say drunken driving—and it is impacting the premium to be paid next time. Given the fact that we have more than 300 million cell phone subscribers it is possible to think of innovative methods to integrate cell phone, net and lap tops and IT spheres.
For instance, many state governments have social security schemes for children, widows, poor people, disabled etc running into lakhs of crores and it is generally conceded that there is substantial leakage due to corruption in these schemes. Actually, the IT companies can implement solutions for many of these social security schemes by quoting rates which include a percentage of the saved leakages.
For instance, there is a old agewidow pension scheme for below poverty line people which entail disbursal of around two crore every month in a state, that implies annual budget of nearly 25 crore. If the leakage is say 15%, then around 4 crore is wasted due to corruption .If that can be saved due to introduction of identificationcards, electronic funds transfer system etc then a part of that “corruption savings” should also be given to the IT company.
In other words these system cleaners can quote for jobs including share of “leakage savings”—it is like providing incentives to “whistleblowers.”
Same logic applies to many other companies of India Inc. Nano has shown that there exists a huge market for low-priced cars and Kevin care showed the same for Shampoo in satchets.
There is a huge domestic market crying to be served and the margins may be lower but the market size is very large. India Inc which has traditionally focused on cherry picking and premium segments should accept the challenge provided by this crisis to look inwards in to the domestic market.
That is the clue to their survival and growth and not looking at the movements of Dow and musings of Obama and Bernanke.