The interview was published in Outlook Business in the issue dated December 10, 2011. Download PDF

The interview was published in Outlook Business in the issue dated November 26, 2011.

The presentation was done by Anshul Pachouri at the conference “New Approaches to Building Markets in Asia hase 2 Workshop on Regulation, private sector authority and market building in Asia”

The interview was published in Outlook Business in the issue dated October 15, 2011. Download PDF

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The interview was published in Oulook Business in the issue dated October 1, 2011. Download PDF

Investments in the auto sector in Gujarat, including a likely new plant by India’s biggest car maker Maruti Suzuki India Ltd, could add up to Rs. 14,000 crore in the next few years and lead to a surge in employment opportunities.

“The auto sector of Gujarat, including ancillary units, has the potential to generate at least 100,000 new jobs in the next two-three years going by the number of auto companies rushing to the state,” according to Amit Kapoor, honorary chairman of the Institute for Competitiveness, a think tank. Before firming up investments, the companies as well as the Gujarat government would have factored in manpower issues, he said.

Companies that have approached the state for setting up plants include Bajaj Auto Ltd and Hero Moto Corp.Mint reported earlier this month on Hero Moto’s plans to set up its fourth unit in Gujarat. The Business Standard quoted Rajiv Bajaj, managing director of Bajaj Auto, as saying in a 20 July report that the two-wheeler manufacturer planned to set up its fourth unit in Gujarat’s Mundra area. The plant will also manufacture a passenger car the company is developing with Renault-Nissan, the report said.

Last week, Honda Motor Co. Ltd and Toyota Motor Corp. held preliminary talks with Gujarat on setting up plants, said a state government official familiar with the development, asking not to be named. Among other industries, Hindustan Aeronautics Ltd is also considering a project at Sanand. Mint could not independently verify the status of these projects.

Finding enough people to fill the prospective job openings is something that preoccupies the companies, since industries availing of government benefits—which constitute the incentives that encourage companies to choose the state—need to make sure that 80% of the workforce is made up of people from Gujarat.

An official of a company that has set up a special economic zone in Gujarat said the challenge is to find workers who have been domiciled in Gujarat for 15 years.

“The availability of skilled manpower is surely a matter of prime concern for us,” said Michael Boneham, president and managing director of Ford India Pvt. Ltd. “We still have three years before we can start production at our plant and we hope to resolve this issue with the support of the state government by then.”

Both Ford and Peugeot officials have said they are working with the state government on setting up skill development centres through the public-private participation (PPP) model and working closely with Industrial Training Institutes (ITIs). An email sent to a Peugeot official remained unanswered.

While the manpower requirement will depend on the level of automation and plant design, the state employment policy is playing a role in strategy.

“All the best people have been absorbed by the Tatas and Bosch Rexroth India Ltd at Sanand,” said an official of an auto company evaluating the state for investment. “We will gather data of the available workforce and make a presentation to the state government at an appropriate time in future. We respect the law of the land. We have been assured all necessary support by the state and we will approach the government to help us whenever the need arises.” Bosch is in the process of setting up a new hydraulics plant at Sanand.

Peugeot and Ford, with an investment commitment of Rs. 4,000 crore each, have also been allotted land in the same 2,200-acre industrial area at Sanand that is home to the Nano project.

Peugeot has expressed its interest in investing Rs. 250 crore to set up a skill development and research and development centre at Sanand, a senior government official has said. The company said recently that the new facility could generate as many as 4,000 jobs. Ford aims to employ about 5,000 at Sanand, he said. Mint wasn’t able to independently verify this.

Of their total 900 employees at Sanand, Tata has hired 800 local residents from the ITIs and through a training programme, another government official said. Other companies could also follow suit.

The next auto entrants into Gujarat are proposing larger plants with more workers than the Nano factory, said the company official cited above. He added that the ratio of skilled to unskilled manpower would be 60:40.

Maruti, which is looking at locations in north Gujarat for its new unit, hasn’t yet decided on the project although Reuters reported 14 September that it will likely build a $1.3 billion passenger car factory in the state, citing Japan’s Kyodonews agency. The move will gather urgency as Maruti seeks to cope with a strike at its plants in Gurgaon and Manesar, both in Haryana.

“Assuming we do go to Gujarat, we will train people for the facility,” said R.C. Bhargava, chairman of Maruti. “The state has training facilities.”

With state elections scheduled next year, the government isn’t likely to amend the stipulation on local employment, an industry expert said on condition of anonymity.

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The interview was published in Outlook Business in the issue dated August 6, 2011. Download PDF

The current EU economic crisis has raised concerns over high sovere- ign debt and its harmful effect on economies that has left Greece and Portu- gal in crises. The theory of debt says that once external debt becomes very large, economies are unable to generate pri- mary balance to repay the debt, causing currency deflation and adverse shocks. In light of the global impact of debt, we try to discern the state of affairs in India.

India has to pay external debt of $305.9 billion that accounts for 17.3% of GDP and 10.3% of total public debt on India as of March 31, 2011. The gross public debt on India is more than 70% of GDP, as per IMF, in the year ending 2011. The coun- try’s external debt has grown at the rate of 12.3% annually during 2006-11 while the economy has grown at an annual growth rate of just 7.3%, which is alarm- ing and will leave future generations un- der higher debt burden. This month, the Institute for Competitiveness’ state per- formance barometer looks at the condi- tionof debtacrossthestatesandassesses their position in managing their finances looking through the lens of fiscal deficit, debt-to-GDP and interest payment share in revenue receipts of the government. Higher fiscal deficit makes debt bubble larger and compromises with growth: Ut- tar Pradesh has very high fiscal deficit of 24% of revenues that demands for more borrowing from the markets, and the debt burden has reached `. 2,34,581 crore in 2011, as per RBI. The debt on Uttar Pra- desh alone constitutes 12.9% of the out- standing liabilities of all state govern- ments and the debt-to-GDP ratio has reached 45.8 in 2011. The high debt leaves the government no option but cutting ex- penditure, decreasing subsidies and rais- ing taxes in the economy, which also incr- eases inflation and slows real growth rate. These fiscal irregularities are resp- onsible for slower growth of the state that is just 5.5% annually in the last five years against overall India growth rate of 7.3%.

Mizoram and Sikkim have very high debt-to-GDP ratio of 98.1 and 82.2, respec- tively, and are on the verge of touching the level of debt-to-GDP of Ireland (101.6) and Belgium (103.1) in the EU, which is not appreciable for financial stability. The debt-to-GDP ratio of above 60 is con- sidered dangerous both for developing and emerging economies. Such a high debt increases the risk of financial and economic turmoil and EU has put the mandatory condition of debt-to-GDP less than 60 for any nation to become the part of the European Central Bank and EU.

Robust GDP growth in states makes debt sustainable: Orissa experienced tre- mendous growth rate of nearly 10.02% in the past five years, enabling the state to bring the debt-to-GDP ratio from nearly 60% in 2005-06 to its half in 2010 with the declining rate of above 12% annually (graph 1). The higher growth rate genera- tes more economic activity that eventual- ly increases the revenue receipts of the government from which it is able to repay the interest and principal amount of the debt. Thus, the strategy for states should be to achieve higher growth rate.

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Public spending which varies across states, has to increase. States like Delhi and Sikkim spent more than Rs 7,000 per hectare but Rajasthan spent less than Rs 330 per hectare on average between 2001-10. Many farmers in India don’t have access to enough capital to buy seeds & fertilisers. Land holdings are also small, restricting production. Without more public spending yields can’t go up.

More foodgrains have to be produced for every hectare to feed our people. Gujarat and Chhattisgarh have improved their productivity by more than 90% and 70% respectively but are still behind Punjab and Haryana. In Tamil Nadu and Karnataka, productivity fell in 2009-10 compared to 2001. Higher productivity can also help farmers gain from higher food prices. In UP, Rajasthan, Orissa, and Himachal Pradesh more than half of the workforce is engaged in agriculture but at very low labour productivity, defined as agricultural GDP divided by total agricultural workforce. This shows how much states can leverage their agricultural workforce for development.

The agricultural workforce is estimated to be 286 million in 2010 against 234 million in 2001. But the percentage of total workforce engaged in agriculture has fallen from 58% in 2001 to 55% in 2010. At the same time, the contribution of agriculture to GDP fell from 23.2% to 17.7%. Despite a bigger workforce in agriculture, the contribution of agriculture in the Indian economic growth has come down drastically.

Agriculture in different states is still driven by the traditional methods of cultivation, limited awareness about crop information systems, new seed and fertilisers and has huge dependence on weather. The problem lies back deep in the lack of robust policy initiatives and agriculture in many states. Different

schemes of the government are limited in terms of reach and access by the poor farmers. The agriculture sector needs more marketing assistance and training of farmers on new high-yielding technology so that they can increase their per capita GDP by getting both the right price and increasing the yield.

The states can be classified into three categories depending on the type of strategy they need to follow to improve their agricultural and labor productivity.

Value-Chain Enhancement Strategy -These states which have higher agricultural productivity & GDP must invest in developing food value-chains for timely supply. These states can enter the profitable, value added segment of food-processing. These include: Punjab, Haryana, Andhra Pradesh, Goa, Tripura, Delhi and West Bengal.

Technology – Upgradation Strategy The states at the middle of agricultural productivity need to invest in new information systems, introduce high yield seeds, quality fertilisers and equipment. These include: UP, Uttarakhand, Meghalaya, Nagaland, Tamil Nadu, Kerala, J&K, Himachal Pradesh and Gujarat.

Investments Strategy -The laggards need to invest heavily to train farmers about good farm practices and high yield methods. Interest-free loans, subsidised seeds and fertilisers are needed in Rajasthan, Bihar, Orissa, Assam, Mizoram, Arunachal, Sikkim, Jharkhand, Maharashtra, Madhya Pradesh, Chhattisgarh and Karnataka.

The article was published in Economic Times on May 28, 2011. Download PDF

The interview was published in Outlook Business in the issue dated April 16, 2011. Download PDF

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For a moment, let us accept the decree of AICTE and its underlying ideas that there is a need for regulation. Here, we need to ask a few compelling fundamental questions and analyse the situation deeper.

Need for regulation: Regulation is required to preserve, maintain and protect the rights of the consumer. In addition, regulation needs to look at creating a level playing field and protect the rights of the service providers. We would typically look at a market wherein we have infinite customers and finite providers. Regulating the number of providers presents a fair degree of competition. Regulation looks at an underlying assumption that cut-throat competition would lead to price wars.

What is wrong with AICTE decree?: Regulation tries to create oligopolies wherein there is a restriction on the number of players. These firms can’t exist in isolation and they operate around some minimum acceptable standards within the industry.

There is no interdependence between business schools as they exist in isolation. The challenge is to ensure customer service and laying down minimum acceptable standards. The world over, we have had accreditations and certifications for business schools such as The Association to Advance Collegiate Schools of Business (AACSB) and The Association of MBAs (Amba) that reflect the quality and degree of standardisation in schools and the processes they follow.

Each player today has unlimited access to the market, and that forces the mechanism of price and service regulation. As the case stands, the AICTE decree will disorient this very nature of competition.

A regulator ensures complete disclosure of information by service providers and then leaves the choice of accepting and rejecting in the hands of the customer. On the other hand, service providers tend to differentiate by creating brands and interactions at touch points that could have a different impact.

However, this is certainly not the case with business schools, which clearly create differentiation through the quality of students, the syllabi, the placements they achieve and research they undertake.

Now, if AICTE says they would admit students, determine the pricing and the curriculum, it would amount to the idea that AICTE is becoming a service provider and all the business schools in the country would become agents of delivery.

This change certainly compels us to ask a question: is AICTE a regulator or a service provider? In case AICTE does not understand this question – which it would not in all likelihood – let us ask a question pertaining to the telecom industry: does Trai find customers for telecom operators?

Telecom industry is a perfect example of oligopoly wherein the interdependence between the players is high and this ensures the delivery of service and smart regulation has created playing field that is not exploitative for customers and detrimental for service providers.

The final word: It is absolutely clear that AICTE is trying to do what it is not intended to do. The regulation will not benefit the business schools. It would, though, certainly benefit business schools that are gross underperformers, i.e., schools that can neither find students nor generate revenues. This goes fundamentally against the ethos of capitalism wherein the innovative and fit survive.

The regulation may make top schools reinvent themselves and exit this particular product.

To say the least, the government has taken a regressive step and it would effectively undo what business schools built over decades tediously. If the government doesn’t retract the decree, it may be concluded that we would be left with a socialistic society at the lowest level of quality and performance.

In effect, AICTE will resemble the erstwhile monopoly of the Life Insurance Corp of India where the insurer had no competition but intense competition within agents.

The Article was published in Economic Times on March 12, 2011.

The interview was published in Outlook Business in the issue dated March 19, 2011. Download PDF

The interview was published in Governance now. Download PDF

The interview was published in Outlook Business in the issue dated February 5, 2011. Download PDF

However, increased government spending on education since 2007 notwithstanding, 142 million children in India are denied primary and secondary education and a third of the nation’s population cannot read. Clearly, with the Indian economy growing rapidly, fuelled by the rise of knowledge-intensive and hi-tech sectors like ICT, automotives , pharmaceuticals and others, states must ensure quality education to enable Indians reap the benefits of economic growth.

In order to understand which states in India are prioritising education, we considered four indicators – higher secondary school enrolment , government revenue expenditure on education , number of universities and women’s literacy rates. These indicators serve as good pointers to the condition of education in a state and impact on economic growth.

Small states target education as the recipe for growth; need more focus

The hill states of Uttarakhand and Himachal Pradesh will benefit from high per capita school enrolment figures, which are much higher than the national average of approximately 3,230 students per lakh people, even as their GDP growth rates are above the national average. Meghalaya, Tripura, Haryana, Goa and Delhi are other states with healthy GDP growth as well as school enrolment figures. These, except for Haryana, are also among the top 10 states in terms of per capita revenue on education, arts and culture. This indicates that education is a clear priority in these states.

Women’s literacy is another dimension and the one widely seen to have a big impact on economic growth. Many small states fare well in this regard. Kerala clearly stands out with exemplary female literacy rate (87.72%). The state also shows healthy school enrolment figures, good government expenditure and adequate infrastructure.

The fact that these states are small – both in geographical area and population – requires them to pay attention to the quality of their human resources if they have to attract investment and successfully harness their natural endowments . For instance, both Uttarakhand and Himachal Pradesh have focused on creating industrial zones. The success of these industrial zones depends on the availability of employable talent locally, besides power, cost of land, logistics and government incentives.

From a competitiveness perspective, these states would need to align skills imparted by the institutions in the state with the skills to be required by the industry in the future. States, therefore, need to make a realistic projection of labour that would be required by the industries the state is promoting as well as by those industries that already exist, and then focus on developing institutions that can train people who can be placed in these industries. This is the key to enable people to avail of the opportunities within their home state, instead of being forced to migrate to other states or metros for employment.

Large states daunted by task of educating masses despite adequate infrastructure

Tamil Nadu and Maharashtra are the only two large states with good higher enrolment figures for higher secondary school. Other large states such as West Bengal and Karnataka, that have healthy GDP growth, and even Bihar and Andhra Pradesh, that have substantially higher GDP growth than the national average, show poor per capita higher secondary school enrolment. Madhya Pradesh scores low on both counts. Large states, with the exception of Tamil Nadu, Maharashtra and West Bengal, are also at the bottom of the list when it comes to female literacy.

Educating a large population is a challenge for big states. If we look at the figures for government expenditure, this is evident. Large states do not figure among the top 10 spenders per lakh population. Yet, West Bengal spends more on education, arts and culture than Tamil Nadu and Maharashtra that show good enrolment figures . Madhya Pradesh and Uttar Pradesh spend the least per capita on education.

Ironically, these large states have the best infrastructure in the country. Uttar Pradesh has the largest number of universities (29), followed by Maharashtra (27), Tamil Nadu (22), Andhra Pradesh (20), Madhya Pradesh (19), Bihar (17), Karnataka (16) and West Bengal (14). However, the quality of education imparted by these institutions is a matter of concern. States such as Madhya Pradesh and Uttar Pradesh are neither able to adequately fund their educational institutions, nor retain quality faculty.

Inadequate employment opportunities for graduates further strengthen the cycle of out-migration , leaving such states bereft of their knowledge workers and lowering the motivation for profit-making corporations to invest in these locations. This has, however, been changing in specific cities where centres of learning, corporate will and attractive location factors are fuelling clusters of industry in specific verticals. Bangalore in Karnataka has emerged as a hub for the IT industry and so has Hyderabad in Andhra Pradesh. Uttar Pradesh has world-class institutions like the Indian Institute of Technology at Kanpur, Indian Institute of Management at Lucknow and the Banaras Hindu University at Varanasi, but has been unable to develop industries around these to harness the resident knowledge from these places and employ the graduates. The standards of statelevel universities that attract local students must also be simultaneously raised while local employment opportunities are created.

Low-performing states need urgent intervention to progress

Some of the small and mid-sized states that do not fare so well need specific intervention. Chhattisgarh, Orissa, Gujarat and Nagaland have poor higher secondary school enrolments despite moderate and high GDP growth. Jharkhand , Punjab and Assam have low GDP growth rates and low school enrolment. Other than Nagaland , Punjab and Gujarat, these are also the states with low female literacy.

Rajasthan is on the cusp of both GDP growth and school enrolment. However, Rajasthan has surprisingly high government expenditure on education, showing that the state has prioritised education and is determined to cross over into a better performer in the next decade. States such as Chhattisgarh and Jharkand, which do not have a single university yet, need to urgently create the right infrastructure to raise their human capacity and attract investment.

Long-term benefits on the horizon

States need to focus on the benefits that education provides in the long term. A literate population results in controlled population growth rates over time. High-quality workforce will allow states to boost economic growth by focusing on more sophisticated and value-added industries and services instead of merely continuing to invite investment in basic manufacturing and service activities.

The increased productivity that a trained workforce can deliver results in enhanced prosperity and better distribution of wealth, which are the ultimate goals of governments and private sector corporations alike.

The Article was published in Economic Times on December 25, 2010. Download PDF

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Introduction to Clusters. Elisabeth Waelbroeck-Rocha, BIPE, France and TCI Director (Presentation)

Cluster Development. Ifor Ffowcs‐Williams, Cluster Navigators Ltd, New Zealand (Presentation)

Cluster Management. Klaus Haasis, MFG Baden‐Württemberg, Germany and TCI Director (Presentation)

According to the theory of demographic dividend, the rate of economic growth increases due to a rising share of working age people in a population. For India, falling fertility rates are resulting in a larger chunk of working-age people, who can contribute to the GDP and generate higher output per capita.

In fact, the International Labour Organization (ILO) has stated that India will account for the highest working age population in the next 10 years, in a report released recently. In the document prepared for the G-20 Summit held earlier this month in Seoul, the ILO says that the G-20 nations will see their working age population between 15 and 64 years increase by 212 million in the period 2010-2020 . Over 64% of this increase will occur in India alone!

This month’s IFCIndia State Development Barometer takes a sharp look at what population really means to the economic growth of India’s states and analyses how states can use their demographic situation to improve their competitiveness, and hence, enhance their prosperity.

Rising stars among states

It is widely accepted that growth among Indian states is skewed, with some prosperous states bearing the burden of growth, while several other lag in terms of GDP growth and development parameters.

The average decadal GDP growth figures show that unexpected states such as Bihar and Orissa, historically notorious for poor growth, have exhibited a sustained GDP growth rate. Bihar, specifically, is notable for exhibiting a remarkable decadal growth rate of 10.83% while contributing on a modest population base. Bihar accounts for 8.1% to the country’s population, as seen in the accompanying graph.

Meanwhile, states such as Maharashtra , Goa, Punjab and Tamil Nadu, that are known for their higher levels of industrialisation, human development or agricultural prosperity seem to have slowed in terms of GDP growth over the past decade.

Size does matter

A large size of population appears to be a burden on the economy of states such as Uttar Pradesh, Rajasthan, West Bengal and Madhya Pradesh. These states are also usually characterised by low per capita income and higher disparities. Large population size is a major factor, among several others, that is dragging down the economic growth of relatively affluent states like Maharashtra, Karnataka and Tamil Nadu. Yet, a few states such as Bihar, Andhra Pradesh and Gujarat with large populations are exhibiting high GDP growth.

No burden on economic growth

Sixteen states in India have a GDP growth higher than the national average. Of these, ten states show a population growth rate higher than the national average , while six other states have a population growth rate lower than the national average.

Population growth, considered a burden to economic growth, seems to have little correlation with GDP growth (correlation = 0.24). Large states such as Bihar, for instance, have showed sustained GDP growth over the decade along with a steadily rising population, whereas states such as Punjab and Manipur with slower population increase are showing GDP growth rates that are lower than the national average.

Kensaku Konishi

The interview was published in Outlook Business in the issue dated November 13, 2010. Download PDF

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Competitiveness can exist at various levels. Even the rural economy can be a fertile ground for productivity and innovation. Take the case of the milk clusters in Punjab and leather clusters in Agra or Chennai. They are not the function of a town or a city but the work of villages coming together to specialise in an age-old skill, and to leverage the benefits of their superior workmanship on a large scale. According to the India State Competitiveness Report, Maharashtra is one of the most competitive regions in the country. It boasts of a number of urban agglomerations like Mumbai, Nasik and Aurangabad. States like Maharashtra, Gujarat, Haryana and Punjab are characterised by high per-capita GDPs and high levels of competitiveness.

The urban agglomerations in these states drive their growth. Cities offer leadership to the state as a whole, and their presence is more than just a motivating factor for growth and competitiveness. Hence, it is crucial for policy makers to target competitiveness at each of the geographical strata so that these areas attain robust economic growth. The influence of rural areas reflects in city- and state-level competitiveness, finally manifesting at the national level. To understand competitiveness and to instil the dictums of productivity in any nation, policy makers must understand that competitiveness is built bottom up. Hence, village-level competitiveness reflects on districts and cities. Cities fuel growth in states, which eventually drive national competitiveness.

Leadership Links Value Chains

In this chain of competitiveness, leadership must emerge at every geographic stratum to fully measure the importance of a coordinated effort for the nation as a whole and a region as a part. Just like anti-trust laws at the national level, regional-level tax policies can also have an impact on the growth of a region as a business destination. Similarly, while capital market conditions may decide the direction of investment flow, local education systems and training centres determine the return on these investments. Autonomous bodies are set up to take strategic decisions at village, city or state levels but they are not sufficient to transform a country’s competitiveness to match global standards.

Value chains across geographical strata must align with each other to give the economy a competitive advantage as a whole. They exist at the local, regional, national and global levels. Integration of value chains across different levels allows productivity of the economy to increase from the bottom up. Hence, policy decisions need to keep a larger picture in mind. New York, London, Tokyo and Seoul are just small regions in the countries where they are located. However, they created a unique positioning for themselves on a global scale. The competitive advantage created by these cities for their countries generated a gigantic impetus for the development of these nations as a whole.

The interplay of the public and the private sectors will have a big impact on business strategy and environment. It would be unfair to leave leadership to the government alone. Look at Nestle’s experience in Punjab. The company built a productive milk cluster in Moga, buying milk from more than 75,000 farmers through 650 local dairies. It established milk purchasing organisations in each town to create a collection and processing infrastructure, educated farmers on hygiene and animal health, and provided other facilities to create a milk cluster. The whole initiative brought prosperity to the regions in and around Moga.

The government and other local bodies are facilitators. The onus of actual formulation and implementation of strategy falls on the private players. This chain of competitiveness and leadership begins at the individual level and leads from the firm to the industry at the macro level. Leadership of the individual determines whether the region will become an IT hub or a base for agricultural processing. These decisions determine the operations at the firm level, and hence, an industry is formed. Leadership at the individual, firm and industry levels will determine the competitiveness of the business environment.

The two chains, individual-to-industry and village-to-country, exist simultaneously. Good leadership merges the chains to create a synthesis of value and growth. For example, the present context demands an active role from the facilitator in the process of development by directly aiding the private sector reach for growth and prosperity. Companies can operate efficiently subject to a supportive environment. The social, political and legal context has to be in alignment with the technology of the firms. Hence, competitiveness of the economy can be sustained only when the public and private sector align towards a common goal.

It would be misleading to assume only large industries are competitive. Local industries should also be given opportunities to create a competitive base as they serve local markets. Typically, smaller industries are known for innovations, while the onus of income and employment growth falls on larger firms. Bangalore changed the way Indian professionals were seen but the harbingers of change were not the multinationals, but small firms.

At the same time, one cannot ignore the contribution of companies like Tata, Reliance and Godrej, and their collective contribution to income and growth in India. Corporate leadership must emerge to create unique propositions and value-generating businesses. Regions must be leveraged for their resources and location to create a differential advantage for the people and the firm.

To conclude, it is baseless to assume that competitiveness emanates from the most efficient or the largest. Competitiveness is a collective testimony to the efforts of various public and private players from the lowest levels to the highest. Productivity is making the most of available resources at every level, competing in the most economically intelligent manner. Every region is a cog in the national wheel, and poor productivity from one will slow down the nation in its race to become competitive globally.

The Article was published in Outlook Business on May 29,2010. Download PDF

Tell us about the concept of ‘liveability’.

Liveability is about how people actually engage themselves with the city they live in. It’s a personal construct, but can be measured by looking at different aspects, like infrastructure, planned environment, work opportunities, demographics, economic environment, socio cultural milieu, housing options, safety and many others. It has to do with answering questions like ‘can I live here happily with my family’? This goes beyond quality of life.

We looked at various studies, especially two studies done by Mercer and The Economist. We found that they were typically looking at 2-3 Indian cities, usually Mumbai and Delhi. We felt we needed to benchmark Indian cities (the study covers 37), as a way to understand what is right or wrong with them, and then to figure out how to improve them. A study like this would help people who are working in governance structures and has huge policy implications. At both CII and the Institute for Competitiveness, we felt we can contribute something significant with such a study.

How does the report compare with similar international surveys?

One major difference is that we’re looking at hard data and not perceptions. Most quality-of-life studies are too dependent on perceptions. If I am born in a city, I like it no matter what and I am biased. We felt we needed to do away with this bias. We looked at hard, published government data. For example, for safety, we looked at the number of accidents, crime incidents reported, etc.

In the West, reports such as these are often used to take decisions about relocating at a personal level. Also, from a foreign investment perspective, does a study like this go on to become a location selector for foreign companies?

Yes, at a personal level, it may be aspirational to locate to a city that figures high on the Liveability Index. For companies, however, there is a need to go beyond liveability. Competitiveness is a far deeper construct, built further on liveability. Every business has to analyse its needs and find a location where they are most competitive and answer questions like ‘What location is going to give me the chance of becoming more productive?’ or ‘For every dollar that I invest, what is the return I am getting?’. We talk about four factors—demand conditions, supply and support factors, local context and competition, and access to high quality business inputs—formally known as Porter’s Diamond model for our analysis to help companies take location decisions. It’s a very well grounded and quick process.

The report identifies urban policy and infrastructure as main problem areas. How do we bridge the gaps there?

We should look at the urban design function in cities quite closely. Issues like crowding and accessibility need to be looked at. We have to make people move towards public transport. The city has to get public-private models that are comfortable. We need to find smart ways of solving existing problems, using technology for example. We need to talk about issues like walkability, for instance, as a part of integrated transport. Right now, there is some hope, as local and state governments are becoming more aware.
The Institute for Competitiveness is involved in projects where urban transportation is being looked at to build integrated mobility and transportation mechanisms. We’re organising the Asia Competitiveness Forum later this month, where we have 50-60 transportation experts coming in to talk about transport and solving problems specific to mobility.

What can city-level governments do with the information from your report? How responsive is the government to suggestions and criticism on urban governance, infrastructure and other issues?

This varies from city to city. Some cities in India are listening, there are public-private partnerships happening. In Chennai, there is something called City Connect, where the city and private sector are working on specific projects. On the other hand, there are cities that will say ‘we’re great on quality of life and we don’t want to accept the report’. You can’t do that. You have to constantly analyse the situation and work at improving it. Mindsets need to change to create more liveable cities. The challenge is to create societies that are more inclusive.
Looking at it from a company’s perspective, a poorly planned urban area means a huge productivity loss. As the total number of hours one spends on the roads increases, one keeps losing productivity. Governments and cities need to look at that.

You also speak about the branding of cities. What is the merit in that? How would you brand some of the cities in India?

Cities in India are competing for the same business against each other and against cities in Malaysia, Indonesia, Vietnam, etc. Cities need not all pursue the same focus. There is a need to discover what is the uniqueness for my city.
In India right now, we’re all getting a bit obsessed with IT. Chandigarh, Trivandrum, Pune and many others want to become IT hubs. Why is that necessary? Everyone thinks IT is productive. But productivity can happen in any business. Similarly, there is nothing called a hi-tech industry—every industry can be innovative and hi-tech.
Every city has its own selling point. In my view, Delhi is about business and connecting with the government. Mumbai is for finance, Bangalore and Hyderabad are IT, Pune can be a great education hub. Every city cannot be everything, nor can every city be a BPO or IT hub.
We are being short sighted by not understanding that we can create new centres. Right now, we’re looking at a city that’s doing well and trying to get every industry into that place. There are many examples to look at. Las Vegas created so much prosperity in the middle of the desert. Boston creates immense productivity and value out of being a town focused on education and research. Similarly, the Netherlands became a hub for the flower industry using its logistics expertise. So why can’t we look at things like that?
State governments should look at their cities and look at what they can do with each city in it. Governments have, more and more, started looking at these aspects and chief ministers are increasingly seeing themselves as CEOs. So I see that we are poised for change.

The interview was published on the IndoDutchconnect on April 7, 2010. Download PDF

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The article was published in Images Special Report on “Malls of India” on September 14, 2009. Download PDF

India, USA and UK are comprised of different states with different resource and market conditions. Of the 50 US states, only 20 percent can boast of a per capita GDP greater than the national average of $45,845. Delaware has a per capita of close to $60,000 while a Mississippi is a little above $20,000. These regions display the highest and the lowest growth rates, respectively. The regions in UK (average per capita GDP US $45,574) demonstrate a similar pattern with South East UK at the pinnacle of growth (above 5.5 per cent) while North East lags behind at less than 4.25 per cent. The conclusion is simple: States in the same country follow a variant growth trajectory due to the difference in their resources and policy status.

Similarly India is sub-divided into 29 states differing in terms of their productive potential and the type of industry they can support. The actualization of their potential holds the key to increasing the competitiveness of the nation as a whole. Sub-national regions are the locus of important determinants of competitiveness for the nation. The potential of the states drives the diversified competency of the nation where regional specialization provides the impetus for growth of the nation. The secret of growth of USA and UK lies in relegating the economic roles to the appropriate levels of the geographical strata.

India is still reeling under the influence of concentrated economic activity. The national average per capita GDP is $977.7 but Goa is above $1500 while Bihar is closer to $200. However, the similarity ends here. Unlike USA and UK, the pattern of most states tends to display a proclivity towards similar industries. Certain states benefited from first-mover advantage and the others imitated the policy and structure to induce similar growth rates–irrespective of the location and its inherent competencies.

India needs to be perceived as an amalgamation of resources and competencies spread across its states. Businesses and companies need to adjudge investment opportunities through the lens of the competencies offered by the states. India needs to build on its competitiveness banking on the specialization proffered by each region and develop the infrastructure and policies to support that industry. It’s time for all the Indian states to realize their roles in the development of the industrial base in the country and take a productive initiative in this race for competitiveness.

The Article was published in Harvard Business Review Blog on June 2, 2009.

The Article was published in Money life on April 23,2009. Download PDF

But here’s the rub: Low-cost labor does not provide sustainable competitive advantage to the nation as it is always in a precarious position and in danger of being overtaken by another low-cost provider of human capital. In the long run, it is the innovative capacity and capability that will create sustainable competitive advantage.

Today India faces a choice: it can learn and start the growth process or stunt it with its denial. India needs to understand what its real competitiveness is today, whether it is sustainable and in the long run and how would it create conditions for creating sustainable wealth and prosperity for its citizens. The concept of competitiveness serves as a useful guide for the country here.

Looking at the concept of competitiveness we fundamentally know that it is about productivity– the returns we get per dollar invested. Looking at the concept of competitiveness, we see that successful economic development is a process of successive upgrading, in which the nation’s business environment evolves to support firms’ increasingly sophisticated and productive ways of competing. Nations evolve through various stages of competitive development.

Innovation in all likelihood increases trade, helps maintain market share, improves processes and creates high-quality products. India is clearly lagging behind in producing products efficiently. Only by taking a long-term orientation and outlook will India see a true opportunity to change its path– not by continuing the current policy initiatives that are incomplete and in bursts.

Recession or not, India will have to move ahead, wake up and take action if it is to continue the momentum it has earned in the last 10 years. In the future, it will have to focus more on manufacturing and innovation. These are the sectors that would provide employment and appropriate usage of the talent and educated labor pool already available in the country.

The Article was published on the Harvard Business Review Blog on April 6, 2009.

Michael E Porter

The interview was published in Outlook Business in the issue dated October 4, 2008.

India is an interesting case in the light of the above reflections primarily because the country is fundamentally a factor-driven economy. A factor-driven economy is one whose competitiveness is primarily its low-cost labour and exports. One of the unique features of firms operating within factor-driven economies is that they produce products that are designed and conceptualised in advanced countries. The strategy at the generic level for firms is to compete at the international level by providing significant price advantages. In addition, firms focus on labour-intensive manufacturing and processes. An economy at this stage of development is sensitive to global business cycles and, most importantly, exchange rate fluctuations.

India is a clear case of low-cost labour that is available in the fields of IT and KPO. The success of firms within these sectors is significant; but it should be noted that the firms operate at the low end of the value chain. This is reflected in the spate of recent changes that IT companies are making to their work culture. These changes range from longer working hours per day, six working days per week and reduction in the percentage of salary hikes. The impact has created a situation where the employees have to slog out for 10 to 11 hours per day.

It is easy to understand these drastic changes when we know that these firms are working with a billing rate that is close to $20 per hour. With a sudden spike in the rupee, the operating margins have drastically reduced by around 14 per cent in the last year alone. The depreciating dollar has a huge impact on the sector as Indian IT and KPO sectors are overly dependent upon contracts from the US. The situation is further deteriorated by the increase in transportation costs and rentals.

It seems that India today sits on the possibility of contracting the Dutch Disease: in this situation, a rapid and significant contraction happens within the traded goods sector due to the real appreciation of the currency. It is also a situation where there is a large inflow of foreign currency along with sharp spikes in the prices of natural resources. In the Indian context, the natural resource is primarily cheap labour that is readily available and the traded goods are the deliverables of the IT and KPO companies. India’s growth story is coterminous with the rise of the services sector that shifted gears to a high growth momentum in the year 2001. The rupee in the last year has appreciated by 14 per cent, shaving off a huge portion of the operating margins of export-focused service companies. We expect the trend of an appreciating rupee to continue and this can have a significant impact on the status of India as a low-cost destination for outsourcing. An appreciating rupee over the next few years would have an impact on the strategies firms adopt and the trade in services that happens within the country. There is an imminent danger of foreign companies shifting work to other emerging locations that are willing to provide low-cost labour and other cost advantages.

The challenge that the Indian economy faces today is not that of an economic bubble-burst but is primarily about moving on to the next growth trajectory and economic development. Going by the model proposed by Porter, India has to embark on a journey that would move the country to an investment-driven stage and sow the seeds for catapulting India to an innovation-driven economy. To become an investment-driven economy, India will have to significantly invest in infrastructure, improve the skill sets of its workforce and make better investments that translate into tangible productivity across the board. Only those firms that have the capability to improve technology and move higher up in the value chain would weather the demands of this stage.

India will have to definitely accelerate its reform processes and start working on making it an innovation-driven economy as these steps would determine whether the country would become a developed nation by the year 2020, a dream cherished by our former President A P J Abdul Kalam. As a nation, we would have to start working on building the ability to produce innovative products and services that would match the best in the business of global technology. The focus should be on building processes that would be driven by innovation; this would make the economy resistant to external shocks, vagaries of economic cycles and currency fluctuations.

The bottom line is that our policies should concentrate on enhancing our capability in manufacturing, promote entrepreneurship, and provide incentives for innovation. Last but not the least, if economic growth has to be sustained, the authorities should facilitate infrastructural expansions.

The Article was published in Business Standard on August 12, 2007. Download PDF