India: Toward High-End Outsourcing: Vivek Wadhwa in Business Week claims that “companies on the Subcontinent (are taking) the outsourcing industry to a new level of expertise and competitiveness”. Well, with the rupee’s recent fall, presumably even low-end outsourcing is very attractive :-)

The Rise Of Delhi: Suman Bery has an interesting piece in the Business Standard on “the increasing range and intensity of accessible, close to world-class public discourse on issues of public policy on a very broad range of subjects” in Delhi. I suspect that this trend may well accelerate. I certainly don’t see anything remotely close to this in Chennai (during my quarterly visits).

The blogs that barked: How the blogosphere outed the Stanford fraud (in the US and in the Caribbean) before the SEC or mainstream media did. Question for readers: are there any instances of bloggers outing corporate or government fraud in India before the regulators or mainstream media?

If you’re a whistleblower in India and disillusioned by the lack of checks and punitive action, Harry Markopolos’s travails in his attempt to unmask the Madoff Ponzi scheme might sound familiar

Here’s an earlier IEB post on Wadhwa’s research — Don’t Try Kicking Sand In America’s Face.

On another note, Sunita Narain’s at it again — after colas, now it’s edible oils. (HT: Amit Varma, via email)

Here is the full text of Satyam CEO Ramalinga Raju’s resignation letter

Reactions/ comments?

Professor Kaushik Basu of the Cornell University believes that the rise of the rupee against the dollar is inevitable in the mid-term. He also believes that the sudden collapse of the dollar is unlikely but there is not much that India can do to alter the current dynamics of exchange rates.

In recent days the rupee-dollar exchange rate has been, on average, Rs 39.3 per dollar. A year ago it was 44.7. This means that the rupee has appreciated against the dollar by 13.7% in the last year.

A gentle depreciation of the US dollar over the medium term seems to be unavoidable, given America’s over-spending. The big risk for India and the world is a sudden collapse of the dollar. This is unlikely, since a dollar meltdown is against the interest of all major players, but not impossible. It needs to be understood that the source of the rupee appreciation is, largely, outside of India. Over the last year virtually all major currencies have been appreciating vis-à-vis the US dollar. The euro rose by 14.7%, the pound by 10.4%; the Canadian dollar by 23%, Sweden’s kroner by 13.7% – the same as the Indian rupee. Vis-a-vis all major currencies, outside of the US dollar, the rupee has changed very little. The exception is China. Its currency has appreciated but only by 5.7%. China has a different strategy. It wants to keep up a sustained subsidy to its exporters and continue to build up dollar reserves. This is costly but it gives China muscle against the US. [HT]

This is not very good news for Indian IT firms, whose revenues are generated in dollars and costs are denominated in rupees. The fear of a slowdown in growth and profits has led the IT companies to employ complex hedging strategies against a weakening dollar. Prior to taking over as the Dean of Singapore’s Nanyang Business School a few months back, Jitendra V. Singh (then with the Wharton’s management department) had argued that Indian firms should use the rupee’s strength to their advantage by adapting their business models in innovative ways, much as Japan’s automakers did during the 1980s.

I believe there is a strong parallel here from which Indian companies – especially, though not solely, the IT firms – can learn some important lessons. If Indian companies compete mainly on cost arbitrage, they will find that as their costs rise because of the stronger rupee, they will increasingly become less profitable. Of course, it is also the case that, as the rupee appreciates, net margins at some companies erode more than at other firms. Specifically, if Indian IT companies compete as low-cost providers of IT services, their competitive advantage will erode in a regime of rupee strengthening.

Instead, Indian firms should take advantage of this opportunity to adapt their business models. How can they do that? While the details of the two industries are quite different, the Japanese automobile industry can suggest some answers. Consider what leading Japanese firms like Toyota did as the yen strengthened against the dollar. For product lines where they made the highest margins, such as the Lexus, they continued production in Japan. However, for lower-priced models — where their profit margins were lower and would have been eroded further by the rising yen — they moved production to the U.S. They protected their margins on non-premium products by moving production — and therefore shifting costs — into dollar-denominated areas. They also reduced their vulnerability to further appreciation of the yen.

You may remember that during the 1980s, Japanese auto makers were facing a protectionist backlash in the U.S., and they were subjected to import quotas. Their strategy of moving production of lower-priced/lower-profit cars into the U.S. paid off in a couple of different ways. First, they were able to shift yen-denominated costs into dollars. Second, this was a quite savvy political move, because although these companies continued to gain market share in the U.S., there was little pressure to shut down their plants. Doing so would have meant a loss of American jobs.

I believe Indian companies should take a similar approach in response to this recent rising rupee regime. They need to consider how to adapt their business models. To the extent that they compete primarily on cost arbitrage, the rising rupee will work against them. One key question to ask is how to develop other sources of competitive advantage, such as building high-level capabilities which cannot easily be replicated by competitors, or how to change the mix of activities carried out in India versus other countries. Of course, in order to do this, they will have to change their mindset: They will have to stop thinking of themselves as Indian companies and think more like global companies of Indian origin. They will need to analyze their portfolio of costs and move production to where it makes the most economic sense. Notably, Indian IT firms are trying to address rising wage costs by moving production within India to lower cost regions — Eastern India (Kolkata, Bhubaneshwar) and to Tier II and Tier III towns. However, this will only offset a rising rupee to a limited extent, since the costs will still be in rupees. [IK@W]

This prescription may hold good for Indian IT companies and these companies would surely be considering taking the suggested route. However if the IT companies follow this advise blindly, it will have grave implications for the overall health of the Indian economic landscape. It helps to recount the happenings in Japan during that period -

But, by the late 1980s, the exporters found it harder to bear the burden. They were caught in a squeeze between high costs at home and a rising yen, which made it harder to pass on those costs in export markets. As a result, more and more of the efficient exporters were being driven overseas. They were investing in offshore markets rather than in Japan itself. Step by step, Japan’s efficient export sectors were being “hollowed out.” As this happened, the productivity of the entire economy started being dragged down to the level of the stagnant sectors.

…At the end of 1989, when Japan’s “bubble economy” was at its height, the country felt on top of the world. The crippling heart attack was but a few months away, but Japan felt stronger than ever. [BW]

India growth model has to focus on generating suitable employment for its large population. If the efficient sectors of the economy move out and only the inefficient sectors remain in the country, the employment inclusive growth plummets. It has serious social and political implications in a democratic society. In a sense, individual companies would progress but that growth would be at the cost of country’s economic well-being. It is nobody’s case that this movement of firms should be legislated against; such policy prescriptions are unviable, if not unthinkable, in today’s ‘flat world’ and damaging in the long run.

For other Indian exporters, such as from the manufacturing sector, of leather products and clothes, or of commercial produce like tea and coffee, who are in direct competition with other Asian countries (mainly China), this is not even an option. They will continue to seek RBI intervention to keep the rupee competitive against the dollar, and peg the rupee vis-a-vis the yuan. Notwithstanding the difficulties involved in managing the rupee-dollar rate, there is no option for the government but to manage the rates in the short to medium term. This will indirectly benefit the Indian IT companies as well; some of them may even defer the implementation of their long-term plans to their own detriment.

But the appeal of China as a manufacturing hub and a huge new market is not universally shared among Japanese businesses. Some companies are moving operations to other countries instead, and others are keeping business back home. Japanese companies poured $4.5 billion into China in 2006—a 30% drop from the $6.5 billion invested in 2005, according to China’s Ministry of Commerce.
Even for Japanese firms that are investing overseas, surveys show a shift away from China in favour of other Asian countries. In 2004 around 86% of Japanese firms planned to expand in China; last year the figure dropped to 77%, and 2% said they were actually scaling back their Chinese operations. In another survey, which asked Japanese firms to rate which countries they regarded as the best places to invest in the next three years, the proportion opting for China dropped from 91% in 2004 to 77% last year, while the appeal of Vietnam and India rose substantially (see chart). This is partly because China has become expensive compared with elsewhere in Asia. There is also concern over anti-Japanese sentiment. [The Economist]

SIR – So, Krishnan Ganesh, one of the proud products of India’s higher-education system, is busy developing tools to help improve the quality of primary education in America by outsourcing teaching over the internet (Face value, June 23rd). Meanwhile, precious little is done to remedy the neglect of primary education in Mr Ganesh’s home country. The commitment of India’s elite towards primary education, especially in rural areas, is bordering on scandalous neglect; funding goes towards supporting tertiary education at the expense of millions of poor children. [The Economist/Unedited Version]

It is understandable that people like Mr Reddy should express simplistic opinions. However, it is rather surprising that the editors of The Economist considered it worthy of print.

Here’s something for Mr Reddys of the world. India exports software engineers, while large parts of its government have primitive (or non-existent) computer systems. India exports doctors and nurses, that, given the dismal state of its public healthcare system should be very troubling. India exports workers who build roads and highways in other countries, while its own roads are pathetic. India exports cars, yet so many of its people walk, take the bus or ride relatively risky two-wheelers. India exports pharmaceutical drugs, while so many of its citizens suffer due to their inability to access them. India exports food products, while so many of its citizens go hungry every day.

It turns out that ‘scandalous neglect’ extends to everything from software engineers to road workers, from cars to essential drugs. But why does India export doctors, nurses, teachers and road workers despite their obvious need back home? Well, because they fetch a better price abroad. The harsh reality of globalisation—and you would expect The Economist to know this—is that unless India offers comparative wages and living conditions, those who can export themselves will do so. [See Becker & Posner on the international market for talent]

In a free country, neither the government nor the civil society elite which Mr Reddy blames can correct their ‘scandalous neglect’ of public services by stopping people from leaving. So what are they to do? Well, increases their wages until the marginal emigrant decides to stay. That leads us to the next question—how will Indian society find the money for this? Among other things, by selling goods and services for the best price. Which means, well, exporting software, cars, drugs—and yes, tuitions. Globalisation offers India an opportunity to pay for the modernisation of its public services. [See an interesting article by Mukul Asher and Amarendu Nandy in the In-Depth section of the June issue of Pragati. They argue that communities with a lot of out-migration must use remittance incomes wisely.]

So providing tuition or healthcare to global markets per se can’t be held responsible for the scandalous neglect of primary education. But there is, however, a scandalous neglect of primary education on the part of the government. The wealthy and the middle class don’t care as they can afford private schooling. The political class buys the poor off with promises of quotas in higher education and in jobs. Atanu Dey frequently writes of ways how these might be addressed. But blaming outsourcing is not one of them.

Advocates for Indian family businesses claim that they can teach a thing or two to the rest of the world, both about family values and about running a business. But family values are not unique to Indians. And family businesses have disadvantages which come from having to put trust over competence. It is interesting to speculate over why there isn’t an Indian Taco Bell—a chain of Indian franchises offering standardised Indian food abroad. Is it because running a franchise model requires the ablility to manage control through arms-length contractual relationships—something that Indians, relying too much on trust-based relationships, are unable to do? Or is it just a matter of time before we have a completely different kind of franchising model, one which relies on all the franchisees being, say, Patels? What will be the impact of the often caste and clan-based cliques that exist in Indian family businesses – especially in the top management- on a world that expects meritocratic hiring?

Increasingly, the rest of the world’s relationship with India will move beyond buying things or getting services performed by them to working for Indians as employees and vendors. To the extent that market transactions involve hierarchy, Indians will increasingly move from playing a subordinate to peer and superior roles. How will this transition play out? We don’t know yet. Countries, as much as people, show their true character when they gain power, and in that sense, India’s true character is yet to be revealed. [Ravikiran Rao/Pragati]

Also in this issue, you will find Salil Tripathi’s argument for global Indian news channels, extracts from Niranjan Rajadhyaksha’s new book, ‘The Rise of India‘, and Chandrahas Choudhury’s review of Discordant Democrats.

(This post is not complete without the lodging of a strong protest against Ravikiran Rao calling himself a lapsed blogger. In the land of Amitabh Bachchan, Chandu Borde and Sivaji – The Boss, such lapses are unacceptable)

I’m a free trader down to my toes. Always have been. Yet lately, I’m being treated as a heretic by many of my fellow economists. Why? Because I have stuck my neck out and predicted that the offshoring of service jobs from rich countries such as the United States to poor countries such as India may pose major problems for tens of millions of American workers over the coming decades. In fact, I think offshoring may be the biggest political issue in economics for a generation.

It’s a strange article considering that he does know his economics. Surely he knows that trade is good. International trade is also good, subject to some very well-understood conditions. He understands Adam Smith and David Ricardo well enough to write econ textbooks and is a professor at Princeton.

I think it is easy to see that with the rapid fall in the cost of transporting bits, many non-tradeables have become tradeables. All services that are potentially digitizable have become tradeable. When trade is opened up among two economies, both economies do gain from increased specialization but every sector in both the economies don’t gain. The sector which is import-competing loses and the sector which is exporting wins. Nothing unheard of and unexplained about that. Sure, to protect the interests of those who hurt, you could use trade protection. But that is more costly than to compensate the workers of the import-competing sector.

Blinder agrees that trade protection is not the answer.

Trade protection won’t work. You can’t block electrons from crossing national borders. Because U.S. labor cannot compete on price, we must reemphasize the things that have kept us on top of the economic food chain for so long: technology, innovation, entrepreneurship, adaptability and the like. That means more science and engineering, more spending on R&D, keeping our capital markets big and vibrant, and not letting ourselves get locked into “sunset” industries.

Blinder is wrong about blocking electrons: it is quite possible to block them from crossing national boundaries. It is technically possible and is often done for political reasons. But I agree that the US needs to do more than just try to outlaw offshoring. All in all, a fairy disappointing article. Blinder was just having a bad economics day perhaps.

The 2007 ICT Opportunity Index, the ITU explains, “has benefited from the expertise of several international and research organizations, (and) is based on a carefully selected list of indicators and methodology. It is an important tool to track the digital divide by measuring the relative difference in ICT Opportunity levels among economies and over time.”

It’s the result of some clever analytical effort:

The 2007 ICT-OI, which is the result of the merger of the ITU’s Digital Access Index (DAI) and Orbicom’s Monitoring the Digital Divide/Infostate conceptual framework has been modified since it was last published in 2005. It is an excellent example for successful international cooperation and partnership work and follows the explicit recommendation of the WSIS Plan of Action, paragraph 28, to “…develop and launch a composite ICT Development (Digital Opportunity) Index” to combine statistical indicators with analytical work on policies and their implementation. [ITU]

It does all this and comes to the conclusion that Zimbabwe, Namibia and Kyrgyzstan, among others, offer higher ICT opportunities than India. (via LIRNE Asia)

Let’s say that this conclusion is methodologically sound. What’s it good for?