In support of competition

Perhaps, I shouldn’t write this piece.  Perhaps, I should be mindful of some authoritarian voices from the ruling party and take it as indication that even the semblance of dissent may not go down too well.  So let me preface what I am about to write with a declaration up front:  I voted for the NDA in this election.  Yes, I did.  So do not rush to call me a cangi or aap-tard or whatever just because you do not like what I said.  I request that if you happened to chance across this blog, please keep your cool and give me a patient hearing.  Don’t shoot the messenger.

I am not writing this essay to complain about the price of onions or tomatoes or the rail fare hike.  If anything, I believe the government should not have rolled back the change in formula for season ticket fares as it was not the right signal expected of a government promising bitter medicine before the deliverance of ‘acche din’.  I am concerned about the stand India has taken at the WTO but this is not to complain about that stance either.

In fact, rather than a complaint, I have a question, a simple and genuine question:  what is the government’s overall commitment to accepting competition in the marketplace?  I’d really like to know the answer to this.  And if they are ambivalent on it, I would like to know the reason why.  Actually, this is a question that I feel a lot of Indians need to start asking right now and it is a very pertinent question on which the very future of the country, more specifically the economy, hinges.

In the meantime, I would like to address the ambivalence of those who feel they do not have a clear stand on this issue or do not even consider it important.  I believe some of this ambivalence comes from not experiencing much of the world outside.  There is, at one level, no need to do so as we live in a vast country with enough opportunities to make a living for plenty of able hands.  But at another level, India is only a blip on the international radar.  Indian products compete with those from many other countries for a share of the world trade pie.  India vies with other countries for resources.  Hence, it is time we got out of our cocoon and thought deeply about where we stand and what we need to do to improve the situation.

So, to this end, let me cite some basic numbers from a trip to the USA that I made only a few months back.  I visited Chicago, New York City and Niagara.  All dollar-Re conversion at an assumed rate of 1$ = Rs.60.

Cost of petrol in Illinois state: Roughly $3.95 per gallon.  i.e. Roughly Rs.63 per litre.

Cost of petrol in Mumbai is roughly Rs.80 with taxes.

Cost of an unlimited Indian buffet meal in a well furnished restaurant near Central Park in Manhattan, NY.  Roughly $10 per head, i.e. Rs.600.

Cost of a meal for two at Copper Chimney, Mumbai according to various websites:  Rs.1300.

Cost of a pizza with custom toppings at a classy bar cum grill attached to Quality chain of hotels at Niagara: $8, i.e. Rs.480.

Cost of a pizza at Le Cafe in a mall in Ghatkopar suburb:  from Rs.375 to Rs.475.

Per square feet rate for a fully furnished 3BHK beautiful independent home in Woodridge suburb of Chicago:  Rs. 9600.

Per square feet rate for a flat in Vashi:  at least Rs.10000 if not more.

I could go on and on but I will stop here as this is enough to illustrate my point.  Rampant inflation over the years has narrowed the gap in cost of living between the USA, the most powerful nation in the world, and India to a dangerous extent.  Through the 90s and noughties, India leveraged its low cost conditions to attract investment in various manufacturing and services enterprises.  That arbitrage, I am afraid, is almost completely wiped out.

The only remaining arbitrage we have is the cost of labour.  People still get paid less here than in advanced nations like the USA.  That, for the time being, allows our economy to survive and carry on but not much more.  You have heard about Indian companies feeling more confident about investing in ventures abroad rather than India.  You also know that you have received measly, if any, hikes in pay for the last couple or so years.  Now consider all that I have said above and ask yourself whether the reason for that is what the media tries to feed you or something else.  In a nutshell, if companies raised wages steeply, even the last lever of arbitrage will be gone and India will be a lousy place to do business.  A year back or so, the Chairman of Bharat Forge, Baba Kalyani, also said something very close to my comparison of costs in USA and India; I wonder how many read that interview though as it did not seem to provoke as much debate and discussion as it should have.

What could possibly resolve the situation?  In the short term, India will need to steeply reduce inflation.  I was sharing my experiences in USA with a family friend who has been there several times.  He told me that the price he paid for various kinds of meals (Indian/Chinese/American) in USA in 1994, the first time he visited the nation, was almost the same as what he did this year.  And I could attest to that as the prices he quoted were close to, if not the same as, what I mentioned above.  India cannot retain a competitive edge of any kind for very long as long as it allows the inflation monster to run amok.  Please do not listen to anyone who says RBI is too inflexible on the issue of inflation and ought to lower interest rates ASAP.  If anything, they have not applied enough of a squeeze and a tighter and harsher squeeze would have brought the rate of inflation down sooner.  Even now the base interest rate of RBI is lower than the rate of consumer inflation, that’s how benevolent they are.

But we have seen a bout of inflation creep up every time the economy grows at a good pace for a few years at a stretch.  This means there are serious supply constraints in the economy and growth runs up against this wall too quickly for sustained high economic growth.  And it is here that I come to the subject mentioned in the title:  competition.  The best way to free India from supply side constraints would be to liberate competition from the shackles of bureaucracy.  Please note that I used the word bureaucracy and not regulation.  I do not advocate completely unfettered competition, at least not as a starting point.  It is important that any impetus to economic growth is based on sound foundations that eventually raise the quality of life for the citizens of the nation.

However, it is no secret that the real hurdle to competition is the bureaucracy.  There is talk of increasing FDI in certain sectors and divesting govt holding of shares in some PSUs.  But these do not yet address the root cause of our problems.  We run up against the wall of constrained supply too soon because we tie up business in undesirable bureaucratic knots.  I shall not get into the sordid details here but anybody who has attempted to obtain registrations to start a business knows how costly and time consuming it is.  Please tell me:  how can a first time entrepreneur with limited resources even get a foothold in the race if he has to pay through his nose and wait for months together just to be allowed to start operations?  So, out of exasperation, he indulges in corrupt practices and speeds up the process.  And from that point on, he is part of the unholy business-govt nexus that holds up corruption as an important and difficult barrier to entry for competition.  He who has not sinned alone shall cast the first stone and so we have a perfectly logical, if sickening, explanation for the business community’s tolerance of corruption.

The Aam Aadmi Party argued in the direction of a third party, independent and (supposedly) incorruptible ombudsman to solve all problems.  However, a (theoretically) easier solution would be to simply remove such artificial barriers to entry.  Govt may, to protect national interest, bar entry in some sectors as a matter of policy (though personally I am not very much in favour of such restrictions either) but why bar entry through procedural wrinkles?  And mind you, many of these procedural wrinkles are unofficial; they are not stated anywhere in the published rules or circulars of the govt which makes them even more frustrating to deal with.

But why do I stress this basic aspect so much?  Because it will facilitate more efficient use of capital.  And remember capital is costly in India.  As it is, a business has to pay a high rate of interest on borrowed funds.  On top of that, they have to factor in a longer gestation period just to account for bureaucratic delays.  By merely eliminating such simple but fundamental pain points, we could bring down the cost of capital and, eventually, the rate of inflation quite dramatically over a period of time.

You see what I am doing here.  I am not making a case based on principles because I know it’s a futile cause.  I know the lowest common denominator of everything today is money.  And it is in the interest of the wealthy and powerful of India, be they in the political or the business class, that they wake up and smell the coffee.  The old ways of doing things will not work anymore.  We have over a period of time been forced to integrate more and more with the international market and so are no longer immune, if we ever were, to international developments.  Whether we like it or not, we are locked in a never ending race with other exporting nations and if we don’t keep up, we will have to shut shop.  And if we shut shop, all the property owned by the wealthy will drastically lose its value.  All the money, held in black or white, will become practically worthless in the face of runaway inflation.  And all demand will collapse, leaving no worthwhile business opportunities in its wake.  I may be exaggerating but only a bit and besides it is necessary to indulge in it slightly to get across the point.

Therefore, it well serves the political and business class’s own self interest that they stop charging a prohibitive gate pass for entry into the Indian economic system.  More competition will make the economy more dynamic and impress upon us the importance of time, something which we are far too elastic with.  It is standard practice in India to keep delaying decisions until it’s impossible to postpone them any further.  If we have to slay the inflation beast, this is the first habit that we need to get rid of for it is the cause of our many stalled or failed projects or of promising companies losing their way and becoming stagnant.  Not to worry, competition by itself will inspire fear of defeat to such an extent that owners and managers will have to become more nimble in the way they operate.

And it is here that I return to the question I asked of the ruling party.  It is important to embrace a pro-competition outlook as a conviction and a commitment, not merely as a “there’s no other alternative” path to get out of difficult external headwinds.  Perhaps the fatal flaw in our liberalisation thrust was that it was embraced only out of compulsion.  But liberalisation is not merely an idea whose time has come.  It is the only idea, it is the only way of life that exists.  For you can excuse yourself from running the race on the grounds of being weak and impoverished for some time but not all the time and not for eternity.  Eventually, if you don’t get up and hit the ground running, you will miss the bus.  India is very, very close to missing the bus.  If India misses the bus, BJP can forget all about its dreams of staying in power for years and years at a stretch.  If BJP wants to get re-elected, it must examine carefully what its outlook on fundamental economic issues are and formulate its course of action on said issues keeping in mind where India really stands, circa 2014, and not based on how it existed in some imagined view of ancient India. That India no longer exists.  The only India we have is the one we live in and continuing to disdain the importance of competition in making India a more robust and hardy economy is a surefire way to ensure this India will never get to the India of nationalist dreams.  And in case you want to insinuate that all that I said is anti-nationalist, please consider that a section of our freedom fighters also believed in the idea of India as a nation that embraced entrepreneurship and competition…. including one in whose name a towering memorial is proposed to be erected.

P.S:  You ask why did not I not write in directly to the PM especially since the new PM is refreshingly open to using new internet media for communication.  So, FYI, I did write in to the PMO in early-June with some practical suggestions on how to reduce the time required to start a business in India.  I was given a standard reply that it will be forwarded to the concerned department.  The budget has come and gone and I see no signs of it or anything somewhat in the spirit of what I had suggested being proposed, much less implemented, yet.  I am waiting but I hope I do not have to wait indefinitely.

P.P.S:  And the reason I said to not call me a cangi or AAP-tard is not because I hate those parties that much but simply because petty arguments over which party I support or don’t support will deflect from the topic, which, in my humble opinion, is far more serious than the question of political affiliation.

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