There is a lot of discussion in economic slowdown. Many industrial bodies including automobile manufacturers are pleading with the government for concessions and benefits citing lack of growth. Some people think that it is only a cyclical phenomenon. Others think it is structural. We discussed one reason - how rapidly lowering inflation stalls growth. But that is not the only reason. Another reason growth is sluggish is because older growth models are broken. India needs a new growth model. Various growth models have been tried over time and we have followed any. What are these and what we do we need to be successful?
Colonial Model: This model involved control over the supplier of raw material and the buyer. The coloniser was the intermediate processor and controlled wealth creation. To gain control over the value chain the colonial power used military force.
American Model: This model used innovation, capacity and competition to build wealth. It involved developing new products (light bulb), new methods of production (cars), scale (retail) and intense competition to create wealth. In essence, markets here are not controlled. The seed capital for the American industry came from being productive suppliers to colonial powers.
Post War European Model: This model is quite similar to the American one except that it uses borrowed external capital. It also relies upon expansion of trade across the world, but importantly, between American and Europe.
Japanese Model: This model used policy liberalisation, external capital and ideas but built upon it, first with lower costs and then with superior quality, to deliver competing products to expanding developed market. Japan had held its advantage by keep its domestic consumption in check. Two shocks pushed Japan towards innovation – end of US Dollar -Gold linkage in 1970s and the Plaza accord in 1985.
East Asian Model: This model followed the Japanese prototype but in later stages developed their advantage by using a devalued currency. The east-Asian crisis required the creation of dollar reserves which allowed them to keep their currencies low. They also benefitted from the US guarantee of being the policeman of the world.
China Model: This is the East Asian model on steroids –in overabundance. So much so that it may have broken the entire system. While East Asian growth was based on private enterprise, Chinese growth model was based on government trying to replicate that model on a very large scale and blistering speed. In many products China installed a capacity twice the global demand within just 20 years.
Older Growth Models Are Broken
During the 1970s and 1980s Japanese growth was going to cause large scale unemployment in the US because of its actions. But the American response almost pushed Japan to the brink. Treasury Secretary, John Connally, famously said, “Dollar is our currency but it is your problem”.
But China is way bigger than Japan. China broke the normal growth model by scale and speed. It did not allow the developed markets to adjust to the shifting of production centres. The Chinese investment-subsidy model hollowed out the middle class from the entire developed world except, may be, Germany. This time too, there will be a response -- possibly a global one. The trade war and the resulting protectionism are going to get worse.
Thus, India has to grow at a time when global growth is sluggish, globalization has plateaued and is likely to reverse. Countries will create barriers to protect domestic markets. India will have to fight for the global consumer, on unfavourable terms, with entrenched players. India will face stiff competition winning in the markets outside India.
There is a shortage of consumer demand globally. So, all the top global companies will look to gain from addressing the Indian demand. Within Indian markets too, there will be intense competition. India will not have any advantage except what naturally accrues to it.
Competitiveness Alone Will Drive Growth
The way to win in this environment is by competitiveness of an exceptional grade. Indian firms need to be super innovative, and create better products that the world wants to buy. Most of the Japanese iconic products – Walkman, Casio watches, Honda Accord, came in the face of American response to Japan’s rise.
The Chinese too want to follow that strategy. For example, Huawei phones are winning consumer appreciation for innovation in photography.
Indian firms must be super productive by having the best product at the lowest prices. Even today, our firms compete with products from China and across the world which tend to be cheaper despite high import costs. Indian firms need to win in this battle.
Indian firms should be able to scale rapidly when their product or service becomes successful. Firms should be able to procure global equipment, upgrade skills of the manpower and reach the market quickly.
Indian firms also need to be opportunistic. For example, we can leverage the global supply chain created by Amazon and allow our entrepreneurs to sell globally. We must also seek out firm relocating out of China in the light of trade tensions.
Building Competitive Firms Needs Support
Just to help small firms sell through Amazon we need to help them set up Amazon sellers’ page, identify the product trends and create marketing, advertising and outreach strategies. Access to risk capital would help firms scale up rapidly.
Thus, building competitiveness requires a network of practitioners, consultants, investors – in short, an ecosystem. While such talent and capital do exist in India, it is not organised effectively.
We have experts to help a bankrupt firm resolve its bankruptcy, but we do not have experts who can help the firm grow. Government should help create this mechanism with help from industry bodies. Institute of Management Consultants of India (IMCI) and such other bodies should be pushed to help Indian firms in building exceptional competitiveness.
The path for Indian enterprises is difficult but not impossible. The first step on this path is to understand and acknowledge that our growth cannot come using the old models. The days of being a cheap, high quality, large scale supplier to MNCs are over.
Just as we are adopting global and domestic training methods to win medals in the Olympic Games, we need to similarly adopt a mix of global and domestic strategies to be globally competitive. If we train hard, we can win in the coming uncertain global environment.
Disclaimer: The author has advised IMCI in a legal capacity.
(Rahul Prakash Deodhar is a private investor and advocate, Bombay High Court. He can be reached at [email protected], on twitter at @rahuldeodhar or at his website www.rahuldeodhar.com