India and Globlization

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INDIA & GLOBALISATIONFINANCIAL TIMES SPECIAL REPORT | Thursday January 27 2011

www.ft.com/india 2011 | twitter.com/ftreports

Strong growth

yet to improvelives of the poor

India has never looked sogood, nor so bad. In theeyes of global leaders andinvestors, the country is

“coming of age” A procession of statesmen has acclaimed Indiaas a responsible, rising power,inviting it to take a seat at thetop table of world affairs.

An economic growth rate of 8.5 per cent this year puts Indiafirmly alongside China as one of the world’s fastest growing large economies.

Domestic consumption in anawakening market of 1.2bn peo-ple, strikes many as a sure betfor the next 40 y ears, withopportunities in infrastructure,retail and education.

Its leading companies, particu-larly in the IT outsourcing,automotive and pharmaceuticalsectors, continue to expandtheir global footprint. The TataGroup alone is the largest man-ufacturing employer in the UK.

Yet, seen from within, India isconfronted with a debilitating crisis of governance and anoverwhelming challenge toimprove the lives of the largest

concentration of poor people inthe world.

Confidence in the state andbusiness is at low ebb after awave of high-profile corruptionscandals. The world’s largest

democracy is paralysed by dis-sent, some of its business lead-ers distrusted for oligarch-likepractices.

The country’s ability to trans-form the lives of many of its1.2b n p eople is uncertain.Instead, the poor are faced withrising food prices and undimin-ished worries about food andenergy security.

Beyond India’s borders, thefutures of insurgency wrackedPakistan and Afghanistan weighheavily as r isks; while the

security establishment viewsneighbouring China, with whomtrade has boomed to $60bn ayear, as far more of a menace

than a partner.Instead, India is looking more

to the west, as it deepens itsembrace of a free-market econ-omy, and international markets.The high water mark over thepast year was undoubtedly thevisit of Barack Obama, the USpresident. India’s top diplomatsgive Mr Obama high praise for“getting the political messaging right” and taking forward a new

relationship forged by his prede-cessor George W. Bush with thetransformative recognition of India’s nuclear programme.

Mr Obama described the coun-try as “emerged” rather than

emerging and identified therelationship with New Delhi asone of the defining partnershipsin the 21st century. The promiseof access to US technology andan endorsement of a future per-manent seat on a r efor medUnited Nations Security Councilgave substance to warm words.

Similar praise was doled outby four other big powers thatseek a closer p ar tnership .Within six months, David Cam-eron, the UK prime minister,Nicolas Sarkozy, the French

president, Dmitry Medvedev,the Russian prime minister andWen Jiabao, China’s president,alighted in Delhi. Their visitsredefined the country’s globalstanding, long due for a reap-praisal after the end of the coldwar, and lent support for Indiato take a greater role in theworld’s multilateral institutions.

The country’s economic man-agement has also received highpraise. Its swift bounce backfrom the global financial crisisis the toast of economists.

Pranab Mukherjee, the fi-nance minister, has laid out aconvincing path to fiscal consol-idation after opening the taps of public spending.

Duvurri Subbarao, the gover-nor of the Reserve Bank, hasmaintained an agile balancebetween growth and inflation,while sidestepping currencyintervention and capital con-t ro ls i n t he f ac e o f s tr on g inflows. The RBI has openly

expressed fears about its abilityto tame inflation and the needto attract more foreign directinvestment.

Manmohan Singh, the primeminister, calls it vital for social

development and employmentopportunity. “In the past twoquarters, our growth rate hasbeen 8.9 per cent. From nextyear onwards we will be able togrow at a rate between 9 and 10

per cent,” he says.His optimism is shared by

many business leaders. MukeshAmbani, the billionaire chair-man of Reliance Industries,describes some of New Delhi’s

governance travails as “bumpsin the road” rather than any-thing calamitous.

Such confidence has spurred aspree of overseas mergers andacquisitions, including shale gas

assets in the US, UK footballclubs and business processing operations in Latin America.

Last year, cross border M&Asaw a strong revival; deals inand out of India were five times

the value of the previous year.More outbound acquisitions

w er e m ad e l as t y ea r t ha ninbound, reflecting the increas-ingly global nature of Indiancompanies. Overall M&A activ-

ity was estimated at about$45bn by Grant Thornton, theauditing group, for the first 11months of the year.

World leaders arekeen to recognise thesuccess of a rising power. For most Indians, however, thepicture is not so rosy,says James Lamont

IT outsourcingIndia is watching forsigns of protectionismamong partners Page 2

Inside

The economy Ascent to double digitgrowth is new territoryPage 2

RetailPowerful middlemenshut foreign groups outof the shops Page 2

Guest columnFinancing is key tolong term potential.

Eswar Prasad Page 3

Nuclear powerLiability legislation sendsforeign suppliers into aspin Page 3

CarsA model state formanufacturing Page 3

FinancingGlobal exposure opensbetter opportunities forraising cash Page 4

PhamaceuticalsDrug companies changetheir tune Page 4

India is confrontedwith a debilitatingcrisis of governancewith confidence at alow ebb after a tide ofcorruption scandals

Continued on Page 2

Barack Obama with Manmohan Singh: a “defining partnership of the 21st century”

TextilesCreative strategiesrevive ragtrade riches innew markets Page 4



2 ★ FINANCIAL TIMES THURSDAY JANUARY 27 2011

India & Globalisation

Growthfails toimprovelives

Outward investment hastotalled as much as $80bn overthe past decade. The RBI esti-mates that investments bydomestic companies in overseasjoint ventures and whollyowned subsidiaries totalled$10.3bn in 2009-10.

India, meanwhile, is one of the most promising destinationsfor foreign direct investment.Ministers talk ambitiously of attracting investment of $1,000bn into infrastructurewithin five years. In the first 10months of 2010, India attracted$78bn in FDI.

This is well below what manyanalysts believe could beachieved if it freed up restric-tions on FDI and broughtgreater speed and clarity to anoften-stifling bureaucracy. Inthe words of one senior Mum-bai-based businessman, India is

growing “by default”, notdesign.

The Congress party-led gov-ernment faces mounting criti-cism: for not proceeding withmore purpose with structuralreforms since its re-election in2009; for putting up with non-performing ministers in eco-nomic portfolios; and for allow-ing legislation hostile to foreigncapital and profitmaking.

The stock response is thatprocess is as important as solidoutcome in an era of coalitionpolitics.

But pressure is intensifying,as it wrestles with the twin evilsof corruption and inflation. MrSingh and Sonia Gandhi, theCongress party president, areaccused of drift in the face of rising popular expectations tomake administrative reformsand deliver education and betterquality jobs to one of the young-est nations in the world, with 70per cent of the population under

the age of 35.A spate of corruption scandals

surrounding the telecoms minis-try, hosting the CommonwealthGames, property lenders and themilitary top brass, has rockedconfidence in the state. Severalusually discreet eminent figureshave warned of a widespreadgovernance deficit that thecountry can ill afford if it wantsto bring greater development.

At the same time, the govern-ment is struggling to tame stub-bornly high inflation that spentmuch of last year in double fig-ures. The wholesale price indexrose 8.4 per cent in December,despite an earlier pledge by MrSingh to cut inflation to 6 percent by the end of the year.

Crucial to India’s future, andits global standing, is whetherhigher growth is changing thelives of the poor to reduce someof the domestic risks, such asinsurgencies, surrounding ine-quality.

Amartya Sen, the Nobel laure-ate and Harvard professor, andothers are critical of an oftensingular focus on headlinegrowth numbers, without giving greater consideration of thechronic undernourishmentstunting the growth of half thecountry’s children. “Until thenumber of malnourished chil-dren and illiterate women hasbeen reduced by 90 per cent,there should be no horn blow-ing,” says Jean-Pierre Lehmann,founder of the Evian Group.

In coming years, wider distri-bution of India’s growing pros-

perity and shared benefits of global integration are vital if good is to outweigh the bad.

Contributors

James LamontSouth Asia Bureau Chief

Amy KazminNew Delhi Correspondent

James Fonantella KhanIndia Editor FT.com

Anjli RavalNew Delhi Correspondent

Stephanie Gray Commissioning Editor

Steven BirdDesigner

Andy MearsPicture Editor

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Continued from Page 1

Amartya Sen,the Nobellaureate, iscritical ofinadequateattention tomalnourishment

Thick skins shrug off protectionist rhetoric

One of the most striking blowsto India’s international businessimage over the past year waslanded by “Chuck” Schumer,the US senator.

Mr Schumer, a respected legis-lator from New York and a sen-ior Democratic party politician,dared to call Infosys, one of thedarlings of India’s highly suc-cessful IT outsourcing industry,a “chop-shop”.

The unflattering side-swipe,with its connotation of under-world repackaging, caused wide-spread indignation and prickedone of India’s worst fears – pro-tectionism to shut out some of its best performing IT and phar-maceuticals companies fromprized western markets.

A debate about the value of India’s outsourcers to theirimportant clients in the US was

inevitable, as the US struggledwith high rates of unemploy-ment in the downturn. In MrSchumer’s words, chop shops“outsourced good, high-paying American technology jobs tolower wage, temporary immi-

grant workers”.His remarks were a slur onone of the most globalised partsof the Indian economy. IT out-sourcing, centred on the south-ern city of Bangalore, has grownrapidly over the past 30 years toearn nearly $60bn in export rev-enues a year. A sector thatmiraculously escaped govern-ment intervention, it symbolisesIndia’s global potential and thetechnical ingenuity of its versa-tile young people.

Its leaders have thick skins.Narayana Murthy, the founderof Infosys, brushed the senator’scomments aside, saying he wasout of touch and misunderstoodthe contribution and sophistica-tion of India’s IT services.

With growth fragile in manywestern economies, India hasbeen watchful for protectionismamong its trading partners. Thegreatest fears have centred on

outsourcing and its largest mar-ket, the US.

The rhetoric has hardened asthe outlook for the US economyhas worsened. US PresidentBarack Obama, in one address,said the challenge for the US

was to make sure the creation of new-economy jobs was not dom-inated by India and China. Partof that challenge is being metwith higher costs for foreigncompanies.

A move by Washington toraise the cost of visas for Indi-ans working in the US drew aformal protest by New Delhi.Likewise, newly passed legisla-tion to tap higher visa fees topay for health compensation hasraised hackles.

Anand Sharma, India’s com-merce minister, calls new lawsincreasing the fee for H1B andL-1 visas, commonly used byIndia’s IT outsourcing compa-nies to bring talent into the US,“highly discriminatory” anddamaging to his country’s com-petitiveness.

Many senior Indian businesspeople have been surprised thatUS politicians have not resorted

to greater protectionist threats.Some, such as Pramod Bhasin,the chief executive of Genpact,the business-processing com-pany, say fast growing Indiancompanies need to show greatersensitivity to the difficulties US

clients are facing and respondby creating more jobs there.The Indian government,

meanwhile, argues that this is

already happening. Ahead of MrObama’s visit to Delhi inNovember, it emphasised heav-ily the investment of Indiancompanies in the US, and thejobs they create. A study by theUniversity of Maryland showsthat between 2004 and 2009Indian companies made 372acquisitions in the US worthabout $21bn.

“India is the fastest growing source of foreign direct invest-ment in the US. This investmentis creating, saving or supporting tens of thousands of jobs in theUS,” says Nirupama Rao, theforeign secretary.

In spite of the fears, the IToutsourcing industry hasshrugged off dire predictionsthat it might suffer badly fromthe downturn in western mar-kets in the wake of the 2008financial crisis. Leading IT com-panies are expanding, announc-ing ambitious hiring plans,strong earnings and entries intonew markets.

Nasscom, India’s bullish out-sourcing industry association,estimates that the sector’sexport revenues last year wereabout $50bn. It forecasts thatthese will rise 15 per cent thisyear to $57bn and that, within adecade, revenues could top$225bn.

Part of the industry’s contin-ued success is down to a highlyglobalised business model andnew markets. The downturnhas made emerging marketsand the fast growing domestic

economy more attractive.Companies increasingly iden-

tify opportunity in non-English-speaking markets, from Chinato Latin America.

N. Chandrasekhar, the chief executive of TCS, expects reve-

nues from Latin America to beworth as much as $1bn in thenext three to five years, up fromthe current $300m.

“We entered Latin America inlate 2002. By now, we have agood number of clients and criti-cal mass. We have 8,000 peopleand we have revenues of $300m,” he says.

Others are following suit.Tech Mahindra, the joint ven-ture between the Mahindraindustrial group and BT, the UKtelecoms group, is planning abig expansion in Latin America.Aegis, the business-processing arm of the Essar Group, hasacquired Actionline in Argen-tina to develop its Spanish-speaking capabilities.

Such a flurry of activity mightlead Mr Schumer to reflect thatIndian companies are doing much more shopping than chop-ping.

Outsourcing

James Lamont onthe industry’s rolein creating US jobs

Between 2004and 2009, Indiancompanies made 372acquisitions in the USworth about $21bn

High plauditstempered by inf lation fears

The plaudits have flooded in.India is basking in wide praisefrom the world’s leading econo-mists and policymakers for

its recovery from the global financialcrisis.

Asia’s third-largest economy hasswiftly righted itself, buoyed by strong domestic consumption. This year,growth is forecast at 8.5 per cent. Man-mohan Singh, the prime minister, pre-dicts that the economy can stretchupwards of 9 per cent in the coming fiscal year.

The country’s financial markets haveswelled with confidence. By the end of last year, Sensex, the benchmark indexon the Bombay Stock Exchange, hadsurged to new highs. All year, theReserve Bank of India mulled what itmight do to smooth the strong capitalflows flooding into the fastest growing large economy after China.

Visitors from the US and Europehave been quick to remark on theexuberance of the Indian market, instark contrast to their own. India isalmost the land that the global reces-sion forgot.

One of the most emphatic endorse-ments has come from the InternationalMonetary Fund. Dominique Strauss-Kahn, its managing director, said on avisit to New Delhi that India had trav-elled an enormous distance over thepast generation to become an “eco-nomic superpower”.

He also praised the Reserve Bank of India for resisting intervention in cur-rency markets and its moves tostrengthen capital controls.

India’s performance recommends itfor a greater role in global economicgovernance – a role that many Indian

economists believe their countrydeserves.

“India has weathered the crisisremarkably well, thanks in large partto sound macroeconomic and financialpolicies. Now, India’s growth is among the highest in the world – making it adriving force of the global recovery,”Mr Strauss-Kahn said.

Similar sentiments have been echoedby Robert Zoellick, president of theWorld Bank, Barack Obama, US presi-dent and David Cameron, the Britishprime minister, along with India’s owneconomic leadership.

Mr Strauss-Kahn, however, soundeda cautionary note. He warned of thedangers of some countries, including India, pushing beyond their potential,and overheating their economies inwhat is still an uncertain recovery.

In a country of 1.2bn mostly poorpeople, the balance is always a precari-ous one, and the ascent to double-digitgrowth is new territory for the policyestablishment.

Few disagree with the desirability of higher growth in an economy long mired in what was called the “Hindurate” of growth. But with higher growthhas come uncomfortably high inflation,some of the highest among the Group of 20 nations. Last month, the wholesaleprice index rose 8.4 per cent, some wayoff a target below 6 per cent.

Some economists and bankers worrythat India has leant too heavily onstimulus measures for too long. Earlierthis year, Stephen Roach, chairman of Morgan Stanley Asia, said New Delhiwas overstimulating the economy withpublic spending and monetary policythat was too loose.

While Mr Singh, a respected develop-ment economist, has won praise fromthe international community, he hasfaced derision at home. The Hindunationalist opposition Bharatiya Janataparty has zeroed in on inflation as acampaign issue, calling the prime min-ister “clueless” in the face of highprices.

“Food inflation is hitting the highestever level in contemporary times while

overall inflation is crossing 9 per cent,”complains Rajiv Pratap Rudy, a BJPspokesman. “The prime minister andhis government seem to be ‘tom-tom-ming’ the GDP growth, calling it good.[But] what good is such a growthwhich keeps away the common manfrom his daily rations?”

Mr Singh is politician enough toknow the perils of high prices – partic-ularly food prices – to electoral for-tunes. Last month, the government suf-fered a scare over the price of onions, astaple of national cuisine, which tre-bled overnight. So acute was the short-age that relief supplies had to berushed from Pakistan and China, andthe government introduced anti-hoard-ing measures. Onion prices are famed

for having toppled at least two govern-ments, once in 1980 and again in 1998.

The onion scare was symptomatic of the rough ride the Congress party gov-ernment has in the months ahead if itfails to tame prices against a backdropof rising commodity prices, unpredicta-ble farm output and a reviving globaleconomy.

In spite of being one of the mostaggressive tighteners of monetary pol-icy last year, higher interests have hadlittle impact on resurgent growth.

The RBI’s hawkishness is likely tocontinue well into 2011. Already, someeconomists believe the central bankmay raise the repo rate, at which thecentral bank lends to commercialbanks and currently at 6.25 per cent, by

50 basis points as early as this month.Rate increases over the coming yearare forecast within a range from 75basis points to as much as 125 basispoints.

India is at a thin edge of a wedgeshared by many of its neighbours.

“Asian economies remain on mone-tary steroids,” says Frederic Neumann,co-head of Asian economic research atHSBC, the banking group, “pumped upby low rates and plenty of foreignliquidity. Overstimulation, in econom-ics as in life, usually has dire conse-quences.”

“Central bankers need to worryabout rising inflation pressures, assetbubbles and excessive investment.Inflation is on everyone’s mind.”

The economy

Strong growth is welcome,but rising food pricesare causing concern,writes James Lamont

Price perils: the government suffered a scare when the cost of onions trebled overnight, so it brought in relief supplies AFP

Dramatic food price rises may

help open doors to foreigners

For Indian policymakers, theopening up of multi-brand foodretailing to foreign participationhas been one of the most diffi-cult, politically sensitive issuesin 20 years of economic reforms.

With a complex, highly frag-mented retail sector involving tens of millions of mom-and-popshops, pushcart vendors, bazaarstalls, and powerful middlementraders who link farmers to con-sumers, Indian governments

have long spurned any talk of opening the food retailing sectorto foreign companies, even asminority shareholders.

International chains such asWalmart, Tesco and Carrefour,can only own and operate cash-and-carry stores, limited to sell-ing to other businesses and forg-

ing technical support allianceswith Indian retail companies.

But India’s Congress party ledgovernment has begun thinking differently about the retail sec-tor, driven by its concern aboutnearly two years of stubbornlypersistent, double-digit foodprice inflation, which rose to anall-time high of 18 per cent inDecember.

Many members of the govern-ment appear to have comeround to the idea that foreigndirect investment in food retail-ing could help improve the effi-ciency of the back end of thefood supply chain, reducing spoilage and waste, thus easing some pressure on prices.

Yet whether the government,weakened by a series of corrup-tion scandals, is ready to take a

stand on opening the retail busi-ness to foreign direct invest-ment – which would spark afierce outcry from the powerfultraders lobby – remains to beseen.

“The government is clearlyconvinced that they want to dothis, whereas earlier they were

not,” says Raghav Gupta, presi-dent of Technopak Advisors, aretail consultancy. “But interms of being able to predict,‘will they change it,’ I don’tthink anybody can predict it.”

Indian conglomerates, such asReliance Industries, BhartiEnterprises, the Tata Group,RPG, the Aditya Birla Group,Godrej, and the retail-focusedFuture Group, have all gamelyplunged into the food and gro-cery retailing business in thepast few years.

Yet even these companies arenot allowed to source freshfruit, vegetables or grainsdirectly from farmers, but mustget them from middlemen whooften double as moneylenders tofarmers, add their mark-ups tofarm gate prices, but offer little

by way of technical support tohelp boost productivity.

Indian companies have alsofound the going in retail busi-ness tougher than expected, dueto sky-high rents for sites, and alack of experience in managing the complex businesses.

During the global downturn,

many companies were forced toclose large numbers of theirstores and pare back theirexpansion plans while severalsmall operators went bankrupt.Today, organised retail stillaccounts for just 5 per cent of India’s estimated $435bn retailindustry, still mainly concen-trated in big metropolises, andincreasingly in the next layer of so-called “tier two cities”.

With their own domestic com-panies eyeing the huge opportu-nities in India’s still nascentretail market, the US, and sev-eral European governments,have been pushing New Delhi toopen up the sector.

The first signs of a shifting attitude came last Februarywhen Pranab Mukherjee, thefinance minister, suggested in

his budget speech that opening the retail trade could “help inbringing down the considerabledifference between the farmgate prices, wholesale pricesand retail prices”.

In July, the department of industrial policy and promotionissued a long, carefully

researched “discussion paper”arguing that the country wouldreap many benefits, including the development of appropriatepost-harvest, cold-chain infra-structure, if foreign directinvestment in retail wasallowed. Several cabinet minis-ters and big businesses havealso expressed their cautioussupport.

With the price of onions hav-ing more than doubled inDecember – and other vegetableprices skyrocketing – public sen-

timent seems to be graduallyshifting too. The Times of Indiamade an impassioned plea inJanuary for opening the door toFDI in the retail trade and relax-ing controls on agriculturalsales and marketing to allowcompanies to buy directly fromfarmers.

“Criminal waste of foodoccurs in India due to the lackof integrated storage,” the news-paper argued. “As prices hugelyjump from farm gate to retailoutlet, consumers reel even asfarmers get just a third of thefinal price of their produce.” Itconcluded, “if deep-pocketed big retail chains and corner shopscan coexist and prosper …. else-where in the world, they'll do sohere as well”.

Given the mounting pressureon food prices, some Indian

media have speculated that MrMukherjee could announce anopening of the retail sector assoon as February’s budgetspeech. But Mr Gupta says hebelieves it will be “at least a fewmonths before anything hap-pens”, given the still vehementopposition from traders.

Retail

Amy Kazmin on thepolitically sensitiveissue of obtaining investment

Market making: food price inflation is concentrating minds Bloomberg



FINANCIAL TIMES THURSDAY JANUARY 27 2011 ★ 3


A healthy financial system is essential for progress

The Indian economy is at acritical juncture in its growth

trajectory. It is benefiting frommarket-oriented reforms thatstarted in earnest 20 years ago.Now, after a decade of blazing growth, the economy is at aninflection point. Today’s policychoices will determine whetherthis growth surge remainssustainable or fizzles out.

Finance holds the key toachieving India’s long-termgrowth potential. As theeconomy becomes larger, morecomplex and market-oriented,the financial sector will play acrucial role in underpinning growth by channelling domestic and foreign capitalinto productive investments.Increasing access to thefinancial system is also apriority for making growthmore balanced and sustainable,from both economic and socialperspectives.

A system that providescredit, savings instruments andinsurance to a broad swathe of

the population is essential fordistributing the fruits of growth more evenly.

Progress on financial reformhas been uneven and slowed bythe global crisis. Like manyother emerging markets, India

weathered the crisis far betterthan the advanced economies,with only a modest dip ingrowth. This has spawned twodangerous notions. First, that itis desirable to keep much of the banking system under statecontrol as that makes theeconomy resilient to crises.Second, relatively insulatedfinancial markets will protectthe economy from outsideshocks.

It is true that state-ownedbanks did better during thecrisis, with stronger depositgrowth and more creditexpansion. A differentinterpretation is that, during aperiod of turmoil anduncertainty, deposits fled tobanks that had implicitgovernment backing and thesebanks were in turn emboldenedand indeed encouraged to keeplending.

What is missing from thecalculus are the long-term

economic and social costs of abanking system that isinefficient and narrow.

Despite all the strictures theyoperate under, somegovernment-owned banks havemanaged to compete effectively,

holding their own againstdomestic and foreign privatebanks. It is time to cut thesebanks loose from governmentcontrol and reduce barriers tothe entry of new private banks.

As India continues to deepenits integration into world tradeand finance, it will be moreexposed to external shocks.Rather than going into adefensive crouch, the rightapproach is to manage theprocess of globalisation to thecountry’s benefit whilecontaining the risks.

Dependence on foreigncapital certainly leaves aneconomy at the mercy of thewhims of foreign investors.Despite India’s sizeable warchest of foreign exchangereserves, the current accountdeficit of more than 3 per centof gross domestic product is aserious concern.

At the same time, India hasenormous financing needs,

especially for rectifying itswoefully inadequate physicalinfrastructure.

So, foreign capital is welcomebut the question is whether thefinancial system can absorbthese funds effectively rather

than just fuelling asset bubblesand adding to macroeconomicvolatility. Controls to limitsurges in capital inflows are aseductive solution but they arelargely ineffective.

Besides, the last thing Indianeeds is policy uncertainty thatfrightens away foreigninvestors and causes financing problems.

Here again, financial marketdevelopment is the answer. Abroader set of markets can helpabsorb foreign funds andchannel them towards moreproductive uses. For instance,the development of corporatebond markets would helpchannel foreign capital (anddomestic savings) into long-term financing forinfrastructure projects.

Opening up sectors such asthe retail trade to foreigndirect investment would alsobring in more stable funds,along with technology transfers

and the ancillary benefits of greater competition.

To the government’s credit,financial reforms continuedeven during the crisis period.India has introduced currencyderivatives, interest rate

futures and even credit defaultswaps in a cautious mannerwith tight regulations.

The Reserve Bank of Indiahas wisely resisted theintroduction of capital controlsand made it a priority toincrease financial access. Thesesteps are welcome but thebroader financial reformagenda remains vast.

Moreover, finance does notoperate in a vacuum.Institutional reforms and goodmacroeconomic policies areessential for a financial systemto work well and deliver highgrowth. In addition to itscorrosive effects, rampantpublic corruption scares awaylong-term foreign investors andshifts the composition of inflows towards more shortterm and less stable forms of capital.

Large budget deficits and thehigh level of public debtconstitute another source of

vulnerability. Roping in banksto help finance deficits byforcing them to buygovernment bonds makes a badproblem worse by imposing ahuge cost on the banking system and crowding out

lending to the private sector.Unless the government cantackle these problems, they willerode India’s growth potential.

The country’s red-hoteconomy and growing importance on the worldeconomic stage are hugeachievements.

The danger is thattriumphalism leads to stalling of reforms, or even somebacksliding. What is needed isgreater urgency and thepolitical will to implementreforms when times are good.Otherwise, it will be a goldenopportunity lost.

The writer is a professor of economics at Cornell Universityand a senior fellow at theBrookings Institution. He is theco-author (with M. Ayhan Kose)of Emerging Markets: Resilienceand Growth Amid Global Turmoil (Brookings InstitutionPress, December 2010).

Guest Column

ESWAR PRASAD

Greater urgency andthe political will areneeded to implementreforms when timesare good. Otherwise,a golden opportunitywill be lost

Government bowls sector a surprise googly

When India ratified a ground-breaking civilian nuclear energy deal with theUS in 2008, it was a seminal moment,ending decades of New Delhi’s pariahstatus, and opening the door to inter-national co-operation for India todevelop its nuclear power industry.

International suppliers – including GE, Westinghouse, Bechtel, Russia’sRosatom, France’s Areva, and Japan’sToshiba, Hitachi and Mitsubishi – areall eyeing lucrative opportunities, asIndia wants to undertake a hugeexpansion of its nuclear energy indus-try to help close its vast domesticelectricity deficit.

But the country recently bowled theglobal nuclear power industry – andpossibly itself – an unexpected googlyby adopting a civil nuclear liabilitylaw that will hold suppliers liable forany accident for up to 80 years after aplant’s construction.

Many countries with nuclear powerindustries channel potential liabilityin case of an accident to operators.India’s very different law has sentnuclear companies into a spin.

They and their Indian partnerswarn that the rules will be a seriousdeterrent to sales of equipment andtechnology to the state-owned NuclearPower Corporation, the only entityallowed to operate nuclear powerplants in the country.

“It is important that the govern-ment gets this right in order to meetits ambitions to develop nuclearpower for India and to enable itsindustry to become a key part of theglobal supply chain,” says Ted Jones,

director of international supplierrelations at the Washington-basedNuclear Energy Institute. “The stakesare high.”

Yet many Indian lawmakers andanalysts remain sanguine, insisting the size of the country’s nuclearequipment market – estimatedat about $30bn – would prove anirresistible lureto foreign com-panies, despitetheir reserva-tions about thelaw.

“I d on’t thinkthe liability lawi s g oi ng t odeter foreigns u p p l i e r sfrom com-ing to theI n d i a nmarket,”s ay s S id -dharth Vara-darajan, stra-

tegic affairseditor for TheHindu, ar e s p e c t e dnewspaper.

“The sup-plier cannotexp ect to

dictate terms if we are going to buy$30bn worth of stuff.”

The law’s real impact will onlybecome clear over time. The govern-ment is drafting regulations that willdetermine precisely how it is to beimplemented, which could soften theblow. New Delhi is also considering whether government-to-government

assurances, and provisions in con-tracts, might be sufficient to assuresuppliers they will not face unlimited,uninsurable liability.

The controversy surrounding thelegislation highlights the way theCongress party-led coalition remainsconstrained by combative domesticpolitics, which results in policies thatoften fall short of what internationalbusinesses, or even the governmentitself, would desire.

Similar tensions between the Con-gress party’s aspirations and its lackof progress in reforms are visible inits hesitance over liberalising theretail sector, its inability to pare backexpensive fuel subsidies and the snail-like pace of other reforms.

But the nuclear liability law alsoreflects policymakers’ assumptionthat they can leverage their hugemarket to set their own unique rulesof engagement. “When they come,they will have to come on terms thatIndian democracy is prescribing,”says Mr Varadarajan. “Indian publicopinion cannot just be brushed aside.”

India, which relies on imported oilfor all its energy needs, has big ambi-tions for the expansion of its nuclearcapacity, with its national energyplan calling for 30,000MW of nuclearpower by 2020, 63,000MW by 2030 and250,000MW by 2050, up from 4,000MWof installed capacity today.

Its 2008 deal with the US ended dec-ades of sanctions – dating back toNew Delhi’s first nuclear test in 1974 – that barred foreign countries andcompanies from sharing any civilnuclear energy technology with India.

But the parliamentary debate overthe law – the last crucial step to laythe foundation for access to foreigntechnology and equipment – was heldamid a climate of renewed nationaloutrage over the 1984 Bhopal gas trag-edy which killed thousands of people,and left tens of thousands of otherswith severe lifetime health problems.

The memory that Union Carbide,now owned by Dow Chemicals, paidjust $470m to settle its Bhopal obliga-tions – overshadowed the debate on

the nuclear bill, as the Congress partytried to push it through ahead of Pres-ident Barack Obama’s recent visit.

“India is perhaps the only democ-racy with a vibrant public opiniongoing into large scale acquisition of

nuclear p ower,”says Mr Vara-

darajan.“ It w as

i n e v i t a b l eg iv en t heexp er ienceo f B ho pa l

t ha t t he rewould be

h ei gh te ne d c o n-sciousness of therisks with technol-o gy , a nd w ho i s

going to bear thatrisk.”To Sumit Ganguly, a

South Asia expert at Indi-ana University, the entire epi-

sode is “so typical of India” and itspolicymaking style. “It’s this wholenotion that ‘we are so big, we can

do anything we want’.“It’s going to significantly hob-

ble the ability of companies tocome in.”

Nuclear industry

Amy Kazmin reports oncontroversial legislationthat threatens to get in theway of plans to address

a huge electricity deficit

Big is beautiful: analysts areconfident size of Indian marketwill be an irresistble lure

Companies warn that therules will be a seriousdeterrent to sales ofequipment and technologyto the country

Tamil Nadu on the road to

attracting more investment

Chennai, the capital of TamilNadu, is proof that India – like China – has what it takesto become a global centre for

manufacturing.The coastal city’s foreign invest-

ment-friend ly environment hasattracted some of the world’s largestcarmakers, turning the state into amanufacturing and export hub for

small cars and a model for economicdevelopment.

South Korea’s Hyundai, Ford of theUS, Japan’s Nissan and Renault of France are among the carmakers thathave poured billions of dollars intovast plants in the southern state,churning out comp act and fuel-efficient vehicles.

In 2010 alone, more than 1m carswill be produced in Chennai, with athird of them exported to Asia, Africaand Europe. In a country where set-ting up a greenfield project is oftendifficult, Tamil Nadu offers some hopefor a nation that is overdependent onthe services industry.

The state’s blend of financial incen-tives, stable industrial policy, a con-sistent stream of skilled labour andproximity to a big and sophisticatedport make it an attractive location fora production hub, say foreign carmak-ers based there.

“Tamil Nadu is a place where wefeel very comfortable to do business,”says Michael Boneham, managing director of Ford India. “India wasn’t

on our radar for a while, but now werecognise it as a hub for small andfuel-efficient cars.”

Incentives include tax exemptions,aid in acquiring land on which tobuild plants, and infrastructure sup-port, along with a reduction in the redtape involved in securing permits andlicences.

Tamil Nadu has also allowed auto-maker s to keep the mainstreamunions out of their plants, lessening the potential for labour disruption.

Ford has invested about $1bn tob uild a p lant with a p roductioncapacity of 200,000 cars and 250,000engines.

At present, 85 per cent of the vehi-cles are sold in the domestic market,but the Detroit-based group recentlyshipped its first made-in-India Figos toSouth Africa and by next year Fordplans to expand exports to include 48countries in the Asia-Pacific regionand Africa.

The plant in Chennai is labour-intensive, with about 4,000 peopleworking two nine-hour shifts. But it isalso one of Ford’s most innovative – the first one capable of producing pet-

rol and diesel engines on the sameproduction line.

“We have members of the group’sglobal team coming here to analysehow our model can be applied else-where in the world,” says R. Balasun-daram, vice-president of Ford India.

Hyundai, whose sprawling $1.6bnstate-of-the-art manufacturing plant

occupies 535 acres, has been in Indiafor nearly 15 years and is now thecountry’s second-largest carmaker bysales.

With current production capacity of 600,000 vehicles and expected expan-sion to approach 700,000 units by 2012,it is also India’s biggest car exporter,with nearly 50 per cent of its outputsold to 110 countries.

“From the start, Hyundai’s idea wasto turn India into its small car hub,”says a company representative. “Herewe have models such as the Santroand the i10, which are only producedin India and nowhere else.”

The success of Ford and Hyundaihas drawn other carmakers to TamilNadu. Nissan recently launched thecomp act M icr a and its p ar tnerRenault will roll out its first India-

specific car in mid-2011.Local businesses in the state have

also enjoyed a boost, as auto-part ven-dors have mushroomed and employ-ment has boomed. Analysts estimatethat the state’s auto industry employsabout 250,000 people.

Tamil Nadu’s actions to draw for-eign direct investment are attracting the eye of manufacturers in otherindustries as well. For example,Nokia, one of the world’s largestmobile phone makers, has sited itsbiggest production plant there.

Foreign investment is also helping the southern state overcome some of the chronic deficiencies plaguing other parts of India.

Chennai’s roads, while better thanthe norm in India, are far from perfectby global standards and trucks trans-porting vehicles to the port are barredfrom travelling through the city cen-tre between 6am and 10pm to reducecongestion.

However, the local government haspromised to build a ring road withinthe next three years, which will let

trucks transport goods undisrupted.The carmakers are also encouraged

by the state government’s record fordelivering on promises.

“Here [in Chennai] we have beenable to do what wasn’t possible else-where [in the world] produce a robustand modern car in a super competi-tive environment,” says Mr Boneham.

The auto industry

Carmakers are encouragedby the way the stategovernment deliverson its promises, writesJames Fontanella Khan

Tata Nano How the poor man’s car lost its way

The Tata Nano car was launched fouryears ago with much fanfare.

It was hoped that the low costvehicle would help create a newsegment of car owners in India, asthose on lower incomes shifted fromtwo wheels to four.

But, Tata was stopped in its tracksafter sales of the world’s cheapest carplunged to just 509 units in November2010, falling 85 per cent from a yearearlier to an all time low.

Tata subsequently launched a seriesof initiatives aiming at reviving thefortunes of the Nano.

A special finance scheme topurchase the model was offered toTata Motors employees who earn

more than Rs12,500 ($280) a month.The Nano Happiness Guarantee wasalso launched for customers, morethan doubling its warranty from 18months to four years, while also

throwing in a maintenance contract forjust Rs99 ($2) a month.

The five seater Nano, which hit theroads with a price tag of Rs100,000($2,500), has battled troubles such asfires in some of its models andproduction delays.

Analysts say that there areunderlying problems that need to bedealt with.

The Nano is considered far tooexpensive for its intended market.

The price for the basic modelwithout air conditioning wasRs100,000 when the car launchedbut has risen to Rs137,000 asa result of increased production costs.

The Nano has found it difficult to

attract low income earners in crowdedMumbai and New Delhi, who are alsounlikely to have space to park a car.

Anjli Raval

The success of Ford andHyundai has drawn othercarmakers to the state.Nissan has launched theMicra and parent Renaultwill roll out its first India specific car in mid 2011

Dual fuel: Ford ‘s Chennai plant is the first one capable of putting together petrol and diesel engines on the same production line Bloombergt




Rich pickings at home and abroad

International pharmaceuti-cal companies once lookedwith frustration at Indiandrug makers, which werenotorious for churning outlow-cost, copycat versionsof patented drugs and sell-ing them to d ev eloping countries.

More recently, they havebeen looking at India’s fastgrowing pharmaceuticalindustry in a different light– as an increasingly inte-gral part of the global sup-ply chain in an environ-ment of intensifying pres-sure on prices.

The quest for low-costproduction and researchand development facilities – coup led with an eye toIndia’s own fast-growing domestic drugs market – has led to a flurry of foreign

takeovers in the past fewyears. Japan’s Daiichi San-kyo paid $3.6bn in 2008 forIndia’s biggest drugmaker,Ranbaxy Laboratories, andin 2009, Sanofi-Aventisbought a controlling stakei n S ha nt ha B io te ch , aHyderabad-based vaccinemaker for €550m.

L as t y ea r, U S- ba se dAbbott Laboratories paid$3.7bn for Piramal Health-care’s generic drug formula-t io n u ni t, a nd R ec ki ttBenckiser, the UK house-hold products group, agreedto p ay £454m for Par asPharmaceuticals, whichcombined over-the-counterdrugs with branded per-sonal care products.

Other big drug companieshave also been looking toIndia as a means to expandtheir own generic drug pro-duction capacity, as theygear up for the expiry of

some of their most valuablep at en ts i n t he c om in g years, as well as to gainaccess to the country’s vastdomestic market.

However, Hari Bhartia,co-chairman and managing director of Jubilant LifeSciences, a New Delhi-based

company, says most Indianpharmaceutical companyowners feel little urge tosell, giv en the curr entrapid, profitable expansionof their businesses at homeand abroad.

“Almost all the big phar-maceutical companies aretrying to develop genericdivisions – that is part of their strategy,” says MrBhartia. “You would haveseen more deals if therewere more sellers. But thereare not many sellers. Theirbusinesses are still growing steadily, value is building up and there is no hurry tosell.”

But other types of part-nerships – including prod-uct licensing deals, andresearch and developmentcollaboration – are alsogrowing. Pfizer has signedthree product licensing agreements with Bangalore-based Biocon to develop ar ange of insulin for itsinternational markets.

GlaxoSmithKline has anagreement with Dr Reddy’sLaboratories to collaboratei n e me rg in g m ar ke ts .Lupin, the Mumbai-based

drug maker, recently signeda five-year deal with Far-manguinhos, the Brazilianstate healthcare company,to supply a four-in-one com-bination drug for tuberculo-sis.

India is now the world’sthird-biggest manufacturerof pharmaceutical products– including active pharma-ceutical ingredients, andfinished dosage formula-tions – b y v olume, andnumer ous p lants havereceived the approval fromt he U S F ed er al D ru g Administr ation that isrequired for exporting tothe US.

Exports have soared fromRs128bn in 2002-2003, toRs384bn in 2008-2009, andhave continued to grow inthe past two years. About20 per cent of pharmaceuti-cal exports are bound forthe US. Yet not all Indianpolicymakers are pleased

with foreign pharmaceuti-cal groups’ growing interestin local drugmakers.

Recent takeovers haver aised concerns among some policymakers that for-eign ownership may lead tosharply higher domesticdrug prices, potentially abig problem in a countrywhere 80 per cent of totalhealthcare costs are shoul-dered privately.

Foreign-owned companieshave about 15 per cent of India’s domestic drugs mar-ket, up from 10 per cent in2009.

Jyoti Mirdha, a Congressparty lawmaker who sits onparliament’s health andfamily welfare committee,has urged New Delhi tomake it tougher for foreigncompanies to take control-ling stakes in d omesticdrugmakers.

“It took us 40 y ears tocome to this status of self-sufficiency in pharmaceuti-cal drugs,” says Ms Mirdha.“No matter what happens,we should be able to manu-facture our own drugs.”

The ministries of healthand commerce are consider-ing proposals that would

r eq ui re g ov er nm en tapproval for any foreigncompany to purchase morethan 49 per cent of an exist-ing Indian drugmaker. “Itshould be considered a sen-sitive sector,” says M sMirdha.

However, such restric-t io ns a re l ik el y t o b eopposed by domestic drug companies, many of whichhav e b een on their ownoverseas acquisition sprees.

“The prices of important,lifesaving drugs are alreadyregulated, and they will beregulated, whoever ownsthem,” says Mr Bhartia,who, along with his posi-tion at Jubilant Life Sci-ences is president of theConfederation of IndianIndustry.

“The p har maceuticalindustry in India has hun-dreds of companies, and if somebody wants to acquire

one, it’s fine,” he says. “Wealso have the right to go tothe US, and Europe andacquire.

“Acquisition by compa-nies to take market share ina particular country is nor-mal. There is nothing tofear.”

Pharmaceuticals

Global companiesare not so sniffy about cheap drugsthese days, writesAmy Kazmin

Jyoti Mirdha,a Congresshealth expert,wants limitson foreignownership


Global reachprovides new avenues for raising cash

Indian companies like tothink big. Often bigger thant he y c an r ea li st ic al lyachieve given the financing constraints that many facewhen it comes to borrowing m on ey f ro m a b an k i nAsia’s third-largest econ-omy.

However, this is slowlychanging. The global expo-sure of Indian conglomer-ates such as the Tata Groupand Reliance Industries hasopened new avenues forother comp anies in thecountry to raise cheap cash

overseas without having togo through the complica-tions that are common inIndia when seeking credit.

The preferred destina-tions to clinch more favour-able conditions for financ-ing have traditionally beenLondon, New York, Seouland Tokyo. More recently,Beijing and Shanghai haveemerged as attr activeplaces in which seek evencheaper funding.

Reliance ADAG, the tele-coms-to-power conglomer-ate contr olled b y AnilAmbani, the billionaireindustrialist, signed a string of loan agreements in 2010worth almost $14bn withChinese banks.

The fir st d eal saw M rAmbani’s Reliance Powersigning a $12bn financing agreement with a consor-tium of Chinese banks thatwould help it buy $10bn

worth of power generationequipment supp lied b yShanghai Electric.

In a separate deal, Reli-ance Communications, MrAmbani’s debt-strickenmobile phone operator,r eceiv ed a $1.93b n loanfrom China Development

Bank to fund the outstand-ing debt it took out in early2010 to acquire 3G spec-trum.

In both cases, the Indiancompany was offered creditat less than half the priceoffered by banks in Mumbaior New Delhi.

“The Chinese do a greatjob when it comes to financ-ing deals,” says an execu-tive at Reliance Communi-cations. “We save about$100m a y ear comp ar edwith what we would [haveto pay in interest] in India.That’s a lot of money.”

Reliance was one of thefirst big Indian groups toapproach Chinese banks forfunding. However, manywill follow suit if the condi-tions are superior to thosein India, say analysts.

“Indian companies arebecoming more global andpractical when it comes to

finding ways to raise fundsto scale up their business,”says Rashesh Shah, chair-man of Edelweiss Group,the Mumbai-based financialservices house.

He add s: “The cost of credit is much lower out-side India for a number of reasons, so if Indian compa-nies can, they will go any-w he re t o f in d c he ap ercredit, be it the UK, the USor Korea they will go for it.China is just the latestopportunity for them.”

In spite of the growing inflationar y p ressur esChina is facing, the cost of capital remains signifi-cantly lower than in India.Lending rates for Indianbanks are usually morethan 10 per cent, while aChinese banks can offerrates as low as 4 or 5 percent.

The Shanghai interbank

rate for three-month loanswas just over 4 per cent inmid January, comparedwith more than 9 per centin India.

The Reserv e Bank of India raised lending ratessix times in 2010 and isexpected to do so again in

January, as it struggles totame soaring food pricesand rampant inflation.

“For Indian banks to com-pete with US or Chinesebanks is difficult, as theydon’t have to deal with thehigh interest rates we have

in our country,” says Mr

Shah.In the past, the Indian

government made it diffi-cult for domestic banks toraise cash outside the sub-continent. However, thecountry ’s d oub le-digitgrowth ambitions have ledt he c en tr al b an k a nd

finance ministry to relaxoverseas borrowing norms.

Initially, Indian execu-tives flew to London andNew York to raise cash viathe equity or debt market.“It is easy to explain whyIndian companies will cometo L ondon. Pr estige isimportant, as is access tothe FTSE 100 and the possi-bility of lower debt funding costs as a result of a Lon-don listing,” says a reportby the City of London Cor-poration.

However, the governmentand business people havebeen looking at the emerg-ing markets such as China

to diversify their funding opportunities. In January,for example, India’s consu-late general in Shanghaiinvited Chinese banks towork closely with Indiangroup s to inv est in thecountry’s infrastructure.

India urgently needs cash

to develop its shambolicinfrastructure. The govern-ment’s planning commis-s io n s ay s t ha t a t l ea st$ 1, 00 0b n i s n ee de d t odevelop public transportand the power network. Thedeal between Reliance andthe Chinese banks reflectst he t re nd , w it h C hi naexpecting Indian companiest o b uy i ts p ro du ct s i nreturn for cheap financing.

“We are going to see moreand more of this kind of f un di ng c om in g f ro mC hi na ,” s ay s S an ja ySakhuja, chief executive of Ambit Corporate Finance.

“This doesn’t mean that

Indian companies will stopapproaching US and Euro-pean banks for M&A-relateddeals, but certainly Chinawill be the preferred optionfor those seeking credit forexpansion plans that willinclude cheap Chineseequipment.”

Financing James Fontanella Khan reports onthe savings to bemade by seeking funds abroad

Growth ambitionshave led the centralbank and financeministry to relaxborrowing norms

Banks seek global presence in emerging markets

Religare Capital Markets, the financialservices firm backed by the billionaire Singhfamily, is set to become India’s first globalemerging markets investment bank.

The group, which plans to make a seriesof acquisitions in the next six months toexpand its presence internationally, isplanning to become the point of referencefor Indian companies considering deals indeveloping countries.

Its expansion reflects the growing hungerof Indian companies to acquire assetsabroad, particularly in emerging marketssimilar to the home country.

The small size of most such transactionsmakes it difficult for a company to get biginvestment banks to back their deals.Religare aims to fill this gap.

“We hope to work on a variety ofmid size deals which can go from

$100m to $400m,” says Tarun Kataria,chief executive.

He says that the firm has already formeda joint venture in Turkey and acquiredbases in Sri Lanka, Singapore, Hong Kong,London and New York. It plans to set up inBrazil, the Philippines, Indonesia and SouthAfrica.

Religare is not the only Indian bank keento build an international network. Growingnumbers of merchant banks are setting upjoint ventures and alliances with theircounterparts in emerging markets.

“It is much more convenient to set up a

partnership with an investment bank inAfrica and South America than opening anoffice there,” explains Rashesh Shah ofEdelweiss, a financial services group.

James Fontanella Khan

Rate rise: central bank raised lending rates six times in 2010 and is set to do so again soon

New destinations save once ‘doomed’ sector

India’s $20bn-plus textileand garments industry wason the verge of disappear-ing in the aftermath of the

global financial crisis.For a sector that counts more

than 15,000 companies employ-ing 50m people – making it thelargest employer after agricul-ture – its near-exclusive depend-ence on the west made it vulner-able to macroeconomic forcesthat were beyond its control.

However, the global recessionforced textile and garmentsexecutives to seek imaginativenew solutions.

As many of the companies’trusted European and US clientsfiled for bankruptcy, and compe-tition from neighbouring coun-tries such as Bangladesh and Sri

Lanka grew, they started look-ing for business in other emerg-ing markets.

Suddenly, the new destina-tions for their products were theUnited Arab Emirates, SaudiArabia and China, says Moham-mad Idrees, a small manufac-turer of leather belts based inthe heart of Mumbai’s Dharavi,Asia’s biggest slum.

Mr Idrees says that the futureof his business was seriously atrisk after his customers of 20years in Germany and Italystopped paying their bills.

“I waited six months for mymoney to come from an Italianclient,” complains Mr Idrees,sipping a steaming cup of chaiin a corner of his workshop,which looks like an upmarketversion of a Dickensian sweat-shop.

“I stop ped waiting and Ilooked for other solutions and Iended up selling to the Chi-nese,” he says. “They pay on

delivery,” he adds with a spar-kle in his eyes, as if it was amatch made in heaven.

The shrewd businessman from

Dharavi is not the only entre-preneur in India who has beenl oo ki ng t o S ha ng ha i a ndGuangzhou as the new destina-tions that might revive whatseemed a doomed sector.

Although differences in lan-

guage and culture remain a big problem in establishing tradelinks between small- and medi-um-sized companies in China

and India, many are forcing themselves to overcome theirfears.

Ali Ahmed Khan, director of the Council for Leather Exportsin the south Indian city of Chen-nai, the country 's hub for

leather products, says manymanufacturers have startedmoving away from their tradi-tional markets and are rethink-

ing the way they operate.“Europe and the US are still

important but we can see a shiftto other emerging economies,”says Mr Khan.

“As China becomes a globalpower, we expect more trade to

go on between the two coun-tries.”

A. Balakrishnan, director of SDS Leather who regularly trav-

els to China in search of newclients, says that “demand fromChina is growing fast, reallyfast”.

“I’ve recently come back froma visit to Guangzhou to meetclients and they made a huge

order,” says Mr Balakrishnan,who says he has lost count of the number of times he hasflown to China in the past six

months.One of the reasons India hasrecovered faster than developedeconomies from the globalfinancial crisis is partly thanksto entrepreneurs such as MrIdrees and Mr Balakrishnan,who were compelled to establishnew trade links when tradi-tional ones were severed.

I n s pi te o f t he t en si onbetween India and China, whichare struggling to r esolv e adecades-long border disputeover the Indian state of Aru-nachal Pradesh, trade betweenthe two has grown rapidly inthe past decade.

“India-China bilateral trade in2010 is expected to pass $60bn,making China India’s largesttrading partner,” says KamalRungta, managing director of EJ M cKay , an India-Chinafocused corporate adviser.

Since the beginning of 2010,about 20 p er cent of Ind ia’sexport revenues have come from

China, which still enjoys a sub-stantial trade surplus withIndia.

Although there are no recenttrad e d ata b reaking d ownexports revenue of the textileand garments industry on acountry-by-country basis, sev-eral sector executives say thatsales to China and the UAEhave picked up compared withprevious years.

India’s textile industry is farfrom being out of the woods andrising commodity prices haveput additional pressure on com-panies’ balance sheets, but it isfinally seeing some light at theend of the tunnel.

Back in the alley ways of Dharavi, Mr Idrees goes aroundpatting children’s heads, with asmile on his face, and seems notto mind that the road ahead of him is waterlogged following the heavy monsoon rains thathave hit India’s financial capi-tal. He says he has found his

new way.“Europe and America are the

old world. The future is else-where. The future is China and,obviously, India,” he says.

Textiles

James Fontanella Khan reports on a

revival in prospectsfor an industry that employs 50m people

Towel toil: workers make finaladjustments to towels that havebeen made without chemicaldyes. India has found newmarkets for such wares

In spite of the bordertension between Indiaand China, trade

between the twohas grown rapidlyin the past decade



FINANCIAL TIMES THURSDAY JANUARY 27 2011 ★ 5




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India and Globlization