‘The 1991 reforms were brought in reluctantly; there was distrust of biz’ | Specials News

How were things poised around the time of the liberalisation in 1991? 

People talk about reforms in 1991, but it actually started in 1987. Many countries were going through a rough patch, especially the three big centrally controlled economies — China, Russia (then the Union of Soviet Socialist Republics or USSR), and India. Western Europe and the US were largely liberalised. 

Ironically, India had opened up to foreign companies way back in the 19th century, when the Lever Brothers started operations in 1888. So, by the time I joined Hindustan Lever, foreign enterprises had been around for 100 years. India was in a situation where it could have gone dramatically ahead of China, Russia and everybody else. 

There was a drought in India in 1987, and for the next four years, the government really struggled. Finally, in 1991, there was a significant set of reforms because that was seen as the only way to proceed. Partly, the reason for those reforms was that in 1987, when the crisis hit China and Russia as well, those two countries acted immediately. China liberalised from 1987. They began liberalising around Hong Kong and went up to Shenzhen and expanded north along the east coast, all the way up to North Korea. That area became the powerhouse, and accounted for 90 per cent of China’s economic growth. It was very intelligently done. 

In Russia, meanwhile, they started the Glasnost and Perestroika, which were aimed at increasing transparency and liberalisation. The fundamental error they made was that they privatised their big state-owned enterprises and gave them to friends and family. Those people became worth tens of billions of dollars. That did not work to the benefit of the people. It became an oligarchy and not free enterprise. 

Did India hold back subsequently? 

Well, the reforms were brought in reluctantly and India followed a revenue maximisation model. There was distrust of business.

In 1990, I switched from Hindustan Lever to PepsiCo, which had just started business in India. The contrast with Russia and China was very stark. In Russia, Leonid Brezhnev (the then President of the USSR) himself signed the deal with Don Kendall, the PepsiCo chairman in 1972, and welcomed the company into the country. In China, Pepsi was allowed pretty much a free entry after 1987. 

In India, it was quite a nightmarish experience. For one thing, we could not call it Pepsi. We launched as Lehar Pepsi because the administration insisted that foreign brand names were not allowed. That piles on so many expenses – all the bottles had to be labelled Lehar Pepsi. It didn’t sound right. I don’t know who benefited from it. I don’t know what the government got out of it, but it created a huge five-year angst. 

Then the government said that we could not set up a subsidiary in India. So, we had to form a joint venture with Punjab Agro (a State-owned farm corporation) and Voltas. They were outstanding partners, but three-way alliances are tough. Then the other problem was navigating through the states. For instance, in Karnataka, there was massive opposition, not so much because of Pepsi – people didn’t even know the company’s name – but against multinationals. 

In China, however, once that decision was taken by the government, the company grew very, very strongly. The initial years reflected the fear that people had. I was in a US chamber meeting once in New York, when somebody called this the East India Company syndrome. It is true that the East India Company ruined India and China. But the world had moved on and global companies were very different and were law-abiding. 

Do you think the reforms fuelled Indian consumer demand? 

The demand was always there. When I was a student, a foreign trip was basically for shopping. You’d go to Singapore or Hong Kong and the first thing you’d do is raise the dollars and buy stuff and bring it back, because it was not available in India.

We used to hanker for things like the Sony Walkman, which was not a luxury good, per se, though a few people could afford them. Cell phones are now essentials. There has been a sea change. It’s the reverse, nobody shops for gifts overseas. It’s much cheaper and better in India. The malls in India are far better than in the US. 

You joined Reebok in 1996. Was the government more welcoming by then? 

I remember that there used to be a monthly meeting at the Foreign Investment Promotion Board (FIPB), which was a nightmare. Every month, there used to be a lottery on the front page of newspapers announcing that some firm or the other had been approved for foreign investment. It was almost like a Mughal court granting licences, and it was not scientific. 

We were asked to form a joint venture. It was done with a lot of suspicion of foreign companies and with a great deal of control. Things have changed a lot now. Foreign companies can operate much more freely. Many multinationals have started operations in India, and they’re doing very well. 

How difficult was it to operate in India? 

It was a very different world. When I was hired by Reebok, the first thing I realised was that there were no shoes to sell. We could not manufacture the shoes because multinationals weren’t allowed in the sector. So, we tied up with shoe manufacturing companies at the time — Phoenix International was a great partner. However, there were certain components that were not available in India, like high-end plastics, certain kinds of soles, rubbers, cleats [studs that go on the sole]. 

We were making shoes for fast bowlers like former Indian Test cricketer Javagal Srinath, who needed shoes that didn’t slip. But those cleats were not available in India, so we had to import them. Though cleats were not on the banned list, we just couldn’t import them. Everything required very high levels of interaction with people in government. 

We used to meet policymakers and ask them, “Sir, do you play golf?” And if they said yes, we would ask them, “How do you find the golf shoes?” They would say something like, “I always buy them overseas.” And we would tell them that we could make the Greg Norman collection (named after the golfer) here, but we needed certain approvals. No country in the world makes everything. Even the US today imports a tremendous number of components. 

To make a simple shoe, you require the leather, which we can get here; primary plastics, some of which are available; but high-end plastics were not available. We would say we will try to indigenise but we need the approval. That’s what it took to do the simple things like getting your product out. Today, that’s not the case; you can import essentials and put them together. 

And then, of course, there used to be many constraints on how many dollars you could draw for tours. You had to rely on an uncle, a cousin or somebody to give you the money and then repay them later. There was a draconian control on foreign exchange. That’s changed a lot. 

Growing up in such conditions has created a tough generation of Indian entrepreneurs. That’s why they do so well in Dubai or Oman or Qatar. You see the success that Indian promoters have – it’s tremendous, because it’s like a hot knife going through butter since there are very few regulations. 

You moved to China with Yum Foods. What was that experience like? 

India introduced the Goods and Services Tax (GST) around the same time that China introduced VAT (Value Added Tax) — in 2016. I was in China at that time. Believe me, it was a delight. Our profit margins were very strong because VAT actually lowered our cost. There were just three slabs, effectively just two slabs, because one was almost not applied. There were hardly any classification issues, and the few that were at the beginning were removed. You didn’t have the classification issues that we saw in India about whether a product was a roti or a paratha. China’s VAT landed very well largely because they cut taxes a lot, and really simplified things. Then, in three steps, they lowered the VAT rate subsequently. 

The other thing in China is that once the central government takes a decision it is implemented. States don’t come into it. Whereas here, you need state-level registrations, municipal-level contacts and so on, which makes it incredibly complicated for businesses. 

Lastly, officials are empowered there. I’ve dealt personally with them. The local office of China’s investment promotion agency was like our friend. They used to call me up and ask, “Hey, what can we do to help you? Why aren’t you opening the office faster? Do you need help recruiting people?” That attitude is rewarded in China, especially the mayors of cities are rewarded on the basis of GDP (gross domestic product) growth and foreign investment. 

From my narrow perspective as an executive who has operated in India, China, and the US, I can say that it’s much easier to do business in China. However, I must say that in the last two years, China has become more restrictive. They are making the mistakes that I think we made earlier, like imposing irrational, punitive taxes on businesses. They are introducing very tight capital control and they’ve also become very intrusive on personal liberties. 

That’s the big window of opportunity for India. Experts would much rather live in India than in China, given the freedoms that we have, if we could just make it easier for them, so that they are not having to hire an army of lawyers, brokers and middlemen to run an ordinary business. 

Do you think the administration thinks that way? 

I think the bureaucracy does not think that way. I’ve dealt with the bureaucracy all my life in India. It is deeply entrenched in the bureaucracy’s culture that nobody gets a reward if GDP increases, but you lose your job if a mistake occurs. So, the rational thing to do is to avoid mistakes. To do that, you avoid taking decisions and push them up to the political leadership so that you’re not to blame. 

We should really learn a lot from China. We can definitely learn a lot from the way they set up the high-speed rail and the tax system. There’s no shame in copying that. 

Do you think the urgency we saw in the ’90s was lost in subsequent years? 

There was a drought in 1987, and a balance-of-payments crisis in 1990. That was a nightmarish period. So, there was indeed a sense of urgency, which was evident even in Russia and China. However, once the immediate crisis was over, China was able to remain highly motivated to grow the economy. 

In India, priorities change periodically with elections. That happens in every democracy, even in the US, which may be the worst example at the moment, where policy is changing sharply because of the midterm election in November. Everything is being seen through that lens, rather than how to build capability and capital investment for 50 years. China still thinks that way. 

Democracy has tremendous advantages. But it is a reality in India that state and central elections do divert the attention of political leaders. The BJP has a tremendous mandate and that’s why I feel very hopeful that they can return to their original vision of simplifying things, trusting people. 

I am not here as a critic. But look at other countries that are doing very well to see what we can learn from them, especially China. There is a lot that is wrong with China that we can take advantage of. We have a vibrant democracy, a free press, we have the English language to communicate with the world, we have top executives at companies around the world. We also have great relations with the largest economies. We should build on that. 

I think we have become a little inward-looking, there is a lot of self-congratulation. That needs to be balanced with a rational look at what the actual GDP is, the balance of payments, and how much we export. Besides, the government may be very welcoming, but, at the ground level, I may still have to deal with the municipal corporation for local permissions. That part of the reform puzzle has not been addressed yet. We continue to have a large government with a huge number of bureaucrats. 

Has the pace of churn and emergence of new champions in Indian industry slowed in recent years? 

I look at it differently. To me, there has been a tremendous explosion of Indian entrepreneurial talent. I am from IIT Kanpur and I interact with some youngsters who have started companies. I was blown away by the power of these companies in the internet space, particularly. Even otherwise, there are people making breakthroughs in medicine, rocketry, etc. I feel confident that those companies can become very successful. The proof will be if they can expand to other countries. Throughout my life, I’ve had this theory that a country’s presence in the world is judged by the number of brands that it creates that are global. 

Why should Starbucks be the leading coffee chain in the world? The US doesn’t even grow coffee. Why should McDonald’s be the leading burger chain? Indian food is tastier. If you take the top 100 brands of the world today, maybe 70 are from the US.

Look at Instagram or WhatsApp, their impact in India is just massive. That impact should come from startups in India. I think it will happen because costs in the US are going up a lot. And the US has a very broken political system. They somehow seem to find the worst people to elect into office. And China is very vulnerable in that regard, too. They have a very opaque political system. That’s not the case in India — it is very open. So, I think that will happen automatically. 

But to enable that, I think we must have a strong domestic market. None of these US brands like Starbucks or Apple would have worked if they had failed in the US. That will happen in India as well. 

What reforms do you think India should take up now to boost its growth to the next level? 

I think India has done well since 1991 to liberalise and it has become a productive, vibrant economy. But the world is not absolute, it is relative. It’s not how good you are compared to the past, but how good others are. If you look around Asia, you realise that India needs to do a lot, lot more. 

The framework is focused on revenue maximisation, which goes back to British times. That’s something that would be great to look at differently. Take the real estate market for example. There still is a lot of black money. Everybody knows it; it’s a really horrible thing. It deprives the government of taxation and creates huge inefficiencies. A lot of this happens because of punitive levels of taxation and (cumbersome) compliances. 

So, there needs to be a dramatic reduction in taxes across the board. If you take that risk, you will see a decline in the short term, but you will see tremendous compliance and improvement in the long term. Nobody wants to cheat on taxes when they’re born, they are taught those things as they grow up. If there’s a 40 per cent tax on an item that costs you ₹100 to make, then have to sell for ₹140. Companies have a 10 per cent profit margin, but the government has a 30 per cent profit margin. That’s not sustainable. 

Overall, I would say the level of trust is still quite low, both ways, between the government and the traders. 

When the Bharatiya Janata Party was coming to power, all of us felt very happy because they promised to lower taxes and make things simpler for traders and shopkeepers, who were a big constituency. We are hopeful that life will become very simple. That’s the direction the government needs to work in. There should be much more simplification, much greater trust, and it should remove the 40 per cent slab in the GST… that makes no sense. No country has been able to sustain such a rate; it will just lead to a lack of compliance. If somebody is running a sinful business, you should shut it down if you really think it’s a sin. 

If you poll traders and shopkeepers, I think you’ll hear that things are better than before because they have more goods to trade, but the process is still very complicated; there’s a lot of paperwork. 

There needs to be a discussion on why our culture is punitive, harsh and anti-business. It should be welcoming, pro-business, and a partnership. There’s still suspicion that if you leave any room for doubt in the rules, people will exploit them. As a result, the rules are so complicated that it’s difficult to even read them. That needs to change. 

By the way, there are states where it is easier to do business. Tamil Nadu and Gujarat are very different from Bihar and some others. Kerala is an exceptionally well-run state and has been since the time I was born. So, India could look at a regional approach, like how China did. That may not be possible in India because of our political structure. But I think certain states can be given more freedom. Tamil Nadu, too, is a very well-organised state. 

Someone needs to make sense of that riddle, because unless we solve it, we’ll be running patchwork solutions and not have a really vibrant global presence. There’s no reason why we should not be the world’s second biggest economy after China in 20 years. 

I visit IIT Kanpur often. The expressway from Delhi is fantastic, and then you get inside Kanpur and the metro is superb. But you look at the roads in the city and nothing has changed since 1976. They’re still lined with little shanties and you see women carrying children on one side and something else on their head, and it’s heart-breaking. There’s no reason we should have that.

If you sit in your car looking at your phone, India looks great. But if you just roll down the window and look around you, you realise there is a lot to be done. 

I think India needs to have a goal to surpass China. It is doable. We have the demography, culture and global talent. We generally set our sights too low, but there’s no reason why India cannot be the world’s leading economy, anything less is to let the people down. Reforms that unshackle the people will get us there.