India Inc: Triumph or time bomb?

India’s business success has triggered waves – and takeovers – across the globe. But, asks Vedant Walia, can it make the transition from short-term profits to long-term value?

“The Empire Strikes Back!” That was the headline trumpeting Tata Steel’s victory in a high stakes auction to acquire Corus (formerly British Steel) for £6.2 billion, and so become the world’s fifth largest steelmaker. For the media and politicians alike, this was cause to celebrate: India Inc. had firmly announced its presence on the world stage.

Flushed with confidence, Indian business has seen its overseas acquisitions soar from £500 million in 2000 to over £10 billion last year. India is now the second largest inward investor to the UK, and is rivalling China in Africa and Central Asia.

It’s all a stark contrast to 1991, when India’s long-protected enterprises stood trembling as liberalisation threw open its economy. The last decade has seen Indian firms embrace globalisation and prosper. IT and offshoring have led the way, but they’re now being joined by manufacturing, natural resources and pharmaceuticals. Take Ranbaxy, a pharma company which sells in 125 countries and manufactures in seven. Or Infosys, which has hired 25 graduates from the UK to join others from America, Japan and Australia to be trained in the historic city of Mysore. The Indian multinational company is a rapidly emerging reality.

But there are clouds on the horizon. Climate change is threatening to degrade the resource base on which this growth depends. And the growing divide between the metropolitan hubs with their highly skilled workforce and the impoverished majority could yet derail India’s economic miracle.

That may seem like an overly harsh assessment for an economy that is growing at over 8% annually and has enriched millions of people. But for some Indians it has also meant forced dislocation from their homes to make way for the latest industrial complex. In Nandigram, West Bengal, an Indian state whose communist ruling party brought in McKinsey & Co to upgrade its image to international investors, 14 people were killed during a protest against land being taken for a new Malaysian-owned chemical factory. These local flashpoints are flaring across the country, from farmers fighting Coca-Cola for water rights in Kerala to violent labour protests at a Honda plant near New Delhi. Increasing tension between the aam aadmi (the ‘common man’) and India Inc. now seems inevitable – unless action is taken.

But what action – and by whom? “Stop having such ostentatious weddings!” That was the implicit message from prime minister Manmohan Singh in a recent speech to business leaders. He laid out a ten-point social charter for widening the benefits of India’s economic boom by creating “socially, politically, environmentally, and financially sustainable growth processes.” He called for more investment in skills development and innovation, and for a shift away from conspicuous consumption “not just because it is socially undesirable at our level of development, but also because it is environmentally unsustainable.”

Fine words, perhaps, but they drew a frosty reception from an audience all too ready to spot hypocrisy when they heard it. Highlighting the lavish lifestyles of Indian ministers, one commentator declared that “governments in glasshouses should not throw words like ‘conspicuous consumption’ around”. And such calls are unlikely to appeal to businesses whose surging profits are founded on the consumerist appetites of India’s burgeoning middle classes – with everyone from small Scottish whisky distillers to global giants like Vodafone cashing in. More fundamentally, critics pointed out that the government was unlikely to risk smothering the economic fruits of liberalisation with a blanket of regulation.

India Inc. is facing a very ‘Big Ask’. It needs to reconcile its industrial boom with social and environmental crises, while at the same time satisfying its shareholders by maintaining its impressive rates of growth in an increasingly competitive global marketplace. There is no shortage of entrepreneurial energy, skills or innovation capacity in 21st-century India, but can it be mobilised in time – and will it be enough?

A distinctly Indian approach

When the city of Jamshedpur won a UN award in 2004, it was in recognition of the quality of its urban infrastructure, vibrant economy and cosmopolitan population. But by implication, it also recognised a distinctively Indian approach to corporate responsibility.

Jamshedpur – also known as Tatanagar – was built around India’s first steel plant, and is still run by subsidiaries of the mighty Tata Group, which provides housing, municipal services, education and healthcare. It’s reminiscent of an enlightened Victorian factory town – but one combined with a particularly Indian brand of industrial nationalism. “The Tata Group has played a crucial... role in nation-building, consciously choosing businesses that build the foundations of our economy and lead to long-term growth,” claims MD Kishor Chaukar. Other leading Indian companies, such as Birla, also subscribe to this view. Typically, the ‘foundations of our economy’ means heavweight sectors such as steel, mining, cement and transport.

But as the old adage goes, ‘it’s not how you spend the money, but how you make it, that matters’. Indian companies are starting to realise that the foundations for a more sustainable future will not come from a small share of the profits generated through short-term business models that add to environmental problems and social tension. It’s against this backdrop that the corporate responsibility bandwagon has finally rolled into India’s boardrooms, pushed by the growing adoption of multinational business norms. One hundred and twenty-four Indian companies have signed up to the UN’s Global Compact principles on human rights, labour standards and the environment.

So is Indian business shifting seamlessly from philanthropy to a wider view of corporate social responsibility? On the surface, yes. A recent WWF survey of 192 prominent Indian companies (including multinationals) found that 60% claim to assign high priority to critical environmental issues when making commercial decisions. Its report, Indian Companies in the 21st Century, declared : “Many [business leaders] in India [understand] the magnitude of the challenges it faces, but also [show] a willingness to turn these challenges into business opportunities.” So far, so good. But one in ten admit to breaking environmental laws themselves, and over half believe other companies routinely do so. This sanguine appraisal is reinforced by an assessment from US pension fund CalPERS, which concluded that 25 leading Indian companies are in danger of failing to meet its basic social and environmental standards. So while there may be an appetite for innovation, many Indian companies would currently struggle to satisfy entry-level CSR criteria.

But is Western-style CSR really the best approach for India? Arguably, a model developed for the relatively comfortable operating conditions of London or New York, which grew out of managing reputation and addressing niche issues such as volunteering or diversity, will always fall short in India. For India, a better model might be that of the ‘leader business’. This is a term coined by Forum for the Future to refer to companies aiming to build long-term value for shareholders and society. It’s echoed by Patrick Cescau, Group CEO of Unilever, who says that “tackling social, economic and environmental issues is an integral part of our mission and business strategy”.

It’s finding echoes in India, too. Sudhir Sinha, vice president at Reliance ADA Group (one of India’s largest companies with interests in energy, telecoms and finance), calls for companies to “integrate CSR into their business agenda in a way that changes the conditions of society and markets”. Harish Manwani, chairman of Hindustan Lever, puts it more starkly: “We cannot have a successful company in a failing society”. (Manwani is only too aware of the challenges which that implies: Hindustan Lever is facing labour unrest after announcing job cuts as part of an efficiency drive.) Out of this mix of growing pressure and growing awareness, a distinctly Indian model of sustainable business is starting to emerge.

In November, the Confederation of Indian Industry (CII)’s Green Business Centre hosted an ‘investor forum’ in Mumbai, bringing together energy entrepreneurs with potential investors. The CII has also partnered with IT services company ITC to set up a Centre for Excellence in Sustainable Development.

ITC’s latest sustainability report talks of a “conviction that country must come before corporation”. In practical terms, this translates into initiatives such as the award winning e-choupal rural internet programme, providing valuable market information to three million farmers, and its ‘sustainable value chain’ initiatives around enhanced seeds and livestock management.

This enthusiasm for selling to the ‘base of the pyramid’ (BOP) is increasingly shared by rising Indian execs. Villagers have found themselves the unlikely hosts for fact-finding groups of bright-eyed professionals, armed with laptops and mosquito repellent – and it seems to be paying dividends. By combining specially designed technology with the reality of Indian conditions and limited infrastructure, companies are finding that they can successfully engage with the poor to mutual benefit.

India’s largest private sector bank, ICICI, is pioneering new ways to increase access to financial services in rural villages. Using a combination of adapted technologies such as biometric cards and voice recognition to overcome low literacy levels, products such as cattle loans or crop insurance are offered in partnership with community based organisations. This is business, not philanthropy. ICICI now has 3.2 million rural customers and a loan portfolio of some $3.2 billion.

But successful and sustainable BOP models will not be easy. If companies only pursue ways to sell more products to more poor people without regard to broader consequences, then BOP will not be part of an inclusive economy. Tata Motors wants to make obsolete the familiar sight of an entire Indian family balanced dangerously on a small Vespa scooter. In its place, it wants them to be driving a Tata car – albeit the world’s cheapest, with an initial price tag of around $2,000. Good for the families who can afford to upgrade, perhaps, but a lot more damaging in terms of congestion, air pollution and climate change.

Squaring the circle of social aspiration and environmental sustainability remains a huge challenge. But the combination of Indian entrepreneurship on the one hand, with a slowly dawning sense of sustainable responsibility on the other, might yet spring some surprises.

11 January 2008

Vedant Walia