Paran Balakrishnan: Sharper model carries India into new world

Could it be time for a spot of nostalgia? In the good old days, India watched from the sidelines as the world went its merry way. Asian Tigers? Nothing to do with us. Asian Crisis? The Thais may have sold their Mercs, but the crisis didn't wash up on our shores. We steered a different path, often in cars such as the Ambassador, a tarted-up Morris Oxford that first hit the streets in the early 50s.

India's auto industry was, for decades, symbolic of its economic isolation from the world. Ambassadors, Premiers - a 60s Fiat - and a local version of the Triumph Herald ruled the roads.

That changed in the 1980s when Suzuki began making its pint-sized compacts in India, and quickly became the country's biggest carmaker.

Cut to the present. We've got the same smart aerodynamic vehicles that are driven elsewhere in the world - Toyota Camrys and Honda Accords.

Even gas-guzzling SUVs such as the Ford Endeavour and the Honda CR-V thread their way through the chaotic streets.

In other ways, too, the global economy has arrived in India. That was unpleasantly clear during the past few weeks when the Dow and the Nikkei sneezed and India's Sensex caught pneumonia. In barely one month the Sensex has crashed from a record high to a six-month low, and it is now bouncing up and down as investors get jittery.

India isn't the same country that barely missed a beat during the Asian Crisis. Today, after decades of isolation and go-it-alone economic policies, it is paying its dues and slowly becoming a part of the world economic order.

For a start, there's the World Trade Organisation. India has become a vociferous and influential member of the WTO.

As a result, it has had to dismantle the punitive tariff walls that kept imports out.

So Indian shops are now full of imported products that weren't available in an earlier era - everything from Chanel bags to Thai cane furniture and Scotch whisky, although the duty on imported whisky is still about 200 per cent.

And, if it's food you want, everything from New Zealand butter to Pringles chips or even Jamaican Blue Mountain coffee is available at a price.

At another level, India has mounted a diplomatic charm offensive in Asia and other parts of the world. As part of a "look east" campaign, diplomats are negotiating free trade and economic co-operation agreements with countries such as Thailand and Singapore. India is also talking to a host of countries, including Brazil, Israel and the Gulf nations, hoping to build a web of alliances that stretches around the world.

The results are visible in shop showrooms. Some manufacturers have stopped production in India and are importing products such as air-conditioners and microwave ovens from their factories in Thailand - something that once wasn't allowed.

This has had an extraordinary effect on the economy. Indian businessmen, once cocooned from the world, now know they must produce cheap products that can compete with the best the Chinese or the Koreans can throw at them, whether its toasters, two-wheelers or steel.

Many Indian businessmen must be thinking nostalgically of the era when India had a strict socialist-style of business. Would-be manufacturers had to obtain Government licences that were tightly controlled and given to only a few manufacturers. The quantities that could be produced were strictly controlled.

Businessmen spent weeks and months wandering the corridors of the industry ministry, trying to cultivate ministers and bureaucrats who controlled the all-important licences.

The result was that three or four manufacturers cornered the market and ensured that production numbers were always a bit behind demand, so prices and profits stayed high.

It was, though Indian businessmen will deny it, a great way to do business if you were lucky enough to get a licence.

All that changed during the 90s and the results have been dramatic. The licensing system was overhauled and it became easier to do business.

The Government has stopped trying to micro-manage industrial production. Today, it is a capitalist free-for-all, and the devil take the hindmost.

Equally importantly, in the 90s capital began its fast and furious journey round the world.

The Merrill Lynches and Morgan Stanleys opened shop in India and foreigners began investing in India's stock markets.

Initially, the amounts were small, but they rose steadily during the decade. Today, even relatively conservative money managers such as Calpers have opened offices here in India and are increasing their investments.

The foreigners are active market players and tend to have a strong effect on the Sensex.

What is the cumulative effect of all these changes? Obviously, they have helped kick-start the economy and lay the ground for explosively high growth rates.

But you have to take the rough with the smooth and suddenly, Indians are watching anxiously as economic events unfold in other parts of the world.

Will the dollar continue its miraculous high-wire act? Will the American housing market collapse like a house of cards? Is the Chinese economy about to overheat and send the world demand for commodities crashing?

Will the Japanese raise interest rates, forcing money managers to take back lots of the cheap money that has flooded into the emerging markets?

The result of this nervousness is showing in the Sensex, which has been up and down in the past few weeks whenever the Dow looks a bit feverish.

But India business is still insular and mainly focused on the enormous domestic market. That differs from China and the Asean nations, which are geared to exports and would be devastated by a downturn in the United States. And, India's all-important infotech industry tends to prosper even during economic slumps - outsourcing is a great way to cut costs when budgets are tight.

In the 1990s, former Finance Minister Yashwant Sinha proudly boasted that India had not been affected by the Asian Crisis, which devastated the region's fastest-growing countries. Today nobody is making such confident statements and they are watching which way the wind is blowing in other parts of the world.

* Each week, Business Herald columnists track developments in the world's two emerging economic superpowers. Paran Balakrishnan is an associate editor of the Telegraph, Kolkata.