FW: It's a Topsy-Turvy World (by TCS VP)

Udhay Shankar N udhay@pobox.com
Fri, 31 Jan 2003 19:45:45 +0530

For people who don't follow the Indian software scene: 'TCS' is Tata 
Consultancy Services, India's largest software company as measured by 
revenues. A thought-provoking restatement of something that many of us have 
been thinking for a while.


PS: apologies for the formatting - I am hastily converting from the 
original HTML.

>In this topsy-turvy world, the rupee is appreciating against the dollar; 
>the Indian inflation rate is down to 2-4 per cent; and NRIs are leaving 
>the US for India, in search of better job opportunites and a better 
>standard of living.
>The Axioms
>For as long as I can remember, some things have been accepted as axiomatic 
>by all of us: the "original" NRIs (non-resident Indians), the "other" NRIs 
>(not really Indians, also known as RNIs, resident non-Indians), RRIs 
>(resident real Indians), R2Is (returned to India Indians), and the rest.
>To paraphrase Thomas Jefferson, "We the people hold the following truths 
>to be self-evident: that the rupee will always depreciate against the 
>dollar (the US dollar, naturally - is there any other kind?); that the 
>inflation rate will always be higher in India than in the US; that the job 
>market will always be better in the US than in India; that the standard of 
>living will always be higher in the US than in India."
>"We the people hold the following truths to be self-evident: that the 
>rupee will always depreciate against the dollar; that the inflation rate 
>will always be higher in India than in the US; that the job market will 
>always be better in the US than in India; that the standard of living will 
>always be higher in the US than in India."
>So accustomed are we to accepting these premises without question that we 
>have thoroughly internalised them - we no longer consider these as overt 
>externally introduced assumptions, but as immutable laws of life, like 
>Newton's three laws and Maxwell's four equations.
>But now things have gone topsy-turvy in this land of India that is Bharat. 
>As Mark Antony said, "Oh what a fall was there, my countrymen!"
>Consider the following facts:
>The rupee
>After depreciating steadily against the US dollar (from 31.37 to the 
>dollar in 1991 to 49.07 to the dollar in 2001), the rupee has now 
>appreciated against the dollar, and is now at 48 to the dollar. In fact, 
>but for active intervention by the Reserve Bank of India (RBI), the rupee 
>would appreciate by another 2.5 per cent against major currencies, 
>including the US dollar.
>India's foreign exchange reserves, which hit rock bottom at less than $ 1 
>billion back in 1991, are now at $ 68.5 billion and climbing steeply. Too 
>steeply, as a matter of fact. If the RBI did not "sterilise" these massive 
>dollar inflows, the rupee would appreciate even faster than at present. 
>The "merchandise" trade of India shows a deficit only because the Indian 
>government perversely insists on counting India's massive software exports 
>of $ 8.2 billion under a strange head called "invisibles". Its outdated 
>rationale is that, since no material changes hands, software exports 
>cannot be counted as "merchandise".
>But for this and other such accounting quirks, India would show a 
>merchandise trade surplus.
>Similarly, our strange way of counting foreign direct investment (FDI) 
>substantially understates the amount of money that the Indian economy is 
>able to attract. A recent issue of "Business World" points out that, if we 
>were to use the norms published by the International Monetary Fund (IMF), 
>India's FDI in 2001 would be $ 8 billion, not $ 2.2 billion, which is the 
>government's official figure. (As an aside, using the same IMF norms, 
>China's FDI falls from $ 40 billion to $ 22 billion.) In any case, India 
>is now showing a current account surplus.
>By contrast, for many years the US economy managed to get away with a huge 
>trade deficit, since the other countries of the world turned right around 
>and invested their trade surpluses in the US. This gave the US a huge 
>surplus on the current account, even if it had a trade deficit. But now 
>the trading partners of the US are no longer automatically willing to 
>re-invest their surpluses in the US. This is one of the reasons why the 
>current economic slump in the US has been so prolonged.
>The Indian inflation rate
>The inflation rate in India has been hovering between two per cent and 
>four per cent per year for the past several years. With salaries 
>increasing at a much faster rate (especially, but not exclusively, in the 
>software sector), the real incomes have been increasing at a very healthy rate.
>Coupled with the rapid drop in real estate values (possibly because most 
>of the black money has already been invested in this sector), the 
>disposable income, especially in inexpensive metros like Hyderabad, has 
>just been going through the roof. This is why there is such an increase in 
>the number of restaurants and entertainment outlets.
>The Indian Job Market
>With the job market being so bad, many in the US are either delaying their 
>graduation or returning to graduate school. As a result, Indian students 
>who have gone to the US without financial aid are being forced to complete 
>their Master's Degrees entirely on their own money.
>And how about the job market? Until the dotcom bubble burst in 2000, 
>everyone assumed that the part of one's career spent in India was just a 
>prelude to one's "real" career, that is, a job in the US. Anyone who had 
>the option of going to the US was considered mad if he did not exercise 
>that option.
>Fresh Masters graduates in Computer Science from very ordinary American 
>Universities were able to command starting salaries of $ 60,000 per year. 
>So it was not unusual for kids from middle-class families to take huge 
>loans to go to the US to do a Master's Degree even without any financial 
>support, since they were sure that (a) they would get financial aid after 
>one semester, and (b) they could recoup the loan amount and much more as 
>soon as they finished their degrees.
>But now the situation has turned around completely. With the job market 
>being so bad, many in the US are either delaying their graduation or 
>returning to graduate school. As a result, Indian students who have gone 
>to the US without financial aid are being forced to complete their 
>Master's Degrees entirely on their own money. If at all a fresh Master's 
>Degree holder in Computer Science is able to get a job, he will be lucky 
>to get $ 36,000 per year - a drop of 40 per cent from earlier highs.
>I know of many Indian students who have gone to the US taking loans and 
>still spinning out their degree programmes, since they have no hope of 
>getting a job of any kind. Some persons I know are compounding their 
>earlier mistake by taking further loans to do a second Masters Degree, all 
>because they don't want to contemplate returning to India.
>Ever since the downturn in the US economy, H1B visa holders in the US have 
>become an endangered species. The downturn in the US software industry has 
>not spared even GCHs (that's "green card holders" for those of you who 
>don't regularly read the matrimonial columns).
>The bursting of the dotcom bubble was quickly followed by a seemingly 
>never-ending series of accounting scandals, which makes one wonder how 
>much of the "growth" of the US economy during the 1990s was real, and how 
>much a stage-managed mirage.
>In fact, many of my US-based friends have told me that not only has the 
>software job market disaster claimed (literally) tens of thousands of 
>jobs, but also there is no end in sight.
>But how about the situation in India? After growing at a dizzying pace of 
>50 per cent-plus between 1998 and 2000, in 2001 the Indian software 
>industry grew by "only" 30 per cent.
>Being an ethical company, in summer 2001 Tata Consultancy Services (TCS) 
>honoured all the campus recruitment offers it made during the preceding 
>year and inducted everyone at the originally indicated time. Some other 
>leading software companies did not honour their campus placement job 
>offers, preferring to hide behind the euphemism of putting these offers 
>"on hold". But even these companies did not resort to massive layoffs as 
>their American counterparts did.
>Now, in the fall of 2002, it is business as usual. Every large company is 
>hiring by the thousands. TCS itself has hired 4,000 persons in 2002, and 
>others are hiring similar numbers.
>In terms of undergraduate calculus, one could say that so far as the 
>Indian software industry was concerned, the first derivative has always 
>been positive. The second derivative temporarily became negative, but now 
>it too has turned positive. Anyone who even thinks about quitting a steady 
>software job in India and going to the US can only be considered a fool.
>The standard of living in India
>In comparing living standards in India and the USA, it is desirable to use 
>the "purchasing power parity" (PPP) exchange rate, and not the official 
>exchange rate. To illustrate, one dollar equals Rs 48. But one cannot get 
>a good cup of coffee for eight cents (Rs 4) in the USA, nor a cup of 
>coffee in an air-conditioned restaurant for 30 cents (Rs 15). One cannot 
>eat out for one dollar (Rs 50), and so on.
>The last point is about the standard of living. As little as three years 
>ago, I felt that in my lifetime I would not see a day when a person living 
>in India would opt not to move to the US because he would not have the 
>same standard of living. There are plenty of reasons why a person living 
>in India might opt to stay here, family responsibilities being the most 
>common. But I never imagined that the inability to maintain one's standard 
>of living would be a consideration.
>Of course, in the software industry, it was not unusual to see someone 
>with 10 or more years of experience opting to stay on in India, because he 
>felt that his experience would not be "counted" in the USA and that he 
>would therefore not command a comparable position abroad. But it was taken 
>for granted that a person holding a particular level of position in the 
>USA would always have a better standard of living than his counterpart in 
>India. Even I felt the same way. Again it took the slump in the US 
>software industry to turn things topsy-turvy.
>In comparing living standards in India and the USA, it is desirable (in my 
>opinion) to use the so-called "purchasing power parity" (PPP) exchange 
>rate, and not the official exchange rate. The PPP is a concept that has 
>been around for many years, and is intended to measure the different cost 
>of goods and services in different societies.
>To illustrate, one dollar equals Rs 48. But one cannot get a good cup of 
>coffee for eight cents (Rs 4) in the USA, nor a cup of coffee in an 
>air-conditioned restaurant for 30 cents (Rs 15). One cannot eat out for 
>one dollar (Rs 50), and so on.
>Services are also cheaper in a developing society. One cannot get a flat 
>tyre repaired in a roadside shop for 80 cents (Rs 40) - in fact, one is 
>lucky to get it repaired for $ 40! The United Nations formalised this 
>concept in the early 1990s, and started ranking international economies on 
>the basis of the PPP-weighted GDP.
>Of course, the GDP itself is a flawed notion and is stacked against 
>developing countries, because a housewife producing lunch for her husband 
>is deemed to make no contribution to the GDP, while a restaurant worker is 
>believed to do so. But let us not go off at a tangent. The point is, when 
>the first PPP-weighted GDP figures came out in 1993, it was determined 
>that the PPP factor for India was about 4.5. This factor has remained 
>pretty much constant over time. This means that in reality the Indian GDP 
>is undervalued by a factor of 4.5. To put it another way, in reality $ 1 
>should be taken as Rs 10.5 (which I will round downwards to Rs 10 for 
>convenience), and not Rs 48.
>If we apply the PPP weighting, it follows that a person earning "X" 
>dollars per year will have a comparable living standard if he is able to 
>earn Rs 10 X per year in India. The question therefore becomes, is such an 
>expectation realistic? Even as little as five or six years ago, the answer 
>was in the negative, even in sunrise sectors such as software.
>But thanks to the rapid increase in software salaries in India, coupled 
>with a deflation in US salaries, the situation has now turned around. In 
>recent months, I have seen a flood of applications from persons either 
>living abroad or having recently returned from abroad. When they apply to 
>TCS, they are naturally obliged to mention their last salary abroad. With 
>this data, I can definitely state that TCS is able to offer Rs 10 X per 
>year to a person earning $ X per year abroad.
>Of course, if a person earns $ X in, say, Tennessee and Rs 10 X in Mumbai, 
>his standard of living would be much better abroad. But conversely, a 
>person earning $ X in Silicon Valley would be much worse off than a person 
>earning Rs 10 X in Hyderabad. As the Chief Minister of Andhra Pradesh 
>never tires of telling his audience, one out of four software 
>professionals from overseas is from AP!
>I can add one more data point to the discussion. When I decided to leave 
>the Ministry of Defence after 11 years back in 2000, I explored just two 
>job options. One was in the US, in a company that belongs to the 30 
>companies that make up the Dow Jones Industrial Average, and the other was 
>my present job in Tata Consultancy Services.
>Both jobs were comparable in scope. The overseas job was as a "Research 
>Fellow" to do what I felt like - I would have been just the fourth 
>Research Fellow in that company's Research and Development (R&D) set-up. 
>Similarly, in TCS I became the fifth EVP (executive vice-president). At 
>that time, the US salary was numerically just about 10 times my TCS salary.
>So in terms of PPP-weighted income, my TCS salary two years ago was just 
>about equal to the US offer. Just two years down the road, my income in 
>TCS has increased by more than 50 per cent, while I imagine that my US 
>salary would not have increased by anything like this amount. Clearly I am 
>now better off in PPP terms in my Indian job than I would have been in the US.
>To summarise, at least in PPP-weighted terms, it is now definitely 
>realistic to expect an Indian salary that is comparable if not superior to 
>the US salary.
>Other sectors
>I have argued that at least in the software industry, India is able to 
>offer world- class salaries, at least to persons with about 10 or more 
>years of experience. Will this idyllic state of affairs spread out from 
>the software sector to other segments of Indian society? I am not sure, 
>but I would not rule out the possibility either. Many in India are 
>convinced that our next success story will be in bio-technology (BT). "BT 
>will follow IT" is a commonly heard slogan.
>I myself have launched my company's activities in bio-informatics, an 
>essential part of bio-technology, so I have studied this market a little 
>bit. In principle, I don't see any reason why we cannot repeat our IT 
>success in BT.
>We have some advantages that apply to both domains, such as a large pool 
>of reasonably well-trained manpower, attention to detail, and of course, 
>knowledge of the English language. India is slowly but surely emerging as 
>the "back office" to the world.
>Our antiquated labour laws, outdated procedures for customs clearance, 
>cumbersome rules governing import and export, our (in)famous bureaucracy 
>are all factors that are working against India becoming a major player in 
>The main worry that people like me have is the apparent inability of India 
>to compete in the arena of "pure" manufacturing. Our antiquated labour 
>laws, outdated procedures for customs clearance, cumbersome rules 
>governing import and export, our (in)famous bureaucracy are all factors 
>that are working against India becoming a major player in manufacturing.
>But apparently all is not doom and gloom. I see many hopeful signs, all 
>based of course on what I read and hear, not on personal experience. 
>Various business magazines have pointed out that, whenever a multinational 
>company has set up a plant in India, the cost of manufacturing in India 
>has not been significantly higher than elsewhere, and in some cases it is 
>the lowest in the world (even lower than in China).
>Examples of this are St Gobain's of France, one of the leading 
>manufacturers of glass in the world. Of course, Tata Iron and Steel 
>Company, better known as Tisco, is now the cheapest producer of steel in 
>the world, notwithstanding our high cost of electricity, high cost of 
>capital, and high cost of rail transport. So if we decide to make 
>manufacturing a priority, we can make a mark there too.
>The Indian economy grew at an "official" rate of about 6 per cent during 
>the last 10 years. Even at this official rate, the Indian economy has been 
>the second fastest growing economy in the world during this period, China 
>being the fastest. But what I see all around me seems to point to a much 
>more robust growth than this figure would indicate.
>I have talked to many economics experts about this apparent disparity. I 
>should emphasise that I have been talking to "real" economists who need to 
>work and survive in the marketplace, and not the closet Marxists who pass 
>themselves off as economists and infest Indian academia and newspaper 
>editorial pages.
>What I hear the professional economists saying is that, while Chinese 
>growth figures are based on somewhat generous interpretations of their 
>performance, the Indian figures always understate the actual growth. Over 
>the years we have apparently perfected a system of officially shooting 
>ourselves in the foot, and repeatedly doing it. For instance, the services 
>sector, which has been growing at a tremendous clip in India, is given a 
>very low weight in our official statistics, whereas static sectors such as 
>agriculture are given a huge weight. The late (and great) jurist Nani 
>Palkhivala said, "It takes a superhuman effort to keep India poor."
>Earlier we could count on our "netas" and "babus" to supply this 
>superhuman effort. Now that the Indian economy has been unshackled a 
>little bit, they are apparently content to present a picture of poverty 
>and degradation through the clever use of statistics. If our "netas" and 
>"babus" had a little more imagination, they would re- interpret our growth 
>figures to present the Indian economy in the best possible light. Instead, 
>they seem to be doing just the opposite.
>The future
>Does this mean India is poised to take over the US as the largest economy 
>in the world? Of course not. The US society has several advantages that 
>have been carefully built up over time. There is no way in which India can 
>even close the gap in these advantages, let alone dream of overtaking the US.
>To cite just one example, the US has the best universities in the world, 
>by a huge margin. Forget about India - even the best European universities 
>are nowhere near the best American universities. A mediocre American 
>university is miles ahead of a mediocre university anywhere else. So far 
>as India goes, our universities are in an abysmal state, and I do not see 
>any signs of improvement.
>Everyone speaks of the politicisation of the universities, especially in 
>terms of the appointment of Vice-Chancellors. But I consider the system of 
>reservations, both in student admissions and in faculty appointments, to 
>be a far bigger evil. So I am not at all hopeful that we will have a good 
>university education system at any time in the near future.
>Another advantage enjoyed by the US is its vibrant and dynamic economy. 
>The US offers a challenging atmosphere in which new technological ideas 
>can be conceptualised, tried out, perfected (and also rejected), and 
>exploited commercially. In contrast with the situation regarding 
>university education, in this respect I think India is beginning to get 
>its act together. The Indian economy now demonstrates a surprising amount 
>of dynamism, with mergers and acquisitions, branding exercises, 
>competition for customers, and all the other positive aspects that one 
>associates with the consumer-oriented US economy.
>To cite just one instance of this, the charges for cell phones started off 
>at Rs 16.80 per minute, and are now down to about Rs 1.20 per minute (a 
>reduction by a factor of 14) in just about five years. The recent 
>introduction of WLL/CDMA technology promises to bring down the prices even 
>Unlike many other economies, our economy is mostly driven by internal 
>consumption, especially the huge unfilled demands for everything, ranging 
>from soaps to soap operas. This is not at all a bad thing. With our huge 
>internal economy, I believe Indian society is now beginning to offer an 
>opportunity to aspiring innovators and technology creators to come up with 
>"Indian solutions for Indian problems".
>Also, our technological scene is now beginning to mirror the world scene 
>in areas such as Information Technology (IT) and pharmaceuticals. Hence, 
>after a technological solution has been proven in the Indian context, it 
>can be exported abroad. This is quite a contrast to the old days, when 
>Indian innovators had no exposure to the overseas marketplace, and thus 
>had to try and dream up products and technologies in a vacuum.
>One criticism I hear about the Indian technology scene is the absence of 
>so-called venture capitalists. I for one have never believed in the 
>"venture capital culture" that supposedly exists in the USA. If one 
>studies the years of the dotcom boom carefully, one realises that the role 
>of most venture capitalists has been to start new companies and take them 
>public, not to take them to profitability. Now that the US stock market is 
>no longer willing to pay astronomical sums to own shares in loss-making 
>companies, the venture capital culture has pretty much died out in the US 
>as well.
>Another criticism with which I don't agree is the so-called absence of the 
>"entrepreneurial spirit" amongst Indians living in India. I think the 
>popular media (both in the US and India) has played a very undesirable 
>role in defining what an "entrepreneur" is. According to the media, an 
>"entrepreneur" is someone who starts his own company. "I am running a 
>start-up" is the kind of glamorous phrase one is supposed to toss out at 
>parties, to draw the admiration of all and sundry.
>To my mind, an entrepreneur is someone who starts a new venture and 
>creates jobs. It does not matter whether "he is his own boss" or not.
>But I must say that I disagree with this viewpoint. To my mind, an 
>entrepreneur is someone who starts a new venture and creates jobs. It does 
>not matter whether "he is his own boss" or not. In practice, this rather 
>romantic business of being one's own boss often forces one to take 
>expedient short-term decisions, instead of concentrating on creating 
>long-term lasting value.
>In contrast, when I started the bio-informatics activity in TCS, I had the 
>luxury of hiring 35 persons without worrying about generating an immediate 
>positive cash flow. Because of this, we are able to concentrate on 
>building up our intellectual assets, which is the only way to become a 
>global player.
>What I am saying is that I see plenty of creativity and entrepreneurship 
>amongst RRIs, even if they don't all rush off and try to "be their own boss".
>The last two years have been truly amazing in terms of demonstrating what 
>India can expect in coming years. Thus far only a few tiny cracks have 
>been introduced into the solid wall of Nehruvian state control that has 
>prevented India from reaching its true economic potential. But even with 
>these tiny cracks providing equally tiny openings in our bureaucratic 
>control mechanisms, Indians have delivered the world's second fastest 
>growing economy for over a decade now. The future can only be better, not 

((Udhay Shankar N)) ((udhay @ pobox.com)) ((www.digeratus.com))