State of the Economy: An Interview with Ashok Soota
February 16, 2012
2011 started on an optimistic note for the Indian Economy. But by mid-year, the economy was battling stubbornly high inflation, faltering GDP growth, a depreciating rupee and the flight of foreign investors. While recent indicators are showing signs of improvement, many executives are baffled about what to expect in 2012. Our editorial team spoke with Ashok Soota, Founder and Executive Chairman of tech start-up Happiest Minds, about the current state of the Indian economy and about what to expect in 2012 and beyond.
What is your view about the current state of the Indian economy and what are your expectations from 2012?
Before I comment on the current state of the economy, I think it is important to distinguish between the state of politics and the state of the economy. Politics in India can be fractious and divided. At times, the political scenario makes you feel like everything in the country is falling apart and that’s what it felt like in 2011. Similarly, one should be able to segregate the state of the Indian economy (ceteris paribus) from its reactions to global economic events, shocks and crises. For instance, the depreciating rupee in the second half of 2011 was a reaction to the European crisis. In spite of a major downward trend in 2011, economic conditions have improved in the last two months. The rupee has recovered to almost 49.8 per US dollar (up from 53 per US dollar in December 2011) and headline inflation has dropped. Hence, looking back, I think the Indian economy overreacted to certain external events and to the politics at home: like the log-jam in the Winter Session of Parliament and the reactions of the financial markets to the European crisis.
But overall, I think the economic fundamentals are strong. Though India might have performed poorly in 2011, I believe it will bounce back in 2012. Inflation will remain under control. While it may not go down to a really low figure, it will not go out of control either. Similarly, the rupee will hold steady or continue to appreciate. However, economic conditions around the world, like the Eurozone crisis, will continue to impact India. Taking all this into consideration, and looking at recent data, I think the economy will bounce back and grow at 7 plus percent in FY 2013.
Do you think the volatility in the Indian economy has intensified?
Volatility around the world has gone up. We are witnessing stock markets fall by 300-400 points in a day and bounce back by a similar number the very next day. Similar trends are being witnessed in currency markets around the world. In that sense, volatility has become the new normal and it will be here to stay.
What about the medium- and long-term outlook for India? Do you think India has the potential to be the second- or third-largest economy, as projected in reports like “Dreaming with BRICs: The Path to 2050” by Goldman Sachs?
For all its shortcomings, India -over the last five years -continues to be the second-fastest growing major economy in the world. Though recent incidents like the 2G spectrum scandal and other large corruption cases seem to suggest that the government is completely paralyzed and that we are not moving ahead, I feel that it is good that these issues surfaced. I think the economy is moving under its own steam. But an important trend to note is that emerging economies like Brazil are catching up, in terms of attracting investments. But if you ask me about the medium- and long-term outlook for the Indian economy, on a trend curve, we will continue to be the second-fastest growing major economy until growth in China starts to plateau off. At the moment, this does not seem to be the case. China continues to defy all predictions of a slowdown. Maybe India will overtake China and become the fastest-growing economy in the next five or six years
Many business executives are of the belief that India will not reach its potential GDP growth unless the government pushes for a second generation of economic reforms. What do you think India needs to do on the reforms front?
We must view economic reforms in different ways. If you put economic reforms under one capstone, then it becomes difficult to interpret their importance, hence one needs to differentiate between them. I will call one set of reforms Foreign Direct Investment (FDI)-related, where reforms imply opening of the economy and its sectors or industries to foreign investors – like the recent decision to allow FDI in single-brand retail. In the non-FDI set, there are labour reforms, land reforms, election reforms, agricultural reforms and so on. The ability of a government to push for FDI-related reforms is a function of its strength in the Parliament. It is clear that the ruling United Progressive Alliance (UPA), led by Prime Minister Manmohan Singh, wants FDI-related economic reforms like FDI in retail. But with the UPA’s own allies like Mamata Banerjee (Leader of the Trinamool Congress in West Bengal) opposing it, one can only hope they will come through. Hence, the government’s intent may not always translate into reality. The good news is that the Government has not given up, but seems to have made a strategic retreat while it garners support.
In terms of the non-FDI related reforms overall, I think we are doing alright. Labour reforms in India are taboo and no policymaker will want to touch them. But in the end, I think we are doing fine without labour reforms. In fact, our labour laws are more flexible than those in some European countries and do not create many hurdles. In the services sector there are no issues. In the manufacturing sector, where trade unions are more prominent, there are workarounds where needed. Accordingly, we should not expect any big changes on labour reforms, but at the same time this should not deter investors.
I think what is more important is the economy’s ability to absorb capital rather than its ability to attract investment and FDI. Equally important are reforms to curb the rampant corruption in the country. While the anti-corruption campaign led by Anna Hazare in 2011 brought the country together, with regard to the urgent need to fight corruption, the Lok Pal (Ombudsman) Bill by itself will not address the deeply-entrenched corruption in the country. Nevertheless, it is a good start and we are starting to witness many high-profile, corrupt individuals – including Ministers and politicians – being thrown into jail for the first time in Independent India.
Having successfully established MindTree and now your new venture, Happiest Minds, what advice will you give to investors and companies that are closely observing the unfolding of the Indian opportunity?
Well, my advice will depend on what aspect of the economy we are talking about. As far as the overall economy is concerned, I think the India growth story is intact. But is India a difficult country to do business in? Many internal surveys like the World Bank’s ‘Ease of Doing Business’, seem to suggest that India is a difficult country. What comes naturally to us may not appear to be so for others. But I do not think there is any challenge that is insurmountable as long as one has the right advice and right local partner. But one needs to be cautious with regard to policy changes, particularly in regulated industries like telecom as we have seen in the 2G spectrum case where 122 licenses have been cancelled. On the plus side, I think – in the same industry – the recent Vodafone judgment indicates that there is a rule of law in the country. Hence, there are a lot of positives and negatives with regard to the Indian market. There are many new sectors that are attracting investments, such as Alternate Energy, Bio-Tech, Web 2.0 companies etc. The need for Infrastructure investments remains huge. India is a growing market and if you want to be a part of this growth story, I think it represents one of the most attractive options in the world.
About Ashok Soota
Ashok Soota is widely recognized as one of the pioneering leaders of the Indian IT industry. He is the Founder and Executive Chairman of a start-up called Happiest Minds. The company was launched on August 29, 2011 with the mission to create the Happiest People and Happiest Customers and is focused on disruptive technologies such as cloud computing, social media, mobility, business intelligence and analytics. Prior to founding Happiest Minds, Ashok co-founded Mind Tree, one India’s most prominent IT companies, in August 1999. The company, under Ashok’s leadership, became a US$ 350-million global entity, employing over 9000 people and with offices located in the US, Europe and Asia. (For more information about Ashok Soota: http://www.happiestminds.com/about-us/leadership-team/ashok-soota)