Monsoon blues

All the bluff and bluster of services driven, $1 trillion economy comes apart, almost minute by minute, as the monsoon gets delayed.

Unlike the G 7 countries, where a miniscule per cent of people survive on the farm, in India and China more than one thirds of people survive on the mercy of the land. And unlike China, India is a democracy. Already there are protests in Uttrakhand and Madhya Pradesh on water shortages, these could just be starters should the Monsoon fail. The Monsoon is the umbilical cord of the Indian economy - even 60 years after independence - that cord has not been cut.

While estimates differ, there is a broad agreement among economists that the monsoon determines at least two per cent of GDP growth for India. In the context of the slowdown, a bad monsoon can be a disastrous. Even more so because so far buoyant rural demand has allowed India to grow at more than 6 per cent per year.

The share of the Monsoon fed agriculture in total output in India according to official statistics is at 18 per cent. The trick is the number of people dependent on it - and that is overwhelming. A government that swears by the national employment guarantee scheme cannot afford bad rains.

A failed monsoon will put pressure on FMCG’s, the sensex as well as tertiary sectors such as transport and storage. It will also curtail any food grain export hopes India may have harbored and put pressure on the trade deficit by encouraging imports.

“Monsoon is critical. It is a trigger not just for the FMCG sector but also for the economy. I believe that if the Monsoon fails, it shaves off the demand. At the end of the day a good one percent of the economy as a whole gets written off.”, comments Chennai based C K Ranganatan of Kavin Care, India’s second largest shampoo firm.

And it is not just the shampoo or the soaps we may suffer. We could be all in the dark. After all that fancy engineering with massive dams like Tehri, there is a 34 per cent deficit in India’s dammed reservoirs already. Bad rains will mean North India in a partial eclipse.

India’s hope of keeping the recession away was counting on the fact that we have robust domestic demand - but that too may be hit with a bad monsoon. The cumulative effect of an economic slowdown and a bad monsoon can be deadly.

To sum up, if as you read this and if it is not raining, be prepared for a longer economic downturn. A lack of money supply can be made up with the monetary policy, lack of bank loans interest rates can take care of – but short of hiring the American Indians - rains will be tough to come by.

Ranbaxy sale - innovate or perish

Just when Indians were rejoicing the takeover of iconic British brands Ford and Range Rover by the Tatas, Daiichi Sankyo spoiled the euphoric mood.

In what has been the biggest takeover of a listed firm in India's history the Japanese major paid $4.6 billion in cash for Ranbaxy.

This is not just another takeover. It holds valuable lessons for corporate India as well as the government regarding India's emergence as a global player.

For many years Ranbaxy was held as an example of an Indian multinational that bravely went where few Indian companies had gone before.

In the world of drugs, Ranbaxy was betting big. It was trying to move beyond the generic space where Indian firms can reverse engineer off patent drugs.

It had also benefited in its early days from lax patent protection. This allowed the firm to grow in size by profiting from volumes of scale.

The change came when Ranbaxy set itself a target of developing original drug compounds through proprietary research route.

Alas, the strategy proved to be its undoing as an independent firm. India's economy still lacks firms with the wherewithal to make path-breaking discoveries.

Over the last three years this painful weakness of corporate India was becoming all the more obvious. Ranbaxy was unable to come up with even a single original blockbuster drug discovery. The rights India signed away in the WTO deal were coming home to roost.

With a patent regime loaded in favour of the West, developing new drugs was proving prohibitively expensive. Drug after drug developed by Ranbaxy ran into American and European patent regimes.

On the generic front too there was competition from smaller, more nimble firms. Few know that Ranbaxy was not even in the top five generic drug developers worldwide.

Unable to make patent breakthroughs Ranbaxy was at a stage where it may have discovered that it could reach just so far on its own and no further.

The sale by itself is not bad news for the promoters. After all, the firm was established in 1962 with an investment of Rs 2.5 lakh and gave a return of Rs 10,000 crore to the investors.

It is in the genius of the capitalist system that it provides for several exit routes to entrepreneurs. So everyone, the promoters of Ranbaxy, its shareholders and the Japanese firm gained by getting the correct combination at the right price.

However, for corporate India the deal comes as both a shock and a loss. This deal exposes the fact that across industries Indians are still incapable of being thought leaders.

Soul-searching has already begun in the Indian corporate world. Several firms across industries could be potential take-over targets since their growth formula depends on incremental volumes and cost arbitrage unlike global leaders that are innovative thinkers and have proprietary research in their portfolios.

Particularly vulnerable are firms in the IT, textile and pharma sectors. Even top firms like Wipro make less than 4 per cent of their turnover from products and patents.

A very large percentage of second-rung IT firms are nothing but glorified code developers. India Inc needs to take a long hard look at its current globalising strategy. Instead of the easy way out where you fill in the gaps in the international trading system based solely on cost advantage, corporate India must invest in research and development.

This is a longer, costlier route to becoming world-class companies but it is also a surer way of ensuring sustainable success.

On the government's part, it would do well to use the proposed $2 billion sovereign fund to buy the right technology which can later be auctioned to Indian firms so as to provide them a firm footing in the exclusive club of original ideas.

Ranbaxy's takeover has a stark message for corporate India. Innovate and prosper or the big fish will gobble you up.