Newcomers are racing ahead as older industries struggle to shake off the inheritance of an over-protected past, says Krishna Guha

A casual observer, glancing at India's macro-economic situation, would see little evidence of a nation in the throes of profound change.

But look at the micro-economy and an entirely different picture emerges: one of quickening structural transformation reshaping India's business world and markets, and with them the lives of millions of people. The number of milestones passed in the past 12 months shows how far this process has advanced.

Infosys Technologies, a software exporter, became the first Indian company to list on a US stock market. It was joined by ICICI, the first Indian financial institution to undergo a US audit, and Satyam Infoway, an internet service provider.

Reliance Petroleum commissioned India's first private sector oil refinery, one of the biggest in the world. Essar Steel became the first Indian company to default on an international debt issue. Private sector fund managers overtook Unit Trust of India, the public sector fund manager, in terms of sales for the first time.

The number of acquisitions hit an all-time high. Zee Telefilms, a media company, bought out joint venture partner Star Television, in India's biggest media deal. Tata Tea tabled a record bid for a foreign company, Tetley Tea. Lafarge, the French company, became the first multinational to enter India's cement industry.

Ranbaxy and Dr Reddy's Laboratories led India's pharmaceutical industry into a new era, when they licenced the first products of their research to foreign companies. And software exports hit a new record, while the sector's market capitalisation crossed Rs1,000bn: the highest valuation ever placed on an Indian industry.

The rapidity and extent of change is captured on India's stock markets, where the list of India's top private sector companies by market capitalisation reveals the churning that has taken place. An entire generation of family-owned industrial conglomerates has sunk into decline, while new investor-friendly businesses in sunrise sectors have burst into prominence.

Industrial turmoil has shattered the monopoly on commercial wealth held by the great business dynasties of Bombay and Calcutta. Self-made entrepreneurs now pack the list of India's richest men: Azim Premji of Wipro, N.R. Narayana Murthy of Infosys Technologies, Subhash Chandra of Zee Telefilms, Shiv Nadar of NIIT, Anji Reddy of Dr Reddy's, and Dhirubhai Ambani of Reliance Industries.

Ratan Tata of Tata Sons, and Kumarmangalam Birla of Aditya Birla, India's two great industrial houses, are fighting to adapt their empires to competitive markets. Many lesser dynasties are already at the brink of commercial extinction.

"India is integrating with the world economy," says Anil Ambani, managing director of Reliance Industries. "There will be big winners and big losers. We are seeing the emergence of a large number of companies that did not exist 10 years ago. Just because you were a power-house in the 1960s doesn't mean you are going to be around in the new millennium."

Hindustan Lever (FMCG)

Wipro (IT)

Infosys Technologies (IT)

Reliance Industries (Petrochemicals)

Zee Telefilms (Media)

Indian Tobacco Company (FMCG)

Ranbaxy Laboratories (Pharmaceuticals)

Larsen & Toubro (Engineering/cement)

Niit (IT)

Satyam Computer Services (IT)*

Hindustan Lever (FMCG)

Reliance Industries (Petrochemicals)

Tata Engineering and Locomotive (Auto)***

Tata Iron and Steel (Metals)***

Indian Tobacco Company (FMCG)

Larsen & Toubro (Engineering/cement)

Bajaj Auto (Auto)

Grasim Industries (Diversified/cement)†

Hindalco (Metals)†

Whirlpool (Consumer durables)**

___________________________________________________________

*On Oct 31 1999

**On Oct 31 1995

***part of Tata Group

†part of Aditya Birla Group

Source: Business Standard Research

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India's export-oriented software services industry is at the forefront of the business revolution - global in outlook and entrepreneurial in character, a child of the free market. From humble beginnings, Indian companies are migrating to high value software services, e-commerce, business consultancy and technology research.

Exports are set to hit $4bn this year. The sector's market capitalisation crossed $25bn last month, before slipping back on profit-taking. "India's software companies bring multiple advantages to the table," says N.R. Narayana Murthy, chairman of Infosys Technologies.

"We have a more scaleable model because we have access to trained manpower. We can ramp up projects more quickly. Our global delivery model maximises the work done in software development centres in cost competitive economies such as India's."

Indian software companies are now globalising aggressively, listing in the US and seeking acquisitions abroad. In the process they are changing perceptions at home and abroad about where India's business advantage lies.

"Our real cost advantage is in brainpower not manpower," says R. Ravimohan, managing director of Crisil, a credit rating agency. "Most services are driven by brainpower. There is a clear arbitrage between what it costs here and elsewhere."

The success of the software sector is part of a broader story, the rise of a new service economy, of branded and knowledge-based businesses, which mirrors the decline of heavy industry and of commodity producers.

"You are seeing phenomenal growth in the services sector across the board," says Uday Kotak, vice-chairman of Kotak Mahindra, Goldman Sachs's affiliate in India. "Media, advertising, retail, personal financial services, entertainment, tourism, leisure. This is a powerful segment of the economy."

The rise of the service sector is being driven by changing patterns of demand. India's old regulated economy offered little variety of consumption and channeled public savings into industrial investment. But after a decade of liberalisation, consumers have more money to spend, and increasingly sophisticated lifestyle expectations, which require credit and investment products to finance.

The service boom is also a competitive response to globalisation. The high cost of capital, caused by vast government borrowing, is India's biggest source of competitive disadvantage. Industry is capital-intensive, most services are not. They require people, which India has in abundance. Capital-intensive services tend to be in the non-traded sector.

"The future is in services, and margins are in brands," says Harsh Goenka, chairman of RPG, a conglomerate which is India's biggest retailer, with supermarket and music store chains. In the traded sectors of the economy, Indian companies are discovering that only intellectual property allows them to retain pricing power when foreign companies come into the market.

"Increasingly, the world will recognise knowledge-based assets," says D.S. Brar, chairman of Ranbaxy, a pharmaceutical company. "The time for machines, bricks and mortar, large plants is going to give way to knowledge assets: research and development, brands and information technology."

Like the leading software companies, the top pharmaceutical companies are exploring opportunities for research collaboration with foreign companies exploiting India's rich human capital. Both groups favour tough new patent laws.

Media is another sector where India may have a competitive advantage through its cheap brainpower. Indian media companies already export content to ethnic markets around the world, and harbour global ambitions.

"I want Zee to be a total media business serving globally," says Subhash Chandra, chairman of Zee Telefilms, a media company. "Whatever we lose to competitors in terms of the Indian diaspora should be made up through global projects."

Many of the leaders in the sunrise service and knowledge industries are first generation focused companies. However, big business houses are also becoming increasingly service oriented. Tata Consultancy Services is India's biggest software exporter. Birla Sun Life, a joint venture, is the country's biggest private fund manager.

"As a group our policy is to build up less capital-intensive businesses," says Kumarmangalam Birla, chairman of Aditya Birla. Restructuring India's old industrial economy is a much tougher task than building new sunrise businesses.

There is an entire inheritance to be undone: fragmented capacities and diversified businesses whose competitive advantage was industrial licences, not efficiency.

"We have survived in a protected environment," says Ratan Tata, chairman of Tata Sons. "We have not had the pressure of competition. Almost never from outside, very seldom from within the country." In some industries India is simply not globally competitive. In others, where India possesses natural resources, the degree of efficiency varies to a remarkable extent. All face relentless pressure on prices.

"To maintain profitability you have to keep cutting costs across the board," says Natoram Sekhsaria, managing director of Gujarat Ambuja cement. This also involves building do-it-yourself infrastructure in power and transport. But the ability to restructure is hampered by socialist-era labour regulations, which penalise companies with inherited cost structures.

"For new businesses there is not too much constraint, but for old businesses there is a lot," says Mr Goenka. "That is a serious problem." Competition is ruthlessly separating out each sector, driving uncompetitive producers into loss. But India has no exit policy.

So sick companies linger on, shielded by lax bankruptcy laws, not paying their debts, pumping out production and kept alive by a financial life support system. This slows consolidation, and saddles the banks with bad debts, pushing up the cost of funds for competitive companies.

Inefficiencies in the banking sector, along with high government borrowing, prevent India from making the rupee fully convertible on the capital account. During the Asian crisis this was seen as a virtue, but in so far as it blocks access to cheap capital it is a cause of industrial uncompetitiveness.

A closed capital account also makes it difficult for Indian companies to expand abroad, acquiring the global resources to face international competition at home.

"This is the biggest bottleneck to Indian industry becoming more competitive," says Mr Ambani. "How long can you keep us bottled up in India?"

The challenge to the government as it sets out India's second generation reforms is to enable old industry to restructure fast enough to still have a role in the emerging new economy.

The velocity of change in the economy, and the quantum of risk born by the private sector can only increase as India further opens its markets under its agreement with the World Trade Organisation and feels the first impact of the technology revolution.

"If reforms do not take place at the required speed Indian industry will pay the price," says Rahul Bajaj, chairman of Bajaj Auto. "Everybody knows that globalisation throws up opportunities and challenges, but we will not be able to face the challenges or seize the opportunities."