Why India needs Creative Destruction

When Infosys brought back NRN who tagged his son along, there was a lot of hue and cry about how he had abandoned his own principles. I for one thought otherwise and felt that he being the guy who gave up so much of his time and energy to create the company was attempting to save the company and there was nothing wrong in doing the same.

But having seen the affects of how companies which disrespect meritocracy gets nowhere over a period of time, I now believe that this was the biggest error made not by NRN but by the shareholders of the company who approved the said resolution.

Unlike America, our Institutions generally do not interfere with the running of the company and most of the times sides with the management and hence it’s difficult if not actually impossible to launch a hostile takeover on any company.

In case of Infosys, promoters hold just 16.04% of the stake while FII’s and DII’s combined hold the majority – 58% of the company shares. For them, jointly, it would have been as easy as 1-2-3 to overrule the Board of Directors who took the decision. But based on reactions coming from them, it looked like they actually welcomed the move.

But then again, most of them are concerned with their investments and if they feel that it’s the right step, so be it. But the question is, is it the right step? In India we repeatedly complain of how one family is able to rule us but do not question as to why majority of the big companies have no one other their own ilk to run the company. Is India so short of talent?

While a hue and cry was raised in case of Infosys, the pass over is seen as a normal occurrence in majority of the cases. Reliance got split and passed over to his sons, Birla is a family run enterprise and even Tata after making news about a global search finally settled down for the son of its largest shareholder.

There have been numerous case studies on Family run business and Professional run business and depending on how you arrive at the final set of data, you end up seeing one better than the other.  

If we were to look at our own lives and the things we use, majority of the cheap items we use today seem to come from China (as also nearly everything in electronics) or is the handwork of a company whose parent company is a MNC situated outside of India. And in the very few where its Indian companies that dominate, it has more to do with the laws than the ability to overcome competition.

The thing we seem to be missing and the key factor that has ensured that not many big companies have emerged from India is called “Creative Destruction”.  It’s in a way amazing that while the whole thought behind Creative Destruction is said to be taken from Hinduism “Shiva in the form of Nataraja”, we ourselves have decided that application of it is not something that is worthwhile.

The absence of competition has meant that many a company enjoy unbridled margins at the cost of the newcomer who is not allowed to compete against him with barriers placed at every corner.  Of course, where we have loosened the rules and let fair play, the results have been seen as vastly beneficial to the end customer.

Two industries / sectors come to the top of the mind – Telecom and Stock Exchange. While the telecom story is well known, the story of the stock exchange is not. Prior to 1996, there were around 27 active stock exchanges across the length and breadth of the country.  Each stock exchange was limited to the state boundaries beyond which they were not allowed to operate so as to ensure that there was no overlapping. This meant that arbitrage opportunities were plenty in number what with exchanges having their own settlement periods.  And despite that number, the depth was low owing to lack of transparency, high charges and outright frauds.

But things started to change when NSE came into the picture. Within 4 years, it ensured that all localized exchanges were more or less on the verge of shutting down with only BSE being able to survive the onslaught.

But that was 1996 and its now 2013 and as anyone connected with the financial markets saw when MCX tried to launch its own Equity exchange, it faced hurdles that would have stumped any other player but due to the fact that it already ran an exchange, it could wait the time.

One of the biggest complaints against Creative Destruction has been about how it will kill existing jobs. But as studies after studies show, in the long term, it improves the overall economic climate of the country as well as ensuing one constantly upgrades his skill sets to ensure that he is not left behind. Till that happens, it’s difficult to see companies emerge from India that is seen as dominators like many of the US / European companies have. There is only so much that cheap labour and a weak currency can provide for as China and India are fast finding out.