Indian Business: Past, Present and Future
Address delivered by Shri Shaktikanta Das, Governor, Reserve
Bank of India on the occasion of Iconic Week of
Azadi ka Amrit Mahotsav Celebrations organised by the Central
Board of Indirect Taxes and Customs in Mumbai on June 9, 2022
It is a great pleasure to address such an august gathering in this
event organised by the Central Board of Indirect Taxes and Customs
(CBIC), Department of Revenue, Government of India as part of the Iconic
week of Azadi ka Amrit Mahotsav celebrations. The topic I have chosen
for my address today, namely, "Indian Businesses: Past, Present and
Future" will resonate with the audience here. Businesses form the bedrock
of an economy and on an occasion like this, it would be worthwhile to look
at how Indian businesses have evolved over the years. The current
context of transformative changes that are altering the business
landscape in India and across the world is yet another reason for choosing
this theme.
2. I have structured my talk in the following order. I shall start by
recounting the historical evolution of Indian businesses to draw lessons
for the future. I will then turn to the current scenario where I propose to
highlight the tremendous opportunities that are available today for Indian
businesses and the challenges that they would have to contend with. I
also propose to highlight aspects of corporate governance and related
issues that are indispensable for a sustained performance by any entity
or business.
3. Historically, businesses have been the creators of wealth by bringing
innovation in production and trading activities which facilitated higher
productivity and better standard of living of the people. Apart from creating
growth and employment opportunities, thriving businesses generate vital
resources through tax payments for the government to undertake welfare
measures. Thus, both from growth and welfare standpoints, businesses
play a crucial role in overall economic development. In the words of Nobel
Laureate in literature T. S. Eliot, "Only those who will risk going too far can
possibly find out how far one can go."1 The underlying theme of business
is to explore opportunities and capitalise on them.
4. In India, business and entrepreneurship have always had a special
place in our society. The history of Indian business is a fascinating story
and one that is closely intertwined with the political and economic history
of our country. Traditionally, Indian businesses were rooted in local
knowledge and resources that were greatly admired all over the world.
During the colonial period, however, many of our businesses were faced
with existential challenges. Showing resilience and capacity to innovate
and improvise, Indian business has over the years not only survived but
is now well-positioned to take India's growth story forward. Indeed, this
could just be the moment of India's arrival as a global growth driver.
A Peep into History
5. The history of Indian business is fairly long. India was a key hub of
scientific innovation from its very early history which lent India a pole
position in several areas like medicines, mathematics, astronomy and
metallurgy. During the medieval period, India was a prominent economy
having trade relations with the rest of the world. India was central to the
Silk Route and the Cotton Road. India's indigenous craftmanship was
world renowned.
6. In 1700 AD, India's share in world GDP was 24.4 per cent, ahead of
China's share at 22.3 per cent (Maddison, 2001). Even so, large scale
domestic business was restricted by the fragmented nature of political
landscape coupled with infrastructural bottlenecks. While trading and
money lending were the hallmark of business, manufacturing, which was
primarily small scale was largely left to artisans. In short, trade was the
face of Indian business alongside a flourishing banking and exchange
business offered by merchants.
Colonial Period
7. The advent of imperial powers and the discovery of new trading
routes completely changed the face of Indian business during the colonial
period. The onset of the industrial revolution in the late 18th century had
catapulted England into a position of leading industrial power. British tariff
policy encouraged exports of raw materials to the detriment of India's
domestic industrial development and local enterprise. A Reserve Bank of
India Survey in 1948 estimated that of all foreign capital invested in India,
only 28 per cent was in the manufacturing industry, whereas 37 per cent
was invested in merchandising and transport, and 20 per cent in tea,
2
coffee, and rubber plantation. Clearly , the thrust was to promote British
interests.
8. Despite adverse circumstances, Indian business managed to hold its
own amidst the nationalistic fervour of the times. With British industrial
power on a decline due to war preoccupations, several Indian industries
such as textiles, jute, iron and steel, paper and cement consolidated their
position. Considering the stagnation in the previous decades, the post-
World War I spurt in industrial activity was significant. Notably, Indian
businessmen also remained alive to the socio-political atmosphere of the
time by pursuing and propagating the nationalistic agenda.
Aftermath of Independence
9. The initial decades after independence brought in changes to the
Indian business environment with economic policy focussed towards
capital-intensive production structure. Indian businesses were unshackled
from the confines and constraints that reduced them to be just raw
material producers.
10. In the subsequent period, shocks such as wars (1962, 1965 and
1971), droughts (1965-66) and the OPEC oil crisis (1973) revealed the
underlying vulnerabilities of the Indian economy. In hindsight, excessive
regulations stifled entrepreneurial growth and led to inefficiencies that
reflected in macroeconomic imbalances of the period. As a result, a new
vision of political economy driven by markets and private enterprise
started to evolve steadily.
Reforms and After
11. In the 1980s, the Open General License (OGL) list for imports was
expanded, industrial controls were somewhat eased, limited external
borrowings were allowed, and an early version of indirect tax reforms
began. The external payments crisis, as we entered the 1990s,
culminated in the path-breaking economic reforms of 1991.
12. The economic reforms of 1990s were wide-ranging and were
essentially based on the trinity of liberalisation, privatisation and
globalisation. They entailed deregulation; the end of the licence-permit raj;
increased outward orientation; and willingness to let market forces play
their role. The financial system and the external sector also underwent
fundamental reforms relating to strengthening of prudential norms and the
supervisory system; operational flexibility of the banking sector; taxes and
tariffs; exchange rate; and capital flows. The reforms aimed to bring
competition to promote efficient markets that deliver growth, create wealth
and reduce poverty.
13. In the years since the initiation of economic reforms, Indian business
has witnessed various transformational changes. In several sectors
spanning information technology, telecom, pharmaceuticals, automobiles,
hotels, textiles, engineering goods and entertainment, our businesses
have created global reputation. Indian business entities have shown a
great deal of flexibility in an environment of rapid technological changes.
This has led to a shortening of product lifecycles and innovation and
technology have become key sources of competitive strength. The
country now commands a diversified industrial base that has shown
resilience in the face of multiple challenges posed by shocks such as the
Global Financial Crisis, the recent COVID-19 pandemic and now the war
in Europe.
New Opportunities and Challenges
14. The last few years have seen several policy measures and reforms
that have created conducive conditions for Indian businesses to grow
more rapidly. There has been a clear focus on improving ease of doing
business, simplifying procedures and creating incentives to enable
business and industry to take a quantum leap. The Make in India and the
Production Linked Incentive (PLI) schemes aim to establish India as a
world class manufacturing centre. The historic reform of goods and
services tax (GST) unified various central and state tax laws and provided
relief to businesses from cascading of taxes. Despite initial teething
troubles, the new system has removed tax barriers across states and
created a single common market thereby facilitating free flow of goods
and bringing efficiency gains across sectors.
15. A few states have rationalised labour laws to simplify procedures and
ease restrictions of entry and exit. The Insolvency and Bankruptcy Code
(IBC), 2016 is a ground-breaking reform to help time-bound resolution of
stressed assets that will free up scarce capital to drive growth. To bridge
the infrastructure deficit, several measures including the National
Infrastructure Pipeline (NIP), National Monetisation Pipeline (NMP) and
the PM Gati Shakti have been taken up. All these measures are expected
to create a conducive business eco-system in India.
16. Policy actions taken by the Government and the Reserve Bank since
the onset of the pandemic in early 2020 have mitigated the disruptive
effects of the pandemic while restoring market confidence and ensuring
quick revival in economic activity. Alongside, businesses are going
through a redefining phase and are adapting to the new realities emerging
from the pandemic. Adoption of digital technologies and Artificial
Intelligence (AI) is getting accelerated across firms/businesses/sectors.
These disruptive technologies offer opportunities to young enterprises to
create their own niche in markets dominated by incumbents. A reflection
of this is seen in the emergence of several start-ups in the Indian business
landscape as young entrepreneurs experiment with ideas in digital
payments, online retail, on-demand delivery, education, software and
more. The number of unicorns, or new businesses valued at over USD 1
billion, is rising very fast. These start-ups are supported by a new
ecosystem of angel and venture funding, incubators and accelerators -
as well as new patterns of consumption in society. A word of unsolicited
advice to these young entrepreneurs and start-ups: they should constantly
evaluate the build-up of risks and vulnerabilities in their businesses. I
recognise that many of them may already be doing it and risk taking is a
part of their business model, but nonetheless these are things which
should always be kept at the back of one's mind for long term sustainability
of any business.
17. Now we are in a situation where it has become imperative even for
well-established firms to adopt technology solutions if they wish to remain
competitive. The advent of new technologies is fundamentally changing
all aspects of business. Decision making is increasingly supported by
insights from data analytics, artificial intelligence and deep learning. Now
there is almost a real-time assessment of customer needs, innovations
and market trends that is helping manufacturers to manage production
capacities, save costs, reduce risks and meet evolving customer needs
more quickly. We are in the age of data-driven smart manufacturing. If
Indian businesses aspire to remain competitive and attain world-class
status, it is important that they gear up to make the right investments
sooner than later. I believe the pandemic-induced changes in strategy,
management, operations and priorities are going to stay. Therefore, the
success of Indian entrepreneurs will depend on how quickly and efficiently
they are able to make necessary adjustments in their business models.
Corporate Governance, Ethics, Accounting Transparency and
Business Models
Corporate Governance
18. I would now like to draw your attention to the single most important
aspect that determines the long-term success of a business and that is
corporate governance. The thrust of sound corporate governance is to
help build an environment of trust, transparency and accountability in
business entities. These are prerequisites for fostering long-term
investment, business stability and integrity. It is important to remember
that trust is the most valuable asset of a business; and good governance
aims to protect and preserve that trust in the organisation. Good
governance entails effective and collective oversight by the board and
senior management of a company. This would also include control layers
of risk management and internal audit. These need to be based on a
proper risk appetite with the purpose of inculcating appropriate risk
culture. Ethical conduct, accounting transparency and appropriate
business models are various components of the broader governance
framework. Organisational culture can exert substantial influence on both
ethical conduct and transparency practices.
Ethical Conduct
19. Former Associate Justice of the U.S. Supreme Court Potter Stewart
once stated: "Ethics is knowing the difference between what you have the
right to do and what is right to do". Ethics denotes the conduct of
responsible professional behaviour within the mission of a business by
managing risks professionally and pursuing profits legitimately. It is
essential that the board and senior management of a business instil a
strong sense of ethics in their organisation by setting up a comprehensive
internal code of conduct which is easily and clearly observed, continuously
communicated and disseminated across the organisation. The strength
and viability of a business entity directly draws from its organisational
culture and ethics.
Transparency in Accounting
20. A robust corporate governance frame+work would require that
businesses follow prudent accounting practices and provide transparent
disclosures. Sufficient information should be made available to the market
participants to enable them to make informed judgments about the health
and viability of a business entity. Creative and aggressive accounting
techniques and policies tend to overstate financial strength and would be
detrimental to the long term sustainability of a business. The Board of
Directors and the Audit Committee should ensure that integrity of the
financial statements is not compromised in any manner. Entities with
robust corporate governance and high transparency get rewarded by the
investors with higher valuation metrics and are also able to raise capital
at a much cheaper cost.
21. The Reserve Bank has mandated a host of disclosures for its
regulated entities to ensure that they make full and fair disclosure of all
material information in their financial statements. This would make them
relevant, reliable, comparable and transparent.
Business Models
22. Business models and business strategies of individual entities should
be conscious choices, that are adopted following a robust strategic
discussion in the Board, after considering all relevant aspects. Businesses
should avoid aggressive short-term reward seeking culture, without
regard for the build-up of excessive risks in the balance sheet. The
common characteristics of some inappropriate business models or
strategies that are observed include:
 Inappropriate funding structure;
 Building asset liability mismatches which are highly risky and not
sustainable;
 Unrealistic strategic assumptions, particularly excessive optimism
about capabilities, growth opportunities and market trends which may
lead to poor strategic decisions that imperil business model viability;
and
 Over-focus on business considerations with neglect of risk, control
and compliance systems.
23. As I said earlier, risk taking is the essence of doing business. What I
am now emphasizing is the need to carefully weigh the upsides and
downsides of every risk before embarking upon it.
Conclusion
24. India has a long history of industrious entrepreneurs and businesses.
In a sense, the evolution of Indian economy is essentially a reflection of
the transformation seen in Indian businesses over the years. The story of
Indian entrepreneurship is fascinating and now we are witnessing a new
generation of entrepreneurs who are the flag-bearers of epochal changes
in the conception, organisation and operation of businesses. In my speech
today, I have attempted to highlight certain important aspects which are
essential features of successful and sustainable businesses.
25. At the Reserve Bank, we do recognise the role of existing as well as
emerging businesses for economic progress. Long term success of any
business is directly linked to its quality of governance, internal control
systems and the robustness of its risk and organisational culture. The
Reserve Bank has been pushing for improvements in the governance and
compliance culture of its regulated entities through a series of measures.
26. Indian business is now at a critical juncture with both opportunities
and challenges. The macroeconomic and geopolitical environment is fast
changing and there is a greater need to remain alert. I am confident of our
dynamic entrepreneurs having ample capacity to deal with the challenges,
capitalise on the opportunities and leap forward. Let me end by recalling
what Steve Jobs said about the role of perseverance in success: "If you
really look closely, most overnight successes took a long time."3
My best wishes to you all on this great occasion of the Iconic week of
Azadi Ka Amrit Mahotsav.
Thank you. Stay Safe. Stay Well. Namaskar!