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INDIA: The making of a market economy

India, a nation of a billion people and the world's largest democracy, has received much media attention in the West as a centre of outsourcing activity for software programming, financial analysis an...

May 1, 2005
By Pulp & Paper Canada


India, a nation of a billion people and the world’s largest democracy, has received much media attention in the West as a centre of outsourcing activity for software programming, financial analysis and, even, interpretation of medical tests like X-Rays and MRIs. The chief attraction for western nations is a well-educated workforce willing to work for a wage that is, on average, one-sixth of that in Canada and the United States.

It forms a leading player in the quartet of developing nations collectively known as BRIC (Brazil, Russia, India and China). The nation, which has mixed socialist leanings with a love affair of British traditions, has been undergoing a long march to a market economy. In the last 10 years, India has posted a robust average annual growth rate of 6%, with GDP growth pegged at 8.3% in 2004 — boosting GDP to an estimated US$3.03-trillion in 2004. Although the figures are striking, India borders China, arguably the true economic superpower in the region (see PPC, April 2003), which reported GDP figures double that of India, or US$6.45-trillion. (In comparison, the US’s economy generated US$11.00-trillion and Canada slightly less than one trillion dollars in 2004.)

Even so, the numbers do not reveal the complete story. “Despite robust economic growth since the 1990s, especially in high-technology industries, nearly 80% of India’s population still earns less than $2 per day,” reports the New York Times World Almanac and Book of Facts 2005. Such describes, in a pithy manner, some of the socio-economic concerns besetting India. For one, the wealth has long remained at the top, and only recently has some of the wealth trickled down to a small but growing professional class. It’s a problem not unique to developing nations like India, but its inequalities are starker because of the rapid creation of a professional middle class, which numbers some 300-million people.


Even so, its advantages are many, says Ajoy Chatterjee, a native of India and chairman of the Pulp and Paper Technical Association of Canada’s Midwest branch. “The country has a well-developed banking system and information-technology sector, and has a high rate of English usage. Equally important, India has one of the world’s largest pools of highly trained technical workers.” Still, foreign companies face other factors besides language and education to thrive. (See sidebar: Ways of India.)

Meeting consumer demand

The good news is that forest-products experts predict that, in the next 10 years, companies plan to invest more than US$50-billion in the Asian region, notably in China and India. In India, consumer demand is expected to grow from 6.5-million tonnes (Mt) to 15-Mt in 10 years — a jump of 130%. A rough estimate is that paper consumption follows the rate of increase of a nation’s GDP, which in India’s case has been averaging about 8% a year.

The information-technology (IT) sector has greatly contributed to the growth of the pulp and paper industry. The IT sector has been achieving annual average growth rates of between 25% and 30% a year since 1991 — a trend that many say will continue for a number of years. The relationship to IT is linked in the same way it is in North America. “When the computer became commonplace in business, we thought that the paper industry would die,” Chatterjee says. “But the opposite is true. Everywhere you go in offices, you see spreadsheets. Paper consumption has risen.”

The forest-products sector contributes about $8.5 billion to the nation’s economy, a figure that is expected to rise appreciably in the next decade. Yet, it has to focus its energies in three areas to ensure its fruitfulness: 1) workforce reduction and equipment updates; 2) increase fibre resources; and 3) adopt some Canadian and American business practices, not least of which is to become more transparent and accountable.

Consider the following. Such companies as Hindustan Paper Corporation Ltd. and Tamil Nadu Newsprint and Papers Ltd. (TNPL), the world’s largest producer of bagasse-based paper, might be large concerns, yet are government-owned, and hence suffer from many of the ailments of publicly run entities, including waste, inefficiencies and low productivity. “The industry is plagued with the trade-union movement,” Chatterjee says, which makes it difficult for foreign investors. “Industrialists want to invest but they are forced to pay higher wages — thus, they cannot become competitive.”

For example, Hindustan Paper, the country’s sole newsprint producer, is for sale. “Because it is government-owned, it is not running that well,” Chatterjee says. “Yet, I understand that some Canadian companies are looking at Hindustan.” It would not be the first Indian-Canadian business deal. AV Cell in Atholville, NB, is a 50:50 Canadian: Indian joint venture between Tembec Inc. and Aditya Birla group [Ed. note: Since the article was written, this same joint venture has signed a framework agreement for the St. Anne Nackawic pulp mill in New Brunswick. See Industry News, p7.]

The brightest story in the region, however, is Ballarpur Industries Limited (BILT), based in the western port city of Mumbai (formerly Bombay). Mumbai is India’s largest city. Called the City of Gold, its population of 18-million ranks it as among the five most densely populated commercial centres in the world.

BILT is unquestionably India’s largest pulp and paper company, and the only Indian corporation to number amongst the top 200 companies in the world. It is the undisputed leader in India, two-and-half times larger than its nearest rival. For example, it has a 45% market share of India’s 223,000-t coated paper market, and 18.2% share of the 106,000-t photocopier paper market. In the year ending June 30, 2004, BILT posted total sales of 22.4-billion Rupees, or about $638-million (CAD).

The company currently claims 9,200 employees, running 15 machines at five locations. Yet, the company is making the hard decisions it requires to become globally competitive. It plans to reduce its workforce, some by attrition, by about one-third, to 5,500 and close four machines, replacing some of the older machines with newer models. If successful, it would operate 11 machines, some state-of-the-art, thereby doubling its paper-producing capacity while increasing its productivity and efficiency.

Gautam Thapar, vice-chairman and managing director of BILT, put it this way (with cautious optimism) at last year’s Asian Paper Conference in Singapore, “While China must guard again overcapacities, the only other country which will show any real growth of consumption in Asia will be India.” This presents some real opportunity to Canadian equipment makers and chemical suppliers.

Securing the fibre supply

Even so, to meet such lofty objectives, India has to find sustainable ways to increase its fibre supply, an issue that many nations in the region currently face. “The fibre supply is very tight,” Chatterjee says. “India relies mainly on bamboo and eucalyptus, and is looking at possibly using jute, the residue from sugar cane production, as a viable source of fibre.”

India has a small forest area, the majority of which the government owns and manages. These forests are essentially off-limits to commercial interests. Half the forests have been degraded, and as a result the corporate sector has petitioned the government for access, yet thus far without success. “The government forests are now managed primarily for ecological services and meeting local communities’ subsistence needs, ending decades of commercial focus,” says the London, England-based International Institute for Environment and Development, a nonprofit organization promoting sustainable development in a recent report on forestry and land use. (See sidebar: Fibre shortage.)

Government policy forbids companies from developing or owning large-scale forestry plantations on non-forest lands. The Forest Conservation Act of 1988 ended the direct role of private corporations on government lands. ”
Forest-based industries, accustomed to getting subsidized raw material supplies from government forests, are now expected to meet their requirements from non-forest lands by establishing a direct relationship with farmers, says the International Institute in the same report.

That being the case, companies have been looking to local farmers to secure their fibre needs. One initiative is to encourage farm-forestry operations near the mills. BILT Tree Tech Ltd., a subsidiary of BILT, has been supplying farmers with seedlings and has put in place a buyback option for the wood. The farmers have been planting eucalyptus, acacia and casuarinas trees. The company is working with 12,000 farmers and have planted 40,000 hectares. It expects to double the area by 2007, with the expectation that 30% of its total wood requirement will come from farm-forestry operations.

R.K Jain, officer in charge of Central Pulp and Paper Research Institute (CPPRI) in New Dehli, a leading government research institute, says that such tree-farming practices are generally successful. “The availability of annually renewable non-wood fibre such as wheat straw, rice straw and bagasse is plenty to sustain projected growth in the sector.” Still, Jain concedes that “the quality, environmental and other associated aspects need to be addressed for the long-term use of these raw materials.”

In short, the industry needs not only high-quality sources of fibre, but also a regular source of fibre to ensure papermaking operations continue. Some pulp is imported from other Asian nations like Indonesia and Thailand, concurrent with the lowering of import duties.

Another major initiative is to encourage more recycling. “It has been a constant endeavour of the industry to increase the use of recovered fibre by improving the rates of recovery,” Jain says, referring to a recovery rate of 20%.

Working with cultural differences

Another, perhaps, more pressing issue is India’s large bureaucracy, having inherited the British system of government with influences from neighbouring China to the east and Russia to the north. Such forms one of the chief frustrations for Canadian and American businesspeople that are used to a capitalist free-market system, where information and goods move quickly between nations with little obstacles or influence. This illustrates another problem — corruption at the government level, which diverts money from where it is best needed. (See sidebar: Becoming open.)

Risk-taking is low in India, says David Saad, president of Calibra Corp., a software developer, in Bangalore, an area that Indians refer to as the Silicon Valley of India. Saad, who has resided and worked in both Canada and the U.S., has been residing in India since 2001. “The problem is rooted deep in the local culture,” Saad points out. “As a result, the society is very averse to taking risks, which is a most formidable enemy to entrepreneurship. Government jobs are highly regarded because they provide the highest degree of security, which is highly cherished.”

To be sure, one of the obstacles that Western companies face in setting up shop in India is overcoming cultural differences. Although globalization might promise the Americanization of values, there is resistance, particularly from a culture that has thousands of years of history and many notable achievements in science and technology to its credit. Change comes, but at a slow pace.

Chatterjee agrees with that assessment. A native of India, but having resided in the West for most of his life, Chatterjee points out Indians conduct business in a manner that is hard for Canadians (or Americans) to understand, which becomes pronounced in their work ethics. “My thinking is different than theirs,” he says. “In India, there is always a tomorrow, whereas for us it’s today that’s important.”

To be sure, obstacles exist. Yet, the appeal is unmistakable, if not enticing. Forecasts show that there are not enough mills in India to produce the expected demand in newsprint, fine papers and tissue papers. The government of India has opened the country to foreign investment, allowing ownership stakes in Indian companies. The best scenario is a 50:50 joint-venture. The Canadian dollar still carries some weight. As Chatterjee puts it, “A hundred million dollars will buy you a state-of-the-art mill in India.”

Ways of India

India, despite its move to computer technology, is still primarily an agrarian economy, where agriculture in all its forms employs more than two-thirds of its labour force. That means that few people outside the urban centres know what is taking place in newly constructed steel-and-glass office buildings. The buildings represent an invasion of sorts, of new ideas and ways. It’s by design that the buildings glass windows are blue and black, a metaphor for the secrecy of these backroom operations.

Life in India moves at a different pace, which can be a frustrating experience for Westerners. “The majority of American companies will fail in India due to such factors as cultural and religious differences, work ethics and time differences,” says David Saad, chairman, president of Calibra Corporation, a software firm in Bangalore, India’s so-called Silicon Valley. “As a result, 90% of American companies fail in India.”

Becoming open

Each year Transparency International ranks nations on what it calls Corruptions Perceptions Index. In its latest report (2004) India ranked 90th, placing it on the bottom end of 145 nations. Finland came in first; and Canada ranked 12th, ahead of the United States’ ranking of 17th place.

“Corruption in large-scale public projects is a daunting obstacle to sustainable development, and results in a major loss of public funds for education, healthcare and poverty alleviation — both in developed and developing countries,” says Peter Eigen, chairman of Transparency International.

The organization estimates that the amount lost due to bribery in government procurement worldwide is at least US$400 billion per year. Transparency International is based in Berlin, Germany.

Fibre shortage

Forests cover approximately 23% of the country’s area, of which 97% is government-owned. While in the past forests faced intense pressure from commercial developers, today the rural population is taking down trees for fuelwood, a real necessity in a society that is mainly agrarian.

“Nearly three-quarters of India’s population resides in rural areas and has some degree of dependence on forests,” says the International Institute for Environment and Development, a nonprofit organization promoting sustainable development based in London, England. “Over half the forests are in degraded condition.” It reports that an estimated 131 million tonnes of fuelwood has been cut down in an unsustainable way.

To counter such degradation, the government has enacted regulations to protect and manage the nation’s forests. One of the chief initiatives is the Joint Forest Management Program (1988), which involves local communities and farmers to act as stewards of the forests. Farmers are important producers of wood, contributing about 50% of the fibre supply from nonwood sources. The program, which started on a pilot scale in the early 1990s, has spread to more than 18% of forest lands.

“The industry has been successful in raising wood in marginal lands held by farmers,” R.K Jain of the government research institute says, “and most of the large players have drawn up long-term strategies in which they have participated in the social forestry program.”

Perry J. Greenbaum, a freelance business and technology writer, divides his time between Montreal and a rural community near Concord, New Hampshire. He can be reached at pjgreenbaum@metrocast.net.