Britain and India: Left for dust

As Chancellor Gordon Brown finishes his first trip to India, The Economist publishes a piece pointing out how that while Britain hopes to profit from its old ties with India, "thus far it has been disappointed".

And yet while India is keeping its part of the deal, growing at 8% a year, Britain has thus far been slow to profit. A report by the House of Commons select committee on trade and industry recently declared that British business had been left behind. Exports have grown slowly compared with those from other big economies (see chart): a baffling mixture of scrap metal and pearls has constituted almost two-thirds of Britain's sales to India recently, the select committee found.

British firms have also been unadventurous investors. Just 0.5% of their foreign direct investment has gone to India in the past few years, although India's share picked up in 2005.

Half of one per cent FDI? How pathetic.

But Britain's failure to invest in (or export to) India is hardly unknown. The most interesting part of the article, Chasing an elephant, discusses those "successful, dynamic immigrants from India who provide a good link to the country they left behind":

Indians began arriving in Britain in large numbers shortly after their country gained its independence in 1947. More than 60,000 came before 1955, about a fifth of whom were whites born in India. This first generation drove buses and worked in foundries and textile factories. Their children moved into white-collar jobs. Later arrivals opened corner shops or ran post offices. The flow peaked between 1965 and 1974, boosted by Idi Amin's decision to expel some 90,000 Gujarati Indians from Uganda, after an angel had told him to do so in a dream. Of the 1m people in England and Wales who described themselves as Asian British (Indian) in the 2001 census, most were born in Britain.

They are a conspicuously successful bunch. The most recent survey of what 18- year-olds are up to in Britain could not find enough unemployed Indians to constitute a meaningful sample. Those who have arrived in the past few years have entered the labour market right at the top. Indians have been granted over three times as many visas for highly skilled migrants as any other nationality since the Home Office invented the category in 2002. They are prominent in public life too. Though fairly few have been elected to Parliament, there are plenty in the House of Lords. And they also prop up political parties: this week Lakshmi Mittal who, appropriately for Britain's richest man is named after the Hindu god of wealth, helped the hard-up Labour Party by giving it £2m ($3.9m).

Given this pool of talent, Britain's relative sloth is surprising. “The problem”, says (Lord) Kumar Bhattacharya, scion of an Indian tea dynasty and founder of the Warwick Manufacturing Group at Warwick University, “is that people just assumed Britain would outsource lots of menial jobs to India and move up the value chain. That was patronising.” Some say British firms overestimated the difficulties of doing business in India. And they are hindered by protectionism in the service industries where the British are strong. Foreign banks face restrictions; foreign law firms are banned. Until that changes, and there are signs that it may, Britain's trade deficit with India is likely to grow.

That said, Britain is profiting from India in other ways. It was the second-largest foreign investor in Britain in the first half of last year. Tata Consultancy Services, one of the largest Indian investors, employs more than 2,000 people in Britain. The government thinks there are 23 Indian companies listed on the London Stock Exchange, more than on the New York Stock Exchange and NASDAQ combined.

Sir Gulam Noon, founder of a ready-meal business, and (Lord) Kiran Bilimoria, who set up Cobra beer, are confident that British businesses will do better in India. But Britain may have to get used to the idea that, despite all the shared history, as India grows the relationship between the two will become increasingly one-sided.

Comments

[jon livesey]

I think this piece might just as well be entitled "Europe left in the dust". Notice that it is China and the US which have streaked ahead. I presume that's because China sell cheap consumer goods to India's growing middle class, while the US wins with technology and arms.

In Europe we worry about little things, and hardly talk about the elephant in the room, which is that Europe is stuck in a horrible place, where it can't compete with the Third World on price, and can't compete with the US on technology.

Of course, Europe just about has a corner on the world market in constitution writing and pointless regulation, so that's something.

[Lafayette]

jl: "In Europe we worry about little things, and hardly talk about the elephant in the room, which is that Europe is stuck in a horrible place, where it can't compete with the Third World on price, and can't compete with the US on technology."

Whilst I agree with your proposition ("Europe is stuck in a horrible place"), I don't agree with your conclusion.

German exports are leading the country out of its worse recession since WW2 and doing so with one of the most expensive average labor rates not only in Europe but in the world - at least twice that of the US. Why? Its machine tool products are amongst the best in the world.

Europe, led by France and Germany, and despite the ill winds of the A380 fiasco, has created an Airbus that is welcome as a suitable alternative to the hegemony of Boeing in the commercial aircraft sector. And, yes, it was done by state financing of initial investments, but perhaps no differently than Boeing with its military contracts.

The only problem with Europe is the fact that, after having reached an exaggerated level of economic well-being due to the customs barrier of the Common Market (that protected high internal labor costs), contemporary with a newly awakened commercial dynamism in China, is finally realizing that the "good life" is not as easily earned as previously.

This latter is the major economic and social hurdle that remains for Europe to jump. Even during the best of years, Europe's unemployment reached new summits (around 10%) beginning in the 1980s, and has persisted ever since. This should have been a warning shot across the bow of the ship of state (Brussels). But, hubris is not apparently uniquely an American disease.

Europe's fate in the near future depends largely upon the Euro and its ability to descend from the stratosphere. It also requires a reawakening of the population regarding excessive state expenditures for the "social Europe", this pap for the masses, which only created a motivational somnambulism amongst its youth who came to believe that life owed them a living. A bit of social Europe is fine, a bit too much is debilitating.

Last time I looked, one still had to make a living from the sweat of their brow.

[Arthur Eckart]

Both China and Europe employ labor inefficiently. China keeps employment high through slave wages and temporary employment, while many European countries create labor shortages through government intervention (e.g. social programs, regulations, taxes, etc.). Also, European wage rigidies, and labor immobilities (e.g. unions and reducing layoffs) slow economic progress. Moreover, trade barriers protect both China and Europe, while keeping consumer surplus low. Heavy government influence in China and Europe slow capital creation, since government tends to work within budgets. Without regard to profit, efficiencies are often not promoted. Consequently, living standards rise at slow rates in China and many European countries.

[jon livesey]

Ironically, EADS admitted this week that Airbus is due to make a loss for the 2006 full year. This is despite a recovering airline market and record profits at Boeing - 9bn IIRC.

I'm glad that Lafayettte mentioned Airbus because it illustrates a clear distinction in philosophy. If you decide that your criterion for success in business is nationalism, then of course you like the fact that Airbus is "a suitable alternative to the hegemony of Boeing in the commercial aircraft sector."

However, no economy has an unlimited amount of capital, nor an unlimited amount of design skills and skilled labour. These limits are what drives comparative advantage in advanced economies. The economy does best which employs its limited resources in areas in which it can make good, productive use of them.

It may give the citizen a warm thrill to look up in the sky and see one of "our" planes flying. You are welcome to that thrill, but I have Boeing shares in my retirement fund and I don't make myself what I can buy cheaper from someone else.

[Akhond of Swat]

One reason for the low level of British FDI is the fact that services like banking and insurance still have many restrictions on foreign ownership in India and these are the areas where the UK has a competitive advantage. When these restrictions go, FDI from Britain is likely to rise.Gordon Brown's visit to India was to lobby for opening up these sectors.
On the other hand, several Indian companies have recently listed on the AIM, allowing British investors to participate in Indian growth.

[Lafayette]

JL: "One reason for the low level of British FDI"

As I recall the figures, the UK has one of the highest incoming FDI levels within the EU, if not the highest.

Did you mean therefore outgoing FDI?

[jon livesey]

"One reason for the low level of British FDI is the fact that services like banking and insurance still have many restrictions on foreign ownership in India and these are the areas where the UK has a competitive advantage."

That's a very interesting comment. Thank you. I will try to dig into that a bit further, but with this explanation it makes more sense.

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