“Business in India: A bumpier but freer road”
The Economist
Sep 30th 2010 | Delhi
Despite all the mess and chaos of India, the country’s business is booming. This will change the world
AN INDIAN boss gestures from the lofty window of his steel-and-glass office. Ten years ago, says Pramod Bhasin, “you
couldn’t even get a cup of coffee around here.” Now the area bristles with office blocks. Gurgaon, near Delhi, has swiftly
become a global hub for outsourcing. Its recent rural past is not forgotten, however. Villagers still herd goats along its
streets; pigs snuffle in the rubbish.
Mr Bhasin, who heads a firm called Genpact, speaks of outsourcing as a dentist might of flossing. Car firms should
concentrate on making better cars, he says; most other tasks should be outsourced. Personnel departments, for example,
need a few people to handle employees’ gripes face-to-face, but form-filling and data entry can be handled more efficiently
by specialists. “I’ve got 10,000 people doing this,” he says. “They’re good at it.”
Genpact began as an internal unit of General Electric before being spun out, better to
serve a wider set of customers, in 2005. It helps other organisations do dull things
more quickly and cheaply. For example, by analysing the way American hospitals
carried out mundane tasks, such as bed-changing and deciding where to put doctors’
offices, it was able to point out more efficient ways of using people and equipment.
As a result, doctors perform 25% more operations each day. Demand is brisk: Mr
Bhasin predicts that his sales could grow from $1.2 billion to $10 billion in the next ten
years.
Such vast ambitions are no longer unusual in India. Firms now worth $5 billion expect
soon to be worth $30 billion, observes Vijay Govindarajan, of the Tuck School of
Business at Dartmouth College. The country is in a “global sweet spot”, says Nandan
Nilekani, a former software mogul who heads a government project, launched on September 29th, to give every Indian an
identity number.
India’s GDP is expected to grow by 8.5% this year, and could grow
even faster. Chetan Ahya and Tanvee Gupta of Morgan Stanley, an
investment bank, predict that India’s growth will start to outpace
China’s within three to five years. China will rumble along at 8%
rather than double digits; India will rack up successive years of 910%. For the next 20-25 years, India will grow faster than any other
large country, they expect. Other long-range forecasters paint a
similar picture.
Several factors weigh in India’s favour. The first is demography. Indians are young (see chart 1). “An ageing world needs
workers; a young country has workers,” says Mr Nilekani. Previous Asian booms have been powered by a surge in the
working-age population. Now it is India’s turn. The proportion of Indians aged under 15 or over 64 has declined from 69% in
1995 to 56% this year, says the UN. India’s working-age population will increase by 136m by 2020; China’s will grow by a
mere 23m, says Morgan Stanley (see chart 2).
To be sure, many Indians are poorly educated. There will certainly not be jobs in business-process outsourcing for all. India,
unusually for Asia, has not yet made much of a fist of labour-intensive manufacturing for export. But its workforce will stay
young and keep growing, and it includes millions of English-speakers.
India’s second advantage is that the economic reforms of the early 1990s have unleashed an explosion of pent-up
commercial energy. Tariff ramparts have been torn down (see chart 3). The “licence raj”—a system under which it seemed
that a businessman could not pick his teeth without a permit—has been swept aside. Private firms have been forced to
compete with the world’s best. Many have discovered that they can. Exports have shot up.
Indian firms are increasingly global and sometimes world-class. Arcelor Mittal,
based in Luxembourg, is the world’s largest steel firm. Tata Motors, best known for
making cars that cost only $2,000, also owns Jaguar and Land Rover, two luxury
brands. Bharti Airtel, a mobile-phone firm with 140m subscribers in India, is rapidly
expanding into Africa, too.
China’s growth has been largely state-directed. India’s, by contrast, is driven by
45m entrepreneurs, says Amit Mitra, the secretary-general of the Federation of
Indian Chambers of Commerce and Industry, a business lobby. He gushes about
the energy of India’s vast informal sector, and its ability to solve problems. Mr Mitra
recalls meeting the owner of an informal suit-cutting business who used, as a kind
of collateral, the fact that his brother held a government job. The brother went to the
same office every day. So the moneylender could always find him, and that made the suit-cutter creditworthy.
In Dharavi, a Mumbai slum with perhaps 1m inhabitants, many alleys are too narrow to turn a wheelbarrow around. Yet
every other doorway seems to lead to a small business. Bhaskar Chaudhary’s tiny factory works day and night turning out
back pockets, which are whisked to a bigger factory, sewn onto jeans and exported to the Gulf. Business is good. Four
years ago Mr Chaudhary had only one (Chinese-made) embroidering machine. Now he has three. He is still only 21 years
old.
Indian firms export a lot of services, but their primary focus is on the needs of domestic consumers. Indian shoppers
demand goods that are cheap, rather than fancy. Indian “frugal innovators” oblige. Tata Chemicals makes a filter that
requires no power and can give a family of five safe drinking water for a month for 30 rupees ($0.65). Researchers at the
Indian Institute of Technology and the Indian Institute of Science produced a prototype for a $35 laptop in July. A firm called
Ayas Shilpa makes suspension bridges for a tenth of the price of conventional ones. In a country where countless villages
are connected to the outside world only by perilous rope bridges across raging rivers, this is a colossal boon.
Indian firms are devising new business models as well as products. HCL Technologies, a software firm, helps clients
improve their IT systems on the understanding that if they reap no benefits, they pay nothing. If they do gain, HCL takes a
share. “It puts our skin in the game,” says Vineet Nayar, the firm’s chief executive.
India is the last frontier, says Moon B. Shin, the Korean boss of LG Electronics’ Indian subsidiary. By which he means: India
has the largest number of people who have not yet bought many electronic goods. LG’s annual sales in India are about $3
billion. But what really excites Mr Shin is that they rose by 30% just in the first seven months of this year.
LG started manufacturing in India in the late 1990s. It is now the country’s most popular maker of all manner of gizmos. To
succeed, it has kept its prices ultra-low and adapted its products to Indian tastes. Since many Indians are vegetarian, it
offers a fridge with less freezer space and more drawers for vegetables. Since Indians like their televisions loud, LG affixes
powerful speakers. The firm also sells voice-activated washing machines for middle-class families with illiterate maids. Its
products are designed to cope with fluctuating power, and its packaging is extra-tough to cope with India’s terrible roads.
An elephant can stumble
If India keeps growing as fast as it is now, it will change the world. Optimists predict that it will be the next China, only
friendlier and more democratic. Pessimists retort that such forecasts are over-spiced. They point out that India has a lot of
catching up to do. China’s economy is four times bigger, so that even if India starts to grow faster, it will not overtake China
for a long, long time. And they add that Indian businesses face several bottlenecks on the uneven road to growth.
The most obvious of these bottlenecks is lousy infrastructure. Indian roads are awful. Potholes gape; traffic lights don’t work.
Rural roads are largely unpaved; in cities traffic often snarls to a halt. Cyrus Guzder, who runs a distribution business,
complains that long-distance trucks average only about 20kph (12mph). Crossing the border between two Indian states can
be more troublesome than crossing an international boundary. Between Kolkata and Mumbai (a distance of 2,000km), a
truck must negotiate a couple of dozen checkpoints. Delays and shakedowns by grasping officials add 30% to the cost of
road freight, estimates Mr Guzder. “We have to have our own power backup, water-treatment plants and transport for
employees,” grumbles Mr Nayar of HCL. As if on cue, the power goes off in his office. Big companies lay on fleets of cars
and buses to ferry staff to work. Computer servers need costly extra layers of backup.
India’s economy will grow fivefold in the next 20 years, predicts McKinsey, a consultancy. The urban population will double
from the 2001 census figure of 290m to perhaps 590m by 2030. McKinsey reckons that merely to keep pace, the country
must spend $1.2 trillion on urban infrastructure, or at eight times today’s rate. Per person, China’s capital spending on cities
is roughly seven times greater than India’s.
The other worrying bottleneck is a shortage of skills. The workforce may be young and growing, but 40% are illiterate and
another 40% failed to complete school. The Boston Consulting Group sees a shortfall of 200,000 engineers, 400,000 other
graduates and 150,000 vocationally trained workers in the coming years. Meanwhile, there are 62m surplus workers in
agriculture, most of them barely skilled.
India’s best universities—the Indian Institutes of Technology—are world class, but there are only 16 of them. Many
universities turn out graduates who are good at exams but unaccustomed to thinking about real-world problems. Employers
train them for months, at great expense. Then they are ruthlessly poached by rivals.
Public schools are a mess. Supplies disappear. Teachers do not turn up, and even the worst are unsackable: as civil
servants, their jobs are constitutionally protected. India’s adult literacy rate is only 66%; China’s is 93%. Nearly half of
children under five are malnourished, which makes it hard for their brains to develop properly. A government scheme to
deliver cheap grain to the poor is a national disgrace: two-thirds of the grain is stolen or adulterated.
The shortage of skills is wonderful for those who have them. Their wages are surging. The technologically minded young
are getting cocky, their elders grumble. They expect stimulation as well as pay. “They are willing to walk away from a bad or
boring job,” marvels Chaitanya Kalbag of Business Today, a magazine that recently published a cover story on “Brats at
Work”.
The lack of skilled workers makes it harder to bring infrastructure up to the mark. Builders, electricians and plumbers are
scarce. Cock-ups on building sites, such as lifts being installed upside down, are plentiful. The run-up to the Commonwealth
games in Delhi, which begin on October 3rd, has been a reminder that India does some things very badly.
Instability is another huge worry. About 200 of India’s 588 districts are affected by a Maoist insurgency called the Naxalite
movement. The rebels hide in India’s great forests, which are also where much of the country’s mineral wealth is buried. So
mining and logging firms are seriously affected. Some of these also provoke violence, by evicting the poor to make way for
their operations.
The home minister tried to assure investors in September that the insurgency would be quelled and that India was a safe
place to park their money. He may be right about the second point: most businesses can avoid Naxalite-held areas. The
biggest risk for banks in Mumbai and software firms in Bangalore is not that rebels will burst through their front doors but
that a government sensitive to the anger of the poor will take populist steps to assuage it.
Populism is already a big problem. Some politicians woo voters by demonising business. Tata Motors dropped a plan for a
factory in West Bengal after Mamata Banerjee, an opposition MP who is now the national railways minister, whipped up a
campaign against the compulsory acquisition of land. The government often handles such transactions badly, so locals’
fears were not absurd. But the area missed out on much-needed jobs. Ms Banerjee is expected to lead her party to victory
in the next state elections.
Rahul Gandhi, a possible future prime minister, plays populist chords when it suits him. Construction of a new road between
Delhi and the Taj Mahal has been delayed because some of the farmers whose land is to be paved over demanded as
much compensation per square metre as landowners in the pricey Delhi suburbs. After a mob of farmers killed and gouged
out the eyes of a policeman, Mr Gandhi rushed to the area and expressed sympathy—for the farmers.
Corruption is another concern. India’s technocratic prime minister, Manmohan Singh, is widely admired, but some of his
colleagues are crooks, thugs, rabble-rousers or all three. Corruption is debilitating. Many businesspeople think it is getting
worse. In the old days ministers asked for bribes. Now they demand shares in firms to which they are about to award
contracts, Indian bosses complain. Pratyush Sinha, who retired as head of India’s anti-corruption watchdog in September,
reckons 30% of his compatriots are “utterly corrupt”. That is uncharitable. Firms in sectors that do not depend on the
government—software, cars, soap powder and so on—are mostly clean and professional, insists another senior official. The
“messy stuff” mainly occurs in transactions that involve land, public contracts or natural resources. Yet the rot in these areas
is so bad that it threatens to undermine the moral legitimacy of capitalism itself, frets this official.
India also faces challenges from abroad. Its success has inspired both a backlash and copycats. The governor of Ohio
recently made headlines in India by banning state agencies from offshoring any of their work. Some American firms are
shifting their call centres to the Philippines, where workers are as cheap as Indians but culturally closer to America.
The potholed road to prosperity
The Indian government will tackle the country’s infrastructure problems more slowly
and ineptly than it should. But it will tackle them. It planned to spend $500 billion
between 2007 and 2012. That pace will accelerate, not least because the state is
getting better at inducing private investors to stump up some of the capital.
The skills shortage, too, is being addressed. Even illiterate parents now see the
value of education. Rather than pulling their children out of school to work in the
fields, they are increasingly urging them to study, in the hope of landing a job in a
call centre. Where public schools are no good, cheap private ones have sprung up.
Remarkably, in rural areas more than 20% of Indian students, most of them poor,
attend private schools. The literacy rate is rising fast. Among 15-24-year-olds, it is
over 80%, though girls do worse than boys.
Several reforms that will benefit business are inching towards enactment. A proposed national sales tax would replace the
confusing patchwork of state and local levies. A proposed land law would simplify and speed up sales of land for
infrastructure, factories and so forth. And maybe one day Wal-Mart will be allowed to open retail stores in India.
Some investors complain that India’s sprawling democracy is
unpredictable. Understanding the relationship between the central
government and the states is hard enough. Working out what fractious
parties, pressure groups and powerbrokers are up to is virtually
impossible. Even when the government has made a decision, it is
subject to challenge in court or by public opinion. Sometimes it is hard
to tell who is in charge. “Don’t tell the Indians I said this, but I’m more
comfortable in China than India,” says a prominent Western banker.
“It’s much easier to deal with the well-understood ‘org chart’ of China
Inc than the freewheeling chaos of India.”
Both China and India have taken off since their governments allowed people and companies more economic freedom.
China went first, so it has a big head start. But as Morgan Stanley’s economists point out, India’s growth since the reforms
of the early 1990s bears a striking resemblance to China’s since its grand opening in the late 1970s (see chart 4).
And India’s democracy may confer long-term benefits. It is not just that Indians can say what they please without having
tanks rolled over them. It is also that India can change governments without a revolution. In the long run, that may offer a
better guarantee of the stability that businesses crave.
The Economist 2010