Special report: India
Aim higher
India’s prospects have dimmed as politicians shrink from big reforms. They must
become bolder, says Adam Roberts
Sep 29th 2012 | from the print edition
http://www.economist.com/node/21563414
Interactive Map: http://www.economist.com/blogs/graphicdetail/2012/09/india-figures-interactive-guide
PICK YOUR WAY through the narrow alleys of a south Delhi slum to the dark, low-ceilinged home of a
fortune-teller with a green parrot. For a bundle of rupees he sets the bird to work, picking from a selection
of cards. The man glances at one and lets his conjectures fly.
India will soon be the world’s greatest power. An assassination looms. He sees an elderly leader’s death
and a dynastic marriage. There will be political turmoil in the next two years, but strength will follow.
Sporting triumphs lie ahead and riches will fall upon Indians.
It is a razzle-dazzle prediction for a sixth of the world’s population. Yet his analysis of India’s prospects
may not be so far off the mark. And its underlying optimism reflects the attitude of many ordinary Indians,
who have much to feel pleased about.
In many ways India seems set on a promising path. After a decade of rapid economic growth, data from last
year’s national census look good: fast-rising literacy; more girls in schools; the relentless spread of mobile
phones. The economy is worth almost $2 trillion, making it the world’s tenth-biggest. The country is more
stable than ever (aside from a brief spell of trouble in Assam this summer). It is young, big and fastgrowing. By the mid-2020s it will be more populous than China. Income per person is up; rural poverty
down; polio has just been eradicated; paved roads are becoming more widespread; and so on.
The soothsayer is surely right, too, about the impending political drama. A general election is due by mid2014 at the latest. The prime minister, Manmohan Singh, turned 80 on September 26th, and some members
of his cabinet too are getting on. A political succession is inevitable in a country where the median age is
barely 25.
The challenge is to manage this change, and keep the gains coming, even as the economy goes through a
tougher patch. Annual growth is down to about 5%, from a peak of 10%. Professional fortune-tellers—
politicians, bureaucrats, industrialists, economists and analysts—generally come up with a dimmer
prognosis than the Delhi soothsayer. Anand Mahindra, the boss of Mahindra Group, a leading
manufacturing and technology firm, reckons this is the worst conjunction of political and economic
problems he has seen in his adult life: “I can’t remember any year worse than this.”
External problems hurt, including weak global growth and high oil prices (India imports 80% of its oil, then
subsidises a lot of it for consumers). But the greatest pains are self inflicted: locals and foreigners
discouraged from investing; a fiscal deficit that could provoke a financial crisis; a current-account gap that
is hard to finance; a slumping rupee. India faces awkward years, probably beyond 2014.
The core of the internal problem is often summed up as “governance”. That means, first, politicians (netas)
who do not rule. Mr Singh did announce some limited economic reforms this month, which provoked
considerable political upheaval. But generally his government has failed to carry out profound reform,
passed no significant legislation and is mired in sleaze.
Netas and babus
The ruling United Progressive Alliance (UPA) coalition, dominated by Congress, has been stalled. Faced
with slowing foreign investment and a revenue squeeze, Pranab Mukherjee, until recently the finance
minister, bizarrely attacked foreign investors, such as Vodafone, and retrospectively tried to rewrite tax
rules. That spread uncertainty. Fortunately in July he was booted upstairs to become president.
His successor, Palaniappan Chidambaram, briskly sets out a tempting menu of his intended economic
reforms to boost confidence and raise investment and growth. Yet with a do-little prime minister and a
dithering dynastic party leader, Sonia Gandhi, he looks short of political means. Congress’s coalition allies
(together with obstructionist opposition parties) have repeatedly blocked reform. This parliament is on
course to sit for less time than any other in India’s independent history. Netas beyond Congress share the
blame for paralysis.
Now add unhelpful babus, bureaucrats working in an ossified system bequeathed by Britain. Their dead
hand explains much of what does not happen day-to-day. The “licence raj” of old may be gone, but too
much of the commanding heights of the economy are still run—or rather, held back—by officials.
Politicians, rightly, got the blame for the dramatic power cuts of this summer, when 600m people in the
north of India suffered blackouts for two sweltering days. But the deeper problem is organisational: a
wretched public coal monopoly gets too little of its product distributed by the state-run railways to (mostly)
state-run power stations.
Babus have been a problem since Mughal days, but things have got worse. “Bureaucracy now works to
rule. No civil servant is remotely interested in pushing something along. There are three years' worth of
pipeline projects stuck,” lamented a senior planning official earlier this year.
Like politicians, babus are worried by corruption scandals that also finger bureaucrats. A welcome new
freedom-of-information act means dodgy deals no longer stay hidden. The public is so angry that even
honest decisions are sometimes construed as favouring special interests, so babus consider it safest to do
nothing. Tenders for road construction, bids for land to set up factories, applications to supply goods to
local government—all are now stuck in bulging in-trays.
Is there a way out? The country’s first batch of liberalising reforms, in 1991, was precipitated by a balanceof-payments crisis. Perhaps another economic emergency would force a second round of big reforms.
India’s economy is in a bit of trouble. Growth is down. Foreign direct investment, which last year hit a
record $47 billion, has dropped by 67% so far this year, and domestic private firms are refusing to invest.
Services and consumer spending are still buoyant, but industrial production contracted this summer.
Compare contrasting GDP and
population levels across India’s states with our interactive map and guide
Inflation may at last be dipping, which could allow the independent central bank to start cutting interest
rates. But it, and investors, will be reassured only if they see politicians deliver serious reforms. The IMF
has said that the fiscal deficit could rise to about 9% of GDP this year. Most important, that means slashing
subsidies by more than a token amount. Beyond that, a host of measures is waiting to be passed or
implemented. A land-reform bill could make it easier for industry to set up factories. More relaxed labour
laws could help get them staffed. Welfare spending could switch from a widely abused system of food
rations to cash transfers into individuals’ bank accounts.
Inviting more foreigners to invest in India would help sentiment and plug the current-account hole.
Outsiders may now be allowed to set up supermarkets in some Indian states and buy into domestic airlines.
But continued caps and restrictions on foreign capital look increasingly wrong-headed.
One other important reform would simplify trade inside India. Known as the Goods and Services Tax
(GST), it would replace a tangle of state levies with a single, national one. Rajiv Kumar, head of the biggest
business lobby, FICCI, describes it as India “signing a free-trade deal with itself”. It is an obvious way to
boost trade and growth and lure investors to a bigger single market. Yet state governments and the
opposition are blocking it, distrusting the centre to dish out revenues fairly.
The chances that all, or even most, such big reforms will happen soon are nil. But optimists think that if at
least one or two of them do, the country’s mood could improve. “These three months are crucial for India’s
economy,” says Prithviraj Chavan, Maharashtra’s chief minister and an advocate of reform.
The time for adding to the current, limited reforms is short. The next budget, in the spring, is bound to be
populist as it will be the last before the general election. One property billionaire with good contacts in
government says that “if it’s not done by the end of October, it ain’t happening.”
But building a constituency for bigger reforms—anything beyond letting foreign supermarkets in—will be
fiendishly difficult. On September 18th Congress’s main coalition ally, Mamata Banerjee, the populist
chief minister of West Bengal, in a tirade before television cameras said that her party would quit the
national government and no longer back it in parliament unless the limited reforms announced a few days
earlier were rolled back.
In recent years she had repreatedly blocked reform efforts by Mr Singh. Some close to her had thought she
might be bought off on this occasion, perhaps with more public funds going to her state. Instead a strike
was called for September 20th and street protests erupted. As this section of The Economist went to press,
the outcome was still unclear.
Given a rush of state elections over the next year, ahead of the general one, it is hard to see the party
implementing the big reforms that it has failed to push since 2009. Most assume that Mr Singh’s
government, perhaps with new allies, can hang on until 2014. But Congress will feel growing pressure to
dish out public funds directly to its voters.
Still, say the optimists, India does not have long to wait for an election. If Congress were pushed out it
might be replaced by a pro-growth figure from the national opposition, such as Gujarat’s surly strongman,
Narendra Modi. Mr Modi says he has a “mission” to serve his country. He wants to promote industry and
would surely get the babus working again. The central bank would probably trust him to rein in public
spending.
Alternatively, even a minority government after 2014 might have the stomach for more reform than the
current one. India has had a few of these in the 1990s, and some say that prime ministers who know their
tenures will be short try to get more done than the timorous and long-serving.
The case for gloom
Yet sceptics see a more alarming possibility: that India’s politicians are not really interested in reform. The
liberalisation of 1991 was pushed by outsiders and was relatively easy to implement. But even the limited
reforms announced this month, letting more foreigners into the retail business and slightly cutting diesel
subsidies, caused a political storm, and bigger changes would be far more awkward.
Politicians show no wish to be bolder, having learned from the defeat of the most recent reforming
government led by the Bharatiya Janata Party (BJP) in the general election of 2004. Voters gave that party
no credit for helping create conditions for economic growth, the reform of public pensions and the like.
A dispirited senior member of government in Delhi frets that an old broad consensus in favour of reform
has broken. Mr Singh’s warning in August that slower growth threatens national security sounded like a
vain cry to his fellow politicians.
Worsening the scepticism is widespread dismay over crony capitalism. Growth in the past decade, along
with high commodity and land prices, has too obviously enriched a destructive band of robber-baron
politicians.
Public anger with the corrupt and the super-rich has risen, merging with doubts about market reforms. Mr
Singh likes to say that ordinary voters more than politicians grasp the benefits of reforms, and tried to make
the case for them this month. But the gloomsters may be half right: India’s politicians are not, by instinct,
reformers. They act when pushed.
Ramachandra Guha, a noted historian, points out that India’s cheerleaders as well as its pessimists tend to
overstate their case. This special report will try to steer a path between the two. More than usual now rests
on who holds political power, as the next article will explain.
Power shifts
Weaker national parties, stronger regions,
new voter habits and corruption are
changing India’s politics
Sep 29th 2012 | from the print edition
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MAKING POLITICAL PREDICTIONS in India is risky. The ruling party in Delhi often suffers so many
setbacks that it is hard to believe voters will support it again. So it was with Congress in 2009, yet to
general surprise it was re-elected with a bigger mandate than before. Explanations varied: urban voters
liked rapid growth; rural ones were impressed by new welfare measures; allies flourished in the south and
Congress roared in big Andhra Pradesh; perhaps people distrusted the opposition BJP’s candidates, such as
Narendra Modi (see article).
Almost any explanation, and its opposite, could be right. Politics in India is big and messy: hundreds of
millions of voters, from vastly different backgrounds, are bound to hold widely divergent views. Concerns
at local and state level often trump national ones, and national affairs can appear as an amalgam of assorted
local rivalries.
The next general election is in 2014, unless Congress is forced out sooner. The party’s electoral prospects
look poor. Mr Singh, once a model of rectitude, is tarnished by presiding over the most corrupt government
in India’s independent history. And although he had a hard-won reputation for good economic
management, his new efforts to reform are unlikely to win much support from the public.
As usual, the ruling party has been thumped in big states. Andhra Pradesh provided more Congress MPs in
2009 than any other state, but now a local leader’s desertion has shattered the party there. Congress has also
done badly in massive Uttar Pradesh (UP), earning only a poor fourth place in the state election there this
year.
Rahul Gandhi—the son, grandson and great-grandson of prime ministers—was by now supposed to be
reviving the party, or preparing to assume high office. But having led a dreadful campaign for Congress in
UP, he seems to have lost his nerve. No one really knows what he stands for or whether he can lead.
Nobody ever gets to interview either him or his mother, Sonia, the party president. But that looks like a
defensive strategy, and meanwhile no other young leaders can rise.
Sachin Pilot, a junior minister and loyal friend of the Gandhis, says that analysis is unfair. Mr Gandhi’s
restraint in reaching for power is admirable, he says, and no rising stars are being held back. Other
observers are more sceptical. “Rahul Gandhi intrinsically doesn’t want it. A level of detachment is built
into his personality,” says a Congress leader.
The Gandhi dynasty still holds together Congress (which lacks much ideology beyond broad secularism)
and helps to settle leadership spats. But it matters less and less to voters. Regional dynasties, with power
and money to spread around their states, are in the ascendant. Without their own state as a fief, the Gandhis
look unrooted. A newspaper editor in Delhi thinks India is getting ready “to make the Gandhi family
irrelevant”.
The crumb of hope for Congress is that the national alternatives are weak. Arun Jaitley, head of the BJP in
parliament’s upper house, says the party has a “galaxy of leaders” for 2014. But they are really a collection
of regional leaders, and the BJP is unsure of its ideology, having toned down its earlier, odious, form of
Hindu nationalism but also muddied its old pro-market stance. It gets little support in India’s south, east or
north-east.
The party tries hard to be seen as fighting corruption, yet projecting itself as clean is tricky. It has had its
share of scams and crookedness, notably in the southern state of Karnataka, and it lacks ideas for making
things better. It opportunistically backed Anna Hazare, an anti-graft campaigner, when he became popular,
but not his plans for a powerful anti-graft ombudsman.
Smaller national parties do not look promising. Ramachandra Guha, the historian, thinks a national twoparty system as in America would raise standards. The lesson from India’s states, too, is that a regular
alternation of parties in power tends to deliver the best results. This happens in Kerala and Tamil Nadu in
the south and Himachal Pradesh and Punjab in the north. As parties compete to offer better public services
and other social goods, things like literacy, the position of women and infant-mortality rates improve.
Think local
Regional parties fill the gap. Usually built around a charismatic individual who becomes a state’s chief
minister, they matter, wielding near-presidential power over a territory that often has a country-sized
population. These states control roughly half of all India’s public spending. The most prosperous ones,
which rely least on Delhi for discretionary funds, throw up the strongest leaders, who often influence what
happens in Delhi too.
What is new is the arrival of floating middle-class voters who swing between parties depending on how
they perform, not on promises of rewards for their group
The mightiest satraps pay the least attention to national parties. They include three women: Mamata
Banerjee in West Bengal, Jayaram Jayalalitha in Tamil Nadu and Mayawati, a Dalit (the lowest caste) who
ruled UP until earlier this year. The others are Nitish Kumar in Bihar, Akhilesh Yadav and family in UP,
Mr Modi in Gujarat and Sharad Pawar, an ally of Congress in Maharashtra and nationally. They run some
of India’s wealthiest states and preside over more than 600m people. They are unlikely to unite as a
coherent third force of politics, but have great veto power over national matters.
Yet some voters are beginning to drift away from the rigid identity politics of old. Nationally, Congress still
gathers in the Muslim and the more secular Hindu votes and the BJP the more fervent Hindus, and caste
still counts: Mayawati relies on Dalit votes and the Yadav family on middle-ranking castes and Muslims in
UP. Leaders, in turn, reward favoured groups, sometimes referred to as “vote banks”, with government
jobs, education quotas and other handouts.
What is new is the arrival of a group of floating middle-class voters who swing between parties depending
on how they perform, not on promises of rewards for their particular group. Mostly young, urban, literate,
mobile and privately employed, they are increasingly well-informed thanks to cable news, social media and
mobile phones.
For now they are in a minority, but they will increase as cities expand and schooling improves. Around
100m voters in 2014 will be first-timers. “Young India wants good policy. It wants a good job, education,”
says a high-profile Congress figure in Mumbai. Another government leader calls the middle class a new
“caste”. He reckons it is the single most cheering thing in Indian politics.
These voters may be starting to decide results. For evidence, look at Mr Kumar’s triumphant re-election in
Bihar in late 2010. Caste was still a factor, but voters overwhelmingly rewarded him for delivering better
roads, schools and hospitals, improving law and order and lifting the economy. Mr Modi keeps being reelected in Gujarat mostly because he runs the place efficiently.
The chief minister of Chhattisgarh, Raman Singh, says that voters re-elect him because their incomes are
rising and public services are getting better. He identifies, especially, the more transparent and efficient
delivery of food rations to the poor, thanks to computerisation and the spread of ID cards.
If holding leaders accountable for their performance becomes a national habit, it will be in part because of
an explosion in television watching. Rajdeep Sardesai, a leading news presenter and editor since the 1990s,
says India now has 365 round-the-clock satellite channels, as well as many city-based and cable ones.
Television helps shape reactions to national issues such as corruption. Mr Hazare’s dramatic street
campaign and public fasts were made for TV and earned non-stop live cable-news coverage. Mr Sardesai
thinks TV lets voters “vent anger against the system” and judge leaders from close by, but worries that it
might lead to “public hatred of politics”.
Such hatred would be understandable because much of Indian politics is rotten. A series of outrageous
scams (see table 1) has left voters resentful at the huge losses of revenue involved, especially as a tiny
minority grew rich beyond the dreams of avarice. The billionaires too often flourish thanks to political
connections and access to natural resources, land and public goods such as telecoms spectrum. Growing
inequality spreads dismay.
India may be passing through an American-style robber-baron phase, driven by a commodity boom and a
shift from a closed to an open economy. Gloomier commentators see an outright Russian-style kleptocracy.
“We are creating an oligarchy,” sighs a commentator in Delhi. A leading Congress figure rails that “there
are no audits of political parties. There is such a deep nexus of property and political funding. Many
political leaders are sustained only because they have huge war chests.”
In UP one politician was recently filmed telling officials it was acceptable to steal, and several ministers
were sacked earlier this year for pocketing $1.2 billion from a scheme supposed to help sick villagers. A
political party is said to clear business projects in exchange for 30% equity in them. One satrap is believed
to have become the biggest property developer in India.
The costs are real. A power minister in one state reportedly tried to close functioning power stations so he
could take a cut when pricier electricity was imported instead. India’s new airports, irrigation schemes and
toll roads are typically overpriced and often late because they are built by firms with political ties.
Politicians want the lifestyle enjoyed by the country’s billionaires, but parties also raise huge quantities of
cash to win elections. Voting in India is generally clean and honest, but the campaigning is expensive and
dirty. And everything is big. A typical MP in the Lok Sabha, the lower house of the national parliament,
has to woo around 1m voters.
Even state assemblymen have massive constituencies. Money is needed for the usual stuff: posters, rallies,
trips to villages, local organisers and the like. In India many voters in tight races also expect pre-election
goodies, so politicians regularly dish out cash, TVs, food mixers, saris, rice, whisky and even, in Punjab
this year, heroin. Official limits on party spending are universally flouted. Even the limited hope of letting
private donors and parties maintain their close relations but making them transparent, as in America, seems
forlorn at the moment.
More likely, politics will become cleaner if and when India’s economy shifts away from a system in which
politicians allocate public goods. More wealth created by entrepreneurs, innovators and manufacturers
might loosen political ties. But such changes will take time.
The candidate
Narendra Modi wants to be India’s next
prime minister
Sep 29th 2012 | from the print edition
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Modi wants to get ahead
RESPLENDENT IN A pink shirt, with a neatly trimmed white beard, Narendra Modi chuckles when asked
if he is a dictator. Suggestions that he cannot compromise, lead within a team or suffer criticism are
“absolutely baseless”, says Gujarat’s chief minister.
No politician stirs as much anger, or grudging admiration, as the burly Mr Modi. He leaves little doubt
about his wish to become prime minister, talking of his “mission” to serve: “I am interested in doing
something for my country.” Polls show him to be the most popular figure to lead the country, outshining
Congress’s indecisive Rahul Gandhi. The rank and file of his Bharatiya Janata Party (BJP) love him.
He faces two main challenges. The first is Muslims and other minorities. Many distrust and despise him for
what happened in 2002, shortly after he took over as chief minister, when over 1,000 people, mostly
Muslims, were killed in riots. He appeared to turn a blind eye, letting mobs vent their rage after Hindu
pilgrims died in a train fire.
Courts have found him guilty of nothing. The state has been calm since and Gujaratis seem mainly to want
to forget the riots. Elsewhere many are sure he is a monster: “A mass murderer who should be in jail,” says
a political observer in Delhi. He fared poorly as a campaigner in the 2009 national election.
Now Mr Modi is trying to reshape his image. Pressed about the riots, he says his local popularity proves
them to be politically irrelevant: “This question has no use…I have faced ten elections of various kinds in
my state. The people always supported me.”
The second challenge is distrust inside his own party and among national coalition partners. In June a close
ally of the BJP, Nitish Kumar, the chief minister of Bihar, said only a “secular” candidate could lead India,
a direct swipe at Mr Modi, a Hindu nationalist. Unfazed, Mr Modi agrees and calls himself secular too.
“This is an article of faith, justice to all, appeasement to none.” The Hindu nationalist movement, the RSS,
which remains influential in the opposition grouping, opposes its one-time protégé, preferring the BJP’s
party president, Nitin Gadkari.
Other BJP leaders are wary of Mr Modi. When he talks of seeing himself as destined to triumph, his eyes
burn with determination. His fellow politicians do not know how to handle such a confident loner, says
Swapan Dasgupta, an observer of the party.
If the party wants to campaign on the economy and efficient government, Mr Modi is its likeliest candidate.
Gujarat’s industrial success, luring manufacturers from the rest of India, is matched by a strong agricultural
record. The hope is that Gujarat’s leader would replicate such gains elsewhere. Investors flock to Gujarat,
Mr Modi says, for its well-built roads, the quick allocation of land, the plentiful supplies of gas, electricity
and efficient bureaucratic support. Corruption has not been eradicated, but it is less debilitating than in
many other places.
As for the benefits to ordinary Gujaratis, Mr Modi cites more girls at school and fewer drop-outs from
education. Infant-mortality rates are down and prosperity is up. Yet many other states, notably in India’s
south, do much better on social indicators.
Mr Modi’s time could come if the BJP got a big victory in 2014, say over 170 seats. It would then be in a
good position to impose its choice of prime minister on its coalition partners. If not, he could turn out to be
India’s Barry Goldwater, says Mr Dasgupta: reshaping the country’s right wing but seen as too divisive to
lead.
The economy
Express or stopping?
India’s growth rate, supercharged for a decade, is falling back to older, lower levels
Sep 29th 2012 | from the print edition
INDIA’S TRAINS MOVE slowly. That gives passengers plenty of time to observe their fellow riders. They
are travelling far to visit a hospital, take up a job, enroll at college. Odishan coffee pickers in Karnataka,
Assamese students in Kerala and Bihari diamond polishers in Gujarat all move as freely around their
country as Americans hop from state to state. That mobility should give India an advantage over countries
like China that penalise farmers when they leave their land.
Indians are also increasingly well connected. On one 4,200km train ride, through 615 stations, your
correspondent never once lost his mobile-phone signal. A decade ago few would have cared, since only 9%
had a phone of any kind. Now, according to census data from last year, 63% of householders have a phone,
usually a mobile. Ericsson, a maker of phone handsets, said this month that three-quarters of Indians now
have access to a mobile.
The endless rows of concrete houses with trailing wires seen from the windows tell a story too. The same
census showed that of India’s 247m households, two-thirds have electricity and nearly half TV. A similar
number own bicycles, though only 5%, so far, have a car.
According to a new report by PricewaterhouseCoopers, in 2010 some 470m Indians had incomes between
$1,000 and $4,000 a year. The consultancy reckons that this figure will rise to 570m within a decade,
creating a market worth $1 trillion. The big Indian firms that are doing best—such as Mahindra and
Mahindra, a carmaker, Hero MotoCorp, which makes motorbikes, or Hindustan Unilever, which produces
small consumer goods—are those targeting such buyers.
Yet the rosy forecasts were drawn up when the economy was roaring ahead and it seemed that another
decade or two of similarly high growth would deliver a big mid-income economy. Now that prospect is in
question. The next few years are likely to see much slower expansion.
Doubters had long been saying that India’s potential rate of growth was bound to be lower than, say,
China’s. They agreed that India could achieve much more than the 3% stopper-train growth rate that was
the norm before reforms in 1991. But they gave warning that it could not keep up an express-train speed of
close to 10% because its economic engine quickly overheats. Recent years have brought high inflation,
especially in food prices. Roads, ports and railways are overwhelmed, blackouts are common and labour
has become as expensive as in China, even though the Chinese, on average, are three times richer.
The Transport Corporation of India, a logistics firm, reported in May that every one of 17 important road
routes was clogged. To drive the 1,380km from Delhi to Mumbai, for example, takes an average of nearly
three days, an average of just 21km an hour. The firm says the delays are getting worse: the road network is
growing by 4% a year but traffic by 11%.
The railways are no better. Raising passenger fares is politically impossible. When Dinesh Trivedi, then the
railways minister, tried it in March, for the first time in nine years, his party leader forced him out. To
subsidise the fares, freight charges keep being raised, pushing many goods off the tracks and into
overloaded lorries on crowded roads.
Seen in that light, the slowdown in economic growth to about 5% was almost welcome. “We should not try
to get back to the highest growth path. India hurts when it is growing at 8.5%,” argues Cyrus Guzder, a
Parsi businessman in Mumbai. His particular worry is energy. India has a voracious appetite for energy and
minerals, he suggests, but cannot dig, import or shift enough coal to keep the lights on even though there
are new power stations, and in theory quite a lot of capacity.
Nor have India’s politicians shown much appetite for reforms to improve matters. One obvious remedy
would be to deregulate the distribution of coal, argues N.K. Singh, an MP from Bihar and economic adviser
to the BJP-led government of 1998-2004. The government could even break up or sell off Coal India, a
massive and badly run state monopoly.
Congress did free petrol prices in 2010, and over the years the rupee has been allowed to float more freely,
but reforms tend to be introduced only little by little. Some scarce goods are now sold by auction, but only
after years of scams. Single-brand retailers, such as IKEA, have been allowed in, and multi-brand ones look
set to follow. But sustained rapid growth would require a slew of big second-round reforms, to include
things like land acquisition, labour laws and tax.
Politicians naturally prefer to spend. Congress is fond of entitlement schemes such as NREGA, which
promises 100 days of paid work a year for every rural household. That, along with other new welfare
measures, is helping some of India’s poorest people, lifting rural incomes and boosting consumer markets,
but probably also raising labour costs.
Surjit Bhalla, a Delhi-based economist, points out that spending on welfare to relieve poverty now
represents 2.5% of GDP. That is not a huge share, but it is rising fast: during Mr Singh’s first government it
was just 1.6%. Mr Bhalla worries that this sort of spending does less to help the poor than, say, the creation
of productive jobs.
Fiscal policy is generally profligate. Diesel prices went up this month, but the fuel remains massively
subsidised, along with kerosene, fertiliser and food.
All this suggests that potential growth is nowhere near double digits but close to what India has today,
especially given a weak global economy.
Businessmen, particularly those enjoying buoyant consumer demand, are still cheerful. Sevantilal Shah, the
boss of Venus Jewel, a big diamond polisher and producer in Surat, says domestic sales are flourishing.
Anand Mahindra, of the Mahindra Group, says he can’t imagine anything but an improvement on a
dreadful year: “I remember that old watch ad, ‘takes a licking, keeps on ticking’, that’s what I hope we’ll
say of India soon.”
Compare contrasting GDP
and population levels across India’s states with our interactive map and guide
Economists are more cautious. At a meeting in April Raghuram Rajan, an academic and former chief
economist at the IMF who has just taken over as the government’s chief economic adviser, inveighed
against the “paralysis in growth-enhancing reforms” and an “unholy” alliance of some businessmen and
politicians that blocks change. He said India had to raise fuel prices rapidly, to be “kinder” to investors in
order to attract capital, and “to become paranoid again” about generating growth. At the time Mr Rajan had
not yet been appointed to his new job, but the prime minister was at his side—and clapped. In private, most
senior officials say something similar.
Sadly Mr Rajan, like his affable and clever predecessor, Kaushik Basu, lacks political clout. Mr Basu
remains an optimist on the economy, contrasting it with the late 1980s when the country felt like a warmer
outpost of Soviet thinking. He is particularly pleased that India has persistently high national savings and
investment which in his view can be sustained, despite some recent slippage. So he reckons that the country
will return to a high growth rate, near 9%, once the current uncertainty and urgent fiscal problems are dealt
with. He puts faith in the expanding young, urban and literate population and in new technology. As for the
rotten bits of the economy, the state-run firms, thankfully they account for only 14% of GDP (against about
a third in China).
A hole in the middle
Yet optimists need to address another problem: the structure of employment, which is very different from
that in most East and South-East Asians economies. Agriculture still employs roughly half of all working
Indians, many of whom are much less productive than they might be. And the service sector already makes
up 59% of GDP (see chart 3) and is still growing rapidly. In particular, IT and outsourcing companies such
as TCS and HCL are performing well, despite global worries.
The missing middle is industry and manufacturing, of the sort that thrives in China and drives exports.
More factories could provide more jobs for the 13m people that join India’s workforce every year, many
still poorly educated. Manufacturing makes up just 15% of the economy, much the same as in the 1960s.
More than other sectors, it suffers from India’s entrenched bureaucracy and wretched infrastructure. Indian
labour costs are high and laws are restrictive. As Chinese wages rise, countries such as Bangladesh are well
placed to pick up business, but India is not. When firms persuade unions to allow contract labour to
increase flexibility, workers can end up getting paid different rates for the same job. At a Maruti factory
near Delhi this summer, that led to clashes which left an HR manager dead.
Manufacturers also complain about the high cost of credit in India. This may ease a bit as inflation
subsides, allowing interest rates to come down. A weaker rupee will make the country more attractive as a
base for exporters. And its own booming markets offer a growing incentive for manufacturers to overcome
their problems. India’s carmakers, by and large, have done well (though Tata’s Nano, a cheap small car, is
not yet the triumph it was billed as). But there seems no prospect of a big leap in Indian manufacturing in
the near future. And if services are to keep expanding, the country needs huge quantities of skilled labour
that will not be easy to come by.
On a hiding to something
A flourishing Indian leather business
Sep 29th 2012 | from the print edition
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Mr Kapur’s bags of success
ON THE FACE of it, Hidesign is a manufacturing failure. Its leather bags are stitched and glued by ranks
of well-educated women in blue saris on a shady factory floor. Most of them have been working there for
ten or 15 years. Each of them takes an average of 13 hours to make a bag which a Chinese worker could
produce in three. Yet their wages are rising by 13-14% a year.
Dilip Kapur, who founded the business and still runs it, admits over a vegetarian lunch in his garden that he
tried and failed to speed them up. Simpler designs and more repetition got the time down to nine hours, but
since labour costs make up only a small share of the total he was saving little and his workers got grumpy.
Worst, he says, “we lost the core strength, a product that spoke of uniqueness. I lost the ability to brand.”
Instead he decided to raise quality. Staff are now rewarded for efficiency in using leather (the costliest
input) and run an internal market to sell offcuts. They calculate their own productivity and follow
complicated spec sheets for a wide variety of designs. His workers’ skills, says Mr Kapur, serve a thriving
manufacturing niche.
He employs 3,000 people and expects this to rise to 5,000 soon. Already he is the largest private employer
in Puducherry (formerly Pondicherry), one of India’s wealthiest corners. Despite slower economic growth,
consumers love his products. Domestic sales rose by nearly one-third last year. Twelve years ago the
company relied on sales to foreign distributors, mostly British, American and Australian, for 94% of its
income. Today 70% of its revenues come from 70-odd branded shops at home.
Growth is “shattering, India is explosive,” says Mr Kapur. He expects 200-300 stores in India within five
years and also has booming markets in Malaysia, Sri Lanka, Russia and South Africa. He is amazed by how
many customers in forgotten corners of India want $100 bags.
He sees manufacturing as essential to his brand, but the skilled workers he needs are getting hard to find.
Many of the daughters of his present staff are studying for jobs in banking or IT. Finding capable shop
managers, graphic designers and marketing people is harder still, he says: “We have mountains of untrained
labour but hardly anyone trained who can work independently.” Even so, the firm is doing remarkably well.
India could do with many more like it.
Special report: India
Education
A billion brains
A better education system calls for more
than money
Sep 29th 2012 | from the print edition
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Your country needs you
CLIP ON A harness, lift your legs and hurtle down a wire towards the sharp corners of a 15th-century
Rajasthani fort. As you whizz, you might have a few niggling doubts. Was the zip-wire serviced by
someone who knew what he was doing? Is the safety adviser any good? Who is trained in first aid?
Fortunately the staff in Neemrana, a tourist spot some 130km south-west of Delhi, are on the ball. Raj
Kumar, the lead instructor of Flying Fox, has an impressive (if not entirely relevant) qualification as a
Master of Philosophy in ancient Indian history. “I had planned to do my PhD, but this opportunity came
along,” he says. The outfit’s British owner-manager, Jonathan Walter, explains that getting and keeping
reliable workers is his greatest headache. The problem is not so much the onerous labour laws but finding
skilled people. To deal with foreigners his staff need good English; for Indian customers they need social
skills to cajole the reluctant into the walk up the hill.
There is plenty of anecdotal evidence that skilled workers are becoming scarce. The man in charge of
building a university, also in Neemrana, says he had extreme difficulty recruiting the ten types of masons
he needed to work on his campus. A manager overseeing hotel construction near Delhi’s airport says good
plumbers, carpenters and electricians are like gold-dust.
A survey by the Royal Institution of Chartered Surveyors estimates that in 2010 India had just over 500,000
civil engineers when it needed nearly 4m, and 45,000 architects when it needed 366,000. It predicts that by
2020 the cumulative shortfall of core professionals involved in the building trade could be in the tens of
millions.
The shortages extend far beyond the construction industry. The editor of a new magazine, the Caravan,
says finding skilled staff is next to impossible because local education is “extremely bad”. A manufacturer
moans that even if you find capable staff, they quickly flit off to the next job.
Even some low-skilled labour is in short supply. An agent in Chandigarh for an engineering company says
that sales of tractors, rice transplanters and harvesters are booming in Punjab because fewer casual
labourers are migrating from Bihar. Even poorer farmers now buy machines to share.
Generally, though, the shortage is of people who are literate, trained and ready to work. The basics are
improving. The national literacy rate is up from 52% in 1991 to 74%, according to the census. But gains
beyond that are coming far too slowly.
There is no lack of interest in education, or willingness to pay. Small towns display garish murals or
fluttering notices advertising “English medium” schools, computer-training colleges, tutors and
management schools. In newspaper marriage ads, prospective grooms and brides often mention their
qualifications before their age, looks or caste.
By one estimate, 40% of Indian students now make some use of private education—either private school or
topping-up by tutors. A survey in 2011 by Credit Suisse suggested Indians typically spend 7.5% of their
income on education, more than Chinese, Russians or Brazilians. Education is seen as a quick route to
prosperity. A senior government economist worries that parents “almost spend too much”.
On a morning in a poor quarter of east Delhi, Khajuri Khas, that eagerness is evident. In one small school,
Ebyon, 200 children sit rapt before young women teachers in a series of small, ill-lit rooms each morning.
Then they move to a nearby state school for the afternoon, enjoying a free midday meal, books and some
other help.
Parents like Ebyon because it is cheap (80-150 rupees a month) and well run. The headmistress, K.H.
Alice, is bright and brisk. A migrant from Manipur, like many of her students, she involves parents, even
illiterate ones. The rude and troublesome, “paan spitters”, are turned away. And she keeps records: case
studies of why some students flourish and others do not. Schools and Teachers Innovating for Results
(STIR), an NGO, is now gathering such examples of good teaching habits to share elsewhere. Spreading
good ideas could do more to transform schools than simply scattering money around, argues the group’s
founder, Sharath Jeevan.
Some 500,000 of India’s 1.4m schools, with around 300m students, are private. They gather in lots of funds
from anxious parents. But the public sector gets plenty of money too. A midday-meal scheme set up here
and there decades ago to get poor children into school each day is now running nationwide, at a cost of
about 120 billion rupees a year. Better nutrition should mean more concentration and better results.
Some 97% of school-age children enroll, though over half drop out before completing secondary school.
The quality of teaching is variable; sometimes teachers do not even turn up for lessons. There is plenty of
rote learning, discrimination against low-caste children, grade inflation and sometimes flogging. Some
teachers accept bribes from students in return for exam passes. One private school in east Delhi has CCTV
cameras in every class which allow the headmaster to monitor his teachers.
To improve matters, training is crucial. N.K. Singh, the MP from Bihar, thinks the country needs to recruit
4m new teachers and to retrain 8m. The government seems to have recognised the problem, setting aside
about $11 billion for education this year (three-quarters for schools, the rest for universities), an 18% rise
on last year.
A new law, the Right to Education act, is designed to lift school results by setting minimum standards for
school buildings, playing fields, student-teacher ratios and the like. That could raise quality, but may mean
more bureaucracy, too. It also requires every private school to reserve 25% of its places for poor locals.
Critics say fees for the rest will rise or standards will fall. But the best schools are getting on with it.
To make India more competitive, though, the biggest gains in education must come after school: in
vocational and higher education. Quantity is not the issue. The OECD predicts that by the end of this
decade India will churn out more graduates than any other country bar China, giving it 24m graduates aged
between 25 and 34, some 12% of the world’s total.
India’s official count of higher-education institutions, both private and public, is nearly 26,500, the world’s
biggest country total. The number of students currently enrolled is 15m, or nearly 14% of the age group.
The government is pushing to increase enrolment to 30% of the age group by the end of this decade. Ernst
&Young, a professional-services firm, says this would involve a rise in the number of students to 40m, at a
cost of around $200 billion. But funds are likely to be forthcoming.
However, the quality is often wretched. “A lot of private education is useless,” sighs a noted economist.
Many management colleges do little teaching but lure applicants with promises of getting them jobs when
they have graduated. Too many people end up with worthless qualifications.
Found wanting
Education in engineering, for example, supposedly a great Indian strength, is not what it might be. The
country produces over 500,000 engineering graduates a year. Aspiring Minds, a Gurgaon-based company
that assesses students’ employability, surveyed 55,000 of them last year and found that not even 3% were
ready to be taken on by IT firms without extra training. And even identifying people for further training
might not be easy. According to the survey only 17% of the graduates had basic skills. Some 92% of the
graduates were deficient in programming or algorithms, 78% struggled in English and 56% lacked
analytical skills. “There is a long way to go before engineering graduates in India become employable,” the
survey concluded.
That sounds glum—until you realise that it also means India produces around 100,000 engineering
graduates a year who could soon be working in its IT firms and beyond. Some pockets of higher education
work well, notably the publicly run institutes of technology and of management, on the back of which the
country’s IT sector flourishes.
Some private groups, such as the NIIT, a computer-education company, also produce reasonable graduates.
The next push is to expand their work into other sectors, such as finance, banking and insurance, says
Rajendra Pawar, the NIIT’s founder. He says his group has trained over 30m people in technology. Over
the next decade he wants to educate 7m more for industries such as hospitality, health care, the retail trade
and banking.
In 2010 India had just over 500,000 civil engineers when it needed nearly 4m, and
45,000 architects when it needed 366,000
Public funds are also being deployed to lift skills. The government is pouring money into a National Skill
Development Fund, allotting 10 billion rupees to it for this year alone. The fund is meant to help train 62m
workers in courses of varying lengths over the next decade. So far, however, it has struggled to find enough
credible partners to spend its money well.
Meanwhile private money is flooding into tertiary education. Several tycoons, rather than leaving their
entire fortunes to their children, have endowed universities such as the OP Jindal University (named after a
steel family), the Azim Premji University (after the founder of Wipro) and the Shiv Nadar University (after
the founder of HCL). They are paying higher salaries for good faculty, luring Indian academics from
foreign universities and encouraging research as well as teaching.
Mr Pawar’s group is now building a university to promote research that will be immediately useful to
business. The leafy campus in Neemrana is rising up beside a maze of Japanese factories. Part of a planned
“knowledge corridor” of new universities in Rajasthan, it offers teaching as well as research into biofuels,
biotechnology, wireless networking and more. Soon the campus will also provide space for start-up firms.
It may not be San Francisco yet, but it is a step in the right direction.
Cities
Concrete jungles
A mainly rural country is ill-prepared for
its coming urban boom
Sep 29th 2012 | from the print edition
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Gurgaon looks good, but do
the drains work?
SAVDA GHEVRA IS a township of narrow, poorly built brick houses with beaten tin doors, west of Delhi.
Flies swirl over open sewers. In the absence of piped water, 55 tankers bring in supplies daily. Only a
minority of homes, “pukka” ones, have toilets. A few trees have been planted, but overall the feel is little
better than that of a shanty town.
In theory, Savda Ghevra represents progress—of a minimal, unsatisfactory sort. The area was set aside for
some of the estimated 500,000 slum-dwellers displaced when Delhi hosted the 2010 Commonwealth
games: fish-sellers from beside the stinking Yamuna river, tailors, rickshaw-wallahs and hawkers who saw
their shacks flattened. Some were taken to Savda Ghevra, given plots and told to build.
Now they have homes and electricity, but many families have been split: the father sleeping somewhere
back in Delhi, the rest of the family in the new home. Some have sold their plots, illegally, to dodgy
property traders. A corner house is for sale at a scarcely believable 2.7m rupees.
India’s cities, by and large, are charmless and badly put together. That is one reason why the country
remains mostly rural (see chart 5). Two-thirds of the population, some 833m, are living in 640,000 villages.
Politicians such as A.P.J. Abdul Kalam, a former Indian president, or Narendra Modi, Gujarat’s chief
minister (who talks of “rurban” life), want people to stay out of cities, and would like the internet,
electricity, schools and jobs to go to rural areas instead.
Since rural voters collectively have clout, much public spending flows to the sticks. Farmers get subsidised
diesel to run pumps. The NREGA scheme creates low-paid make-work jobs. The government also pays
inflated prices for most wheat and rice, then sells much of it back to villagers as cheap rations. That
discourages migration, and in many states it also encourages corruption. An official estimates that 44% of
state-managed food vanishes as “leakage”.
Some states, such as Kerala and Tamil Nadu, have good public services and social indicators despite slow
urbanisation, but resisting it also comes at a price. Village life is often hard for people of low caste, women
and members of religious or other minorities. Villages are usually the places with the worst schools and
health care and the least productive work.
Putting off urbanisation can also mean postponing prosperity. When farmers leave the land to work in
factories, call centres or almost anywhere else, their incomes and consumption almost always go up, lifting
assorted development indicators. In China just over half the population is now urban.
Aromar Revi, director of the Indian Institute for Human Settlements (IIHS), says that India’s 100 biggest
cities, with 16% of its total population, contribute 43% of its national income. Even slum-dwellers are often
productive manufacturers and traders. Yet many urban spaces, like Savda Ghevra, have a legacy of poor
planning and management.
Gurgaon, a business district near Delhi, has plenty of glass towers but falls short on sewerage and power
supplies and is only slowly acquiring public transport. Gridlocked Mumbai can appear to be falling to bits,
especially in heavy rains.
The number of town-dwellers, currently 377m, is growing by around 5m a year. Historically most urban
growth has been due to natural increase, not migration. That is changing as country-dwellers see
opportunities. So in future India’s urban population will rise much faster, doubling by mid-century.
Some urban centres will become megacities. According to one vision, India’s entire western seaboard could
turn into a single conurbation, stretching from Ahmedabad in Gujarat in the north, past Mumbai and south
to Thiruvananthapuram in Kerala. Inland, Delhi and its environs could be a hub for 60m-70m people,
provided there is enough water. Within two decades India will probably have six cities considerably bigger
than New York, each with at least 10m people: Ahmedabad, Bangalore, Delhi, Mumbai, Hyderabad and
Chennai.
Delhi gets plenty of public money, and even Japanese donor funds, which have helped pay for a newish
metro. Several other cities, including Bangalore and Ahmedabad, are also getting metros. Any big
metropolis can tap a central fund, the Jawaharlal Nehru National Urban Renewal Mission, for new
infrastructure. But there is plenty of growth in smaller places too. Already 53 cities have at least 1m
inhabitants. Some are seeing improvements, but many are grim and badly run.
Gorakhpur is a sprawling city near the Nepalese border in eastern Uttar Pradesh, notorious for thuggish
religious politics, gangsters and smugglers. It has 670,000 inhabitants, poor public health and a broken and
clogged road system. A cricket field on the city’s edge is so thickly strewn with rubbish you can hardly see
the ground beneath. Cows munch on plastic bags in the streets.
India’s 100 biggest cities, with 16% of its total population, contribute 43% of its
national income. Even slum-dwellers are often productive
India is ill-equipped to make such places attractive drivers of growth and better living. “I see no
improvement in thinking about cities,” says a senior figure in construction and retailing. Much land is
privately held, but markets are opaque and development too often depends on cronies with political
connections.
Mumbai is especially bad. “Property in the city has run riot,” says Mr Guzder, the Parsi businessman.
Towers shoot up, especially around the Sea Link, a bridge connecting the southern part of the city to the
north. “But we have no urban infrastructure, no widening of roads, no provision of police.” Prithviraj
Chavan, the chief minister of Maharashtra, blames the city’s woes on a “deep nexus of property and
political funding”.
Municipalities also need planning skills. Mr Guzder says the entire Mumbai metropolitan region is
overseen by a single town planner (“and she is retiring soon”). Mr Revi estimates that by 2031 India will be
short of 100,000 professionals—planners, engineers and the like—to manage cities. He heads a new
university that will train people to fill the gap.
Some rich folk are trying to get round the problem by starting a city from scratch. Called Lavasa, it is now
being built on 25,000 acres of hilly private land by a reservoir near Pune in Maharashtra. It looks pleasant
enough: a town to walk in, good infrastructure, a sanctuary for 300,000 inhabitants. But it is mired in
controversy and hardly offers an urban model for one-sixth of the planet’s population.
What it takes
A far more encouraging example can be found farther up the coast. Surat, a city in Gujarat of 4.5m people,
is a flourishing trading hub that not long ago was a wretched dump like Gorakhpur. In 1994, after a
reported (but never confirmed) outbreak of pneumonic plague, it became famous for squalor, gridlock,
slums and rotten management. Since then it has been transformed. Effective managers cleaned up. Rubbish
was collected and transport improved, streets were swept and public services delivered. Miraculously, the
improvements were sustained. Some 96% of residents pay their municipal taxes on time. Manoj Kumar
Das, who now runs the city, says that over the past decade the growth in Surat’s population averaged 5% a
year, among the fastest of any city in the world. According to his planners, by 2031 it could have 9.3m
people, overtaking London.
It helps that the local economy is thriving, with diamond polishing, textiles and petrol products doing
particularly well. The boss of a diamond firm says his home town has been reshaped and feels great.
Investors like its reliable power, traffic that flows and the can-do culture of Surtis. Even the grimier end of
town is uplifting. On a sweltering monsoon day the lack of smell, flies, dust or noise at the municipal dump
is strangely thrilling. It is efficiently run by private contractors, a model that other cities could copy
tomorrow. Even the rubbish is being put to work: soon about 1,200 tonnes will be burned daily in Germanbuilt incinerators.
The city’s sewage works are similarly impressive: efficient, computerised and run largely on electricity
from a biomass plant fired by methane. Over 90% of households are said to be connected to sewerage. The
municipal engineer says the entire city has clean piped drinking water. Slums are being cleared and parks
being created by the river. Next on the list is a rapid bus transport system, more flyovers and a Bollywood
theme park modelled on Disneyland. There are posh car showrooms, and retailers like Jimmy Choo,
Burberry, Armani and Gucci are due to open soon.
What made Surat work? An assortment of businessmen, the boss of a jewellers’ association, the local
chamber of commerce and a prominent city journalist all give the same answer: governance. When
residents felt able to trust officials and their plans, they happily contributed to the city’s success. This year
firms planted 200,000 trees to help make the place greener.
Mr Das says given the right motivation and belief in officials, others cities are capable of similar
improvements. For instance, many people in Patna, Bihar’s capital and his home town, are now connected
to the grid. When he was a boy, he had to study by lantern light.
Special report: India
India abroad
No frills
The country’s foreign policy is frugal,
sober and generally sensible
Sep 29th 2012 | from the print edition
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DOWNTOWN YANGON, MYANMAR’S once-shuttered main city, is home to a large Indian diaspora.
Many turned out to hear a speech from India’s prime minister during his first visit in May. “Keep a place in
your hearts for India,” Manmohan Singh implored a gathering of businesspeople.
Nothing Mr Singh does is electrifying. The same day he turned a historic meeting with Aung San Suu Kyi,
the democracy activist, into a stilted and awkward affair. His talk of a cross-border bus service, and mutual
trade worth $5 billion by 2015, set few hearts racing. A group of resident Bengalis in a hardware shop,
buying materials for a goat cage, shrugged when they heard that Mr Singh was in town.
That he got to Myanmar at all was an achievement, even if he came long after nimbler leaders from Britain,
Bangladesh, South Korea and elsewhere. The machine that guides India abroad is slow and cautious. “We
run a no-frills policy,” concedes a senior official. “We’re not trying to cut a grand figure abroad, it’s a
realist approach.”
Put less kindly, India is still punching well below its weight in foreign affairs. Shashi Tharoor, a
Congressman from Kerala and one-time under-secretary-general at the United Nations, thinks India is
trying to do more but is devoting far too few resources to achieving its foreign-policy goals.
The country’s economy is more closely enmeshed with the rest of the world than ever. Foreign trade is now
equivalent to 43% of GDP, against just 16% two decades ago. By last year India’s two-way trade was
worth a total of $794 billion. In March SIPRI, a Swedish think-tank, ranked the country as the largest single
importer of weapons, with a 10% share of the world’s total. Long a recipient of aid, the country is fast
becoming a donor, dishing out aid and soft loans worth billions of dollars every year. It also has a growing
appetite for energy, mineral, commercial and other interests in Africa, Central Asia and elsewhere. And it is
an enthusiastic joiner of international groups.
On a shoestring
All this speaks of rising ambitions, even if most foreign-affairs experts wisely eschew any talk of an
incipient superpower. But the means are limited. Mr Tharoor notes that the foreign service has only about
800 diplomats, less than a fifth of China’s and roughly the same as tiny Singapore’s (see chart 6).
Overstretch is evident: a single official in Delhi has to liaise with 19 Latin American ambassadors, says Mr
Tharoor. There are few people to handle difficult cross-regional topics such as water resources or climate
change, and few linguists fluent in tongues helpful beyond Asia. Dynamic Indian firms establish
themselves in new markets without government help, but they grumble that rivals, notably state-owned
Chinese ones, enjoy cheap credit and diplomatic backing.
“India’s state is a 65-year-old who has fat in all the wrong places,” concludes C. Raja Mohan, a foreignaffairs expert. It has too few border guards, customs officials, diplomats and soldiers, but far too many penpushers in the coal and steel ministries. After decades of facing inwards, Indian universities, think-tanks
and commentators are only just beginning to show an interest in foreign matters beyond Pakistan, so as yet
there is only a small corps of experts outside government to help advise policymakers. Pointlessly strict
secrecy rules lock up official foreign-affairs documents for good.
Some even wonder how much of a grip the national government in Delhi is able to keep on foreign policy.
Regional satraps who bully Mr Singh on domestic issues have also caused sudden foreign-policy reversals.
Last year Mamata Banerjee, West Bengal’s chief minister, scuppered an Indian water-sharing deal struck
with Bangladesh. In spring this year a Tamil ally of Mr Singh’s government helped to get India to vote
against Sri Lanka at the UN over war crimes, reversing its policy.
Even so, India’s star is rising abroad. Sensibly, its goals are limited: to ensure that its foreign relations serve
its big transformation at home. That goes down better with its foreign partners than its sermonising of old.
Its three main concerns today are America, China and its immediate region.
Relations with America have thrived ever since a civil nuclear deal agreed with George W. Bush seven
years ago. Cultural ties via India’s diaspora in America help, as do stronger trade links. The two countries
also share the experience of running big, expensive, religious, materialistic and messy democracies in
which central governments are constrained by powerful states.
America is now one of India’s biggest weapons suppliers. Mr Mohan points to defence orders worth $10
billion for C130 and C17 aircraft, missiles and more, and says another $10 billion is lined up. Last year
America failed to sell India a big consignment of fighter jets, but that caused only a temporary ripple of
bilateral irritation. Close co-operation in counterterrorism, marine exercises and anti-piracy efforts
continues.
Our interactive map
demonstrates how the territorial claims of India, Pakistan and China would change
the shape of South Asia
The two powers’ interests are converging. India, temporarily on the UN security council, has voted three
times with America against Iran over that country’s nuclear programme (though it has been cagey over
Syria). The two collaborate in Afghanistan, where India is a big civilian donor. Crucially, America is
increasingly adopting India’s stance against extremist groups based on Pakistani territory. Awkward issues
of old, such as who should run Kashmir, no longer get aired.
India wants America to preserve its ties to Pakistan, since no one else, certainly not China, would help
moderate Pakistani behaviour. But American ties with India will get more important, though there will be
no formal treaty. And India will increasingly engage with the West.
One big reason is its second concern: China’s rise. The two Asian powers are developing closer ties,
notably in trade. But they also vie with each other. A China expert in India’s foreign ministry says that
bilateral trade, worth just $2.9 billion in 2000, should pass $100 billion in 2015. But he explains with equal
enthusiasm that India has made rapid gains in domestic military mobility. A decade ago it took two months
to move several army divisions to defensive positions on a disputed border in the north-east; now, thanks to
better roads, it takes just two weeks.
In Myanmar, and elsewhere in the region, the two Asian giants compete for influence and energy supplies.
At the same time India is wary of China’s ability to make trouble, for example over Tibet and the Dalai
Lama (who lives in India). And disputes continue along the still unfixed India-China border, the site of a
humiliating frontier war 50 years ago that India lost.
India wants a stronger military deterrent. In April it test-fired a home-built long-range nuclear-capable
missile, the Agni-V, which in theory could strike China’s big cities. And it is putting more soldiers and
aircraft at permanent forward bases along the border.
Farther east, too, India is forging links with democracies and those already close to America. Ties with
Australia will improve as it looks poised to announce that it will sell uranium for India’s domestic nuclear
plants. India has become modestly active in oil exploration in the South China Sea. And it is a big recipient
of aid and investment from Japan.
Just in case
Last, and long overdue, India is doing more to improve relations in its region. Mr Singh says he is ready to
visit his own birthplace in Pakistani Punjab if only Pakistan would do more to stop terrorists who attack
India, or at least to agree to India’s requests for more open trade. India is also trying to boost trade by
building better border infrastructure and loosening non-tariff barriers. This month the countries’ foreign
ministers at last signed a deal easing their bilateral visa regime.
Though still poorly resourced, India’s foreign affairs seem better run than they have been for a long time.
Gone are the days when Indian leaders abroad somehow managed to appear arrogant, moralising and
ineffectual all at the same time. India’s policy may lack frills, but at least it has a clear purpose.
The tragedy of the commons
An uphill walk
As Indians get richer and better educated,
they need to become more public-spirited
Sep 29th 2012 | from the print edition
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HIKING IN KASHMIR, in the Himalayan foothills, is a joy. Ravishing views of glacial lakes, snowy peaks
and immense green valleys make it easy to see why Kashmiris, other Indians and Pakistanis have long vied
to control this pristine territory. Unlike much of India, it offers the luxury of open, sparsely inhabited space.
The air is still, cool and clean. Butterflies seek out alpine flowers. An occasional bird of prey swoops by.
But over a few weeks each summer, thousands of Indian soldiers ascend zigzagging paths into a series of
valleys near the “line of control” dividing India and Pakistan. They daub rocks with instructions—“Slow
and steady”, “Respect nature”—and the names of their battalions. Marksmen in nests of sandbags look out
for militants. Red communications wires snake up cliffsides and around waterfalls. On every ridge soldiers
are on guard. At stops along a 32km path that at the peak reaches a height of 4,500m, workers set up
kitchens producing noodles, fried food, sugary tea and stodgy sweets. Goat-herders and villagers work as
porters and guides, raising temporary tent cities.
Then the annual invasion begins. Well over 600,000 Hindu pilgrims follow a yatra, a tough walk over
several days to a cave containing a phallus-shaped piece of ice, or lingam. The Amarnath cave is revered as
one of the most sacred sites in India. Barefooted and bedraggled yatris offer a picture of conviviality.
Cheery city boys and middle-aged men with pot bellies race ahead, then slump, happily exhausted. This
year 93 yatris died en route, most of them ill-prepared for the high altitude, exhaustion and exposure to bad
weather. In the past there have sometimes been terrorist attacks, or threats have been so serious that the
pilgrimage has been called off.
The yatris’ devotion is remarkable, but they feel no compunction about leaving some ugly marks on the
landscape. The approach to the ice cave crosses a glacier-turned-rubbish-dump, strewn with plastic, paper,
tins, drinks cartons and mounds of waste half buried in the ice. Local men hired to gather litter along the
way simply hurl their bags into the glacial stream below. Near the ice cave the valley is so crowded with
shacks, stalls, ponies and yatris that it has the despoiled air of a refugee camp, with paths of mud and
excrement. The valley is filled with acrid smoke from damp, smouldering piles of part-burned rubbish.
Helicopters buzz above, whisking the wealthy and unfit to the sacred spot.
No longer special
Years of insecurity and underdevelopment in Kashmir ironically served as a sort of nature conservancy
scheme, leaving the place in good physical shape, melting glaciers aside. But now that military action has
receded, each summer brings a bumper crop of tourists. Both last year and this, Kashmir got over 1m
visitors. The once serene lake in Srinagar, the capital, is crowded with youngsters on jetskis. The mountain
roads are clogged with straining, overloaded lorries. The valley is seeing a construction boom.
It is depressingly common to litter and flout environmental rules if you can get away
with it
Kashmir is slowly becoming more like the rest of India: wealthier, more peaceful but also gradually more
despoiled. In much of the country the consequences of that process look devastating. A report in 1997 by a
Delhi-based think-tank, The Energy and Resources Institute (TERI), gave stern warning that 50 years of
rapid population growth had led to dire environmental prospects. Forest stocks were down. Air pollution
plagued 90% of villagers (who breathed smoke while cooking) and around a third of urban dwellers. Soil
degradation had cut farm output way below potential. Other woes included water shortages, pollutants in
rivers and a dramatic fall in groundwater levels.
Fifteen years on, matters are worse. Rajendra Pachauri, who heads TERI (as well as the Intergovernmental
Panel on Climate Change), says he is “certainly more concerned” than he was at the time. Forests are a bit
better protected and public transport in some cities has improved. Delhi’s air got cleaner for a decade after
buses and autorickshaws switched to liquid gas in 1999. But the winter smog that bedevilled the city in the
1990s is now back. Along with Beijing it is one of the most polluted cities on earth.
The river Ganges is considered sacred by Hindus, many of whom bathe in it. Yet tanneries, paper mills and
other industrial users dump waste and chemicals in it, farmers allow pesticides and fertilisers to slosh in
and the human waste from burgeoning cities goes in largely untreated. Groups such as WWF run projects
with local governments to tackle the damage, but such efforts are too rare.
Fast-growing economies with few rules often run into problems of this sort. But in India, especially in the
north, few people seem to have much of a sense of shared ownership of public spaces or obligation to the
natural world around them. It is depressingly common to litter, extend private property by encroaching on
public land and flout safety and environmental rules if you can get away with it. “It is a tragedy of the
commons,” laments Mr Pachauri. “Everyone feels it is somebody else’s job.”
With luck, this will change as Indians become richer and better educated. A flourishing democracy may
respond more quickly than, say, China has done. But instilling respect for common goods seems
particularly hard. The reasons may include culture (a history of dividing people by caste), religion (for the
faithful, the here and now is unimportant) and a sense of fatalism; or, more directly, the pressures of an
overwhelmingly huge population.
Small failures of consideration for others are ubiquitous: drivers who race through red lights, often causing
crashes; crowds that barge on and off trains, elbows flying. And despite the indignant rage about
corruption, paying or accepting bribes is considered normal, and so is tax avoidance.
Given how common such failures are, it may be difficult to get anyone to worry about a particular example,
such as environmental despoliation. That people generally respond with good humour is a tremendous asset
for the country. But with it often comes an attitude that it is up to others to tackle the problems. “People
have a tendency to want the government to fix things. This is true everywhere, but we carry it to a fine art.
We have no sense of individual responsibility,” notes Mr Pachauri. Altruism is thin on the ground. For
example, Indians rank among the world’s least generous organ donors; and outrageously wealthy tycoons
are only slowly discovering philanthropy.
Yet that may change, too. For all that Indians are accused of fatalism, they are also increasingly ready to
turf out politicians who have disappointed them. There have been street protests against corruption and
innovative ideas for fighting it, such as providing websites where people can post details of bribes they
have paid.
When a crisis erupts—be it environmental, terrorist, economic, political—both leaders and ordinary people
in India draw on values such as tolerance and openness that do their country credit. A favourite word in
India these days is jugaad, meaning a spirit of innovating and making do. The next five years are likely to
be messy, and the high expectations of recent years may need to be toned down.
But eventually India has to move beyond jugaad. Robust success will come only when standards rise, with
better quality in everything from homes and cities to schooling and sporting achievements (pitifully low,
apart from cricket). That requires functioning institutions, more responsible individuals and leaders who
dare to take decisions. Ordinary Indians will gradually start to contribute. More of them will refuse bribes,
pay their taxes, create wealth as entrepreneurs and take better care of the environment. It will be a messy
transition, but a welcome one.
Some sources and further reading, India special report
Politics
“How India Stumbled”, Pratap Bhanu Mehta, Foreign Affairs magazine. July/August 2012, Volume 91,
Number 4
Assessment of Narendra Modi in the Caravan magazine
Economy
"Gandhi’s Experiments with Populism", by Surjit Bhalla
Emerging Consumer Survey 2011, by Credit Suisse
The Working Group on "Boosting India's Manufacturing Exports: Twelfth Five Year Plan (2012-17)"
"Profitable growth strategies for the Global Emerging Middle (GEM): Learning from the ‘Next 4 Billion’
market"
Union Budget and Economic Survey 2011-12
Media reports on transport and logistics costs and delays
"Doing Business in India", by Ernst & Young
Corruption
Comptroller and Auditor General (CAG) reports on various scandals:
-Sale of 2G telecom spectrum
-Report No.- 7 of 2012-13 for the period ended March 2012 - Performance Audit of Allocation of Coal
Blocks and Augmentation of Coal Production (Ministry of Coal)
-Adarsh housing scandal in Mumbai
-Commonwealth games 2010
Skills and education
Aspiring Minds' National Employability Report – Engineering Graduates, 2011
"Higher Education in Developing Countries: What Role, What Impact?", by Devesh Kapur. University of
Pennsylvania
Education Indicators in Focus
"Right to education: role of the private sector", by Ersnt &Young, May 2012
Elementary Education in India - analytical tables
RICS report on skills shortages
The rise of cities
"Urban India 2011: Evidence Report", by the Indian Institute for Human Settlements
"Building inclusive cities, sustaining economic growth", by McKinsey, 2010
Foreign affairs
“Nonalignment 2.0”, a report by experts into Indian foreign policy
SIPRI report into military expenditure around the world, 2011 (table)
Environment
Selected (offline) reports from The Energy and Resources Institute (TERI)
-"Looking back to think ahead", edited by R.K. Pachauri and P.V. Sridharan, 1997
-"Looking back to change track", edited by Divya Datt and Shilpa Nischal, 2010
-"Directions, innovations and strategies for harnessing action for sustainable development", edited by R.K.
Pachauri and R.K. Batra, 2001
General websites
http://censusindia.gov.in/
http://www.mospi.gov.in/
http://indiabudget.nic.in/survey.asp
http://meaindia.nic.in/
Special report: Business in India
Adventures in capitalism
Indian businesses are rewriting the rules of capitalism in a distinctive and
unexpected way, says Patrick Foulis
Oct 22nd 2011 | from the print edition
ON AUGUST 1ST India's finance minister, Pranab Mukherjee, gathered the country's senior
businesspeople for a pep-talk in New Delhi. The event (pictured) was notable for two reasons. First, the
subject of discussion was the wobble in confidence that has taken place over the past year. Although a
mini-industry has arisen of India optimists who predict that the country's entrepreneurial spirit will make it
an economic superpower over the next two decades, many business folk on the ground feel disillusioned.
They worry that India's notorious red tape, graft and lack of infrastructure are finally catching up with it.
Largely unnoticed abroad and eclipsed by the rich world's sovereign-debt crisis, the Indian economy has hit
a sticky patch, with investment slowing, inflation high and growth expected to dip to perhaps 7%, from a
peak of 10%. After two and a half hours, needless to say, the bosses emerged and expressed boundless
optimism with the gruff air of men in the grip of a half-Nelson.
The second surprise, given India's reputation as a land of red-hot start-ups and new entrepreneurs, was the
dynastic nature of those captains of industry. They included Ratan Tata, the fifth-generation head of Tata
Sons, a conglomerate; Anand Mahindra, the chief executive of the Mahindra group, which was co-founded
by his grandfather; and Anil Ambani, who inherited a chunk of the Reliance empire built by his father. The
main representatives of first-generation entrepreneurs were Shashi Ruia, who built the Essar group with his
brother and who has handed day-to-day management to his son; and Sunil Bharti Mittal, who controls
India's biggest mobile-phone operator, and whose son recently joined the firm after a stint as an investment
banker in London. True, not all Indian firms are dynastic: Y.C. Deveshwar, a veteran business leader,
attended in his capacity as chairman of ITC, a firm controlled by institutional investors, rather than a
family. But ITC has become the kind of conglomerate that Western textbooks advise against, spanning
everything from stationery, cigarettes and spice-grinding to noodles and hotels.
Amid the barons and conglomerate bosses, the only man who represented a recognisably contemporary
Western vision of the corporation was N.R. Narayana Murthy, the lead founder of Infosys. It is focused on
one business line, computer services, which are mainly sold to rich countries. And it is owned by diffuse
institutional shareholders, has gold-standard corporate governance and accounting, and in the next four
years is expected to wave goodbye to the last of its founders still playing an executive role. It is a corporate
fairy tale: in a single generation Infosys has leapt from a start-up, founded by a handful of engineers with
$250, to global blue-chip company. The Infosys vision of Indian capitalism was popularised by Thomas
Friedman, an American journalist who had an epiphany after playing golf in Bangalore and meeting
Infosys's chief executive. Mr Friedman went on to write the 2005 bestseller “The World Is Flat”. It
described an India of buzzing entrepreneurs and start-ups, turbocharged by the internet, outsourcing and
global communications—a kind of giant Silicon Valley with worse roads and spicier food. In the years
since, perhaps reflecting the woes of the West and the rise of China's state-backed approach, some
observers have been less restrained, celebrating a reassuring India of a billion innovators who, through a
bottom-up revolution, would propel their country to prosperity.
Cheerleaders hoped India could leap from sclerotic socialism towards a Western
form of institutionally run capitalism. But that is not how things have turned out
Just as Lenin hoped Russia could skip a Marxist phase or two and jump from agriculture to communism, so
these cheerleaders hoped India could leap from sclerotic socialism, which prevailed between independence
in 1947 and liberalisation in 1991, towards a Western form of institutionally run capitalism. But that is not
how things have turned out. Infosys has just been overtaken as India's most valuable computer-services
firm by TCS, part of the 143-year-old Tata group. Look at India's leading 100 firms by market value and
you will not see any others like Infosys—blue-chip, focused, diffusely owned, created in the past three
decades and run on non-hereditary principles—bar a few financial firms. And whereas Mr Friedman cited
“software, brainpower, complex algorithms, knowledge workers, call centres, transmission protocols [and]
breakthroughs in optical engineering” as the new sources of wealth, many of the latest generation of Indian
oligarchs made their cash from old-fashioned things like roads, mines, energy and property. In short, India
has not conformed to anyone's template. It has gone its own way.
What does this new kind of capitalism look like? An immense, often unrecorded informal sector employs
the majority of Indians. But in terms of value added—a crude way of measuring activity that is used by
economists—Indian capitalism is concentrated. In 2007 a government survey of almost 200,000 services
firms, formal and informal, concluded that the top 0.2% of them accounted for almost 40% of output, and
that companies in two states, Maharashtra and Karnataka, which host the commercial hubs of Mumbai and
Bangalore, collectively accounted for about half of output.
Next, look at the stockmarket. It is not an ideal proxy for India Inc, but it is the only reliable one. About
70% of its value sits in the BSE 100 index of the largest firms, the smallest of which is worth just under a
billion dollars, below which a firm is considered a tiddler by global standards. As a group, these businesses
have a return on equity that has declined in recent years but remains solidly in the mid-teens, making Indian
firms more profitable than many of their Asian peers, reckons Anirudha Dutta of CLSA, a brokerage. Debt
levels are low and growth has been strong, with profits rising sixfold since 2001 in dollar terms to $64
billion.
That makes India big, but not that big. It accounts for about 3% of the world's stockmarket value. Cheered,
feared and jeered at home, India's giants are mere middleweights on the global stage. State Bank of India,
India's largest lender, is a tenth of the size of China's biggest, measured by profits. Reliance Industries, a
family-run conglomerate with a skew towards chemicals and energy that is the subcontinent's most
valuable firm, is only a third as big as Total of France. If all goes to plan and India's economy grows
quickly it will still be a decade before its firms begin to challenge those of the rich world and China by size.
After two decades in which sunrise industries such as mobile telecoms, media, health care and finance have
thrived, India's distribution by sector now looks pretty conventional by global standards (see graphic).
What makes India unusual, aside from its rapid growth, is its form of ownership. Its evolution can be
crudely split into three periods. Until 1991, when liberalisation began, Indian businesses that had not been
nationalised were family affairs that survived in a world of micromanagement and official targets—the
“licence raj”, a surreal mix of Soviet stupidity, British pedantry and Indian improvisation. Firms responded
by branching out into any activity where they could find room to breathe, while facing little serious
competition in their main businesses. Many enjoyed close links with the Congress Party that formed India's
first post-independence government and dominates the ruling coalition today. By the time an economic
crisis brought on liberalisation in 1991, though, most business folk were utterly fed up.
The pattern of ownership in the second period, between liberalisation in 1991 and 2003 (when the
economy's growth rate moved up another gear) was far more turbulent, as lazy old family groups were
exposed to fierce competition at home and from abroad and the prices of everything from machines to
India's currency were freed up. Many firms didn't survive. Of the largest 20 listed on the stockmarket in
1990, only five remain in a recognisable form in the top 20 private firms today, ranked by market value.
The big textiles houses that dominated the scene in 1990 were much diminished over the next decade
(although Bombay Dyeing is, despite its name, still in business), and some of the grand families behind
them such as the Mafatlals dropped from the upper ranks of capitalist clans. Indian business in its first
decade of freedom, then, did destruction and creation. Indeed, as the economy took off in 2003 the
possibility that the old, oligarchic form of capitalism might be obliterated altogether, perhaps even to be
replaced by a freewheeling approach that had more than a whiff of America about it, seemed a sensible
prediction.
Sensible, but wrong. For if an alien investor landed in Mumbai today and ignored every aspect of life there
other than the structure of the stockmarket, the closest thing would not be New York's bourse, but a weird
mix of São Paulo, Seoul and Shanghai. Some 41% of India Inc, measured by the profits of the biggest 100
firms, sits in the hands of state-controlled companies, from big oil firms to Coal India, with its vast empire
of opencast mines, its own corporate song and 377,932 loyal workers. Blue-chip firms controlled by
institutional owners, such as ITC, and a handful of subsidiaries of foreign firms such as Unilever, together
account for only 18% of overall profits. The remainder, some 41% of earnings, are made by firms under
some form of family or founder control. This special report will include Tata Sons in this category even
though the present fifth-generation boss is likely to be the last family member in charge and most of its
shares are owned by family trusts that are meant to be independent.
Capindialism
Within this broadly defined category of family or founder firms it is also possible to find examples of every
kind of fresh success. Gautam Adani, a strapping billionaire with a habit of watching share prices on
television as he talks, has used brawn and guile to build from scratch an empire of ports, power and coal
centred in Gujarat, a western state. In a Mumbai suburb Dilip Shanghvi, a soft-spoken scientist, has turned
Sun Pharmaceutical from a minnow into a global generic-drugs firm worth $10 billion. Yet the older family
firms, toughened up by 20 years of competition, matured by bitter feuds and splits, and still with
remarkable reserves of animal spirits, have at least held their own.
India's economy is one of the world's most dynamic. Some industries, such as media and aviation, are
unrecognisable from ten years ago. There has been a fair amount of turnover among the leading firms. But
overall, India's form of ownership has barely changed over the past decade. The division of profits made by
family firms between those in their first, second and third or older generations has stayed pretty constant.
The new kids on the block have made gains but not won the day. Nor has the profit share of family firms
overall, of whatever vintage, changed much. The mix of state, blue-chip, foreign and family owners has
been remarkably stable.
In the past decade Indian business has not been on a journey towards someone else's economic model,
whether Chinese, European or American. It has not been growing out of an immature phase, or shaking off
a simpler way of doing things. Instead it seems to have established its own equilibrium—what might be
called “capindialism”—in which profits are controlled not by institutional shareholders but mainly by the
state, or by entrepreneurs and their descendants. Outside the state firms, the fiddly conglomerate is the
favoured form of organisation. This special report will try to answer the big questions all this raises. Why
has Indian business developed in this way? Will it continue to? Can the aspirations it has raised be met?
And is this new form of capitalism good for India—and the world?
Family firms
The Bollygarchs’ magic mix
Why India’s soft state encourages familyowned firms and conglomerates
Oct 22nd 2011 | from the print edition
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TO FIND RAJEEV PIRAMAL, the 35-year-old boss of Peninsula Land, you go down a drive in deafening
Parel, an up-and-coming business district in Mumbai that used to be the centre of the textile industry. A
new tower block is zooming up on one side, and nets hang overhead to guard against falling debris. Mr
Piramal's office is in an old mill building whose steel pillars are stamped with “Blackburn”, the English
town where they were forged long ago. This is a place where corporate death and rebirth is happening in
real time; where derelict factories and workers' tenements are being demolished to make way for trading
floors and media outfits with ping-pong tables in their lobbies.
The family firm isn't dying in this environment, it is thriving. Mr Piramal's great-grandfather was a trader
who made it big in textiles in Bombay, as Mumbai was once known. The family's mills were clobbered in
the 1980s and early 1990s, but unlike some of Bombay's other famous textiles clans, such as the Mafatlals,
the Piramals have not faded away. They turned to property, redeveloping their defunct industrial sites a
decade ago, then taking on others' mill land and, most recently, evolving into a mainstream developer
across the country, with book equity of some $300m. Rajeev's branch of the family also dabbles in
engineering and entertainment. Another bit of the clan split off in 1981 and operates a luggage business,
while yet another, which broke away in 2005, specialises in health care and glass. In 2010 it sold its
domestic drugs operation to Abbott, an American firm, for a staggering $3.8 billion. This year it bought a
5.5% stake in Vodafone Essar, a big mobile-network operator.
Adaptable, ingenious and combustible, the family firm remains the backbone of India's private sector, not
an anachronism. “This is politically incorrect,” jokes Kumar Mangalam Birla, who runs Aditya Birla, the
third-biggest family business house by sales, before going on to argue that the family, and the vim it brings,
is an essential part of India's economy. There is no easy way to categorise these business houses, but
vintage is one approach (see table). The oldest, such as Aditya Birla, Tata and Bajaj, stretch back over three
or more generations and are wily survivors. Second-generation firms include Reliance Industries, India's
biggest private firm, run by Mukesh Ambani, who split from his brother Anil in 2005, and whose late
father's rise from petrol-pump attendant to billionaire is the stuff of legend.
First-generation firms include the winners from sunrise industries such as telecoms and computing, which
boomed in the late 1990s and early 2000s—Bharti Airtel and HCL, a technology firm, being two fine
examples respectively. More recently the ranks of first-generation firms have been swelled by the Adani
group, big in ports and power, and GMR, an infrastructure firm based in Bangalore. The shift from export
and consumer-facing industries towards “rent-seeking” sectors with more government involvement is an
important and, some say, worrying trend.
A final category is the offshore Indian family group. The Hinduja brothers, who run everything from Ashok
Leyland, a truckmaker in India, to a Swiss bank, are partly based in London. Vedanta, a big naturalresources outfit, shifted there in 2003. Such firms mix Indian and foreign activities. It is tempting to include
Mittal Steel, based in Europe and run by Lakshmi Mittal, in this group. But he is better regarded as an
escapee from India who made his fortune only after leaving the country as a young man.
Doing it vertically and horizontally
Most of these groups have two shared characteristics. First, complexity. Although many have simplified
since 1990, most are still fiddly, with intricate chains of holding companies and subsidiaries. Second, they
are conglomerates, often with one or two core activities and a long and growing tail of others. The holding
chains are relatively easy to explain and are common in other countries such as Italy and Brazil. A cascade
of companies means outside capital can be brought in at multiple levels without weakening family control.
In India complexity is also sometimes a response to family spats, with rivals each given a distinct sphere of
influence. India's regulators help, too; they talk a good game about corporate governance but do not require
top-notch accounting and let firms build stakes in others without buying out all minority shareholders. K.V.
Kamath, the chairman of Infosys and of ICICI, a bank, believes governance will improve. “Companies will
voluntarily change,” he says. Others are less optimistic. Meanwhile, the Reserve Bank of India, the central
bank, frowns upon using bank loans to fund takeovers, so they rarely happen.
Reliance MediaWorks knows all about family dramas
The causes of the complexity, then, are understandable. It is India's love of conglomerates that is the
mystery. Some blame history: before independence in 1947, British companies often operated with a local
managing agent who had his fingers in lots of pies. Alternatively, during the socialist era between 1947 and
1991, Indian firms faced claustrophobic restrictions from the state and tended to expand in any direction
where they could get air. Another explanation is cultural. Taking a sample of 16 of India's big houses, nine
came originally from the Marwari and Bania communities, famous for their trading nous. Perhaps these
cultural roots come with a preference for how to organise firms. Even tax might be important: one baron
says that capital controls make it hard to get family money abroad legally. If it has to stay at home, better to
put money into a new business than a bank account that returns less than inflation.
Yet the best explanation is India's soft state. Courts can take years to make their minds up, so contracts are
hard to enforce. Infrastructure is often poor, supply chains tricky, red tape a hazard, and markets for people,
materials and finished goods unreliable. Tarun Khanna and Krishna Palepu of Harvard Business School
coined this idea in a 1997 paper. In these circumstances it makes sense to do things yourself. Such vertical
integration even happens at Infosys, which generates much of its own electricity and tops up the education
of new recruits. The Adani group will soon mine coal in Australia that is delivered to its own port in
Gujarat and used partly to fire its own power stations.
Even Bollywood does vertical integration. In Film City, a leafy area north of Mumbai reserved for movie
sets, Anil Arjun runs a new facility that will offer film-makers everything from sets and camera equipment
to editing services. Outside India, his firm specialises: its Los Angeles arm helped ensure the 3D images in
“Avatar” were properly aligned. But inside India it does the Full Monty, even owning cinemas. The
company in question is Reliance MediaWorks, and it exemplifies a second kind of way of spreading out a
conglomerate: horizontally, across unrelated industries. It is part of the Reliance Group, run by Anil
Ambani and active in power, finance and telecoms, among other things. The benefits of this second kind of
expansion may seem less obvious, but it is still wildly popular, suggesting that synergies flow from being
part of a big group in terms of financial muscle, managerial talent, brand, technology and influence with
officials.
A test of the soft-state theory is whether firms that are not in family hands also diversify vertically and
horizontally. Very often they do. A good example is Larsen & Toubro (L&T), an engineering firm founded
by two Danes in Bombay in 1938 which is widely viewed as one of India's best companies. Although it has
slimmed down in some areas, its activities are still very diverse, from making submarines to building roads.
Physical assets comprise a small share of its balance-sheet, with minority investments, loans made to
customers and working-capital balances making up the lion's share of its assets. This suggests it is in part a
financial firm now, and that it uses its muscle to compensate for the lack of bank funding and bond-market
financing for infrastructure investments. This year L&T floated a finance business, and it is considering
applying for a banking licence. India's family bosses would applaud.
Family firms dominate the private sector in much of Asia and Latin America. But unlike in South Korea,
where the chaebol act in close concert with politicians, India's firms only engage with the state
opportunistically—it is their enemy as well as occasional partner. Nor should India's conglomerates,
particularly family-owned ones, be slammed for rigging markets, as they are said to in other countries such
as Mexico and Israel. India's capitalism doesn't really work that way. The family houses go to war with
each other and face new entrants: in industries such as retailing, power and mobile telecoms, profitability is
poor as a result. In India the institution of the family firm is entrenched, but there is constant turnover. Who
is on top at any point “never stays the same”, says Adi Godrej, the head of the Godrej group. The numbers
back this up. For family firms in the top 100, overall returns on equity look similar to those of state-owned
and institutionally owned firms, indicating that family firms are not making supernormal profits. This year
an IMF study concluded that although such firms were as dominant as ever and the number of new entrants
had fallen, competition was still lively.
India's family capitalism is dynamic and its patriarchs are the only people prepared to put billions of dollars
at risk to build the new India. It is, of course, possible to find other objections, from the crowding out of
new entrepreneurs to inequality. But it is also worth considering whether India's family firms will fizzle out
of their own accord. In other countries family conglomerates and corporate federations have been merely a
phase of capitalism, and have declined on their own. This can happen in three ways. They can become
flabby and lossmaking, as in the case of Japan's keiretsu. The need to raise outside capital to finance growth
can slowly dilute the family's stake to insignificance. Or they can run out of credible heirs. The last two
factors are common in America and Europe, where Hilton, Cadbury and others have evolved into
companies run for institutional investors.
Will India's family firms fade of their own accord, too? To a Western eye, Tata is far along this path. It is
bewilderingly complex, with at least 20 operating divisions, a couple of them heavily lossmaking. After big
foreign takeovers such as that of Jaguar Land Rover, a carmaker, and Corus, a steel firm, it is capitalhungry. And when Ratan Tata, its patriarch, who has no children, retires at the end of 2012, there is no
obvious family heir—the firm has been trying to find an outsider to fill his shoes. The main holding
company's shares are controlled by family trusts and Pallonji Mistry, a construction magnate. Those trusts
are admittedly likely to retain Mr Tata as chairman even after he departs from Tata itself, but are supposed
to operate independently. And already investors view the credit risk of Tata's subsidiaries differently,
suggesting they are not convinced it is an integrated whole. Tata, then, might seem so disparate and so
close to losing any family connection that it is ripe for a revolution.
The view from Bombay House, Tata's headquarters in Mumbai, is different. The end of family influence
need not imply a change in strategy, the firm argues. Its biggest problem is to keep a sense of direction
once Mr Tata departs—some outsiders say it now lacks much of a common culture. Its financial structure
does not compel it to change, either. Take its overall profitability.
In other countries family conglomerates have been merely a phase of capitalism,
and have declined of their own accord. Will that happen in India?
Like all Indian groups, Tata says it does not run the empire by monitoring its totted-up share of all of the
profits or losses of every subsidiary, as a Western conglomerate might. Yet unlike most, it does measure
this, under an initiative by Ishaat Hussain, the finance director of Tata Sons, the holding company. So
although some flaky businesses do shelter under the Tata umbrella, figures shown to The Economist
suggest that Tata's overall profitability has recovered after a slump due to its acquisition splurge (see chart
4). Nor is the group short of resources. Its high profits help fund growth, and Tata Sons could raise almost
$12 billion by reducing its stake in TCS, its technology arm, from 74% to 51%. Mr Hussain says the firm
aims to raise its stakes in group firms where it owns less than 51%, not make them more independent.
Across Indian family groups there are pockets of pressure. Anil Ambani's Reliance Group needs to raise
equity. And in the infrastructure industry, heavy upfront investment and project delays are leading to
financial engineering. Family groups like GMR, which built Delhi's wonderful new airport, and HCC,
which built the Sea Link bridge, Mumbai's only showpiece development, are experimenting with raising
equity at multiple levels of their business, creating structures that look fiddly and could in time prove
fragile. But the finances of India's family groups as a whole do not contain the seeds of their own
destruction. Reliance Industries is both profitable and has a rock-solid balance-sheet. The more complex
Aditya Birla group, to the extent one can tell from the outside, is more indebted and scores less well on its
return on equity, but is in serviceable condition. Some, such as Mahindra, refuse to tolerate sloppy and
lossmaking divisions. Bharat Doshi, the group's chief financial officer, sounds as if he could work for GE
when he says all units must have a return above their cost of capital.
And when family groups do sell out, they often reinvest, rather than retiring to nightclubs in San Tropez. In
2008 the Singh brothers sold Ranbaxy, a third-generation pharmaceutical firm, to Daiichi Sankyo of Japan
for $4.6 billion. They have ploughed almost $1 billion of their proceeds into their remaining health-care
business, Fortis, and Religare Capital, an emerging-markets investment bank they are bravely trying to
build from scratch.
Leave those kids alone
The third threat, succession, looms the largest. In India there is a lot of talk that the next generation of
hereditary capitalists, after studying abroad (usually in America), might be more interested in becoming
rock-climbers and rappers than industrialists. But in truth the lure of the family is still strong. Those barons
with young children tend to say that they can do whatever they like. But at almost all family groups where
the children are adults, they have joined the firm. Kids are expected to work their way up, like their dads.
Gautam Adani, the ports-and-power mogul, says of his eldest son: “For ten years he will go through the
entire firm…we are grooming him.”
The vulnerability this creates is twofold. First, there is the problem of rows as succession takes place. To
avoid this, the current vogue is for family constitutions, often drawn up by expensive lawyers in London.
These show a touching faith in the power of a contract to overcome sibling rivalry. Then there is the
potential problem of credibility. Although India's family bosses are generally an impressive and engaged
bunch, some of the current generation can seem semi-detached. In an interview with The Economist in May
2011, Naveen Jindal, a member of parliament and head of a steel firm worth $9 billion that is the biggest
branch of the OP Jindal Group, seemed hazy about and reluctant to discuss the details of his firm.
The biggest long-term risk for Indian family firms is not competition probes, rickety finances or lacklustre
profits. It is that the kids aren't good enough. One widespread hope among families is a fudge, in which the
next generation, even if uninvolved directly in the firm, still call the shots but employ professional
managers to run things day to day. This seems unlikely to work: what chief executive would accept
strategic direction from a chairman with no experience? And even if the family retains control, the amount
of money outside investors have put into Indian firms means they may resist appointments based on
surnames. To stay in control, Indian families will have to stay involved and be competent, particularly as
their firms grow larger, more complex and more global.
Inbound and outbound deals
Their oyster, with grit attached
Cross-border deals involving Indian firms
have been more famous than profitable
Oct 22nd 2011 | from the print edition
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Made in India
IN THE SOUTHERN state of Kerala earlier this year a treasure was discovered in a temple. Hidden in
secret vaults for hundreds of years, it is thought to be worth many billions of dollars and includes coins
from the Roman empire, Venetian ducats, 16th-century Portuguese money, 17th-century Dutch East India
Company currency and even the odd nugget or two from Napoleonic France. “The find is like an economic
history of India unfolding,” says Gurcharan Das, a writer and former boss of Procter & Gamble in India.
For most of its history the subcontinent was open to trade and the outside world. The insularity and
protectionism of the 1947-91 period was, he says, “an aberration”.
When it comes to trade, India is still not as open as China. Exports, and not just software and outsourcing,
are however growing fast and there are signs that India is gaining traction as a manufacturing centre. Bajaj
Auto, a family firm, for example, exported almost 1.2m motorbikes and three-wheelers in the year to
March 2011, with about half going to Africa and the Middle East. For all that, though, most Indian firms
are making their mark not by trying to be the workshop of the world, but by aspiring to be multinationals:
active, in control and physically present in lots of countries, doing everything from development and
manufacturing to branding and distribution. They are doing all this far earlier than firms in other emerging
countries would dare.
Indian bosses, a sophisticated and worldly bunch, have a huge cultural head start, as anyone who has
witnessed a Chinese state-owned firm trying to charm the outside world can testify. They are sometimes
said to have other advantages, too; Indian firms can handle diverse workforces, for example, since they
already do at home. The most breathless strain of this argument is that if you can make money in India you
can make it anywhere. Indian firms, it follows, are destined to rule the world.
That last claim is silly. Indian firms also face formidable disadvantages. One is their size: they are
middleweights by international standards. Their fiddly holding chains make it hard for them to pay for
things by issuing shares, and their cashflows can be thinly spread across many subsidiaries. Raising debt in
India to buy things abroad is expensive, with base interest rates approaching 9%, and difficult because the
central bank frowns upon it. Indian firms raising funds abroad are hobbled by the country's poor credit
rating. India does have large foreign-exchange reserves, but these are not recycled as cheap foreigncurrency loans to fund corporate adventures, as they are in China. T.C.A. Ranganathan, the boss of ExportImport Bank of India, a state body aimed at financing trade, says it simply does not have the same risk
appetite as its Chinese equivalents.
These factors help explain why the first wave of takeovers abroad by Indian firms, between 2004 and 2008,
took such a peculiar form (see table). A product of the debt bubble, they were leveraged buy-outs in all but
name, from Tata's trio of deals to those undertaken by Hindalco (part of the Aditya Birla Group) and
Suzlon, a wind-turbine firm. These firms used money borrowed largely from Western banks and money
markets, in some cases secured only against their targets' cashflows. As the crash in the West began, their
refinancing options dried up and the target firms' profits slumped in most cases.
Things looked pretty bleak. Ishaat Hussain, the finance director of Tata Sons, recalls the group being
battered and putting a programme in place to raise spare cash. Tata Motors' vice-chairman, Ravi Kant, says
the combination of a deal and a financial crisis “put great stress” on the carmaker. At one point it asked the
British government for state aid. Smaller firms that had followed the leveraged buy-out path got whacked,
too. Havells, an electronics and consumer-goods outfit, bought Sylvania, headquartered in Frankfurt, in
2007, but by 2008 its London bankers threatened to pull the plug. Everything was on the line, recalls Anil
Gupta, its joint managing director: “The family's reputation, our business's reputation and our personal
reputations.”
His firm toughed it out and emerged stronger. Tata and Aditya Birla did too, though their subsidiaries Tata
Motors and Novelis are still viewed as risky bets by debt investors. Suzlon, once a darling of investors, had
to restructure part of its debt. Mere survival, however, is not the point of takeovers. The real test is creating
value. Tata has done very well on JLR but most analysts reckon it overpaid on its larger deal for Corus.
Last year Novelis failed to cover its cost of capital, though Mr Birla is optimistic. From a shareholder's
perspective Suzlon has been a disaster. Indian bosses tend to argue that they are building for the long term
and hint that return on capital is for wimps and nitpickers. Many Indians are also intensely patriotic about
these deals. But at some point a more sober judgment must be struck.
The leveraged buy-out approach may already be fizzling because the generous debt terms that it relied on
are no longer available. Mega-takeovers are likely to be the preserve of big, cash-generative groups with
simple structures. One such firm, Reliance Industries, is on the prowl, though its proprietor, Mukesh
Ambani, is thought to be impressively stingy about deals. Bharti Airtel took the leap in 2010, paying $11
billion for Zain, an African mobile operator. The acquisition makes strategic sense but unfortunately looks
like another case of overpayment, particularly because Zain's profits have since disappointed.
For the many other Indian firms without giant resources and a taste for Russian roulette, a more nuanced
approach to dealmaking abroad beckons. In a continuation of the vertical-integration habit, Indian firms
have spent billions buying up coal resources in Australia and Indonesia. They may have to compete against
undisciplined Chinese buyers and there are worries about political risk in Indonesia, but in the main these
deals make sense given the shortage of domestic production.
Another emerging trend is that of the “pocket multinational”, which uses a series of smaller bolt-on
acquisitions to build up its presence abroad. These can provide access to new products, technologies and
markets, but without an all-or-nothing gamble. Crompton Greaves, part of the Avantha group controlled by
Gautam Thapar, underwent a strategic review in 2001-02. “The results were sobering,” he says. In response
it made a succession of foreign deals, mainly in Europe, in its area of electronics and engineering, with the
main aim of gaining know-how and better products. With a total outlay of some $250m these deals made a
decent return on capital last year, though trading has since been hit by the euro-zone crisis.
Godrej, a family conglomerate whose biggest line is consumer products, is another exemplar of this
approach. Although not closed to the idea of a large transformational acquisition, Adi Godrej, its boss, says
the firm was too disciplined during the boom. Instead of betting the farm it spent about $1 billion on a
series of small purchases in niche areas, such as an Indonesian firm that makes household products
including insecticides and air-fresheners, and a South African maker of hair products. Mr Godrej says it is
taking a hands-off approach to managing these businesses and that the acquisitions have all made fair
returns.
In most cases the aim of such deals is to marry the savvy Indian approach to things like working capital
with the acquired firms' managers, technology and products. The danger is that the acquiring firms are
spreading themselves too thinly, creating the overheads of a global company without the corresponding
sales. Still, it is an approach that is gaining popularity, with Infosys recently emphasising that it would
consider bolt-on deals. The technology firm also provides a good example of a third international
expansion strategy, that of going abroad without deals, but simply starting new operations in other
countries. Infosys now has quite a big operation in China, for example. S. Gopalakrishnan, its chief
executive, says it has been successful in recruiting Chinese talent and has done well at winning business
from the Chinese subsidiaries of multinational clients. But it is still hard to sell to Chinese firms
themselves, he says.
History suggests that building a multinational bit by bit and eschewing giant, high-risk deals is the best way
to create a durable firm without wasting money. But it takes time, and India Inc has been in a terrible hurry.
With financing conditions now tougher and some hard lessons learned from the first round of Indian
takeovers, a more measured approach is likely in future. Just the kind of approach, in fact, that mature
multinationals from the rich world, with decades of experience under their belts and world-class advisers,
take when viewing new markets like India, right? Not quite. Foreign firms that have expanded into India
have had their share of problems, too.
A land of milk and honey
R.C. Bhargava can still remember the day the Maruti Suzuki factory in Delhi started churning out small
cars in 1983. To the amazement of the newly hired Indian workers, the Japanese supervisor said the plant
had to be spotless first and, picking up a mop, got to work. “We decided from the start that we had to
compare ourselves with the best in the world,” Mr Bhargava says. That included tea breaks exactly seven
and a half minutes long. Today he is chairman and Maruti Suzuki is one of India's most successful foreigncontrolled firms, with about half a billion dollars of profits last year. Still, during 2011 it has suffered a
wave of strikes in its factories. Even three decades on, the going isn't easy.
If India is, as the cliché goes, a land of contrasts, then the biggest may be that between the bosses of firms
the world over who are crazy about India, and their staff on the ground, who have often become
professional eye-rollers. Corruption, sloppy standards, a lack of decent staff and red tape are the main
gripes. Many say Indian business culture, while beguiling, is less accessible that it first seems. Hierarchies
can be rigid. And deals get done through informal networks. For all that, however, their bosses at home are
often mustard keen, tantalised by projections that show India is too big to ignore, with the world's biggest
and youngest pool of labour and a growing middle class.
Tapping into the first attribute, India's labour force, has so far mainly been the preserve of the technology
industry. Following the lead of India's outsourcing firms, IBM, for example, has gradually built up a
workforce of over 100,000 in India, a big chunk of whom serve its clients abroad. But beyond outsourcing,
using India as an export base tends to be hard work indeed. Capital-intensive projects are formidably tricky
to get started. Posco, a South Korean steel firm, announced plans for a $12 billion investment in a factory
in Orissa, an eastern state, in 2005, aimed both at meeting domestic demand and producing for export.
Today work has yet to begin and the plan is still in limbo. The long squabble seems to have involved every
part of India's government and judicial apparatus.
Carmakers are the great exception, but they come with a twist. Maruti exports just over a tenth of its
production, mainly to Europe. Hyundai, a South Korean firm and the biggest exporter by volume, sells a
fifth of its production abroad, says Arvind Saxena, a director of the Indian arm. Clusters of expertise exist
in the states of Tamil Nadu and more recently Gujarat, where most car investments now tend to go, thanks
to welcoming local officials. Foreign car firms source almost all their components locally. Hyundai India
led the way for 70-odd Korean suppliers who have invested some $700m in facilities around its plants near
Chennai. The level of research and development by foreign car firms in India is still puny, but in time that
should come too.
What India does not seem to give foreign firms is a clear-cut cost arbitrage over other places in the world,
despite its vast and cheap labour force. Other inputs such as electricity can be costly and unreliable. Tricky
logistics also make a difference. To get its finished cars to Chennai's port, Hyundai has to pack them onto
trucks that rumble through the city centre every night during the small hours. It reckons its Indian factories
make vehicles at a similar price to its plant in Turkey, once trade duties are included.
For foreign carmakers it only makes sense to export from India products that you are also selling there, to
piggyback off the economies of scale that India's big domestic market creates. Small cars are a great
example. The hitch is that the products made in India have to be good enough and similar enough to be
attractive to the rest of the world. That isn't always a given.
“I remember sitting in a remote village with a man who was tasting cola for the first time. He spat it out and
said, ‘this tastes like medicine',” recalls Ashok Kurien, then a marketing guru and now an entrepreneur. “I
realised you couldn't sell a cola in this country on taste.” His solution was an advertising campaign for
Thums Up, a local cola, under the slogan “Taste the Thunder”, that tapped into the average Indian's fears
and yearnings as the economy opened up in the early 1990s. It was so successful that The Coca-Cola
Company eventually bought the drinksmaker and tried to replace the local brand with its own global one.
The result was an outcry, and the American firm had to backtrack. Today Thums Up, owned by Coca-Cola,
is still in rude health, and keeping dentists busy.
If manufacturing in India is hard for foreigners, building a customer-facing business is no walk in the park
either. India has been a success story for Nokia, Finland's handset giant, and remains its second-biggest
market and a big manufacturing base. But sales there have declined since 2008, paradoxically reflecting
both its lack of high-end devices to rival the BlackBerry and the iPhone, and its lack of low-end ones, such
as phones with dual SIM-card slots that penny-pinchers use to surf between networks. To compete in India
you need one eye on the world and another on the street.
Ask a street vendor for a “Cadbury” and you'll be given a chocolate bar. That's real distribution and
branding power, but it has taken a long time to build. The confectionery firm (originally British and bought
by America's Kraft in 2010) has been in India since 1948. Its local bosses are Indian. It belongs to a select
group, including Maruti Suzuki, of firms that have been in India for the long haul, mainly employ locals
and seem to have developed deep competitive strengths. Many have listed local subsidiaries. Siemens,
Germany's industrial giant, has been present in India for almost a century and now makes nearly $3 billion
of sales there. It will soon employ four foreigners for every 1,000 locals.
For foreign firms, building a customer-facing business is no walk in the park. To
compete in India you need one eye on the world and another on the street
Hindustan Unilever, the local offshoot of the consumer-goods giant, makes half a billion dollars of profit a
year and is one of the most prestigious employers. It takes reinvention seriously. “We need to innovate
constantly,” says its boss, Nitin Paranjpe. “If we obsessed about minimising risk we'd do nothing.” The
largely indigenised foreign firm prospers in banking too, with India's biggest foreign lenders—Citigroup,
HSBC and Standard Chartered—having pedigree there. For all these firms their Indian units have gone
from being backwaters to growth engines for their parent companies and sources of talent. Eventually some
of these firms will be run by Indians who earned their spurs in the subcontinent—so far, most of the
handful of Indians who've made it to the top of global firms emigrated from the mother country when they
were fairly young.
That success in India just takes time is not a message other foreign firms like to hear, though. Many have
gone for the blunderbuss approach, with big upfront investments in distribution to try to win market share
quickly. This often gets messy. More than ten foreign life-insurance firms have rushed into India, all with
local partners. At their peak, before the 2008 crisis, they employed armies of agents to sell savings
products, often unprofitably, sometimes illegally. The industry has since shrunk and been clobbered by
regulators, and some foreigners are expected to exit. It was a “mindless chase for the top line,” says one
boss, “a completely reckless expansion”. Chinese firms have their own kind of land grab. Shanghai Electric
has won big contracts to build power stations in India, aided by a big slug of subsidised vendor-financing
from state-backed banks to the Indian buyers.
Gently does it
For those who just can't wait, the only real option to achieve immediate scale in India is the takeover. But
since most assets are in hot demand, the results of foreign deals in India have been iffy. Vodafone has
already written down its purchase of a controlling stake in India's second-biggest mobile firm after a price
war, a legal tangle with its India partner and an unforeseen tax claim by the government. Japan's Daiichi
Sankyo bought a controlling stake in Ranbaxy, a generic-drugs company, in 2008 which it wrote down
heavily as it ran into glitches with American regulators. And last year Abbott, an American health-care
group, won an auction for Piramal's Indian drugs unit, which came with manufacturing facilities and a local
sales force. But the price of $3.7 billion, or over seven times the target's sales, suggests that the American
bosses forgot to take their medication.
Abbott aside, though, the period of cross-border deals from and to India has gone beyond the euphoric
stage, reflecting the wobble in India's economy, concerns about corruption and the deep troubles of the rich
world. Both foreign firms keen on India and Indian firms keen to go abroad must show more discipline.
This is not just about price—one executive working for a global investigation firm says Western buyers,
worried about graft, are finding out more about whom they are doing business with in India. And with little
in-house market intelligence about far-off countries, Indian firms need to be sure they aren't buying lemons.
Giant trophy takeovers are likely to be pursued only by the biggest firms. For the others, a wave of smaller
and probably more enriching deals and forays awaits. It takes longer to build champions this way, but the
end results will be stronger.
One thing is fairly clear. The shadiest and worst bits of the economy, including natural resources and
infrastructure, are notably bereft of outsiders. Where they have been allowed in, foreign firms' enthusiasm
for India, and their open cheque books, have brought benefits. They have usually raised standards and cut
prices through competition. But the power of competition can of course be unleashed in India in other
ways, too. How about less government and more entrepreneurs?
Innovation and cost-cutting
The limits of frugality
Making things cheaper is not the same
thing as making profits
Oct 22nd 2011 | from the print edition
THE MOST IMPORTANT event in Indian business in 2011 may have been an outburst on September 6th
by Sunil Mittal, the boss of Bharti Airtel, the mobile-phone operator. India's telecoms industry is admired
the world over for the innovative way in which it has slashed prices and put phones into the hands of even
the very poorest. Today there are some 600m active subscribers in India, many of them in the countryside.
But Mr Mittal said the extra cost of servicing rural customers, and their low usage levels, had made things
unprofitable. Prices are now expected to go up across the industry, after two decades of decline. India's
low-cost telecoms revolution has, it seems, reached its limit.
Indian firms have made much of their ability to serve the poor masses at the “bottom of the pyramid”.
Along with cheap phones, other celebrated examples include one-rupee sachets of shampoo and clever
schemes to get around the lack of bank accounts. This reflects raw commercial instinct, but also serves an
ideological purpose by showing that capitalism in India is not just for the middle classes. It is politic for
Indian bosses to talk up their ability to invent things that all can afford.
Whether their firms profit as a result is less clear. Mobile phones are not the only field where the limits of
frugality are being reached. Tata Motors' Nano, a $3,000 car, has been a flop so far. Some blame Tata's
marketing, but other carmakers say they cannot achieve such a low price without compromising on quality,
and that customers are wary. In air travel, insurance, consumer finance and satellite TV, companies have
cut prices to build their customer bases over the past five years but could not reduce costs enough to
compensate, and compromised on quality. As in telecoms, this is likely to lead to price rises and the exit of
the weakest firms.
Today perhaps 17% of India's population has half of its spending power, according to the Asian
Development Bank. Over time the growing urbanised middle class, who are getting richer fast, will become
relatively more important for profits. Margins for these customers are likely to be higher because the cost
of distributing products in cities is lower. The boss of one large consumer-goods firm says, in private, that
today his company makes two-thirds of its money from the poor and lower middle classes, but adds it is
“not enough” to focus on them since “the portion of upper middle class will become substantially more
important”. He is tilting his products accordingly. Consumer-goods firms are often keen to move away
from cheap products, where Chinese rivals pose the greatest threat.
One proxy for the difference in profitability between the urban rich and the rural poor is the price paid for
mobile-telecoms spectrum. In the 2010 auctions for 3G telecoms licences, operators bid ten times more for
a slice of the airwaves in affluent Delhi, with 18m people, than in east Uttar Pradesh, with 120m people.
Similarly, India is about to auction off FM radio spectrum and the competition is expected to be fiercest for
the big cities, says N. Subramanian, the chief financial officer of Radio Mirchi, a big player today.
That is not to say that selling to the poor masses, and inventing ways to cut prices in order to appeal to
them, is not vital. It is, both from a moral standpoint and because India's stability depends on it. But the big
profits lie elsewhere.
State-controlled firms
The power and the glory
India has its own form of state-backed
capitalism too
Oct 22nd 2011 | from the print edition
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We’re from the government, and we’re
here to help
IF YOU SIT in many places in India, whether in the office of the boss of Infosys in Bangalore or in a
suburban home, your host may clutch a remote control and appear anxious. You are not the cause of this
distress. Your host is waiting for a power cut, after which the remote will be used to switch the air
conditioning back on. Power, more than any other industry, captures the prevalence of the state in Indian
business—and the harm it can do. Private capital has poured into building power stations, but most other
bits of the supply chain are in the hands of the state. Often this set-up fails to deliver.
When people think of state capitalism, China springs to mind, with its giant and opaque governmentcontrolled firms. But India, more cuddly and less competent, is not too dissimilar. Some 40% of the profits
of its 100 biggest listed firms come from state-controlled ones. In finance, energy and natural resources,
they control at least two-thirds of production. Most were partially privatised over the past two decades,
letting in a small proportion of outside shareholders. The latest example was Coal India, the biggest
producer of India's main fuel. It was listed in 2010.
Over time, the zeal to sell big-enough chunks of these firms to enable them to become more independent
has dissipated. But today's halfway house is not all that bad. In aggregate, the 24 state outfits in the top 100
generated a 17% return on equity last financial year, on a par with the private sector, and profits almost
doubled in the past five years. Privatisation has made some of them more efficient. Bharat Heavy
Electricals, which makes kit for power stations, holds its own against Chinese competitors. And State Bank
of India (SBI) is as tech-savvy as its private rivals.
Even if India doesn't have the stomach for full privatisation, it is letting in the private sector in other, more
subtle ways. A creeping retreat of the state has taken place in many industries thanks to competition. Thus
two of India's most successful industries, air travel and telecoms, are dominated by private companies, even
though the original state monopolists remain under government control. Public-private partnerships are also
common on big infrastructure projects. You might conclude that India, like China, has found its own
equilibrium between the state and market forces. But that view is premature. Public-private partnerships are
all the rage, but more effort must be made to ensure the private bit of them gets a reasonable return. GMR,
the infrastructure firm that built and part-operates Delhi's new airport, is losing money on the project. Its
boss, G.M. Rao, says he is “very confident” that a settlement will be reached allowing it to raise tariffs and
extend its charges. But more clarity will be needed to attract private money for future projects of this kind.
The big listed firms, meanwhile, are subject to meddling. Managers are appointed by the state. The energy
companies are forced by the government to subsidise the costs of some kinds of fuel, to the tune of billions
of dollars, by smoothing retail prices. Coal India's allocations of production seem to be decided at the
highest level of government. And SBI, although it denies it furiously, loaned heavily and patriotically
during 2008-09 to offset a slump in credit from private banks. In 2011 it has booked big write-offs and had
its credit rating downgraded as it digests the binge. A big chunk of the economy is in effect run by political
fiat.
Allowing competition while neither privatising nor killing off the original state incumbents means big
losses at some dying public firms. Air India and MTNL, a telecoms company, between them lost almost $2
billion in the fiscal year 2009-10. Of 217 industrial enterprises owned by the central government in 2010,
59 made losses (see chart 7). At the state-government level there are perhaps another 850-odd governmentowned firms, including zombie local electricity distributors. Their losses would wipe out most of the profits
made by the listed giants.
Profit and loss is the least of it. India's inexorably growing power crisis is a bottleneck that threatens to
hobble its overall growth rate. An orthodox Western remedy would be to let in BHP Billiton, an Australian
mining colossus, to dig up India's coal faster, while selling off the bankrupt electricity boards to private
firms, who have made dramatic improvements in the few places in India where they have taken charge. But
if the state is not prepared to let the private sector tackle its rotten parts, then it will need to adopt a more
strong-armed, Chinese-style approach to making sure the state sector delivers. The middle way it is
currently pursuing isn't working—as those power cuts testify.
The outlook for entrepreneurs
Looking for the next Infosys
India has aspiring entrepreneurs aplenty.
More of them need to make it
Oct 22nd 2011 | from the print edition
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SACHIN BANSAL AND Binny Bansal are not identical twins, or even related, but they should be. They
both grew up in Chandigarh in north-west India, studied computer engineering at the Indian Institute of
Technology Delhi and spent a brief stint working for the same American technology firm. Two years after
meeting in Delhi in 2005 they took $10,000 of their savings, set up shop in a flat in Bangalore and began an
e-commerce business that delivered books to people's homes—like Amazon, but with an Indian twist.
Making the leap, says Binny Bansal, “wasn't difficult”. Today the firm they co-founded, Flipkart, is one of
India's hottest internet businesses, selling everything from books to phones. The site clocks up sales of
$10m a month from over 1m registered users. Flipkart is said to be negotiating a fourth round of funding
from venture-capital firms at an appropriately stonking valuation.
Such success stories should be what India is all about. But there is a nagging worry that there are far more
consultants, bankers, academics and journalists celebrating India's entrepreneurial zeal than people actually
starting new companies. Take the latest figures from the Indian Institute of Management Ahmedabad
(IIMA), India's leading business school. Of the 314 graduates from its flagship programme, only seven
started a business. An amazing 187 joined the gravy train and got jobs in consulting or finance—the kind of
statistic common in rich countries which is now taken as a symptom of their decline. One bigwig at a large
Indian firm says he implores his younger relatives: “Make something. Don't just look at numbers and
criticise things.” But he admits defeat. They are all becoming spreadsheet wizards at banks.
The sense that entrepreneurs have not made the kind of mark they should have in the past decade seems to
be true across the Indian economy. In a paper published by the IMF in January, three economists, Ashoka
Mody, Anusha Nath and Michael Walton, looked at the Bombay Stock Exchange, a decent proxy for
India's formal business sector, with thousands of firms listed on it, many very small. They concluded that in
the 1990s there was a surge of new firms without affiliation to established family-controlled houses, but
that in the past decade the process of new entry “virtually stopped”. Similarly, the share of profits from
new, independent companies, having risen rapidly in the 1990s, has since stagnated. Many business folk
reckon that the relatively few newcomers that have made it big since 2000 are in old-economy “rentseeking” sectors that require more brawn than innovation.
It's not difficult to rustle up some possible reasons for all this. India scores abysmally in the World Bank's
global surveys of how easy it is to start a new firm. Given the propensity of established firms to diversify
into new areas, it seems likely that start-ups are sometimes crowded out. India's banks are not huge fans of
lending to small firms; they often demand onerous amounts of collateral or security on fixed assets, exactly
the kinds of things start-ups cannot provide. There is a decent enough venture-capital industry, but even so,
new firms face hurdles that do not exist in other countries, which may require them to invest more heavily
upfront. Flipkart is a good illustration of this—with a happy ending.
It began as a Western firm might, as the middleman between book wholesalers and its customers, using
third-party couriers to deliver to people's homes nationwide. But Flipkart soon overwhelmed the local
wholesalers and courier firms in Bangalore. To cope, it has now built five warehouses nationwide and hired
an army of delivery staff. In India “you don't have reliable service providers like DHL,” says Binny Bansal.
A round of fund-raising in 2009 helped pay for these investments. By 2010 another problem had to be
addressed: not many Indians have credit cards, and those that do worry about security. The solution was to
accept cash, or more recently credit cards, at the doorstep. Meanwhile, Flipkart must also contend with the
big business groups, like Reliance Industries, which are interested in retail. The hope is that Flipkart's
heavy and early investment in its brand, including a big television campaign, will be enough of a defence
when the big boys move in.
To succeed in India, then, Flipkart, like most bigger firms, has had to integrate vertically, taking on more
processes itself, from storage to delivery and payments. That costs serious money. And from an early stage
it has had to anticipate a competitive threat from the big family giants. The upshot is that although India's ecommerce opportunity is huge, the barriers to small firms are quite big too, requiring more capital, earlier,
than might otherwise be the case. In the dotcom industry such funds are at least relatively easy to obtain.
Ashok Kurien, the former Thums Up marketer, and since then a serial entrepreneur, is involved with
several websites. One of them, called Bollywood Life, received 2m unique visitors within 90 days of
launch. He has already had “ridiculous offers” from outside investors, he beams.
The question for India is whether a few impressive entrepreneurs here and there
add up to a trend. The data for the past decade look disappointing
Outside the dotcom industry, though, raising money is more of a slog. And there are big barriers to entry,
just of a different sort. Memories of how much effort it took to succeed are common the world over, but in
India, it often seems that an extra push was required. Haresh Chawla, the chief executive of Network 18, a
broadcaster, says that when it launched its news channels in 2004-05, in partnership with CNN and CNBC,
it threw everything at it. “Consumers only give you one chance,” he says. In 2008 his firm launched Colors,
a Hindi entertainment channel that became top-rated within nine months of its launch. It spent $125m up
front on programming and promotions rather than engage in a long war of attrition with the established
channels. “You cannot tiptoe in India,” he says.
Just fill in a few forms first, please
Banking may present start-ups with the most formidable hurdles of all, in the form of India's financial
regulators, and consumers' preference for established lenders, particularly state-owned ones. Rana Kapoor,
who in 2004 founded Yes Bank, now one of the larger private players, jokes that getting a licence was a
“Himalayan task”, taking over a year, while building the business was a “Herculean” one. “As part of our
business culture, nobody helps the underdog,” he says. Yes Bank broke through, Mr Kapoor says, partly by
focusing on squeaky-clean corporate governance from day one, and listing the firm as soon as possible to
gain attention and credibility.
And yet, for all these barriers, new firms are emerging in unexpected places. Vinayak Chatterjee, who
graduated from IIMA in 1981, first joined a consumer-goods firm. After deciding against a life-sentence of
selling soap, he went on to establish Feedback Infra, an engineering and consulting firm in Delhi that
specialises in infrastructure projects. With 1,250-odd staff, half of them engineers, and a list of blue-chip
and government clients, it exemplifies the kind of high-end services that India could excel at. Mr Chatterjee
reckons his costs are a quarter of rich-world firms'. Big parts of this business are “no different
fundamentally from IT outsourcing”, he says. The priority for now, though, is to build scale at home. With
about $50m of revenue, growing by about 30% a year, the firm is on its way to that goal. A flotation would
be a natural next stage in a few years' time.
Almost every investor and financial rag has a list of their favourite entrepreneurs. The question for India is
whether a few impressive examples here and there add up to a trend. The data for the past decade look
disappointing, suggesting that things have deteriorated since the 1990s. The hope is that this is a backwardlooking signal about the dynamism of Indian capitalism. Vijay Angadi, a veteran of small-company
investing in India who runs Novastar, a $200m fund, is confident that a new generation of firms will come
through eventually. He reckons that the first initial public offering of a venture-backed start-up in India
took place only in 2004. He is optimistic that the venture-capital industry has become more open-minded,
and is no longer obsessed solely with technology firms. Wealthy angel investors are becoming more
important, too. A decade ago, approached by an entrepreneur who was not in the family, “they would have
laughed him out.” Now, however, they might write a cheque.
And when it comes to small firms, India certainly has a lot of raw material. W. Sean Sovak of Lighthouse,
a private-equity fund based in Mumbai that is focused on small companies, reckons there are some 2,000
firms listed on Mumbai's stock exchange that are active and have market values of below $200m. He first
visited India in 2004 and was “blown away” by its vigour. He and his co-founder, Mukund Krishnaswami,
an American whose parents emigrated from India, both chucked in careers in America investing in small
firms and headed to Mumbai to set up Lighthouse in 2006. Mr Sovak cautions that all is not rosy; many
small firms are in commoditised businesses, he says, and even high-quality firms “face lots of challenges”
and may struggle to manage their growth. But he too is optimistic. “We've seen some of the best
entrepreneurs of our lives here,” he says.
Will they succeed? Mr Bansal of Flipkart reckons so. “Between 2004 and 2009 there was not a lot coming
out in terms of entrepreneurs,” he says. But over time they will begin to challenge the established business
order. “In five to ten years you will see a shift happening,” he predicts. It is vital for Indian capitalism that
he is proved right.
The Indian miracle and the future
Rolls-Royces and pot-holes
Long-term economic success may make
the current way of doing business obsolete
Oct 22nd 2011 | from the print edition
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A tale of two cities
IT'S NOT A movie set. Mumbai today really is a place where you can see Rolls-Royces bumping along
pot-holed streets past naked children, in the shadow of billionaires' personal skyscrapers. India's capitalism
is raw and sometimes ugly, but its private-sector firms are dynamic and mostly optimistic. If the country
maintains its current rate of growth it is expected to become the world's third-largest economy some time
after 2030, and hundreds of millions of people will lift themselves out of poverty. But it is not a second
China. Thanks to an exhausted and cranky state, for which there is no prospect of dramatic reform, much of
the job of development will fall upon the private sector. India's companies are refreshingly red-blooded, but
more than other firms in the world they carry a giant responsibility.
This special report has argued that after a decade of euphoria the business scene has sobered up, partly
prompted by a sticky patch in the economy and the depression in the rich world. Over the past decade a
new kind of capitalism has entrenched itself in India, in which large family concerns, often in their second
generation or older, hold remarkable sway. Yet the private sector is not the comfortable oligarchy it might
seem, for family firms compete head on and often live and die by the sword. And although some big
hereditary groups often seem to prefer investing abroad to investing in India, collectively these firms are
prepared to stump up very large amounts of money on long-term capital projects in India—the kind of
money that only the government in China, or bond markets in the West, can conjure up.
Many of the big cross-border takeovers of the past seven years, by Indian firms abroad and foreign firms
into the subcontinent, are not the triumphs their promoters and excited supporters claim. One or two almost
sank their backers and some will never make a decent return on capital. This yardstick tends to be shrugged
off by empire builders, but in the long run it is the only one that counts. Indian businesses are going global
quicker, earlier and more deeply than perhaps any other country's have—but the more durable trend is in
the myriad of smaller expansions below the surface, not the trophy transactions bankers brag of.
At the same time, companies have discovered the limits of frugality: cutting prices and building big
customer bases may sometimes lose them money, rather than making it. Big state-owned companies
dominate in sectors politicians judge to be strategic. The areas where the government still runs the show are
often plagued with problems. And despite all the hype about new entrepreneurs, they have had a mediocre
decade.
Some Indians feel that Western critics of their approach are hypocritical—after all, didn't America also
have a stage when families dominated the business scene? They have a point. But the idea that India is
merely at an earlier evolutionary stage on an American journey looks misplaced. India's soft state
encourages the conglomerate form of doing business, whether owned by a bloodline or not. This corporate
model does not contain the financial seeds of its own destruction—not immediately, anyway. Over time the
problems of succession and attracting outside capital will eventually cause families to cede control. But no
sudden change is likely.
The triumph of the conglomerate in India, often family-controlled, does contain a contradiction, however.
Today's way of doing things reflects a rational and even admirable capitalist response to the shortcomings
of the state, and has helped India's economy motor along despite them. But at some point the muddlethrough approach may yield diminishing returns. The recent wobble in the economy and dip in investment
by the private sector has come after a long period of government inertia and scandal. It has prompted some
to doubt whether the country can really deliver growth of 8% or more without sparking inflation.
If India is to finish the long journey to superpower status that has been plotted for it by many forecasters, it
will have to get its act together on things like infrastructure, efficient land allocation, education, bond
markets, reliable supply chains and the enforcement of contracts. Yet if it manages to make progress in
these areas, the rationale for sprawling big business groups—sometimes almost like mini-states in their
own right, as substitutes for the real thing—will gradually disappear. A big danger, then, to Indian
business's current way of doing things is long-term economic success. It would make today's approach to
organising firms redundant. And there is another danger that is rarely mentioned in the offices of business
bigwigs.
Don't just adapt. Lead
As the corporate scene has found its own rhythm in the past decade, something has been lost: the idea that
the company does not merely adapt to the society it operates in, but also acts to drive up standards, even if
the state cannot. The original stars of India's miracle, firms like Infosys, were like breaths of fresh air, with
top-notch governance. Today's bosses seem world-wearier, while officials in some cases have been
captured by vested interests and have lost enthusiasm for pushing through world-class standards in simple
but vital areas like accounting. In the past year of corruption scandals, too many Indian businesses have
been cowardly, like witnesses so terrified of being implicated that they do not denounce a crime. The job of
prodding the government into action against graft, and of raising standards, has therefore been left to big
street protests of urban middle-class people who are fed up.
The second danger for India's business establishment is straightforward: hope. Especially in the cities,
aspirations have been raised. That powerful and inspiring optimism is the underlying engine of India's
miracle, but it is politically essential that people's expectations be met. In the next decade many more
entrepreneurs must break through the established business order. Opportunities must be seen to grow as fast
as profits. Otherwise, at some point, the giant crowds of frustrated urbanites might turn their attention from
India's government to its billionaires.