The Economic Challenges of India

And People Wonder Why The Lights Go Out In Delhi So Often?“Your hypotheses, sir, have been exposed as deeply flawed. And tragic. And super-human in their stupidity,” the Indian gentleman told me when I explained that the economic miracle in India was mostly ephemeral.

Indians, it seems, aren’t lacking in the hyper-patriotic, and India certainly doesn’t lack its boosters in the West. Alas, some folks are beginning to see the light:

BANGALORE, India — In the United States and Europe, people worry that their well-paying, high-skill jobs will be, in a word, “Bangalored” — shipped off to India.

People here are also worried about the future. They fret that Bangalore, and India more broadly, will remain a low-cost satellite office of the West for the foreseeable future — more Scranton, Pa., in the American television series “The Office,” than Silicon Valley.

Stephen Roach of Morgan Stanley-Asia has called this wage arbitrage (Roach happens to be one of the few American economists that gets it right on India). And Americans are right to worry about this. It’s put downward pressure on services as varied as call-centers and tech support, to financial news reporting, X-ray and MRI interpretation and accounting. I would be especially worried if I were an accountant. But then again, many of the big firm accountants need not be worried, as their shilling game for Wall Street will protect them. For a time.

Even as the rest of the world has come to admire, envy and fear India’s outsourcing business and its technological prowess, many Indians are disappointed that the country has not quickly moved up to more ambitious and lucrative work from answering phones or writing software. Why, they worry, hasn’t India produced a Google or an Apple?

Wait a second. India does not have any technological prowess in the true sense of the word. After all, if they did, why would the Ambassador, a car model over fifty years old, made of the heaviest steel imaginable, and horribly inefficient be the best selling domestically produced car in India, still. The Nano notwithstanding.

Innovation is hard to measure, but academics who study it say India has the potential to create trend-setting products but is not yet doing so. Indians are granted about half as many American patents for inventions as people and firms in Israel and China. The country’s corporate and government spending on research and development significantly lags behind that of other nations. And venture capitalists finance far fewer companies here than they do elsewhere.

Re-read that graph closely and you’ll begin to get an idea of the hurdles India faces. And hurdles it is doing nothing, absolutely nothing to overcome. Instead of using its domestic capital for something like infrastructure building, local elites continue to siphon it all off and live behind huge fenced in compounds paying dalits pituful, barely life-sustaining wages.

Delhi RubbishMoreover, the next graph gives a decent idea of what, exactly is holding India back:

Mr. Raghavan and others say India is held back by a financial system that is reluctant to invest in unproven ideas, an education system that emphasizes rote learning over problem solving, and a culture that looks down on failure and unconventional career choices.

While I was in India I read an hysterical book about one young Indian’s experience in America as a college student. Anurag Mathura’s “The Inscrutable Americans,” is an hilarious Occidentalist send-up but more important a sly shot at the Indian educational system and its weaknesses. One could review the book thusly, pilfering this Times article without a hint of irony: “a financial system that is reluctant to invest in unproven ideas, an education system that emphasizes rote learning over problem solving, and a culture that looks down on failure and unconventional career choices.

Sujai Karampuri is an Indian entrepreneur who has struggled against many of these constraints.

His Bangalore-based company, Sloka Telecom, has developed award-winning radio systems that are more flexible, smaller and less expensive than equipment used by phone companies today. Mobile phone companies and larger telecommunications equipment suppliers are buying and testing his products, but he has not been able to interest Indian venture capitalists. For the last five years he has run his firm on $1 million he raised from acquaintances.

One of the reasons companies like this don’t make it in India is simple: “you can’t eat cell phones.” Now, this is a common criticism progressive Indians make. To put it another way, “who wants to buy a cheap cell phone when they are worried about where their next meal is coming from?” In a country that is buying farmland in places like Ethiopia now, food security is much more a thing of the future, than of the past.

Companies like Sloka Telecom are important, analysts say, because they are more likely to create the next wave of jobs than large, established Indian technology companies, many of which are experiencing slower growth. These companies could also help offset some of the outsourcing jobs the country will likely lose because of greater automation and competition from countries where costs are even lower.

Right. And wrong. What analysts fail to realize, mostly because they don’t travel to India, or when they do, they travel a la Friedman, is that India has no infrastructure. You simply cannot build a modern economy if you do not have the basics: good roads, good ports, good telecommunications—it still takes almost six months to get a landline in India and at least a week to get a wireless modem, unless you bribe the salesman and the manager at the store where you buy it.

There are historical reasons that starting a business in India is difficult. During British rule, imperial interests dictated economic activity; after independence in 1947, central planning stifled entrepreneurship through burdensome licensing and direct state ownership of companies and banks.

Businesses found that currying favor with policy makers was more important than innovating. And import restrictions made it hard to acquire machinery, parts or technology. Inventors came up with ingenious ways to overcome obstacles and scarcity — a talent Indians used the Hindi word “jugaad” (pronounced jewgard) to describe. But the products that resulted from such improvisation were often inferior to those available outside India.

I have no quibble at all with these two paragraphs. The are accurate and up to the minute in their accuracy.

“We were in an economy where, forget innovation, expansion was discouraged, creating wealth was frowned upon, there was no competition to speak of,” said Anand G. Mahindra, who heads the Mahindra & Mahindra business group and has spoken about the need for more innovation.

Indian leaders began embracing the free market in the 1980s and stepped up the pace of change in 1991 when the country faced a financial crisis. Those changes increased economic growth and made possible the rise of technology companies like Infosys and Wipro, which focused on providing services for American and European corporations.

Again, the real problem here isn’t with ‘opening to the world,’ it was that India did it the wrong way. Do you know how many people use the Indian rail system every day? 50,000,000. Yes, fifty fucking million people. And India has not spent any money in the last decade—outside of the main tourist line from Delhi to Agra (home of the Taj Mahal)—on expanding, much less upgrading their rail system. And have only poured in a bare minimum for maintenance. Again, how are you supposed to grow your economy if you don’t have a way to move goods efficiently and cheaply from producer to marketplace?

Yet, the government still exerts significant control, especially in manufacturing, said Rishikesha T. Krishnan, a professor at the Indian Institute of Management in Bangalore.

“To start a services company it really takes you just two or three days to get going,” said Mr. Krishnan, whose book, “From Jugaad to Systematic Innovation: The Challenge for India,” is to be published next year. “The moment you are looking at manufacturing, there are hundreds of inspectors and regulations.”

Read between the lines here: bribery and graft is huge. And it is another of India’s very real impediments.

Another change may augur well. Until early this decade, the Indian market was too small and isolated to make it very lucrative for businesses to develop products here, so most technology companies focused on selling services to the West, said Girish S. Paranjpe, joint chief executive of Wipro’s information technology business. “That will change dramatically because the Indian market has become bigger,” he said.

The only reason the Indian market has become bigger is that the population continues to spiral out of control. It hasn’t grown productivity, or efficiency to speak of. Nothing will change dramatically to the upside in India until the basics of economic growth are dealt with. Graft and corruption must be rooted out. Dalits must be given fair opportunities. There must be a multi-decade buildout of the Indian infrastructure upwards of probably a trillion dollars. And Westerners have to get a grip with reality: India will not be, on its present course a new China. Not in my lifetime, at least.

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