Recently, I was asked to speak at the Aspen Institute on India’s strategy for global economic dominance. I said I disliked the concept of dominance. India’s rise, like China’s rise, represents global interdependence, not a new group of dominators. Tata’s takeover of Corus means Indo-British interdependence, not Indian domination of Britain.
More important, I said, was that India, unlike China, was hopeless at formulating grand strategies and implementing them. Our messy democratic system produced umpteen long speeches, resolutions and strategy papers, but this was mostly verbiage. We produced fancy socialist strategies for decades, all of which failed dismally. Today, we live in a coalition era full of opportunistic short-term compromises, so long-term strategy is impossible.
Yet, India has achieved 9% economic growth. How? Because huge new dynamic business sectors have come up, unplanned by any grand strategy. In the 1990s, the government deregulated industry, gradually deregulated finance, and improved the infrastructure for global connectivity. This produced an explosion of ideas and companies that no strategist had ever envisaged.
In the mid-1990s, no planners or strategists visualised a new India dominated by computer soft-ware, BPO, KPO or brain-intensive manufacturing. But deregulation plus global connectivity created a new universe of a million possibilities, and entrepreneurs created new businesses that strategists had not anticipated.
Far from having a strategy for promoting computer software, government policy suppressed it for decades. Narayana Murthy of Infosys says, it took him almost two years to get a telephone connection and a licence to import a computer. Because of trade union pressure, the government discouraged computerisation of Indian services. The infamous bank-trade union agreement of 1993, provided for branch computerisation at the rate of just 0.5-1% per year, meaning the process would take 200 years to complete!
India was saved by Silicon Valley, which hired Indians to work on US projects, and created skills though learning-by-doing. These skills then came back to India, and helped launch the software revolution. This was a by-product of US outsourcing strategy, rather than Indian strategy.
The same holds true of business process outsourcing (BPO). Pramod Bhasin of General Electric persuaded his bosses to shift some of the company’s white collar jobs to India to cut costs. Soon companies galore began to do the same.
India is now shifting up the value chain from BPO to KPO (knowledge process outsourcing). KPO covers high-skilled jobs ranging from legal services, chip design, engineering design, tele-medicine and financial analysis.
All top US companies are setting up Indian subsidiaries in search of cheap skills: if they don’t have a low-cost Indian operation, they will lose out to others who do. Credit rating agencies like Moody’s and Standard and Poor’s have only just increased India’s credit rating to investment grade, yet these very rating agencies are rapidly shifting operations to India.
The boom in brain-intensive manufacturing was also unplanned. There was much talk in 1991 of India following the path of labour-intensive exports that East and South-East Asia had pioneered. Alas, India failed dismally in labour-intensive industries, thanks to political constraints on labour laws. Instead, India is now flourishing in brain-intensive industries such as pharmaceuticals and automobiles.
Indian pharma is now a big global player, with strengths ranging from reverse engineering to contract R&D, contract ingredient production, clinical trials, and basic research for new drugs. None of this would have happened without strong patent rights for drugs, something the government opposed tooth and nail and was finally forced to accept in the Uruguay Round of 1995. This failure of government strategy was the beginning of Indian success.
The auto industry, two-wheelers, four-wheelers, and components have flourished and become world-class. Why? Auto companies need constant new models and improvements to compete, and Indian engineers can do this faster and more cheaply than US engineers. Most engineers today are from private colleges, which confer only a diploma, not a degree. Yet, a company like Bharat Forge now employs no blue-collar workers at all, only diploma and degree engineers, and this skilled force has made it the second largest forging company in the world.
Note that the government has long discouraged private initiatives in education, and education for profit is banned. Supposedly non-profit private engineering colleges have come up, often owned by politicians, and often collect illegal fees under the table. Their educational standards are spotty at best, and up to half the graduates are useless. Yet, these very colleges, warts and all, have aided the revolution in brain-intensive auto manufacture.
What, then should we do in the future? We need to focus on connectivity and deregulation, rather than specific industrial policies. Deregulation and connectivity have enabled Indian cities to take off, often in unanticipated new businesses. But 70% of people still live in rural areas. India needs to provide connectivity to every village. Every village should have an all-weather road, electricity and telecom. Every village also needs a functioning school, not absentee teachers.
Provide decent education and connectivity, and the villages will turn into high-productivity towns. I’m not sure this approach is grand enough to be called strategy. But it is what India needs.