A passage for India

The destination – economic superstatus – is in sight. But, warns Rhymer Rigby, India must overcome poverty, guzzle less oil and stimulate innovation to complete its journey

Five years ago only the largest Indian cities had ATMs. When you found one, you stocked up with as much cash as you could. Today they’re everywhere, the lovely old Hillman Ambassador cars are being replaced by new models and, in the Himalayan foothills near Delhi, summer homes of the middle classes line the increasingly crowded road to Shimla.

Mumbai is probably where things are changing fastest. Some liken the city to New York in the early 20th century and, while the comparison has its flaws, it’s not entirely inaccurate. Manhattan-standard bars and restaurants dot the better neighbourhoods, and shopping malls give wealthy young Indians a pleasant way to kill time. Outside this gilded bubble the other India is never far away. A taxi ride to the airport passes through 20 miles of sprawling slums. Yet, even here, billboards advertise mobile phones.

What India does, almost better than any other country in the world, is produce statistics. GDP grew by 9.2% last year; the country produces 2.5 million science, IT and engineering graduates a year; its middle class numbers a quarter of a billion; and 97% of Indian businesses say they’re optimistic about the future. The once unimaginable transformation isn’t confined to domestic matters either. There’s been a 20-fold growth in US patent applications in the last decade and Tata Steel recently bought Corus (which was once British Steel) for a cool £5.8bn.

Yet for every jaw-dropping number pointing to a glittering future, it’s easy to find one which signifies a not-so-glittering present. Eighty per cent of the country’s population live on less than $2 a day. The female literacy rate remains under 50%; a mere 2.2% of the population complete secondary schooling; and 700 million people (roughly 1.5 times the population of the EU) depend on agriculture for their livelihoods. India also has one of the most energy-intensive economies in the world – it takes 2.88 times as much energy to produce one unit of GDP in India as it does in the West.

There are two Indias. One – the one the West likes to see – is of Bollywood movies, ‘silicon ghats’, such as Pune and Hyderabad, and ancient culture. This India has benefited from the 6% annual growth the nation has averaged over the last 25 years. The other, the India of rural poverty and endless urban slums, is the one most familiar to the bulk of the population. This India is the bigger of the two.

The roots of India’s boom lie in the early 1990s, when markets were opened and liberalised. Before this, India’s economy sat behind high barriers, favoured nationalised industries and grew so sluggishly that economists satirically invented a concept called ‘the Hindu growth rate’. The pace really quickened towards the end of the 1990s. Some now predict the country will catch up with China – a nation to which, in terms of growth, India has always come a sore second.

The paradox of the two Indias

There is no doubt India is growing fast. The question is whether or not it can grow in a way that might be termed smart. Leaving aside the social questions for a moment, the more immediate concern is that it might be growing too quickly. At the moment India has high inflation (especially in foodstuffs), a capacity squeeze which means most firms are working uncomfortably close to flat out, a growing current account deficit, a credit boom and spiralling stock markets. Understandably, many worry the economy could be overheating.

But these relatively short-term macroeconomic challenges pale into insignificance beside the country’s long-term structural socioeconomic hurdles. The country has a small elite, a growing middle class and a vast lower class, many of whom live in abject poverty. India must ensure this majority participate in the growth (just saying ‘a rising tide lifts all ships’ is not enough). It needs to do this simply because huge extremes of wealth and poverty destabilise societies. This, for example, is one reason why the US has far higher rates of crime than Scandinavian countries. In countries where the masses outnumber the well off, such inequality often triggers huge civil unrest.

In the longer term, there is the interesting question of how to deal with a middle class of that size. What happens when they all want cars and plasma TVs, as Indian advertising is encouraging them to? Sir George Cox, the chairman of the Design Council, is optimistic: “The important thing is the explosion of the middle class. This kind of growth draws people upwards, gives them something to aspire to and creates [a domestic] market for products and services. You have to start by generating wealth.” India scores well here. It has long had a market economy: any visitor will know that the stereotype of India as a nation of small businessmen and entrepreneurs is largely true. Sir George also believes that, in time, a large middle class mitigates against extreme poverty. Once people have met their own needs, they look to others as a matter of enlightened self-interest.

We should remember that India has much going for it. With a very young population, it has none of the problems facing European countries, with their growing armies of retirees. It has a large educated population (although it has an even larger uneducated one) and is churning out graduates in useful ‘hard’ disciplines while Western countries struggle to generate interest in science.

India’s great advantage – which China does not share – is that English is a kind of universal second language. It is estimated that a third of Indians can hold a conversation in English. In fact, the number of English speakers in India is thought to exceed the total of those in the US, Britain, Canada and Australia. This is why India has taken a more services-oriented route than China, and it is perhaps the thing about India that worries China most.

In 2005 Kapil Sibal, India’s science minister, claimed his country’s ultimate advantage over its neighbour and rival is that India is a democracy. However, it’s debatable whether this is an advantage in purely economic terms. Although few openly say authoritarian governments are desirable, they do tend to get things done more quickly – a not terribly correct bonus for foreign firms doing business there.

In democracies, people have a nasty tendency to voice objections. In 2003 Coca-Cola was accused of leaving farms high and dry from its water extraction and causing contamination in Kerala. The story was widely picked up in the Western press and the result was a PR disaster. Similarly, Tata’s attempt to build a car factory on agricultural land in Singur in west Bengal has sparked a campaign of protests, some of which have turned violent. Such incidents are rarer in countries with state-controlled media.

So democracy may not be an advantage for a country seeking to industrialise. Especially a far from perfect democracy like India, which is legendary for its Kafkaesque bureaucracy and culture of petty bribery. In Transparency International’s 2006 Corruption Perceptions Index, India scored two-to-three times worse than the US, UK and Finland. So it is with red tape. As the old joke goes, the British invented bureaucracy and the Indians perfected it. In the World Bank’s ranking of countries that it is easy to do business in, India comes 134th, below Syria and the West Bank. Statistics like this act as a brake on entrepreneurialism and foreign investment.

That said, as people get richer and their basic material needs are sated they tend to worry more about non-essentials such as freedom. It’s also true that Google and Microsoft have each come a cropper dealing with China’s authoritarian regime, garnering criticism for acceding to its demands. In the short term democracy may be a mixed blessing, but in years to come it is likely to be an enduring good.

India’s most celebrated successes to date have been in support services. While China has been hailed as the workshop of the world, India is sometimes known as its back office. If China does lower-end manufacturing, India does lower-end services such as call centres and data processing. India’s strength in IT is not necessarily an unalloyed triumph. Many worry that in the services India has chosen to provide it has fallen into a low-value trap.

According to a report by Demos, India: the Uneven Innovator, “The Indian IT industry is a somewhat ambiguous success story.” Although India’s IT companies account for 35% of exports by value and 7.5% of GDP growth, companies are serving multinationals, usually by low-added-value work. Infosys, India’s best-known IT company, spends a mere 1% of its revenue on R&D. The argument here is, as the saying goes, no one ever got rich working for someone else. The industry risks falling into a dependency trap where it never generates new ideas or real value of its own. The report suggests real innovation may not come until the next generation of IT companies.

Yet there is a strong counter-argument to this, along the lines of ‘the best way to learn about making cars is to start by assembling other people’s.’ There are instances of India moving up the value chain. WPP is outsourcing graphic design and animation to Mumbai; several banks have moved analyst positions to the sub-continent; and Reuters has moved 200 jobs to Bangalore. Procter & Gamble has used Elephant Strategy and Design in Mumbai, a company which has already designed luggage for the UK market. Cisco has a chief globalisation officer in Bangalore while, on a smaller scale, Wisden, the cricket periodical publishers, base their CEO in India on the laudable grounds that he should be near their biggest market.

Few in the West do not harbour a sneaking suspicion that one day their job will be eminently outsourceable. There has not – yet – been a huge shift to outsource high-end knowledge jobs, but floods start with trickles. The trickle has already started in the animation business, where India has over £500m of a £37bn world market but aims to increase its share by a factor of 15 by 2010.

The flip side of this is homegrown talent. India is putting enormous resources into science and, along with software, has a booming pharmaceutical sector and a growing car industry. “What you’re seeing,” says Cox, “is an enormous effort going into industrial design capability. We’ve got used to these countries doing our drudge work, but to expect them to be pools of cheap labour forever is nonsensical.” Cox believes it won’t be long before the software you buy from India is also designed there.

The government now has a national design policy, encumbered with more statistics (1,000% growth in design over the next eight years is the modest target), but India is seeing the fruits of earlier, similar labours. The world’s catwalks now see more Indian designs, after investments in design and technology in the 1980s and 1990s.

The country still has enormous problems with counterfeiting and IP remains chaotic, but India’s businesses have become assiduous patenters, suggesting a growing seriousness about innovation.

One headline-grabbing innovation suggests India could emerge as a low-cost carmaker. In 2008 Tata hopes to launch its low-cost car – an entirely homegrown vehicle, with four seats and a 30hp engine, costing around £1,100. While this is unlikely to shake Western markets (for one thing you can’t meet emissions regulations at that price) it may stimulate domestic demand in a mushrooming market for low-cost vehicles. Rather than have its needs met from outside, India may meet them from within. It was expected that Asia’s first mass-produced low-cost car would emerge from China; India now looks likely to pip its rival at the post.

Which brings us neatly to another of India’s problems: infrastructure. The famous railway system (the world’s second largest commercial employer) is impressive if slow. But the road network, second only to the US in length, is in poor condition and mostly made up of two-lane roads. Road travel is slow, and the cities are traffic-choked and lack public transport. Delhi recently got a metro while Kolkata has had one since 1984, but these are small beer compared to their counterparts in the developed world. Even high-tech Bangalore has distinctly third-world roads, and 900 vehicles a day join its already choked streets. Commuters in Mumbai endure journeys that make the travails of Londoners seem like a walk in the park.

The poor infrastructure – and a profligate use of energy – make the economy hyper-sensitive to any upsurge in oil prices. By 2020, imports are expected to account for 90% of India’s oil consumption.

None of these problems compare to poverty. The country’s greatest challenge is to ensure that some new-found wealth trickles down to the very poorest. Many of the policies towards the poor have been problematic, says Professor Ricky Burdett of the LSE/Deutsche Bank Urban Age Programme. “Mumbai’s dramatic growth will make it larger than Tokyo in 20 years. The big difference is that, in Mumbai, over half the people live in slums.” Grim though they seem, the slums have emerged organically and are communities. “Slum clearance often results in people being moved to sub-grade housing,” Burdett says. “You see it in Mumbai where people are moved to sub-standard buildings. People can’t pay for electricity so the lifts wind up full of rubbish which attract rats and cause disease.”

Eventually, he says, they create conditions more problematic than those they left behind. Meanwhile, the middle classes are moving as far (either geographically or economically) from the slums as they can. Their world is one of air-conditioned malls, gated communities and new commuter towns – a fantasy world that allows them to ignore the problems around them.

It is often better, Burdett says, to spend money improving slums. “We did a series of projects retrofitting slums with things like toilets but making them bright and pleasant. They became centres of public life. It’s that sort of micro-scale doing things on the ground that can improve people’s lives.”

Even with the gulf between rich and poor, India has much going for it. You have a society, Burdett says, where violence and crime aren’t major problems. “Mumbai doesn’t have the problems that, say, Sao Paulo has. The issue is ensuring that as cities develop, they don’t develop the problems so often associated with huge economic differentials.”

This, perhaps, is the Indian challenge in a nutshell. It is a country that has a huge amount going for it – and an enormous number of problems. At some point this century it will become the world’s third largest economy. If, at that point, you can still walk around Mumbai in relative safety, India will have managed its growth well.

India’s innovative hotspots

1. Bangalore
   The star of India’s emerging knowledge economy is now being challenged by other Indian cities.
2. Pune
   The ‘Oxford of the East’ came third in Forbes magazine’s 2006 list of most promising locations for global business.
3. Hyderabad
   The capital of Andhra Pradesh, one of India’s most innovative states, is known as ‘Cyberabad’ for its extensive IT industry.
4. Kolkata
   Chandar Sundaram, a senior executive at Microsoft, calls India’s third largest city “one of the next hot places for technology”. Historic ties with the UK may offer rich opportunities for collaboration.

Matthew Gwyther on innovative India’s challenge

The author is editor of Management Today

I recall a conversation I had a few years back with a Hong Kong-based Brit who owned a large giftware company. Almost all his wares were made in China – mostly in the vast ‘workshop of the world’ which employs 12 million souls in the Pearl River Delta.

As the waters lapped against the Kowloon waterfront, I asked him: couldn’t he source his value goods from India? He sighed a sigh that denoted bitter experience. With the Chinese, he said, you get exactly what you’ve asked for. Maybe not the most innovative and imaginative, but they understand process and delivery.

The thing about India, he said, is: enthusiastic people, great ideas, beautiful country, but things don’t go as planned. He mentioned a test order of 2,000 black metal prancing horses he had placed with an Indian manufacturer. The spec was designed and agreed. Handshakes made. Contract signed. Shipment in four months. Guaranteed.

A progress-check call from Hong Kong was made after a month: “Two thousand metal horses in black in three months?” The answer was “fine.” Another call with a month to go: “Still OK for those black horses?” “Why are you ringing? Of course. Fine, fine.”

Two weeks before shipment, a call came in from the Indian manufacturer. “Look, we’ve been thinking about all this and we think what you really need is a thousand horses in white. And, by the way, ceramic is so much nicer than metal when portraying the finer features of a stallion.”    

You would be a fool to miss out on BRIC – Brazil, Russia, India, China – the big emerging economies. But the hard truth is that India is today where China was 10–15 years ago.
To see how far India has to come look at these statistics. National express roads: India 3,700 miles, China 25,000 miles. Spending on public works: India 4% of GDP, China 9% of GDP. Electricity production: India 652 billion kilowatts, China 2,500 billion kilowatts.

Power, by the way, costs 40% less in China than India. Across Maharashtra, the modern economic heartland of India, the big cities lose power one day each week to relieve strain on the grid. Corruption is a problem in China but Transparency International has estimated that Indian truckers alone pay an amazing £2.5bn a year in bribes just to keep their wagons on the road and travelling over the potholes from A to B. 

India does have one major advantage over China. While the latter remains a totalitarian state, India is the world’s largest democracy and is justifiably proud of the fact. Will Hutton, in his latest book The Writing On The Wall, is quite correct to say that a lack of democratic accountability will be a severe brake on China’s development in the next 20 years. Even the great Jack Welsh is coming round to thinking India might be worth a punt: “China excels at process creativity but India excels at innovation.”

We all know which is the more important as we approach the end of the first decade of the 21st century.

John Healey on what Britain can learn from India

John Healey, MP, is financial secretary to the Treasury

It is difficult to read any contemporary article about the Indian economy without being taken aback by the scale and pace of change. India’s GDP has grown by 8% for four years running. It could be the third largest economy in the world in three decades. India produces 2.5 million new graduates a year in IT, engineering and life sciences, and 4,000–6,000 PhDs.

Technological advances in communications mean that many of India’s service industries compete  with our own. But is this a threat to the British economy or could it be an opportunity for Britain?

David Ricardo, the classical economist, had an answer to these questions in 1817. He showed that trade is based on mutually beneficial exchange, and increases welfare for society. The theory is now backed by experience, with the opening of markets leading to unrivalled global prosperity in the 20th century.

India has traditionally been a major producer of many goods and services we buy in the UK. But with the domestic consumer demand that a booming economy generates and the opening of India’s markets, UK companies stand to gain access to over a billion potential new customers. Trade between our two countries has doubled in the past five years, now amounting to £8bn per year. The UK is now the fifth largest investor in India, and India is the third largest investor in Britain. There are 23 Indian companies listed on the London Stock Exchange’s markets, making London the most popular overseas exchange for Indian firms looking to raise capital.

British firms can continue to gain from India’s growth. The UK government is committed to helping create a skills-based, flexible, innovative economy that can take advantage of these opportunities. With these opportunities come challenges, none greater than the impact this growth will have on climate change and the Indian environment.

If we don’t take immediate action against climate change and the world economy continues on its current path, the stock of greenhouse gases could more than treble by the end of the century.

Developing countries may account for 75% of the rise in fossil-fuel emissions between now and 2030. International co-operation is needed now to work with emerging economies like India to put in place the regulation and technology to help ensure their growth is not undermined by its environmental impact. The UK was instrumental in creating the EU Emissions Trading Scheme, the principal mechanism for carbon reduction in the EU. We are convinced the ETS model is the key mechanism for delivering emissions reductions internationally, by building and expanding the global market for emissions.

Global carbon markets and carbon finance have the potential to deliver large flows of investment and transfer of technology to emerging economies. This can ease access to technologies like Carbon Capture and Storage (CCS) to ensure their growth is not affected by environmental pressures. The UK has pioneered international co-operation on CCS because, with this co-operation, we can ensure that the UK, India and other emerging economies grow in an environmentally sustainable way, providing all the benefits economic growth brings to all our citizens.

Article first published in Design Council Magazine, Issue 2, Summer 2007