A Passage to Prosperity

A Passage to Prosperity

By ARVIND PANAGARIYA
July 14, 2005; Page A10
The Wall Street Journal

Having sustained 6% annual growth since the late 1980s, India is now regarded as an unequivocal economic success. Prime Minister Manmohan Singh, who visits the White House on Monday, initiated many of the key economic reforms during his tenure as the finance minister in the '90s. But his task remains incomplete. India continues to trail well behind China, which has been growing at the annual rate of 10% since 1981. From an equal level in 1980, per capita income in China today is more than twice India's. The proportion of the population below the poverty line has dropped below 5% in China compared with 26% in India.

Though trade has grown rapidly in both countries, it has grown far more rapidly in China. Exports of goods and services grew at the annual rate of 15.2% compared with 10.7% in India. By 2003, China's share in world exports hit a noticeable 5.8% while that of India remained virtually invisible at below 1%. Foreign direct investment (FDI) in India expanded manifold in the '90s over '80s, but it remained less than one-tenth the level achieved by China.

The single most important factor explaining these differences is the relatively poor performance of Indian industry. Whereas the share of industry in China's GDP rose from a high level of 42% in 1990 to 51% in 2000, it remained virtually stagnant in India. By contrast, Indian service grew rapidly, expanding its share from 41% in 1990 to 48% in 2000. This trend has continued in the last five years.

Industrial output is far more tradable than services. True, information technology services have a large traded component, but they are less than 2% of India's GDP. Therefore a low share of industry and slow growth in it translate into slow growth in trade. Moreover, in labor-abundant economies such as China and India, FDI is attracted principally to industry to take advantage of lower wages: A low share of industry means a lower level of FDI; and if the conditions for rapid industrial growth are lacking, growth in foreign investment will also be low.

What can India do to achieve the high level of growth and the low level of poverty achieved by China? Some argue that India can achieve this by specializing in services. If the bulk of the recent growth in services in India had been in formal services such as telecommunications and IT, this strategy would make eminently good sense. But these sectors are currently tiny, with distribution services, public administration, real estate, community services, and transport accounting for 70% of services. Moreover, 60% of India's workers earn their living from farming and cannot be drawn into formal services without being taken through 15 years of education. Therefore, the importance of the IT sector to the economy notwithstanding, the only way India can bring a large chunk of the farm population into gainful employment in a reasonably quick time is through faster expansion of the traditional, unskilled-labor-intensive industry. This suggests that the right strategy for India is to walk on two legs: traditional labor-intensive industry and modern IT. Both legs need strengthening through further reforms; and four specific reforms are of special importance.

• First, under a key law enacted in 1982, firms that employ 100 or more workers in India cannot fire them under any circumstances. This law has understandably deterred multinationals as well as large domestic firms from entering labor-intensive manufacturing. For example, the apparel and toy firms in India remain minuscule relative to their Chinese counterparts. Given that workers may refuse to perform their normal duties in the absence of any fear of being laid off, Tyco can scarcely risk moving its toy manufacturing to India. Large Indian firms have tried to escape the labor law by focusing on skilled-labor-intensive or capital-intensive sectors such as pharmaceuticals, IT, machine tools and auto parts, which principally employ white-collar workers who do not enjoy protection. Restoration of the firms' right to fire workers in return for a reasonable severance is essential if India is to transform into a modern nation.

• Second, the fiscal deficit of more than 10% has starved industry of investment funds. Savings by households and corporations currently average 26% of GDP. After excluding household investment and retained earnings of corporations, financially intermediated savings are approximately 12% to 13% of GDP. Thus, the fiscal deficit absorbs virtually all financially intermediated savings. Foreign savings could fill some of the gap, but they translate into large current account deficits, which bring the risk of macroeconomic instability. Unless savings rise dramatically, bringing deficits down is essential to release investment funds to the industry.

• Third, Indian industry needs better infrastructure. To compete internationally, it needs a reliable power supply at reasonable prices. Congestion at ports due to capacity constraints and poor administration hamper swift movement of goods. Airports in India are an embarrassment: A potential investor who takes a flight from New York to Shanghai and then to Delhi will think hard before choosing India over China. Finally, the movement of goods to and from ports requires the construction of reliable roads, a modern trucking industry, and the removal of restrictions on interstate movement of freight carriers.

• Finally, the most important potential bottleneck the Indian IT sector faces is the state of higher education. Currently, only 6% of Indians between 18 and 24 go to college. Of these, a tiny fraction has the skills necessary to perform tasks related to software and IT-enabled services. Unsurprisingly, competition for scarce skills has brought annual employee turnover rates in IT firms to more than 50% and a doubling of salaries for many in less than two years.


If the growth in the IT sector is to be sustained, India needs to fundamentally rethink its higher education policy. Given the fiscal deficits, the government has virtually no resources to expand and improve the education system. This leaves only two complementary options: the entry of private universities and the introduction of tuition fees in public universities for those capable of paying. The virtual ban on private universities in India is most puzzling. Many students would be willing to spend significant sums of money for a decent education, as shown by the expenditures they currently incur at U.S. universities. Given the high private returns to higher education, there is also a good case for the introduction of significant tuition fees in public universities to generate funds for the expansion and improvement of the quality of education.

Having got India on its feet in the '90s, Mr. Singh must now push reforms further to ensure that it can walk briskly on two legs. He has a historic opportunity to build a modern India and he must not miss it.

Mr. Panagariya is the Bhagwati Professor of Indian Political Economy at Columbia. This essay draws on a longer paper in the next issue of The Far Eastern Economic Review.

Chasing Desi Dollars - Time article

Chasing Desi Dollars


THEIR ROOTS ARE ON THE INDIAN SUBCONTINENT; THEIR WALLETS ARE HERE. WHY COMPANIES ARE CATERING TO A HOT MINORITY: DESIS

By BARBARA KIVIAT

Time. com

Wednesday, Jul. 06, 2005

Jay Sean is an hour late, but the crowd gathered in the makeshift studio at MTV's Times Square headquarters doesn't seem to mind. Twenty-some twenty-somethings are sitting around the edges of the room when the spiky-haired British R&B star finally enters, causing more than one girl to lean forward. Sean is miked and seated in front of an MTV logo reminiscent of the Taj Mahal. The camera rolls, and the interview begins. Sean talks about being a kid and starting a band in England with his cousin, recording their first demo tape in his bedroom and being swooned over. He also talks about listening to bhangra music, choosing singing over medicine as a career and picking a Bollywood actress to star in his latest music video. The interview wraps, but the star, who was raised in Britain by India-born parents, stays seated to shoot a few promotional clips. "This is your boy Jay Sean," he says, "and you're watching MTV Desi."

Welcome to the next marketing frontier. For years, Western companies have understood the potential of 1 billion consumers in India, but now they are slowly starting to realize the purchasing power of people in the U.S. who trace their roots to the subcontinent--a group known as desis. MTV India has aired overseas since 1996, but MTV Desi--a channel for Americans of Indian, Pakistani, Bangladeshi, Sri Lankan, Bhutanese and Nepalese descent--is brand new, launching this summer. And MTV isn't alone as it chases desi dollars. South Asian marketing is still in its infancy, but early adopters like General Motors, Citibank and GlaxoSmithKline are advertising in ethnic newspapers, buying airtime on satellite channels, sponsoring cultural festivals, underwriting minority scholarships and even creating new products, like MTV Desi.
Why the interest? It's not just America's growing appetite for South Asian culture--movies like Bend It Like Beckham and stars like Bollywood actress and model Aishwarya Rai. The marketing thrust started with the 2000 Census, which revealed that during the 1990s the number of Indians in the U.S. more than doubled--making them the fastest-growing Asian minority. There are some 2.5 million desis in the U.S., and the vast majority are Indian. That may not seem terribly significant compared with, say, 40 million Hispanics, but consider how premium a customer a South Asian is: Indians alone commanded $76 billion worth of disposable personal income last year, according to market-research firm Cultural Access Group, using figures from the University of Georgia's Selig Center for Economic Growth; median household income is nearly $64,000--50% higher than the national average. The U.S. has always welcomed the world's poor and working classes. India has sent its professionals.

And they're not afraid to spend. Lakshmi Subrahmanian, 48, sums up the shopping habits of her four-person, five-computer, six-figure-income family this way: "We like to buy the best." The mental-health counselor and her electrical-engineer husband Jayram, 53, who own a five-bedroom house in Coral Springs, Fla., are about to trade in their 2002 Mercedes--it's time for something newer. That spells opportunity for General Motors, which has begun pushing Cadillacs in desi circles. "This is a great market," says Jean Liu-Barnocki, GM's manager for Asian-American marketing, "and we're putting some very targeted resources behind reaching it."

At first glance, that might seem fairly simple. Unlike Hispanics and other Asian minorities, South Asians often arrive fluent in English. The influence may be more British than it is American--cricket is preferred to baseball--but a desi in the U.S. can still pick up USA Today and understand a Gap ad.

Whether that message gets through, though, is a separate matter. "We speak English, but we don't speak the same language," says Vivek Sharma, senior manager of India Abroad, a U.S.-based newspaper that, along with titles such as India Today, India-West and New India Times, is attracting ads from the likes of Mercedes-Benz, Lufthansa, New York Life, GM, Western Union, AT&T and the New York Times. Just consider that Sean, in typical eyebrow-raising rock-star fashion, picked actress Bipasha Basu for his music video in part because she was racy enough to have had an onscreen kiss--a rarity for a Bollywood star. The mores of bare-it-all Hollywood could not be further away.

To make an advertising message culturally relevant, says Saul Gitlin, executive vice president at Kang & Lee Advertising, you have to do more than toss a desi face into a commercial. Values such as education, hierarchy and status are unshakable for desi families, even if modified to reflect American lifestyles. "There's a core belief in higher education and studying and saving," says Phil Salis, vice president of consumer marketing at MetLife, which has created desi-specific television advertising to run on satellite channels such as ZEE TV, B4U, Sony TV and TV Asia. He's not kidding: 64% of Indians in the U.S. hold a bachelor's degree, vs. 24% of the overall population. Says Salis: "That's a great opportunity for financial services."

Marketers are also recognizing that in close-knit, largely immigrant communities, familiarity with a brand plays a much more important role than it does with the general public. "Word of mouth is huge," says Lakshmi Bhargave, 25, a graphic artist in Chicago. "We have this theory that between Indians, it's more like two degrees of separation rather than the usual six." So firms show up at desi events and subtly introduce the message: We're a part of your community too. Wells Fargo sponsored a Bollywood concert in Cupertino, Calif., in June, setting up a table in the lobby and dispensing brochures touting its new money-transfer service to India, an initiative aimed at stealing business from Western Union. "It's not just about advertising," says Michelle Scales, director of the diverse growth segment at Wells Fargo. "It's about being visible in the community."

It took Hispanic marketers 20 years to convince media executives that there was a case for targeting Hispanics, and today people like Vimal Verma, chairman and CEO of American Desi, a satellite network that launched earlier this year, are engaged in a similar campaign for South Asians. He hopes what many in the industry do: if the entertainment platform is built, the advertising dollars will follow.

That's what the folks back at MTV are banking on too. "If you wanted to reach young South Asians, there hasn't been a branded, credible platform," says Nusrat Durrani, senior V.P. and general manager of MTV World. Voilà MTV Desi, which should air nationally in July. After Jay Sean's interview, he sticks around to pose for photographs with fans. "To me, it's been a long time coming," the singer says between autographs. "There is a massive market out there." Sean, an artist and an entrepreneur, pauses and then continues, "We make up one-fifth of the population of the world. Imagine that." --With reporting by Jeanne DeQuine/ Miami, Noah Isackson/Chicago and Laura A. Locke/ Cupertino