India's economic agenda: An interview with Manmohan Singh - Mckinsey article

India's economic agenda: An interview with Manmohan Singh
The prime minister discusses his plans to modernize the country's infrastructure, attract foreign investment, and create jobs—all in the service of eliminating chronic poverty and disease in India.
Rajat K. Gupta
The McKinsey Quarterly, 2005 Special Edition: Fulfilling India's promise
India's economic agenda: An interview with Manmohan Singh"

Prime Minister Manmohan Singh of India would like to finish a job he started in 1991. Then, as finance minister in a new government, Singh orchestrated the economic reforms that brought India back from the brink of bankruptcy and set it on a course that made it one of the world's fastest-growing economies. Among the changes were devaluing the rupee, dismantling the infuriatingly bureaucratic business permit system called the license raj, and opening the tightly closed economy to foreign companies. The economic reforms he put in place have been backed by successive national governments and have brought a measure of prosperity and respect to India.

Singh became prime minister in May 2004, when the Congress Party won a surprise victory in national elections. But Congress's triumph was the result of a populist backlash against economic reforms that were seen as benefiting just a few of the 1.1 billion people of India, a large portion of whom remain impoverished, and the party holds power through a loose coalition. Against this backdrop, some questioned whether Singh, the country's first Sikh prime minister and an economist by training, could preserve the reform program, much less move it forward.

In May 2005, after one year as prime minister, Singh himself rated his government's achievements at six out of ten, a performance he said was unsatisfactory. Rajat K. Gupta, a director in McKinsey's Stamford office, talked about the country's prospects with Singh on August 16, 2005, the day after his annual Independence Day address to the nation.

The Quarterly: Mr. Prime Minister, what are your aspirations for the country, and what progress do you think India has made? What are your priorities?
Manmohan Singh: The first and foremost priority is to finish the unfinished task which the founding fathers of our republic set out for us at the time of our independence: to get rid of chronic poverty, ignorance, and disease, which have afflicted millions and millions of our people. Great progress has been made. Particularly in the last 20 years, the India economy has done quite well, social indicators and development have improved, but we are not quite where we ought to be. The next 5 to 10 years are crucial for moving forward in areas to stimulate economic growth and also to ensure that this accelerated economic growth really benefits the poorest segments of our society. We need a growth rate of about 7 to 8 percent per annum, sustained over a period of the next 10 to 15 years. We need to underpin that growth by strong performance of our agriculture, strong performance of our physical and our social infrastructure. These are our key priorities.

The Quarterly: As we talk with our clients, the first question they ask about is infrastructure. Has India made enough progress?
Manmohan Singh: We have a lot of backlog in improving our infrastructure. We have made substantial progress. Work is in place to ensure that our road system is modernized. But our railway system also requires massive investments. We are working with the Japanese government to draw up a program in which the freight corridors between Mumbai1–Delhi, Mumbai–Chennai,2 and Delhi–Kolkata3 can be modernized. Our estimate is that that will cost about 25 thousand crore of rupees [$5.7 billion], and that's our high priority as far as the railway system is concerned. We need to modernize our airports in a big way. Already plans are under way to modernize and expand the airport facilities in Delhi, Mumbai, Hyderabad, and Bangalore. We also are now in the process of modernizing our seaports. Privatization, public-private partnerships, and new initiatives have been tried.
My own estimate is that we need an investment of about $150 billion in the next seven to eight years to realize our ambition to provide our country with an infrastructure which is equal to the economic and social challenges that we face. I'm not saying that everything is in place, but I think that in the last year that our government has been in office we have set in motion the processes through innovative public-private partnerships to explore new pathways to make the infrastructure ambitions a realizable goal.

The Quarterly: You started the reform process in the early '90s, and it's had some ups and downs. One item in that agenda was privatization. I wonder where that stands in your priorities and how you see that moving forward?
Manmohan Singh: We are a coalition government, and that limits our options in some ways. Privatization happens to be one such area. As somebody said, a politician before he can become a statesman has to remain in office long enough. So we have to make those compromises. As far as profitable public enterprises are concerned, especially those which are doing exceedingly well, we don't see that they have to be privatized. But these enterprises, if they want to raise resources for their own expansion, they are free to go to the market. The Common Minimum Program,4 which is the benchmark for us to assess where we want to go, talks about the navratnas.5 These navratnas are companies essentially in the oil sectors, the power sectors, which are doing really well and, other than going to the market to raise funds for their own expansion, our options are limited by what is stated in the Common Minimum Program.
But outside the navratnas, as I see it, the field is vastly open. For enterprises which are not navratnas, if we want to privatize, if we want to get more investment going into those things, I think all options are open. But I must confess to you that in the prevailing milieu, the thinking in our coalition is that for enterprises that are doing well under competitive conditions, we must have special justification to prove to our coalition colleagues that there is need for privatization.6

The Quarterly: Are you happy with the pace of foreign direct investment? And, specifically, how do you feel about foreign direct investment in retail?
Manmohan Singh: I do believe that India needs a lot more foreign direct investment than we've got, and we should have the ambition to move in the same league many other countries in our neighborhood are moving. We may not be able to reach where the Chinese are today, but there is no reason why we should not think big about the role of foreign direct investment, particularly in the areas relating to infrastructure, where our needs for investment are very large. We need new initiatives, management skills, and I do believe that direct foreign investment can play a very important role.
With regard to retail trade, I am convinced that we can work out a package that is fair, that entry of foreign enterprises into the retail trade will not hurt our small shopkeepers but will create a lot more employment. We have to carry conviction with our political colleagues. I am confident that over a period of time we can do that. But for the time being, I have my task cut out to carry conviction with our political colleagues that this is a way to move our economy to a higher growth path—to create new employment opportunities—that this is not a strategy to hurt the small shopkeepers in our country. So I have my task cut out. In the next four or five months, I propose to engage myself in this task.

The Quarterly: The reform process must also incorporate labor reform. I wonder how you feel about that, especially since labor has to be retrained and redirected in many ways for the economy to become more productive.
Manmohan Singh: First of all, we must make a distinction. When we talk about labor reforms, we are essentially talking about 10 percent of our labor force, which is accounted for in the so-called organized sector.7 Outside this 10 percent, for the 90 percent we are a completely flexible labor market. The normal laws of the market take precedence. Even within this organized sector, the problem is most acute in the public sector. In the private sector, most people tell me that they can find ways and means of working out voluntary agreements with the trade unions, whereby necessary labor flexibility can be introduced. In the public sector, we have rigid laws, and therefore there is this problem.
New enterprises, particularly if they are foreign-backed enterprises, do ask this question. And it is a legitimate question. We cannot move straightaway to the Western or the American model of hire and fire, quite frankly. I don't see that there is today a climate of opinion which will go to that extreme. We have to look at the Southeast Asian example, and probably the Japanese. The Japanese for a long period had a different labor-management system.
So we have a problem, there is no doubt. Extreme rigidities in the labor market, inflexibility of the labor market, is not consistent in our achieving our goals in a world where demand conditions are changing so fast, technological conditions are changing so fast. But there are limitations for the time being. We don't have a broad-based consensus in our coalition for me to assert that I can move forward in a big way. But I do recognize that we should take credible action. Our colleagues who are in government in West Bengal . . . do appreciate the need for labor market flexibility. It is my task to carry conviction to our Left colleagues in Delhi. I haven't given up, and I am confident that when all things are considered I think the reform will have more broad-based support. Our coalition today represents nearly 70 percent of the Indian electorate, so we may be slow moving, but if we build a consensus, that will be far more durable than any other mechanism that I know of.

The Quarterly: That is encouraging about the West Bengal government. I understand that it is progressive on many labor issues, even though it is a Communist government.
Manmohan Singh: Even in areas of privatizations they are moving, and moving forward. Our role is to convince their national leadership that what is good for West Bengal can also be good for the rest of the country. I haven't given up hope. I have full confidence in the patriotism of our Left colleagues to believe that in the final analysis of what is good for India, they will also be on board.

The Quarterly: How will the government generate employment, particularly in light of making sure there are enough jobs for the youth coming into the workforce?
Manmohan Singh: Jobs have to be created in all sectors of our economy. Agriculture still accounts for 60 percent of our labor force, and I believe that we will need a second green revolution to increase production and productivity, and in the process, I hope, we will create more jobs. But essentially over a period of time, our salvation lies in getting people to move out of agriculture. Services today account for 50 percent of our GDP. There are lots of people who tell me that services cannot move far ahead of what's happening in manufacturing, and that worries me—this imbalance. I feel we have to do a lot more on manufacturing because, ultimately, services respond to what's happening in the production sector.
So outside agriculture, in manufacturing and services, we must create a lot more jobs. But that also means that we must ensure that our systems of general education and technical education are in line with the job requirements that a more modern manufacturing and a more modern services sector would require. We have to walk on two legs. We have to create conditions in which manufacturing and services—the economy outside agriculture—move and move fast enough. And at the same time the working force that is available must have skills which will fit the kind of jobs which will be in demand.

The Quarterly: What is the government doing to promote India as a manufacturing base, especially agribusiness and food processing, which must be important?
Manmohan Singh: Agribusiness and food processing are important parts of modernizing our economy, of modernizing our agriculture and moving into a phase where a more modernized agriculture helps not only farmers but also helps consumers. Now, I've talked to a large number of producers—people from Hindustan Lever and others—and they've been telling me what India needs most is a unified food law.8 We have just now prepared the bill, and it will be introduced in parliament. The other thing to move forward on this front is that we must have electricity in our rural areas, we must have cold-storage facilities. We have, for the next four to five years, a very ambitious plan to expand . . . the availability of electricity to all of our villages. I hope that that should bring about a new revolution in the handling of agribusiness.

The Quarterly: We've seen uncontrolled urbanization in many parts of the world, which really does not improve the standard of living. What is the plan to promote truly effective, productive urbanization as, by necessity, the rural population moves toward the urban centers?
Manmohan Singh: This has to be a fairly controlled operation. The premature migration of very large numbers of people from rural areas to urban areas can give rise to a lot of strains to the urban infrastructure, which can also create problems of crime—law-and-order problems. But we have to recognize that [urbanization] is the inevitable outcome of the processes of growth and the processes of modernization.
Our urban areas need a lot more attention in terms of investment. In my Independence Day speech yesterday,9 I pointed out that already about 30 percent of India's population lives in cities. In states like Maharashtra,10 40 to 45 percent of the population is in urban areas. I expect over the next 10 to 15 years that we will move to a situation where about 50 percent of our population will be in urban areas. We need new strategies to look at urban transportation systems, urban management of solid wastes, new sewerage systems.
This itself would require Herculean efforts of investment, but I don't believe that resources will be a constraint. Our statisticians now tell me that our savings rate has shot up in the last couple of years to about 27 to 28 percent of our GDP. And also we are a country where the proportion of young people to total population is increasing. All demographers tell me that if we can find productive jobs for this young labor force, that itself should bring about a significant increase in India's savings rate in the next five to ten years. If our savings rate goes up, let us say, in the next ten years, by 5 percent of GDP, we would have generated the resources for investment in the management of this new urban infrastructure that we need in order to make a success of our attempt at modernization and growth.

The Quarterly: What is India doing to make sure that its economic success continues, by building on both the primary-education system and the higher-education system? Related to that is health. The government spends very little on health and health infrastructure.
Manmohan Singh: You are right. As a nation, we should be doing more in both health and education. But our total expenditure on health, public and private, does not compare unfavorably with other Southeast Asian countries—about 6 percent of GDP. But the mix between the public and private spending is excessively in favor of private spending. Our public expenditure on health is less than 1 percent of GDP. There are neglected areas where the public sector has a major responsibility: for primary health care, rural health care. Our ambition, which we have set out in our Common Minimum Program, is for the next four or five years to raise the public spending on health as a proportion of GDP to at least 2 percent.
With regard to education, I think at the top we have an excellent superstructure. The IIMs and IITs,11 the regional engineering colleges, they have served us well. But ultimately, if the educational pyramid is not right there are limits to getting dividends. Therefore we are making, for the first time, the most determined effort to ensure that all our children—particularly children coming from disadvantaged families, particularly the girl child—in the next four or five years have the benefit of minimum primary schooling. But that will generate demand for upgrading the quality of our secondary schools. We have not given that much attention toward upgrading our secondary-school system, and that is our next step. After what we have done in the last one year, primary education is well looked after. What we have now in place is a system which will ensure that all our children who are of school-going age are in primary school. But the secondary-school system will require a major effort, and it worries me.
'We will attend to that because I believe empowering our people means empowering by investing more in their education and health'
When I look at countries like South Korea, all children who are of secondary-school-going age are in school; our children drop out even before they complete primary school. Therefore, yesterday, in my address to the nation, I laid a great deal of emphasis toward improving the quality of our education, both at the primary level and the secondary level. We will attend to that because I believe empowering our people means empowering by investing more in their education and health.
And as far as the system of higher education and research is concerned, I just appointed, under Sam Pitroda,12 a knowledge commission to look at what needs to be done, where we are, and where we ought to be. In the next one or two years, the knowledge sector will receive our attention to the extent that it deserves. I do recognize that India has to be the center, the hub of activity as far as the knowledge economy is concerned. We don't want to miss the chance.

The Quarterly: May I ask a somewhat difficult question? Whenever people discuss India, everyone can talk articulately about the changes that are needed. But in the end, the pace of implementation and actual results often lag behind. There isn't that kind of action bias that you would like to see in the country. Do you agree, and what are you doing to change this?
Manmohan Singh: I think you are right, but one must understand that economic policy and decision making do not function in a political vacuum. It takes a lot of time for us to take basic decisions. And furthermore, because we are a federal set-up, there are a lot of things that the central government does, but there are many things, like getting land, getting water, getting electricity—in all these matters the state government comes in, the local authority comes in. . . . From a political-management point of view, we cannot do without being a federal system, but I do recognize that at times it gives our system the label that it is slow moving. In a world in which technology is changing at such a fast pace, where demand conditions change very fast, we need to look at a more innovative mechanism to cut down on this rigmarole of many tiers of decision-making processes.
I am thinking of identifying areas where we need big thrusts forward. For example, steel is one sector where we are thinking about investing large amounts of money. Our own domestic steelmakers are very bullish in investment in this area. We've got the [South] Koreans involved in building a steel plant of 12 million tons' capacity. Right from the beginning the center and the state governments were working together to ensure that whatever milestones are agreed upon, those milestones were tracked—how they move forward, whether the work proceeds, if there are bottlenecks, to identify those bottlenecks and ensure that those bottlenecks are resolved. For all major projects, this is what I would like to do. It is my intention to set up a mechanism which would bring about a convergence in what the state governments do and what the central government does: a group of dedicated officers to work together to ensure that our three-tiered system of government does not become a bottleneck.

The Quarterly: What message would you like to give global managers as they think about India?
Manmohan Singh: If I have any message, it is that it is our ambition to integrate our country into the evolving global economy. We accept the logic of globalization. We recognize that globalization offers us enormous opportunities in the race to leapfrog in development processes. It also obliges us to set in motion processes which would minimize its risks.
I think, overall, India is today on the move. The economic reforms that our salvation lies in—operating an open society, political system, an open economy, economic system—this has widespread support. Fifteen years ago, a Congress government launched this economic-liberalization program, integrating India into the world economy. Since then, three governments have come and gone, but the direction of economic policy has been, year after year, toward more liberalization. The pace may be slow, may not be as quick as some people would want, but the direction is unmistakable. India's future lies in being an open society, an open polity, a functioning democracy respecting all fundamental human freedoms, accepting the rule of law and, at the same time, to emerge as a successful, internationally competitive market economy.
About the Authors
Rajat Gupta is a past managing director of McKinsey and a director in the Stamford office.
Notes
1Formerly Bombay.
2Formerly Madras.
3Formerly Calcutta.
4A reform agenda agreed to by the partners in the current coalition government.
5The navratnas, or "crown jewels," are India's nine largest public-sector companies.
6On the day of the interview, the Indian Finance Ministry announced that 13 profitable public-sector companies that had been slated for privatization would be taken off the list.
7The organized sector essentially consists of companies that employ more than 10 workers.
8This bill would streamline the approval process for establishing food-processing plants.
9The full text of the prime minister's speech can be found online.
10Includes Mumbai.
11Indian Institutes of Management and Indian Institutes of Technology, respectively.
12Founder and CEO of the telecommunications company C-SAM.

Courtship Ideas of South Asians Get a U.S. Touch

New York Times
August 23, 2005
Courtship Ideas of South Asians Get a U.S. Touch
By GINIA BELLAFANTE

At 10 a.m. one Saturday in July, a few weeks after he
finished his medical residency at Brown University,
Ronak Shah married Kunal Patel, another doctor, in a
union that embraced every ritual of the Hindu nuptial
script.

Dr. Shah arrived at the Hanover Marriott in Whippany,
N.J., by horse and carriage. He wore a traditional
sherwani. And he greeted, before all others, his
bride's mother, in a gesture that signified the
importance of parental engineering in Indian marriage.

But for Dr. Shah and Dr. Patel, both 28, and thousands
of young Indians raised in the United States, that
engineering is undergoing a change. The venerable
South Asian tradition of arranged marriages has taken
on an American reinvention. Dr. Patel's mother and
father had a hand in their daughter's selection. They
were in touch with friends, cousins and cousins of
cousins for suggestions about whom she should marry.
But Dr. Patel was free to reject them all.

Only over dinner with Dr. Shah - her ninth suitor -
did she finally begin a courtship that was fueled as
much by chemical attraction as by familial interest.
Her marriage, as some young Indians refer to it, was
"love-cum-arranged."

Less than a decade ago, the decision about whom a
South Asian woman here might marry was still often
left to her parents, the prospective bride's
individual preference for tall dentists or
contemplative artists notwithstanding. But recently,
purely arranged marriage has evolved into a new
culture of what might be called "assisted" marriage,
in which parents are free to arrange all they like -
allowing their sons and daughters choice among
nominees screened for caste, lineage and geography,
among other measures - and giving the children veto
power.

These young people may have come of age in an America
of "Moonstruck" and "Dawson's Creek," but in many
cases they have not completely accepted the Western
model of romantic attachment. Indeed, some of the
impetus for assisted marriage is coming from young
people themselves - men and women who have delayed
marriage into their late 20's and early 30's, said
Ayesha Hakki, the editor of Bibi, a South Asian bridal
and fashion magazine based in New Jersey.

"That has been the most remarkable trend," Ms. Hakki
said, citing the example of a male acquaintance, who,
after dating on his own, turned to his parents for
guidance.

As Madhulika Khandelwal, a historian who has studied
Indians here, said, "Young people don't want to make
individual decisions alone."

The Patel-Shah union was instigated by the chance
encounter two years ago of Dr. Shah's mother and Dr.
Patel's at Famous Pizza, a restaurant in Queens that
is favored by Indian immigrants. Friends from the town
of Nadiad in India, the two had not seen each other in
30 years. Their conversation moved to the subject of
their still-single children.

In large part, Ms. Khandelwal said, the transition
from formally arranged marriage reflects social
changes in India itself, where assisted marriage is
now common among the educated, urban middle class.
That is because, she said, there are fewer
extended-family living arrangements and more women
pursuing higher education.

The purpose of assisted marriage here is not simply to
preserve Indian cultural identity, but more pointedly
to maintain class, religious and regional identities
in a place where they might easily be diffused, those
who have studied the Indian diaspora say. When Mona
Mahajan, a recent graduate of Harvard Business School
from New Jersey, married an Indian she met on her own,
she was the first in five generations of her family
not to have wed a Punjabi.

Arranged and assisted marriage have left Indians with
the lowest rate of intermarriage of any major
immigrant group in the United States. Among South
Asian men and women here in their 20's and 30's, the
vast majority of whom are foreign born, fewer than 10
percent marry outside their ethnic group, according to
an analysis of the Census Bureau's 2003 American
Community Survey conducted for this article. "In the
beginning I was pretty against all of this," Dr. Patel
said of this newer approach. "Growing up here, you
feel that you're supposed to fall in love, but once
you figure out that everyone goes on blind dates it
doesn't feel quite as strange."

Among Indian parents here who are traditionally
inclined, many begin to seek husbands when their
daughters are 22 or 23, but the search may be
forestalled if the woman is pursuing a graduate
degree, Indian women report. Men begin looking for
wives with their families' help at about age 26;
within more liberal households, children often marry
those they meet on their own.

Preceding any planned meeting is the exchange of the
all important "bio-data" between families, the term
used for a portfolio with the potential bride or
groom's profile.

The embrace of more traditional habits is apparent in
other ways. Weddings are often elaborate and last
three or four days. Families of the betrothed often
still consult a Hindu astrologer who schedules wedding
ceremonies according to the stars. When Anamika
Tavathia, 24, was engaged to a young Indian she met in
college, his family visited hers to propose on his
behalf and the priest determined they should marry on
June 26 of this year between 10:30 and 11 a.m.

This fall is expected to be an unusually busy wedding
season in Indian communities, because many couples
postponed weddings last year when many days were
deemed inauspicious.

Royal Albert Palace, a five-year-old catering facility
in Woodbridge, N.J., with a 21-foot statue of a former
deputy prime minister of India out front, has become
the locus for Indian weddings, and it was there, at a
wedding last month, that two young women discussed
assisted marriage.

"My dad's parents didn't even see each other until the
day they were married," said Kesha Patel, 25, who came
to the United States as a child and is looking for
someone, with her family's help. "So when I think
about that, I'm grateful for the system we have."

Kesha Patel has taken trips to India to meet
prospective partners, and her family has arranged for
her to meet men here, as well.

"Sometimes you'll get the bio-data and it will be
great, and then when you meet the person, you're
disappointed," she said. "My parents won't understand,
they'll say, 'But he's from a good family, he's a
doctor, he's a doctor, he's a doctor.' And I'll say,
'But he's short.' "

Alienating one's parents is anathema to Indian
culture, and most young people wish to avoid doing so
through marriage. Four years ago, Preet Singh, a
28-year-old teacher in Chicago, fell in love with a
woman seven years his senior and not a Sikh. He hoped
to marry her and live with her in his parents' home.

"My mother might have accepted the marriage but she
would not have lived with us," he said. "It was one of
the nastiest breakups of all because that person
helped me mature into a man." Not long ago, Mr.
Singh's sisters posted his profile on an Indian
matrimonial Web site, and he will marry this fall.

Part of his parents' displeasure with the previous
relationship was the fact that he was dating at all.
Though a Bibi magazine survey conducted three years
ago revealed that the majority of married men and
women questioned had had sex before marriage, dating,
as Mr. Singh put it, "does not exist in our culture."
This view leaves parents encouraging children to
resolve the marriage question quickly.

The parents of Leena Singh waited until she was older
than 25 and had earned a master's degree in
mathematics and an M.B.A. to find a husband. Ms.
Singh's father eventually found someone to her liking,
Sanjeev Tavathia, a young man studying engineering in
Iowa. They met in the company of relatives, then went
out alone. Back in San Diego, where she was living
with her parents, she called Mr. Tavathia and told him
she was ready for marriage. He said he was 90 percent
certain. They married several months later.

"From the beginning, I felt there was a physical
chemistry," Ms. Singh said, "but it took years to
develop a mature bond, and I guess you could call that
love."

Despite its groundings in pragmatism, assisted
marriage is spoken about among some young Indians in
highly romanticized terms - implicit in it is the
cinematic idea that immediate attraction should result
in an eternity spent together.

Kesha Petal's sister married a man to whom she was
introduced through her aunts. She decided to marry him
the day after they met. "A lot of my friends," Kesha
Petal said, her eyes gleaming, "tell me you know in an
instant."

India's Promise?

India's Promise?
Conflicting prospects for the world's most populous democracy

by Devesh Kapur


Things have never been as good for India as they appear to be today. Its economy has grown by nearly 6 percent annually for the past quarter-century—virtually unprecedented for any sizable democratic polity. In contrast to the near-famine conditions of the mid 1960s, the country sits on a mountain of grain surpluses and poverty levels have almost halved since that time. Fertility rates, too, have nearly halved during the past few decades, while literacy and health indicators have steadily climbed from their erstwhile dismal levels. This sharply improved economic performance is rooted in a burgeoning middle class, estimated to be almost one-quarter-billion people.

During the 1990s, India’s democracy faced severe challenges from the forces of Hindu nationalism, but that threat, too, has ebbed in recent years. Following its loss in the 2004 general elections, the Hindu nationalist Bharatiya Janata Party (BJP—Indian People’s Party) is in disarray. While the events of the 1990s engendered trepidation in India’s religious minorities about the country’s commitment to secularism, current political conditions appear to allay those fears. Today, for the first time, this country in which four-fifths of the population is Hindu has a Sikh prime minister, a Sikh head of the army, a Muslim president, and, as its most powerful political personality, a Catholic-born Italian Indian.

Internationally, the nation is thriving as well. India is being courted by the world’s major powers—a sharp contrast to the pariah status that it earned following the nuclear tests of 1998. China’s spectacular growth has raised apprehensions among other countries in the region, thus leading both the United States and Japan to court India more assiduously. In turn, China has tried to strengthen its relations with India to preempt Indian involvement in any alliance against it. Trade with China has grown exponentially—from less than $1 billion a decade ago to nearly $14 billion in 2004. Chinese premier Wen Jiabao’s recent visit to India was a remarkable testimony to improved relations between the two neighboring giants, given their strained relations since India’s humiliating defeat by China in 1962. Even neighboring Pakistan has been forced to rethink its relationship with India. In 2002, the countries’ dealings were at such a low ebb that almost one million troops faced off against each other. But with the larger powers courting India, and facing a very different international environment, this long-strained relationship has begun to thaw. The cross-border movement of people across divided Kashmir that commenced this April has raised cautious hopes of progress on an issue that has bedeviled the region for nearly six decades.

There has been a singular change of attitude within India as well. Its elites, basking in the glow of international attention, are convinced that their giant nation’s time has finally arrived. The unprecedented self-assuredness extends beyond the business class to a large number of the young urban educated, who are riding a wave of self-confidence generated by India’s information-technology (IT) boom.

The exceptional confluence of good news—economic, political, international, internal—might seem to indicate that India’s moment has finally arrived. Or has it? Is India’s future akin to an Asian European Union—a liberal, democratic, multinational polity (albeit with lower levels of income)? Or is Brazil the more likely model—a giant system that has become wealthier but remains extremely unequal, and is afflicted by high levels of endemic violence? Or could India go the bleak way of Indonesia—a sprawling but weak polity led by governments with ostensible power but little authority; one that, despite its size, is likely to continue to languish in the minor leagues?

It has long been claimed that everything one can say about India is true—and so is the opposite. Indeed, India, a land of severe paradoxes, straddles several centuries simultaneously. While parts of rural India have agricultural practices akin to those of medieval Europe, its globally competitive IT firms are at the cutting edge of technology. Today, India produces more engineers than Europe and the United States combined, yet the country has the world’s largest number of illiterate citizens. It has a growing and sophisticated nuclear-missile arsenal, yet a mounting Maoist insurgency poses a serious security threat in nearly one-quarter of India’s 600-odd administrative divisions (districts). Despite substantial food-grain surpluses, India harbors the world’s largest concentration of undernourished people. Even as “health tourism” is flourishing, driven by relatively cheap world-class tertiary-care facilities, India’s health indicators are little better than those of sub-Saharan Africa. Although cheap, Indian-manufactured AIDS-cocktail drugs are now widely available in Africa, they are scarcely accessible to the more than five million AIDS patients in India itself—now the largest number in any one country. India’s intellectuals and politicians rail against the evils of privatization, yet the country is, de facto, one of the most privatized economies in the world: virtually anything connected to the government—from state jobs to ministerships, from officials’ transfers to access to subsidized state services—can be bought. The Indian state resembles a gigantic eBay—anything that can be sold, is. Even as minorities are found at the pinnacles of political power, neither accountability nor justice has been rendered for bloody state-directed anti-minority riots—whether against Sikhs in 1984 or Muslims in 1992-93 and 2002.

Perhaps the biggest paradox about India—one that goes virtually unnoticed today—is that the country has remained democratic despite overwhelming odds. India’s democratic endurance, reaching back to its founding as an extremely poor multinational polity that was overwhelmingly rural and largely illiterate, is one of the political miracles of the twentieth century. That miracle is a testimony to the institutional foundations laid by the country’s nationalist movement. But these foundations have been corroding in recent years. The sheer venality of contemporary India’s political class cannot be exaggerated.

There are several reasons for this worrisome state of affairs: a lack of accountability and sanctions for even the most egregious behavior is perhaps the most critical factor. The principal mechanism of accountability is elections—an instrument with inherent limitations in any democracy. In India elections provide an even slighter check for several reasons.

First, despite having one of the highest turnover rates of any democracy (incumbents have a less than even chance of being reelected), the pool of candidates, many with criminal cases, offers voters a choice between Tweedledum and Tweedledee. Second, the rising salience of identity politics in recent decades has privileged caste or religion over all other attributes of a candidate. Third, the sharp political cleavages between Hindu nationalists and secular political groups since the early 1990s have led the latter to accommodate and indulge the actions of any political faction, however venal, as long as its adherents claimed to be secular—paralleling the deeply deleterious effects of similar accommodations made by governments around the world in the struggle against terrorism. Fourth, there has been a deep decline in political parties as institutions. Most are run as family holding companies, epitomized by India’s Congress Party. Virtually all of the scores of political parties in the world’s largest democracy have the most anti-democratic internal practices. The exceptions are the two parties at the polar extremes of the ideological spectrum: the Communists and the Hindu nationalists. These factors, when combined with India’s British-style parliamentary system, have enhanced the power of individual elected representatives and led to a profusion of political parties in an era of coalition governments. Candidates for elections often buy tickets for electoral contests from party leaders—and if they are unsuccessful, shop elsewhere or start their own parties.

As a result, politics in India is a thriving business. Even the most obvious and blatant cases of corruption are not punished by voters, largely because of the force of identity politics. Despite the fact that India’s courts, in particular the Supreme Court—one of the most independent and powerful courts in the world—have pressed for investigations of high-level corruption, politicians virtually never go to jail. Even if they do, they continue to run their activities with impunity. In states such as Bihar, politicians used to hire criminals to strong-arm rivals and herd voters to the polls. Now criminals have instead decided to get into politics themselves and have become members of parliament, thereby obtaining official police security to boot! India’s police forces are under the same politicians’ complete control. Little wonder that they are so demoralized and brutal. While Indian elites become indignant about the horrors of Abu Ghraib, similar practices occur in their own country daily. The state of affairs in the Central Bureau of Investigation—the key federal agency charged with pursuing corruption—is an emblem of the deep disarray in Indian institutions. The bureau has become so politicized that it is unable to prosecute successfully even the most blatant legal transgressions by India’s politicians and bureaucrats.

From courts that take decades to settle cases, to police and prison systems that are brutal and corrupt, to lawyers who periodically go on strike and shut down the courts, the process of justice in India is itself the most potent punishment. Big business buys itself protection (when journalists cannot be bought off, they can be physically threatened), so it is rare for white-collar crime to be successfully prosecuted. In an atmosphere where everyone is deemed corrupt, state functionaries prefer to drag out and lose cases rather than try to arrive at a settlement, because the latter course leaves them exposed to accusations of bribery. For the same reason, honest officials are reluctant to make decisions lest they be accused of acting in “undue haste”—resulting in a state that has been described as having the engine of a bullock cart and the brakes of a Rolls Royce.

At the core of the problems that plague India lies the Indian state itself. India’s elite bureaucracy, once a bastion of probity, has become politicized to such an extent that a minister reportedly claimed recently that, compared to the past, bureaucrats have become so complaisant that when they are simply asked to bend, they now crawl. Transfers to undesirable postings are the key mechanism to ensure bureaucratic pliability: if honest officials continue to be a “problem,” false charges are launched against them. This behavior has adversely affected both the quality of recruitment and the capabilities of the bureaucracy, even as the demands of the economy have become more complex. The problems stemming from an unaccountable polity and bureaucracy are, of course, compounded by a citizenry whose social divisions hamper collective action.

India’s statist model of development created vast patronage possibilities, pursued by powerful coalitions among politicians, bureaucrats, big business, and the rural elite. This dominant nexus was supposedly an important target of the economic liberalization launched in 1991 by the Congress government. Yet the resulting economic dynamism notwithstanding, systemic corruption has, if anything, increased. The economic prominence of the state does not necessarily decline with liberalization: its locus simply shifts from production to regulation. From taxation to land-development decisions in a rapidly growing, land-scarce economy, from state jobs to agricultural subsidies, and even through the process of obtaining a passport, possibilities for patronage and graft are ubiquitous. What is deeply disturbing in the Indian case is the shift in state corruption from “grease money” to outright extortion, paralleling what occurred in Indonesia in the waning years of the Suharto regime.

India’s policymakers and politicians of all hues and stripes have learned—like many of their counterparts around the world—the virtues of a Janus-faced posture toward reforms. Essentially, this entails presenting a friendly persona to foreign investors, who will then perceive the Indian leaders as “reformists,” thereby ensuring them much greater leeway in domestic matters. Indian politics has become much like options trading: politicians can undertake reckless and egregious behavior to achieve or retain power. If they succeed, they gain personally; if they don’t, the losses are inflicted on society at large. Certainly the Congress Party acted this way, starting with Indira Gandhi’s emergency suspension of civil rights in 1975, followed by the anti-Sikh riots in Delhi in 1984, and including electoral fraud in Kashmir over the decades. The BJP simply continued this tradition in such actions as the destruction of the Babri Masjid mosque in 1992-1993 and the horrific Gujarat riots in 2002. (Although there have been moves within the BJP to remove the chief minister of Gujarat, widely regarded as the architect of the 2002 riots, the motivation is not shame but mere self-interest: he is regarded as one of the politicians least open to bribes, so fellow party members feel he has made it more difficult for them to make money.)

Even after unexpectedly regaining power in 2004, the Congress Party has not desisted from constitutional improprieties. Contravening all constitutional norms, it precipitated crises by trying to topple opposition-led governments in state elections. Although these were averted at the last minute, they underscored the larger systemic risk that brinkmanship and partisanship could easily reach a point of no return. That this happened under a prime minister whose integrity and intellectual acumen are considered beyond reproach is particularly remarkable—if Manmohan Singh did not know about the unconstitutional intrigues of his own party, it only underscores his own political weakness; and if he did, then the integrity of India’s political system is even more suspect.

The challenges arising from such a hollowing out of the Indian state should not be underestimated. As the quality of public services stagnates and in many cases declines, elites have de facto seceded from the state. From education to electric power, from phones to transport, from security to the postal system, from water to sanitation, India’s growing middle class is exiting public services—and democratic politics as well. As a consequence, a powerful voice for systemic reform and change is being lost. With India’s income inequalities increasing, as one part of society confidently integrates into a global economy while the other, much larger, part limps along, India is exchanging one set of inequalities—historic, deep-rooted, and caste-based—for another that is class-based and equally as troubling. These inequalities increase the support for populist demagoguery. At the same time, the state’s weakness in providing essential services has created space for more extremist groups to fill in the gap, whether the Maoist Naxalites on the left or the Hindu nationalist Rashtriya Swayamsevak Sangh on the right.
Critics of liberalization in India incessantly harp on the necessity of increasing national government expenditures on health and education. They are loath to admit that primary education and health are principally the responsibilities of the state authorities. Even the Marxist government in power in the state of West Bengal for more than a quarter century has failed to make much progress in providing universal primary health and education (the one realm where communist governments have had relative success). The reason is simple: an unwillingness to enforce the basics of public administration by ensuring that well-paid government employees—from health workers who don’t show up at clinics to teachers who don’t show up to teach—do their jobs, because those same civil servants are an intrinsic part of the ruling party.

The inability of the Indian political system to grapple with the many long-term challenges facing the county bodes ill for its future. Despite its high economic growth rate, India continues to run one of the world’s largest fiscal deficits more than a decade after liberalization. This fiscal “overgrazing” is a classic tragedy of the commons, as individual parties and politicians benefit while the costs are shared by future generations. These expenditures are largely directed to a pampered government bureaucracy, rather than to long-term investments or social supports for the poor. India’s human-development indicators continue to be abysmal for a country aspiring to become a great power. Growing water scarcities foreshadow greater internal conflicts, yet politicians continue to insist on free irrigation for water-guzzling crops such as sugarcane and rice. India’s urban infrastructure is creaking due to low public investment—and this in a country that is one of the least urbanized in the world. But instead of investing in urban public-transport systems, investments facilitating private automobiles are favored. Although India has very low per-capita consumption of electric power, shortages are frequent—and yet free power continues to be promised to farmers. Amid all these alarming trends, there is little indication that the political class’s preoccupation with grabbing and maintaining power will change, provoking further dangerous neglect of India’s real challenges.

It could be argued that fears concerning the troubling state of Indian governance are misplaced. After all, in the nearly six decades since independence, analysts have frequently underestimated India’s resilience. The diverse face of the current national leadership can be taken as an encouraging sign, for example. The rapidly growing economy is creating new interest groups. Just as, a century ago, the excesses of patronage politics and raw capitalism created a groundswell of support for change in the United States, India has many actors who could do the same. Both a vibrant civil society and a dynamic private sector are promising. Indian politics is also likely to be invigorated as constitutional amendments passed a decade ago, reserving one-third of all elected seats in local governments for women, gradually create a new and potentially transformative political leadership.

But Indonesia is a sobering reminder that even decades of growth are no guarantee against sharp and debilitating reversals. Even given the resiliency of democracies, beneath the veneer of India’s middle-class success and international recognition, its governing systems are severely stressed. Hundreds of millions of its citizens continue to be marginalized. India cannot emerge as a major power unless it urgently addresses state reforms, in particular by holding all state functionaries much more accountable for their actions than is currently the case. When the very source of the problem is its solution, the challenge is that much more difficult. Reform is possible, but self-reform—the requirement here—is always the most difficult to effect.

Can India fulfill its democratic promise, its destiny as its founding fathers saw it, in the years ahead? If that happens, it will affect not only the fate of one-sixth of humanity, but will also address one of the most challenging issues facing the global polity: whether poor, multinational, multiethnic states can emerge as liberal, prosperous democracies in the twenty-first century.

Devesh Kapur, Danziger associate professor of government through the end of the 2004-2005 academic year, is moving to the University of Texas at Austin this summer as associate professor of government and Asian studies

The Art of Outsourcing

The Art of Outsourcing

By C.K. PRAHALAD
Commemtary
The Wall Street Journal
June 8, 2005; Page A14

In the very partisan political climate in Washington, what is the one issue that is likely to bring Democrats and Republicans together? The fact that Sens. Charles Schumer (D., N.Y.) and Lindsey Graham (R., S.C.) will co-sponsor a China Currency Act is quite extraordinary. Their concerns and their solutions to the growth of imports from China -- be it textiles or consumer electronics -- are leading the U.S. to a more protectionist posture.

Export of service jobs to India is also a cause for politicians' concern, and the "Exporting of America" theme is never short of congressional attention. The assumption behind this fearful perspective is simple: Greedy managers in global firms are exporting jobs to cheaper locations without regard to the harm this causes to displaced U.S. workers.

I suggest that we look at this phenomenon with a different set of lenses, highlighting the emerging pattern of globalization and the new demands it imposes on global firms. If American firms are to maintain their competitive edge now and in the future, they need to get in front of these changes and direct them, not become isolationists.

The outsourcing of lucrative information technology and high-end manufacturing work is not new, at least between U.S. companies. EDS, IBM, CSC and Accenture built their businesses on outsourcing. Kodak outsourced all IT work to IBM in 1989. Xerox outsourced it to EDS in 1994. The government has been outsourcing work to CSC from the early 1980s. The motivation for outsourcers was always the same -- reducing capital expenditures and operating costs, accessing competence, and focusing on their core activities. Off-shoring of work to an overseas manufacturing facility is also not new. For over 30 years, U.S. multinationals have "off-shored" their manufacturing and R&D facilities in semiconductors, computing, chemicals and pharmaceuticals to the U.K., Germany, France, Ireland and, more recently, to China and India. Flextronics and Solectron built their business on outsourcing of high-volume electronics manufacturing by U.S. firms. So outsourcing to specialized vendors and off-shoring (internally or to an outside vendor) is accepted practice. Why then, is this debate happening now?

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The current outsourcing of knowledge work is a new variant of the long history of outsourcing. Traditionally, EDS took over the entire IT work of a firm including most of the employees. In the current variation of outsourcing, driven by digitization and inexpensive telecommunications and ubiquitous connectivity, parts of work can be parceled out for remote delivery to a vendor. Key management processes can be fragmented. For example, sales-transaction processing and call centers can be separated from the entire sales and customer service activity and outsourced. Investment bankers can isolate routine analysis of a firm's performance from their overall investment recommendation. So, too, can patent search from patent application, making of slides from a customer presentation, developing CAD drawings from purchasing decisions, or market research from product development.

It is this ability to fragment complex processes into their components -- as well as the search for the best and lowest-cost talent to perform it -- that is changing the nature of competitiveness. Also new is the fact that the work can be done almost in "real time" remotely. While work is done 10,000 miles away, Office Tiger, an investments analysis firm in Chennai, India, claims that it can deliver a routine performance analysis of a firm in less than three hours. It is the granularity of the effort that can be outsourced that allows customers to be more willing to experiment. Today, outsourcing is not a complex, board-level decision, unlike the outsourcing of all IT work during the '80s and early '90s.

The current phase of outsourcing will lead to multiple streams of competitive advantage for U.S. companies. Cost is one of them, and will remain at the core of the phenomenon. Quality is another. India has more than 40 software houses with a quality ranking of CMM 4 or 5. There are other benefits to outsourcing, too. Because remote development and delivery demands clear documentation, the process capabilities of both the customer and the vendor improve. Most often, for outsourcing to work, the U.S. customers have to get their legacy processes cleaned up. Many firms have found that outsourcing helps in better documentation of internal processes. Speed of reaction is yet another source of advantage. As vendors and customers work in time zones with a nine- to 12-hour difference, rapid response is possible. Finally, outsourcing allows firms to access a higher quality of skilled people for developing analytics. In just two years (2002-2003), U.S. firms conducting R&D in India have filed for over 900 patents.

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The real debate ought to center around the best way for U.S. firms to import competitiveness -- not "export jobs." Firms compete across the globe -- Motorola against Nokia and Samsung, GE against Siemens, GM against Toyota, and Intel against AMD and TI. Global competition is primarily about inter-firm, not inter-country, rivalry.

Global firms are not just looking for the next source of competitiveness. They are also looking for new markets to grow. The largest markets for cellphones today are in China and India. India is adding nearly two million phones per month. China is one of the largest markets for Caterpillar and is emerging as a large market for cars. Yes, India can be a source of competition for "well-paying jobs." But it is also a growing market for Dell computers, Microsoft software, Motorola cellphones, Whirlpool appliances, and Oracle databases. For example, while technicians work at these remote call centers and other "outsourced" operations, the hardware and software tools they use are made by U.S. firms. Globalization is creating a new form of interdependence. To focus on "independence" and "self-sufficiency" in this era is foolhardy.

The crux of the debate needs to be reframed. If global firms have to compete effectively for global markets as well as retain their position in established markets, they must have the ability to improve their cost, quality, time-to-market and capacity to innovate. This requires a continual search for talent and a willingness to change the internal processes of managing to keep ahead of competition. The current wave of outsourcing is motivated by this desire to innovate ahead of competition.

The longer-term prognosis for the developed world demands that global firms learn to source talent from developing countries such as China and India. Given the demographics, it is estimated that the U.S. will be unable to fill more than a million jobs by 2010. Aging populations and worker shortage are likely to be major problems in Germany, France, the U.K. and Japan. Either one allows for more immigration to fill jobs or rapidly learns to outsource work and have it done remotely in India, China, Eastern Europe, Russia or the Philippines. The firms that learn to innovate quickly by managing differently -- with granular partitioning of workflow and efficient coordination of the fragmented parts -- will retain competitive advantage.

There was a time in the 1980s when Americans fretted about Japanese competitors and how they would take over all the key industries in the U.S. As we look back, the firms and industries which were willing to adapt and innovate have done very well: IBM, Intel, H-P, GE, Dell and Motorola have not disappeared. They are still leaders in their fields. All of them access global talent to retain their competitiveness. Consequently, the key question for U.S. firms should be: How are we going to leverage the talent and markets in China and India to enhance our competitive advantage world-wide?

The current outsourcing phenomenon is the start of a new pattern of innovation in the way we manage. The ability to fragment complex management processes and reintegrate them into the whole is a new capability. It allows us, in the short term, to take advantage of the talent outside the U.S. In the longer term, it allows us to cope creatively with the emerging labor shortage caused by an aging population in developed markets. The time to learn to manage with a global system of knowledge, products, services and component vendors is now. We should celebrate the process that imports competitiveness and creates new jobs. Fear is for losers -- and for Lou Dobbs.

Mr. Prahalad is the Harvey C. Fruehauf professor of Corporate Strategy at the Ross School of Business at the University of Michigan. He is also chairman of The Next Practice, and the author, most recently, of "The Fortune at the Bottom of the Pyramid: Eradicating Poverty Through Profits" (Wharton, 2004)