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September - 2007 - issue > Cover Feature
A richer future for India?
Vivek Ranadive
Tuesday, September 4, 2007
It is no secret that India has experienced impressive growth in the last decade, as the global marketplace has driven demand for IT and business process outsourcing. While the Indian economy has made real progress, the lure of cheap developer talent will not be enough to sustain the ongoing growth that could truly enrich the country’s future. Banking on the spoils of labor cost arbitrage can only take India so far and with 40 million people looking for work and an estimated 35 million more poised to join the labor force during the next three years, economic progress can’t afford to stall. To replicate and build on the successes of its outsourcing industry, India’s leaders must lower barriers to trade and more importantly, encourage new levels of entrepreneurship, capitalism, risk-taking, and creativity.

A richer future for India means crossing the canyon from arbitrage to innovation. Look at the example of Japan’s beginning in the 1960s. The country jump-started its post-war economy by making cheap knock-offs of U.S. goods. Yet it had the foresight to move beyond this strategy to become the world-class innovator in manufacturing and electronics that it is known as today. India would do well to learn from this example. Four things need to happen to ensure that the stage is set for a more innovative, dynamic, and competitive India:

Loosening up of bureaucracy.
At the end of the day, innovation can only spring forth in an open, flexible, and uninhibited market. The frustrations of dealing with India’s large and cumbersome bureaucracy are well known. Foreign investors and business travelers are often daunted by the seemingly endless amount of red tape they must wade through, while Indian businesses face countless rules and regulations. It is incongruous to think that what might take a single week to accomplish in the U.S., such as starting up a company, could take in excess of six months to a year in India. To compete as a true global player, India’s system needs to change. A more streamlined and open system will encourage investment, capital formation, reduce “brain drain” (i.e., top talent moving elsewhere to bring their ideas to fruition), and result in a more dynamic leading-edge marketplace.

Creating world-class infrastructure.
No economy can develop and flourish without the proper infrastructure to support it. Today, India’s business environment is hobbled by congestion, poor roads, and lack of reliable power and clean water. Yet the government still under-invests in these areas. This deficit is so corrosive that it could eat away at India’s potential prosperity – recent examples that come to mind are the safety crisis in Gurgaon and the decision by Intel to build their next chip manufacturing facility in Vietnam in preference over India. Encouraging investment in the country’s infrastructure by the public, private, and business sectors alike to build modern highways, bridges, and airports is a must. This strategy will only spur an increase in local and ultimately foreign consumption of goods and services, which in turn will create more business opportunities and growth for the country.

A cultural shift.
Traditionally, India is not a risk taking culture. To build on its economic momentum and continually aim higher, India will need to take chances on new opportunities and ideas. For this to happen, everything must dramatically evolve – from the education system to the cultural mindset. While India has a solid education system, it is much too focused on teaching students rote memorization and how to be good technocrats. India’s educational institutions need to do a better job of fostering entrepreneurial and leadership skills. Also embracing U.S.-style venture capitalism is an important step to becoming a more entrepreneurial market. VCs have become synonymous with technology startups for a reason: they serve as a vital financial resource for early stage innovation. If India is to build a true ecosystem of entrepreneurship and innovation, it will need to impart problem solving skills and creative business concepts in addition to its current technical scholastic training, as well as solicit venture capital investment and cultivate homegrown VC firms.

Fostering an indigenous market.
Like Japan, India needs to foster a consumer market that promotes people to buy more. If no local market exists and a country is solely reliant on export, as India has done with labor cost arbitrage, then innovation will cease to exist. India could be more successful if marketers were encouraged to adapt faster to new trends driven by heightened local growth consumption. This indigenous market could then be used as a springboard for developing new product innovations. The National Council for Applied Economic Research estimates that by 2010 there will be more than 170 million families earning over Rs 200,000. As the chasm between the rich and the poor diminishes creating a stronger and larger middle class, we will witness the emergence of this vital indigenous market. And that in turn means greater consumption, productivity and growth.

India should be applauded for the huge strides it has made recently. Over the past year alone, the economy has grown by an impressive 9.2 percent, but now the bar is set even higher. With the right conditions and infrastructure in place, I am optimistic that the country can be primed for continued momentum down its current high-growth path and outpace China. It’s also quite possible to expect incomes to triple over the next two decades, and to see the country climb from its position as the twelfth-largest consumer market today to one of the top five by 2025.

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