India’s Struggle to Develop, Part 1

Stephen DeAngelis

March 5, 2010

This is the first in a 3-part series about development in India. French scholar Romaine Rolland once remarked, “If there is one place on the face of earth where all the dreams of living men have found a home from the very earliest days when man began the dream of existence, it is India!” Yet for all its history and all its promise, India remains an enigma. India wants to step aggressively into the future, but it is having difficulty doing so because one of its feet is firmly planted in the past. History should be a platform on which to build rather than an anchor that holds a country in place. There have been a number of articles written about India’s future. Some articles trumpet the promise of a better future, while others detail the challenges holding it back. For example, in BusinessWeek, Mehul Srivastava asks “What’s Holding India Back?” [19 October 2009 print issue]. He reports that “business is battling farmers over land, putting $98 billion in investments—and an industrial revolution—on hold.” He begins his article with the tale of a farmer who asks, “If I don’t want to sell [my land], do I not have the right to say no?” Srivastava continues:

“The answer to that question may determine whether India will see a new industrial revolution, one broad enough to provide the jobs needed to lift millions out of poverty. Mahapatra’s property is part of a 4,000-acre parcel that the government of Orissa state five years ago promised to steelmaker Posco. The South Korean giant had hoped it would be home to India’s biggest steel mill, a $12 billion behemoth with its own port on the Bay of Bengal. So far, Posco hasn’t even managed to build a fence around the site, as Mahapatra and thousands of others have battled police, once even taking Posco workers hostage for a few hours. Across India, similar struggles are holding back nearly 200 proposed factories, railroads, highways, and other projects. Add it up and you’ll find that some $98 billion in investment is in limbo, the Association of Indian Chambers of Commerce estimates.”

Acquiring private property to pursue government purposes is a touchy subject regardless of the country involved. Srivastava reports that according to Indian law, the answer to the farmer’s question is clear: “He doesn’t have the right to say no once the state has decided to acquire his land.” So what’s holding up development? According to Srivastava, the answer can be summed up in two words: political reality. He continues:

“Under Indian reality, there’s not much Posco or the government can do if [the farmer] stays put. Politicians hate the idea of evicting voters, and riots have broken out when surveyors show up with measuring gear. In [the farmer]’s village, locals stand guard at a gate they erected, ready to fight any effort to move them out. … If these problems can’t be resolved, India will be hard-pressed to create the kind of sustainable economic growth enjoyed by its giant neighbor, China. Some 280 million Chinese work in factories; fewer than 45 million Indians do so, and India’s industrial output is about the same as Spain’s. ‘People who’ve gotten a little too excited about the India story seem to have forgotten that without solving a basic issue like land, it’s difficult to see the country having any sort of industrial revolution,’ says Robert Prior-Wandesforde, senior Asia economist at bank HSBC.”

Land is important to India’s poor because, as Srivastava reports, “some 550 million farmers … toil in conditions little changed for centuries.” Two things seem to be keeping farmers from cooperating with the government: fairness and fear. The government has offered to provide small plots elsewhere for displaced farmers, “but never more than five acres, regardless of the amount of land acquired by the government.” The government has also offered “employment for one member of the family, up to $500 in cash for job training, and help building a new house.” There are no guarantees, however, that jobs will always be available — ask steel workers in the U.S. — and that creates an element of fear in farmers who feel secure on their land. Srivastava also notes that in some cases thousands of people have been displaced to build factories and only a portion of that number of new jobs that have been created as a result. In order to move beyond these land squabbles, the government is going to have to demonstrate that it can be fair when it acquires land and that the way ahead is filled with hope rather than fear. That’s not going to be easy to do.

Almost every article dealing with India’s future touches on its lack of infrastructure. The country is in the midst of serious road building effort (see my post entitled Roads to Prosperity); but other transportation infrastructure and power plants are also sorely needed [“A critical bottleneck in road to growth,” by James Lamont, Financial Times, 16 December 2009]. Lamont reports that progress is being made:

“Terminal 3 at Indira Gandhi International Airport in New Delhi is one of the most potent signs of a changing India. Over the past months, travellers have witnessed its cavernous steel and concrete interior and then its monumental glass plated frontage rise out of the dust. … Delhi’s new airport buildings, and the breathtaking Bandra-Worli Sea Link in Mumbai, the country’s financial capital, are two of the clearest examples that infrastructure development has become a top priority. They are a hint of the leap that India might make in terms of productivity if it fixes its overburdened, old fashioned and investment-starved physical infrastructure. Manmohan Singh, the prime minister and a respected development economist, has clearly identified better roads, power plants and ports as important priorities.”

New and improved infrastructure is not just a matter of aesthetics it is an economic imperative for countries like India that need to create millions of jobs. Lamont reports that Singh sees lack of infrastructure as “a debilitating choke-point in the development of Asia’s third largest economy.” The government is spending billions to improve infrastructure and is also trying “to modernise the policy and regulatory framework.” Lamont continues:

“Even before last year’s financial crisis, the government planned for $500bn in infrastructure spending between 2007 and 2012. … Like many Asian economies, India is trying to attract more private investment into infrastructure. Opinion is divided about its likely volume and targets. While some, including McKinsey, the management consultants, warn of a large funding gap and delays, other individuals, such as Conor McCoole, head of project finance in Asia, for Standard Chartered bank, argue there is no shortage of liquidity for projects in the wake of the global financial crisis. He says larger concerns surround implementation and the expertise to encourage private and public entities to work together harmoniously. Some of the big projects include the $50bn Delhi-Mumbai industrial corridor, high-speed rail links between main cities, improved cargo handling at ports and new airport facilities. … But the size of the challenge in a country of 1.2bn people is daunting. Decades of underinvestment have left the country crippled by a severe infrastructure deficit that greatly impedes its ability to sustain high growth rates and alleviate poverty.”

How bad is India’s infrastructure problem? Lamont explains:

“Roads in the main cities are frequently gridlocked; in rural areas they have crumbled away. Ports are close to capacity, while nuclear power stations, short of fuel, run under capacity. Cities, which in other parts of Asia have helped spur growth, are often devoid of planning in India. Only a quarter of India’s 88 cities with populations of more than 500,000 have formal transport systems, according to the Asian Development Bank.”

Although new and upgraded infrastructure would make life easier for many Indians, the biggest benefit would be economic.

“Some economists and investment analysts say that, if physical infrastructure were improved, the country’s entrepreneurial drive would comfortably propel it to double-digit growth to rival China’s. But in the short term, concerns abound about whether the economy has the capacity to absorb such large spending, a shortage of skills, and the impact a wave of building will have on the country’s rich biodiversity. Worries over finance and a lagging policy framework have been highlighted by the Federation of Indian Chambers of Commerce and Industry. … Slow implementation, corruption and lethargy in awarding and approving projects also need to be remedied.”

Visitors to India are often amazed at the apparently random distribution of power lines and obviously unplanned growth in urban areas. Planning, especially urban planning, is sorely needed in India. Lamont explains:

“Robert Zoellick, the president of the World Bank, … told the Financial Times. ‘This goes back to [Mahatma] Gandhi. The real challenge is that urbanisation is moving so fast but the ability to deal with it is complicated by the lack of decentralised authority at municipal levels,’ he says. Mr Singh is mindful of this. ‘India cannot be built from Delhi alone,’ he warns.”

Another Financial Times‘ article also discusses the abundance of talent and lack of infrastructure [“A nation develops,” by Joe Leahy, 11 January 2010]. Leahy begins his article with a glimpse of the talent that is available in India:

“Walk into the John F. Welch Technology Centre in Bangalore and you could be forgiven for thinking you have strayed into Q division – the laboratory dedicated to inventing new gadgets – from a James Bond film. In one area of General Electric’s 1m-square-foot research and development centre, named for the company’s former chief executive, scientists are testing a special ‘pedestrian-safe’ bumper bar for cars, which can hit people at speed without maiming them. Elsewhere, boffins are working on locomotive engines that run on methanol extracted from grass growing alongside India’s railway lines, and on super-compact medical equipment that costs a fraction of the price of similar products in the west. Opened in 2000 with 275 scientists and engineers, today the centre employs 4,300 – or one in six of GE’s researcher ‘technologists’ worldwide. … Bangalore is well known for its vast outsourcing sector, in which armies of twentysomething graduates perform the grunt work of the global information technology outsourcing industry, inputting data and managing the software and computer hardware of clients overseas. Less well known is that the city nicknamed India’s Silicon Valley is becoming a globally important centre of innovation. Alongside GE, multinationals such as Microsoft, Intel, Google, IBM and Britain’s Tesco supermarket chain, are opening R&D centres there.”

Leahy notes that India is just starting its journey “up the value chain” and impeding the pace at which it travels are two things: “overcoming India’s chronic infrastructure problems and improving its education system.” Because large multinationals want to tap into India’s talent, they are likely to be a source of help in both areas. Leahy continues:

“Vijay Govindarajan of the Tuck School of Business at Dartmouth College, New Hampshire, and chief innovation consultant at GE, [insists], ‘We are at the cusp of a new paradigm in which innovation will happen in India and China first and then it’ll go to the rich countries. … Companies, if they don’t realise it, will be toast.’ The research potential of India’s engineering talent pool first drew attention in 1985, when Texas Instruments opened a technology centre in Bangalore. Today, more than 200 multinationals have R&D centres in the country. The ventures aim to tap the country’s phalanxes of engineers – India’s better tertiary institutions churn out about 600,000 a year – as well as the enormous pool of expatriate PhDs working in the west who are keen to return home. Cost is also a factor. Partha Iyengar of Gartner India, a branch of the consultancy, says that in terms of ‘dollar spent per ounce of innovation’, India’s cheaper engineers mean the equation is ‘dramatically different’ than elsewhere.”

Large companies are not just looking at India for cheap labor, however. They would also like to make India’s billion people customers for their goods and services. Despite the fact that India has engineers serving the world, India’s middle class has been slow to emerge. Lamont discusses why:

“Google’s Bangalore office has developed numerous products for the global market, such as the company’s Finance, Mapmaker and mobile text messaging programs. As staff carried out these international jobs, their managers began to take a greater interest in the domestic market. Prasad Ram of Google India says the Bangalore office began to wonder why so few Indians used the internet. Penetration is estimated at fewer than 100m fixed and mobile internet users in a population of 1.14bn people – one of the lowest rates in the world. They found that a lack of infrastructure was one important constraint. But another was a lack of suitable content in India’s 22 regional languages. In response, Google developed its Indic transliteration technology, in which users can type phonetic imitations of words in their language on an ordinary Roman alphabet keyboard that then appear in that language’s script. The product is now being extended to languages such as Arabic. The fact that it is harder to solve technical problems related to product development in India because of its diversity and lack of infrastructure ‘presents an opportunity’, says Mr Ram. ‘If I can solve challenges in a systemic way here, then I can extend the solution to the rest of the world.’ At Microsoft Research India the same problem was tackled differently. The company hired an ethnographer, social scientist and designer to go to villages and study the use of computers. They found that even when rural schools were given a computer for the education of children, the exercise usually failed. Typically one child, usually a higher-caste male, would dominate the use of the machine. The result was ‘Multipoint’, in which a group of children are each given a mouse connecting them to the same computer. The multiple cursors mean they can all participate in whatever exercise is under way on the screen. The system is now being considered for commercial development.”

I suspect that dealing with the infrastructure challenges will prove far easier than dealing with the cultural challenges mentioned above. I believe, however, that those challenges will be overcome and the solutions will be found by Indians themselves. Leahy concludes:

“Certainly, the day when Bangalore will challenge the supremacy of the US, Europe or Japan in path-breaking scientific research is still far off. India lacks the large-scale, high-quality master’s and PhD courses to produce many such breakthroughs. India and China have produced few Nobel prizewinners in science and technology, notes Prof Govindarajan. For India to overtake the US in R&D, the balance of its IT workforce would have to shift to 30 per cent research jobs. … Cities such as Bangalore, which is known for its congestion and, increasingly, pollution also need to address basic issues such as the environment and infrastructure. Otherwise, talented Indians living in western countries will not want to return home. … Still, the sheer weight of raw talent in India and China, Asia’s largest emerging economies, as well as the growing clout of their domestic markets, will be enough to drive the development of more products that will eventually make their way to the west.”

As noted at the beginning of this post, India remains an enigma. If India wants to join China at the top of the economic heap, it’s a riddle that needs to be solved. The American author and humorist Mark Twain once wrote this about India: “So far as I am able to judge, nothing has been left undone, either by man or nature, to make India the most extraordinary country that the sun visits on his rounds. Nothing seems to have been forgotten, nothing overlooked.” Were he to visit India today, he would find a few things that have been “left undone” and need attention in order to continue its legacy as “the most extraordinary country that the sun visits on his rounds.”