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"India is like a microcosm of the world..." - Views on News from Equitymaster

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"India is like a microcosm of the world..."

Dec 26, 2007

Dr. Rafiq Dossani is a senior research scholar at Shorenstein APARC, responsible for developing and directing the South Asia Initiative. His research interests include South Asian security, and financial, technology, and energy-sector reform in India. He is currently undertaking projects on political reform, business process outsourcing, innovation and entrepreneurship in information technology in India, and security in the Indian subcontinent. His most recent books are India Arriving, published in 2007, Prospects for Peace in South Asia (co-edited with Henry Rowen), published in 2005 by Stanford University Press, and Telecommunications Reform in India, published in 2002 by Greenwood Press. Dr. Dossani earlier worked for the Robert Fleming Investment Banking group, first as CEO of its India operations and later as head of its San Francisco operations. He has also been the chairman and CEO of a stockbroking firm on the OTCEI exchange in India, the deputy editor of Business India Weekly, and a professor of finance at Pennsylvania State University. He holds a BA in economics from St. Stephen's College, New Delhi, India; an MBA from the Indian Institute of Management, Calcutta, India; and a PhD in finance from Northwestern University

In an interview with Equitymaster, Dr. Dossani provides insights into the India growth story, the state of the economy and what will it take for the country to grow strongly and sustainably into the future.

Eqtm: Your book “India Arriving” is said to be about the changing India. Can you elaborate on this ‘changing’ nature of the country? What are the key forces that you are seeing shape the new emerging India?

Dr. Dossani: I think that the question I want to address in this book is – Is India changing. Of course we see evidence of change. At certain levels, you see evidence of change in terms of greater growth, industrial activity, rise in and exporting of services in many cases. So these are the pieces that we see. And then, in some cases, people say that India is not changing. It was always a democracy and it continues to be a democracy; The IITs, which are widely praised as an engine of growth, have been there for decades. So what is it that is causing this improvement in the rate of growth? Some things are much worse. Now if you look to the other side of it – you look at the suicide rate of farmers in Andhra Pradesh – it’s now four a day, which is worse than it has ever been. So, if India is changing for the better, how do we explain this side of the state of the country?

I think it is very important for the world to understand and for India to understand as to what is changing. Now, why it is important for the world to understand is that the 21st century seems to be about the market economy and better democracy and so on. And India is one of the leaders in the developing world in moving to that direction. Secondly, even though market economy might spread and democracy might spread, in many ways many things are very different across the country – if you look at the languages, or culture or trade, or ways of doing businesses. We see differences in the ways companies do business in India – they don’t do it the same way. And if you look across the country, there are differences in ways they do businesses. So in a way, India captures that. India is like a microcosm of the world – hundreds of languages, cultures and ways of doing business. So, if you can really understand what makes India tick, I think you can figure out what makes the world tick.

My background in this is that I have been studying India initially as a finance person and as an economist, and later in the field of academics while looking at the technology sector. If one asks as to how is big business doing in India. Then my reply is that big business is really doing well. If I look at the IT sector and the cellular phone sector, the markets are being grabbed by very large players. For instance, the top 10 firms in the IT sector account for around 50% of exports. That ratio is increasing and not reducing. They are growing at more than the industry growth. So I think big business is doing very well, business doing well. So I started looking as to how is small enterprise growing. Is the small business growing as a derivative of big business or is it growing independently? I found that there is a lot of variation but one thing is very clear - that small business is growing on its own steam in India. Now that’s very important because it tells me about the stability of growth. It does not rely on a few large businesses.

I’ll give you one example. When I went to Indore last year to view the IT sector, I discovered that there are fifty software-exporting companies in that city alone. And when I looked closely at what they do, the businesses are not supplying services to the large IT companies. Rather, they deal directly with overseas clients. Not only that, they also develop their own products. So, if you ask me whether I found the work of small companies as innovative as that of the large companies, I will say I found it more innovative. That was very surprising to me. I found one company that makes downloadable applications for cellular phones. I asked to meet their development team. After meeting them, I found that not only do they write very good code, they hardly speak good English. One of the reasons why Bangalore has been successful in IT is that you have a large group of people who are not only well-trained engineers but can also communicate very well to the outside world. They understand project management and they speak good English. Now, here, by contrast, in Indore, was a team of people that had never been outside Indore. To communicate, I had to change from talking English to talking a mixture of Hindi and English. I kept thinking as to how this group of people that had no connection to the outside world, except through the Internet, how are they doing it. That was a big revelation to me that you do not need to know good English - you can have entrepreneurship anywhere, even in a small town like Indore where the power is off for 8 to 9 hours a day and they run their businesses on car batteries. One company I met was maintaining servers of a bank in New York on car batteries from Indore!

That was one part of the project. The other part was when I was visiting all these educational institutions as part of my research. I went to the big publicly owned ones like the IITs and the IIMs and then I went to the small ones, many of which are private as also state owned. I found a complete turmoil going on in that sector. The IITs are losing their faculties at high speed, as they can’t afford to pay good salaries. And the private sector is just taking over the role of what used to be the state-owned institutions, and today they provide 80% of the engineering seats. How did this happen? What happened was that the Centre made a decision during the early 1990s that, since it did not really have the funds to support a nationally run education system, that responsibility should go to the states. So they started transferring the money, which they were spending to provide higher education, to the states. And when the states got the money they said that they did not want to spend on higher education because, from their voters’ point of view, they ought to focus on primary and secondary education. So they decided to shift this money there. Simultaneously, they opened up the system for the private sector to provide higher education.

And then a study I did last year, looking at this very closely in Bangalore, I found that the private sector is providing an improving quality of education. They have already overtaken the local state institutions and the best of them are coming close to the likes of the IITs and IIMs. So, finally I figured out is that what has changed in India is not that democracy has changed, but that it is working in a more federal way, with much more power for the states. Prior to this devolution of power downwards, reforms failed. For instance, if one studies the early reforms of the 1990s, many of them failed – like the cellular reform of 1991 to 1994.

So, what changed really was the ‘regionalisation’ of politics. The big change in India is that the center of power has moved from New Delhi to the states. And that has had certain important impacts.

Eqtm: How sustainable are these advantages? When will you think that India has finally arrived?

Dr. Dossani: I would say a country has arrived if it can provide to the large mass of population basic education and healthcare, and also the opportunity for livelihood. If we do the first two, the third is almost sure to happen. So, from that sense, it is very far from having arrived. If you look at the rural sector for example, even today there are problems. The average calorific value of consumption in the rural sector is 1,600 calories. The minimum daily requirement in the rural sector is around 2,400 calories; in the urban areas, it is about 2,100 calories. So, farmers are still consuming in India at one-third below the minimum rate. If you look at the farmer suicide rate, we have a huge problem. If you look at the issue of women’s health, over 80% of rural women in India suffer form severe anemia. Now, that rate is worst than sub-Saharan Africa, where it is 50%. Sub-Saharan Africa is the poorest region in the world. India is doing worse than that in the rural areas. So, there are lots of problems. We cannot boast that India has arrived.

The question is whether a process is being put in place, where we can say it is getting there. I think that process is in place. It is not without significant risks, because when you regionalise politics, of course you bring the politician close to the people, which is the good part of it. The bad part of it is that you do not have a disinterested view. So, if you have a corrupt regional politician, things could turn worse than before. Many of the political parties are very highly corrupt. So that is the reality. So, although their interests are regional, at the same time there is a level of immaturity that comes with a new party. But there is no way out.

What happened in India is that for many decades, you had leaders like Nehru and Mrs. Gandhi who were interested in the nation as a whole and wanted to control the national destiny from New Delhi. But in order to keep control in New Delhi, they did many things that were bad for the people, such as Nehru’s public-sector economy and Mrs. Gandhi’s Emergency and the bank nationalizations. So, when I say that India is arriving, it is with these cautions.

  • Read Part II

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