Subba’s Serendipitous moments

April 28, 2008

Indians are privately smart and publicly dumb

It takes courage and honesty to write a self critical book titled Games Indians Play: Why We Are the Way We Are.

Prof V Raghunathan ex faculty at IIM(A) and now with GMR Group minces no words as he brings us face to face with the typical Indian mind set. I just finished reading the book and most of his arguments resonated very well with me. In fact it addressed some of the deep questions that I have often asked about the Indian psyche.Now, having lived outside India for over 15 years though I make frequent trips to India, I have never been able to understand the “split personality” in Indian behavior. Prof Raghunathan fills that knowledge gap in a very deep penetrating way.

For people who would like a synopsis here’s his interview with India Knowledge@Wharton:

In his book Games Indians Play: Why We Are the Way We Are, V. Raghunathan writes about a farmer whose corn won top awards year after year. When a reporter asked about the secret of his success, the farmer attributed it to the fact that he shared his corn with his neighbors. Why, the reporter wondered, would the farmer want to share his seed when those neighbors also competed with him for the prize? The farmer’s reply was, “The wind picks up pollen from the ripening corn and swirls it from field to field. If my neighbors grew inferior corn, cross-pollination would steadily degrade the quality of my corn. If I am to grow good corn, I must help my neighbors do the same.”

That Indians often fail to act like this farmer is the principal theme of Raghunathan’s book. Using examples as varied as their tendency to drive through red lights to their failure to protect the environment, Raghunathan argues that Indians often act in ways that focus on winning immediate gains at the expense of long-term benefits. What makes Raghunathan’s approach unusual is that his argument isn’t a moral diatribe: He employs game theory — a branch of mathematics — and related concepts, such as the prisoner’s dilemma, to present his case.

A former professor at the Indian Institute of Management in Ahmedabad, Raghunathan in 2001 was named president of the ING Vysya Bank. He now works for the GMR Group as managing director of GMR Industries, the group’s agri-business division, and CEO of the GMR Varalakshmi Foundation. Raghunathan also teaches game theory and behavioral economics at the University of Bocconi in Italy. To relax, he repairs mechanical clocks.

India Knowledge@Wharton: Your book is titled, Games Indians Play: Why We Are the Way We Are. What are Indians like?

Raghunathan: In the first chapter of my book, I describe what I believe Indians are like by offering 12 canons of “Indian-ness.” For example, one of our traits is “low trustworthiness.” By that I mean we are most likely not to cooperate in a prisoner’s dilemma kind of situation. Privately, Indians are reasonably smart — in fact, we are as smart as anybody else — but publicly we are dumb. Our ability to understand the need for cooperation is very low. We believe that cooperation and selfishness cannot go together — which is not true. We also tend to be very fatalistic in our outlook. We give excuses such as, “What can I do alone? Everybody else is looking out for himself, so why shouldn’t I?”

India Knowledge@Wharton: What exactly is the prisoner’s dilemma, which you just mentioned? How do you use it to explain the behavior of Indian business people?

Raghunathan: The prisoner’s dilemma, which was first developed by researchers at the Rand Corporation during the 1950s, is a concept that has come to occupy a prominent place in game theory. The problem statement goes like this: Assume that you and I are co-conspirators in a crime. Each of us is selfish and coldly rational. We are being interrogated in two separate cells, and we are unable to communicate with each other. The interrogator tells you that he has enough evidence to put each of us away in the slammer for two years each. However, if you squeal on me and help him prosecute me, he will set you free immediately and imprison me for five years. He also tells you that he will make an identical offer to me (though you and I cannot communicate). If each of us betrays the other, he will put us both away for four years. Being selfish and rational, we have to respond to the offer in terms of what is in our best self-interest.

Now, here is our dilemma: Should we defect and squeal against each other, or should we cooperate and hold out against the interrogator? You may reason that if I defect, it would be in your interest to defect as well — otherwise you will be stuck in prison for five years while I go free. And if I do not defect, it is still in your interest to defect, since you will walk free immediately. So you decide to defect. I follow the same reasoning, and I defect as well. As a result, each of us ends up with four years in prison. If we were to cooperate, though, each of us would be better off because the interrogator has evidence to put each of us away for just two years. But for us to end up with that outcome, we need to recognize that the two-year punishment we will have to accept for cooperating is better for each of us than the four-year punishment we would get for defecting and ratting out each other.

Our situation is such that we believe that if we do not cooperate, we benefit more. We put ourselves in the other person’s situation: We ask, if he does not cooperate, why should I? If he cooperates, it may still be in my interest not to cooperate, because I benefit by not cooperating.

Although this may sound abstract and theoretical, this is often how Indian business people tend to think. Very often our exporters show samples that are of a high quality, but when the time comes to ship the goods, they send something inferior. This is very much like a prisoner’s dilemma situation. You may initially make money because you have gotten something for nothing, but going forward — in an iterative kind of a context — you will most probably fail. You will stop getting export orders when your customers figure out that they cannot depend on your quality. They will stop trusting you and start suspecting you. In my book, I cite the example of some Indian companies that had won orders to export powdered red peppers (or chillies) to Korea. Apparently, when the goods arrived, the Koreans discovered that the very first consignment was adulterated with red brick powder. The Koreans emptied the whole consignment in the high seas, vowing never to import this product from India. I read a similar report as recently as last year.

The prisoner’s dilemma also explains why Indian companies often fail in joint ventures. We tend to be over-argumentative and often look out for our own narrow advantage rather than trying to make the venture succeed. If you look at the way we behave in all kinds of situations — whether it involves jumping a red light or dumping our garbage in the streets — that kind of behavior can be explained by the prisoner’s dilemma. I will keep my own house clean, but the streets are not my business. Since everybody thinks the same way, the public interest suffers.

India Knowledge@Wharton: Is that what you meant when you said that Indians are “privately smart and publicly dumb?” Why is that so, and what are the consequences of this behavior?

Raghunathan: Another way of expressing this idea is that we are good lightning chess players but terrible long-term chess players. If I have to see two moves ahead, I may do just fine, but if I have to see 10 moves ahead, I may not. Public interest is like seeing 10 moves ahead, while seeking out private advantage is like seeing two moves ahead. In the prisoner’s dilemma, it is clear that in the short run, it pays you to defect. It takes you a longer period of reflection to realize that even given your selfish motive, you are likely to benefit more if you cooperate — and if each player does the same thing, both come out winners. I came to this conclusion through many other concepts of game theory that I have written about in the book. Having seen how people think in other countries and in India, I [realized] that Indians would tend to conclude in a jiffy that it is in their interest to defect and squeal against their partner. It takes longer to think through that if the partner also defects, both would be worse off. Unfortunately, Indians often don’t think that far. That is why I say we are privately smart but publicly dumb.

India Knowledge@Wharton: In taking the long-term view, what is the “tit-for-tat” strategy, and how does that apply to business situations?

Raghunathan: We tend to deal with the same people over and over again, even though we may interact with hundreds or thousands of parties over our lifetimes. If I tell myself that I will never be the first person to defect, but after that, I will do whatever the other person does, that is the “tit-for-tat” strategy.

In my book, I cite examples from the experiments that the mathematician Robert Axelrod conducted on this concept. Life is a series of interactions of the PD (prisoner’s dilemma) kind, and you deal with the same people several times. I may cooperate with you in an interaction, and you may cooperate as well. Then I go off and interact with other people, and then come back again to you. Remembering that you had cooperated in the past, I cooperate again. Essentially, I keep cooperating in every interaction until you defect. In the following interaction, I too defect, remembering our last interaction. Now it is up to you to decide whether to cooperate or not. If you cooperate, I go back to cooperating as well.

This strategy is different than that of a so-called “massive retaliator,” whose response to one act of defection is to never, ever cooperate again. The tit-for-tat strategy does not have a long memory. It is forgiving. It is a good strategy in the sense that it is never the first one to defect, but at the same time it retaliates against defectors. It makes it clear that it will not respond to defection with continued cooperation. It responds to defection with defection, and will not resume cooperation unless the other party cooperates first.

I show in the book that the tit-for-tat strategy never wins against any one individual. But in the long run, people get to know that you are a gentleman; you are never the first to defect. They know that you are forgiving, but also that they cannot take you for granted. All these are, broadly, the hallmarks of a gentleman, and so I call this the “gentleman’s strategy.”

This strategy can easily be applied to a large number of business situations. For example, consider a businessman who normally supplies materials of high quality but once in a while — one out of 10 times — he supplies sub-standard materials. In other words, he defects one time out of 10, and cooperates nine times out of 10, hoping that you will not retaliate. He is trying to gain some extra points over his interactions. Such a businessman is not using the tit-for-tat strategy; he is using a random-defect strategy. What happens with this strategy is that if one of the players he runs into is a massive retaliator, that player will stop dealing with him completely. His ability to collect any further revenues from that party will end.

However, a tit-for-tat strategist will never defect first. As a result, it becomes clear to all the players over the long run that the tit-for-tat player will never retaliate unless they did something wrong to him first. Unfortunately, in India such business people are few and far between.

India Knowledge@Wharton: In one chapter you cite the example of the TVS Group, a company in Southern India, which recognized that foregoing short-term benefits sometimes helps you gain long-term advantages.

Raghunathan: Yes — Suresh Krishna, chairman of Sundaram Fasteners, which is part of the TVS Group, told me this story about his father, T.S. Krishna. His father had told him this anecdote during the 1960s but he still remembers it.

The TVS Group, like other traders in Southern India, imported diesel engines during the 1940s. The engines were imported from London for about Rs. 1,100 ($220 at the prevailing exchange rate) and were sold in the local market at a 25% to 30% markup for about Rs. 1,400 ($280). But during the mid-1940s, supply was disrupted because of World War II, and this led to an extreme shortage of engines. Anyone who had an import license could easily sell the engines for Rs. 5,000 ($1,000) — many customers were willing to pay such prices. At one level, you could call this market pricing since the demand-supply situation was so skewed. It was a seller’s market. But, at another level, you could also view this as a defection of sorts because the sellers were exploiting the wartime shortage to force buyers to pay a higher price.

Krishna decided that the TVS Group would not follow that approach. Despite the shortage and the prevailing high prices, he insisted on charging the normal markup of 25% and kept selling engines for Rs. 1,400 throughout the war. At that time, the local business community thought he was either naïve or downright daft for missing out on the opportunity to make as much money as possible. When the war ended, however, the traders who had profiteered from the shortage went out of business one after another; today no one remembers those companies. But the TVS Group survived, and it continues to be recognized as a valuable company.

In today’s terms, we might say that TVS had better corporate governance, and its strategy paid off because it delivered long-term shareholder value. Back in 1945, though, it was just one decent man trying to do the right thing for his customers. Krishna refused to defect just because the timing was against his customers. The consequence is that even today, TVS is regarded as a name to be trusted. If the company lists its shares for sale, people subscribe to them. If products carry the TVS brand, people buy them. Krishna probably did not stop to think about the “brand value” of his behavior; still, his actions helped build the TVS brand.

India Knowledge@Wharton: Why do you think Indians are bad at regulation and self-regulation?

Raghunathan: I think self-regulation is molded by regulation. Even in the U.S., when you are driving along a highway, if you did not know that a police patrol car might unexpectedly appear behind you with lights flashing, you might be tempted to drive faster than the speed limit. If the U.S. government had not come down hard on emissions, maybe the auto industry would have not revised its production standards. I believe that self regulation is indeed affected by regulation.

In India, part of our problem is that the regulatory environment is weak. Combined with our fundamental lack of self regulation, matters tend to spin out of control very soon. As I said above, we are like lightning chess players and a little too quick to see where our immediate self-interest lies. When we think we can get away with something and the probability of getting caught is low, we tend to do whatever we want to do.

For example, consider the Companies Act, which governs disclosure of financial information by publicly listed firms. Today, if a public company does not disclose its financial statements on time, the penalty is Rs. 1,000 ($25) a day. This implies that if a company is willing to spend $9,125 on fines, it can go a whole year without making financial information available in the public domain. To me, that almost sounds like an incentive for companies not to file their annual financial statements. How can we have self-regulation when the regulations themselves are so weak? The reality is that back when these regulations were formulated, a thousand bucks a day was a lot of money. Today, you would need to charge corporations a penalty of Rs. 10 million ($250,000) a day for it to be a deterrent.

The trouble in India is that the chances or being caught are low, and the consequences of being caught are weak. As a result, we have forgotten what self regulation means. Democracy has been misinterpreted to mean the right to do whatever you want.

India Knowledge@Wharton: Why is it so hard for Indians to work in teams? Even in a team sport like cricket, one-upmanship often undermines collective performance. Does game theory offer any explanations?

Raghunathan: That is a good question, but I don’t know to what extent game theory can answer it. The only thing I would say is that it depends on how the team players resolve their own prisoner’s dilemma-type situations.

If you approach the resolution of the dilemma externally, you will never resolve the issue. By approaching it externally, I mean asking yourself, ‘If the other party defects, what should I do?’ or ‘If the other party does not defect, what should I do?’ If you ask yourself such questions, the answer at which you will arrive is that you should defect. If both parties ask themselves the same questions, they both end up defecting — and losing.

The only correct way to resolve the prisoner’s dilemma is to ask yourself, ‘What is the correct thing, deep down, for me to do?’ In other words, what is the action that if everyone were to follow it, would lead to the collective good? If you were to approach the prisoner’s dilemma that way, both accomplices would arrive at the same answer — not to squeal against the other. You need to approach the issue internally. The problem arises when you expect others to defect, so you try and pre-empt the harmful consequences by defecting yourself.

India Knowledge@Wharton: To what extent are such tendencies uniquely Indian? For example, if you have been following the horror stories about the recall of millions of toys manufactured in China, wouldn’t you think these are human traits rather than Indian ones?

Raghunathan: Absolutely. I agree completely that these are human traits. You will find them everywhere in the world. The theories I discuss in my book were not developed in India but outside, and people have been writing about and talking about them long before my book came along. But one major difference is that in other parts of the world, the tendency to defect is much lower when you play the prisoner’s dilemma type of games. In India, the tendency to defect is much higher.

Consider the example about the toys being recalled in China. It is of course true that in this one dimension Chinese manufacturers — or their subcontractors — did not pay attention to quality. But I can think of 10 other dimensions in which the Chinese have chosen cooperation with one another over defection. For example, Chinese people show enormous discipline when they work in a team. I have seen Chinese cab drivers stopping before a red light at 2:00 a.m. — no Indian taxi driver would ever do that. The number of medals they win during the Olympics shows that they have systems that work very well.

In Shanghai, in four years they built out the magnetic levitation train that connects the airport to the city. Or consider a simpler example. When I was in Shanghai, I saw a newspaper ad that addressed the citizens and said, “If you want to be residents of a world-class city, you must behave accordingly and not hang your laundry out to dry on your balcony.” When I drove around the city, I did not see a single Chinese home with washed clothes hanging on the balcony. In India, it is unthinkable that you could even make such an appeal.

So it is true that nowhere in the world are people immune to the prisoner’s dilemma. But the incidence of defection in almost every walk of life seems to be unique to India. This may seem to be a caricature, but if I am exaggerating certain features, it is because I want to draw attention to them.

India Knowledge@Wharton: Do you have any reason to hope that the way Indians are will some day become the way Indians were?

Raghunathan: I am not a spiritual person. But in doing research for this book, for the first time I read the Bhagavad-Gita [the Sanskrit text that is regarded as sacred by Hindus]. I realized that the Gita has a lot of things which help resolve the prisoner’s dilemma readily. For example, if you do your dharma [duty] towards humanity, the level of cooperation could be much higher. That is what having a good character is all about.

This gives me hope for the future. As India’s economy improves and education spreads, I hope defection will be replaced by cooperation. My question about why Indians are the way they are is a rhetorical one — it is an expression of my frustration. But my attitude towards India is like that of a parent towards a beloved child who needs correction. You don’t love that child any less; it is because of your love that you want to bring about change. I hope these ideas will encourage some introspection about how to make things better.
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June 4, 2007

A perspective on India

Courtesy my friend Dr.Ananth found this interesting speech given by Scott Bayman–the outgoing head of GE India. I think it makes interesting reading and coming from someone who spent 14 years in India and saw the Indian economy and mindset change, it offers a penetrating yet a balanced analysis.

Now is India’s Time

We all know of China’s rise and its incredible growth story. India’s is still more a bet on the future. However, a future that is coming into sharp focus. Few have come forth with arguments to refute the 2003 BRICs study by Goldman Sachs. The report analyzed Brazil, Russia, India and China. In the study, Goldman projects that over the next 50 years, India will be the fastest growing of the world’s major economies. The report calculates that in 10 years, India’s economy will be larger than Italy’s. And, in 15 years, it will over-take Britain’s. By 2040, it will be the world’s third largest economy. By 2050, India’s economy will be five times the size of Japan’s, and its per capita income will have risen to 35 times its current level.

The World Economic Forum’s Global Competitiveness Index ranks India 43rd, well ahead of Brazil at 66, China at 54 and Russia at 62. India is the only one of the four that improved its ranking. The other three actually slipped.

Some argue that India’s path has distinct advantages. MIT’s Yasheng Huang points out that India’s companies use their capital far more efficiently than China’s; they benchmark to global standards and are better managed than Chinese firms are. Despite being much poorer than China, India has produced dozens of privately owned excellent companies like Infosys, Ranbaxy, Tata Steel, Bharat Forge and Reliance. Huang attributes this difference to the fact that India has a real and deep private sector (unlike China’s many state-owned and state-funded companies.) India has a well-developed, well-regulated financial system and a rule of law. Jeff Immelt explains, “China got the infrastructure right. Its government is superb at developing infrastructure. However, China has not developed a banking system, rule of law or private enterprise to the extent India has. India’s government, on the other hand, has failed to deliver the infrastructure that governments typically are required to supply in developing countries. But, its executives are proving to be world class. Their abilities to build and lead businesses far exceed what we see in China.”

Another example: every year Japan awards the coveted Deming Prizes for managerial innovation. Over the last four years, 12 Indian companies won the award. more than any other country, including Japan.

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Globalization has been a key initiative for GE since 1992, when Jack Welch declared India, China and Mexico priority countries for GE. Since that time we have increased revenues outside the US from 10% to 49% and employment from 10% to over 50%. But, I think globalization really does not describe what happened in GE and what is happening to company after company and country after country. I think interdependence is a better description. Globalization happened during colonization when a select group of countries and companies dominated other countries and trade tended to benefit only the colonizer. Today companies move beyond their borders for

Growth and Profitability

Access to markets,

Lower costs,

Higher quality,

Critical raw materials and components

And, to diversify their workforces.

Governments more and more recognize the importance of interdependent markets. Consider all the free trade agreements signed or being discussed. There is not a successful economy today that got there by being an isolationist and practicing protectionism.

The trends are visible in India. Multinationals are coming for all the reasons I just mentioned. And, Indian companies are moving outside their borders. Globalization opened new opportunities for Indian companies. opportunities that they now are in a position to seize-thanks to the changes in India’s own business and economic environment over the past 15 years.

Hindalco and Sterlite bought iron ore mines abroad because they wanted secure access to raw materials. Tata Tea’s acquisition of Tetley brought a leading brand and with it millions of customers and access to new, readymade markets. Tata’s acquisition of Corus and Hindalco’s takeover of Novalis immediately takes these companies to a size that would take 10 years or more to build organically.

Software services companies such as Wipro, TCS, Infosys and Patni established operations in the US, Europe and China to access markets and to serve customer requirements for non-English language skills.

Bharat Forge bought companies in Sweden, Germany, China and the US, because it wants to be the global leader.

Tata Motors’ takeover of Daewoo’s commercial vehicle business provided Tata with technology for producing heavier trucks for Indian roads.

Automotive components supplier, Sundaram Fasteners’, expansion outside of India puts it closer to its customers as it expands its position as a leading supplier to the global automotive industry.

India’s Transformation

As I mentioned, I have been in India for 14 years; surviving two GE Chairmen; six governments and five prime ministers. But, you know what? In those 13 years no one, not one prime minister, not one government has turned its back on liberalization. Sure, each has its own priorities or its own spin, but the general direction and the commitment has not changed.

Many were surprised at the last elections. On the heels of solid growth, attempts at accelerating reforms and “India Shinning”, all the pundits predicted a BJP route. The Congress led victory sent one clear message, in my mind, to all politicians. The electorate is not anti-reforms. It wants to be included. Reforms must touch and benefit those outside the metro cities, those who live in villages and those less fortunate.

Over the past four years, I have seen what I describe as four big events. First, the telecom revolution. When I arrived, you never knew if you would have dial tone when you picked up the receiver. If you had dial tone, there was a question of whether the connection would be made to the number dialed. If connected, you never knew how long you would stay connected. Today, Indian telecom approaches world-class standards. Cell phones are common, even in villages where landlines still do not exist. Between 2000 and 2005, India added about 18 million fixed phone lines and nearly 73 million mobile connections. Teledensity grew more than three -fold to 11.5 percent; in urban areas to almost 35 percent. Waiting lines for phone connections have ceased to exist.

I describe telecom as the “poster child” for privatization and deregulation.

My second big event is the creation of a new class of consumers driven by the emergence and growth of software, backroom processing, technology and financial services industries. Employees in these industries are highly educated and relatively younger than the workers in other industries. Ten years ago, this group likely would have lived in their parents’ homes and been under-employed or unemployed. Today, this group earns a good wage and has a propensity to spend. And, with the opening up of the economy, now has a wide choice of products and services to buy. For example, when I arrived in India, automobiles were in scarce supply and required a full down payment nine months in advance of delivery. Today, you can have delivery in two or three days at very competitive prices. Color televisions had to be purchased on the gray market, unavailable in quantity or variety. Today, virtually every manufacturer sells the latest models of color televisions. Computers and laptops attracted high duties and needed registered in one’s passport to be taken in and out of the country. The average age of a homebuyer in Gurgaon, a suburb of Delhi, has come down from 55 to 32. further evidence that this new class of consumer has real purchasing power.

The third big event is that Indian industrialists have gained confidence that they can compete on the global stage. At a Confederation of Indian Industry seminar on Manufacturing Competitiveness in April 2002, Chaired by My good friend Jamshyd Godrej, I said, and I quote, “Let me start by saying that Manufacturing is not India’s core competency. Can it be? Probably not, at least in the short run. Let’s face it, there are just too many barriers that all of us cannot control. Don’t get hung up in thinking manufacturing can be a core competence of India. It isn’t going to happen.” Unquote .

Well, I was wrong. I was dead wrong. Indian industrialists no longer worry about multinational companies; they are or want to be MNCs. They no longer talk of level playing fields. They argue for open markets, free trade and view the globe as their marketplace. Indian companies now think globally. The total value of takeover deals by Indian companies, which was less than $1 Billion in 2000, rose to $8 billion in 2006. January 2007 saw two mega deal – Hindalco / Novelis and Tata Steel / Corus. There have been 72 foreign takeovers by Indian companies, worth $24.4bn in the first four months of this year, according to the advisory firm Grant Thornton. In the same period, there were 38 foreign deals for Indian companies, worth $17bn.Indian companies possess the self-confidence to believe, to know, they will be successful in global markets. They are confident they will improve the performance of acquired companies. Whether it is Videocon or Suzlon, Tata Tea or Bharat Forge, companies are talking of becoming one of the world’s big two or three in their business, if not number 1.

Global trends also favor India as more companies in the US, Japan and Europe outsource manufacturing to lower costs. In addition to auto parts, telecom equipment and pharmaceuticals, India has the potential to be competitive in such skill-intensive industries as fabricated metal products, high-end chemicals, consumer electronics and computer hardware.

Across India, total exports are rising at an annual rate of 26 percent. The manufacturing sector is growing at 10 plus percent annually, compared with 6 percent a year from 1991 to 2004. Special economic zones, the model that drove China’s export-led industrialization, are beginning to spread in India.

From fiscal 2001 to fiscal 2005, capital expenditures increased from 8.4 to 24.2 billion dollars. What is striking is that over this same time, government owned enterprises’ share dropped from 33 to 25 percent; multinational companies’ share decreased from 8 percent to 4 percent while local private sector share of capital expenditures increased from 59 percent to 71 percent.

The rise of manufacturing could have a profound effect for a vast number of India’s poor. Forever, antiquated labor laws, creaking infrastructure and paperwork have handicapped manufacturing in India. For many of the three-quarters of Indians with less than a middle-school education, few factories meant few jobs.

The fourth big event is Civil Aviation. On my first domestic flight in India, I was 35 minutes early. Upon arriving at the tele-check-in counter, I was told quite rudely that I was late. To which I responded, “I still have 5 minutes.” The agent literally tossed the boarding card across the counter, and said, “You’re lucky.” Because of his attitude, I thought the flight was overbooked. In fact, it was only half-full. Today India has some of the best domestic airlines in the world. Moreover, that government owned carrier I checked in for on my first flight has significantly upgraded its service. Think, just think, what would have happened if the government had not allowed private air carriers.

Today, we are experiencing the benefits of open skies agreements with increased non-stop flights from more Indian cities to more cities around the world. Choice has brought competition and the consumer is benefiting.

Those of you who travel in India might say, “Yes, but what about the airports”. To which I respond, watch the impact of public-private partnership go to work. This is India. We wait for the demand, for the crisis before we respond. Once we strike out on a course of action, we know how to get it done.

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India is part of the changing world political and economic order. An Asian trading bloc is developing driven by:

  • The decline of Russian influence in India
  • China’s emergence as an economic power
  • India’s and China’s improving relationship and growing trade
  • India’s free trade agreements and discussions with Singapore, Thailand and Malaysia
  • India’s initiatives for open sky agreements within the region

Here is something to think about.

  • China, Japan, India and ASEAN providing the four pillars
  • Korea, Australia / NZ, and the rest of South Asia providing the four walls creating a very powerful trading block.
  • India becoming the bridge to the Middle East and former Soviet States.

Obviously, this is a long-term scenario, but one companies and western governments must think about as they develop their global strategies.

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Sometime back I was asked for a vision for India for 2020. That vision is very relevant to today’s discussion and in fact more real today than two plus years ago when I developed it. Please allow me to share it with you. Remember, this was over two and a half years ago.

My vision includes an enhanced stature in the global community. Relationships with the United States grow even stronger as both sides recognize that they are natural allies. China and India find ways to compliment each other economically and learn to live with their political differences. India plays a leadership role in helping combat the war on terrorism and re-building Afghanistan and Iraq.

My vision requires bold actions by Government to stimulate the economy over time and to accelerate additional reforms. Ports, roads, airports and seaports are improved and expanded. The trend in telecom privatization and increased competition continues resulting in lower rates, improved service and universal availability across the country. Tax policy, Companies act, labor law and land use regulation are revised and modernized helping drive economic growth.

Power sector reform takes off and accelerates. The financial troubles of the State Electricity Boards are behind us.most likely through privatization and separation of generation, transmission and distribution. Both local and foreign developers and investors return and become willing to start new projects. Lack of reliable, affordable power ceases to be an issue for most of India’s citizens and businesses.

My vision includes an economy that grows beyond the four to six percent experienced in the past few years to double this amount. Four to six precludes any real change in standard of living for many of India’s poorer, less fortunate citizens. Eight to twelve brings real opportunity for people to improve their lots in life.

I hope to see real progress in privatization. Privatization doesn’t necessarily mean government selling out but can be accomplished by divesting through the stock market to achieve broad ownership. Success in privatization results in government “getting out of the business of being in business” and into the business of being in government where it can do more good for the country.

When my vision becomes reality, foreign investment in India picks up. As China improves its position as a low cost supplier, including challenging India’s supremacy in software and technology, India also becomes a competitive manufacturing location for global companies. Indian software firms prove their metal, expanding into China and other countries to maintain global leadership. Unshackled from regulation and aided by strong local markets, more Indian companies become truly multinational.

Lastly, India assumes its rightful place among the world political, military and economic powers.

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Nine years ago at the US India Business Council, I made a talk about my perspectives of India. I was pretty hard on the country; pointing out the lack of progress across many fronts after much hype and promise. Today, as you can tell, I am happier with the progress of reforms and much more optimistic about the future.

Granted, not all is well and there are miles to travel. Pankaj Mishra described a number of challenges in a New York Times Article titled The Myth of the New India.

He points out that only a small minority of Indians will enjoy “Western standards of living and high consumption at least for the foreseeable future. The increasingly common, business-centric view of India suppresses more facts than it reveals. Mishra points out that recent accounts of the alleged rise of India barely mention the fact that the country’s $728 per capita gross domestic product is just slightly higher than that of sub-Saharan Africa. Despite a recent reduction in poverty levels, nearly 380 million Indians still live on less than a dollar a day.

Malnutrition affects half of all children in India, and there is little sign that they are being helped by the country’s market reforms. Facilities for primary education have collapsed in large parts of the country.

Mr. Mishra further observes that to date, India’s economic growth has been largely jobless. Only 1.3 million out of a working population of 400 million are employed in the information technology and business processing industries that make up the so-called new economy. No labor-intensive manufacturing boom of the kind that powered the economic growth of almost every developed and developing country in the world has yet occurred in India.

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During a question and answer session at an India Today Forum, I stood up to respond to similar examples of all that is wrong with India, to cries of “aint it awful”, to allegations that the government has failed the country and India has no chance. I made a point that Indians should stop beating themselves up so much. They should be proud or what has been accomplished. Indians should view the glass as half-full rather than half empty. I pointed to a number of examples such as: India is home to the best domestic airline in the world. Jet Airways matches up with the best of the best anywhere. India’s telecom industry moved from pitiful to world class in a very short period. Indian software and Business Processing Outsourcing firms are the best in the world. A robust auto industry evolved in just a decade. Component suppliers in India are world class. They are expanding offshore. While still nowhere near enough in numbers, modern medical facilities are opening at a rapid pace.

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India’s GDP is accelerating: from 1.0 percent average annual growth between 1900 and 1950 to 3.5 between 1950 and 1980 to 6.0 between 1980 and 2002 to 8.0 between 2002 and 2006. Wealth must be created before it can be redistributed.

To date, India’s economic growth has been largely jobless. But, as I pointed out earlier, manufacturing is expanding; and this is creating jobs. Consider the following.

  • India is the fifth largest commercial vehicle manufacturer in the world.
  • India is the second largest tractor manufacturer in the world.
  • Hero Honda Manufactures more motorcycles than anyone else in the world
  • Bharat Forge has the world’s largest single-location forging facility, its clients include Honda, Toyota and Volvo. all very demanding customers
  • The GAP sources about $600 million and Hilfiger $100 million worth of apparel from India
  • Wal-Mart sources in excess of $1 Billion worth of goods from India. And, it expects this to increase to $10 Billion in the next couple of years.
  • GE has grown from less than $100 million in local revenue to almost $3 billion with a target of $8 billion by 2010.

As manufacturing continues to expand to serve both domestic and global customers, it will create jobs.

India’s competency in high tech businesses also will create jobs.

There are 170 biotechnology companies in India, involved in the development and manufacture of generic drugs, whose business is growing exponentially.

The Indian pharmaceutical industry at $6.5 billion and growing at 8-10% annually, is the fourth largest pharmaceutical industry in the world, and is expected to be worth $12 billion by 2008.

India’s telecom infrastructure provides the largest bandwidth capacity in the world, with well over 8.5 Terabits per second.

India is among six countries that launch satellites and do so even for Germany, Belgium, South Korea, Singapore and EU countries.

India produces 200,000 engineering graduates and another 300,000 technically trained graduates every year. Soon India will have the largest working population in the World. Seven hundred million people out of 1.1 billion people are young. And, the young population will continue till 2050.

I don’t dispute the fact that the country must tackle huge social issues as pointed out in the Mishra article. I also don’t dispute that more could have been done and more needs to be done. However, there is progress. The incidence of poverty has declined from 44% in the 1980s to 36% in the 1990s to 26% in 2000. Literacy rates improved from 44% in the 1980s to 52% in the 1990s to 65% in 2000. In addition, over this same period, life expectancy increased from 56 years to 60 to 69.

In India, we have a woman born a Catholic / leading the most popular party / stepping aside so a Muslim president / could swear in a Sikh as Prime Minister / to lead a nation that is 82% Hindu / but has the second largest Muslim population in the world. And by the way, some of the wealthier Indians residing in the country are Muslim. I defy anyone to cite another country with such diversity and tolerance.

In my 14 years, I learned one big lesson. India is a confusing and difficult place to quickly enact change and make rapid progress. Consider:

  1. India is a 5,000 year old ancient civilization
  2. It has 18 official languages; with 325 spoken languages and 1,652 dialects
  3. There are 1.3 Billion people living in a land one-third the size of the US.
  4. There are 5600 daily newspapers, 15,000 weeklies and 20,000 periodicals published in 21 languages with a combined circulation of 142 million. Moreover, as those of you who read some of them know, each has a very strong bias on every issue.
  5. India is the world’s largest democracy with a parliamentary form of Government. That’s the good news. The bad news is; it makes taking tough decisions very difficult. However, I would never ever trade it for the alternative.

I argue the glass is half-full and filling; not half-empty and running out.

Thanks very much for listening.

China no threat to India in IT services

Filed under: Business,Competition,India,Model,Strategy — Subbaraman Iyer @ 12:58 am
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The China – India growth story often leads to the question whether China could pose a threat to the India’s offshoring success. A couple of years back many advised Indian offshoring firms to set up operations in China to take advantage of the huge engineering talent there, which could be leveraged for IT service operations. Some even speculated that China could be the alternative to India. Even last year, a reputed consulting firm suggested that US firms would move over to China in view of the rising costs in India. In fact many IT services firms based in Singapore, set up operations in China, only to be disappointed with the operations.

I, for one, never believed that China could be a threat to India.

However recent research from Forrester seem to support my view. I guess there are many reasons for that:

  1. Chinese firms are just targeting the Japanese firms and some of the US MNCs for low end work. Given that Japanese are not adept at managing offshoring work, more so in the IT services area, Chinese firms have not been successful in scaling up operations. Moreover, Chinese firms have not managed to inspire confidence and credibility to deliver the IT services, despite their superior physical infrastructure.

  2. Chinese firms lack the necessary management expertise to deliver IT services. Even their technical resources are geared for manufacturing and perhaps design, not for software deployments or consulting.

  3. Chinese firms also lack the necessary intellectual capital to build and manage the processes for the global delivery model.

  4. Even in China salaries have shown an increasing trend, more so amongst people who are bilingual.

  5. The Yuan has also shown an appreciation trend compared to the dollar, and more so compared to the Indian rupee.

The evidence that China can never be a threat is clinching. The top 20 Chinese firms employ close to 15000 professionals, while the top 5 Indian service firms employ more than 300,000 professionals. In 2007-2008 alone, the top 5 Indian firms plan to increase their headcount by another 30%.

Hence despite all the Government initiatives and the superior physical infrastructure, China poses no threat to the Indian IT services industry. Clearly the likes of Accenture and IBM see this trend because while they have been reducing their headcount in US and Europe, they are increasing their headcount in India, not China.

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