At Large

India Lets Success Happen

Since it stopped planning, the country has become a global economic force.

By 7.1.08

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China and India have followed vastly different paths to economic success. In China, a dictatorship has implemented its strategic vision with an iron fist. In India, under democracy, every party advocates different policies, so a national vision would be impossible even if people wanted one. Yet this non-strategy has produced 9% annual GDP growth for five years.

India's 1991 economic reforms abolished industrial licensing and many other controls, and demoted central planning to indicative planning. Deregulation plus investment in new infrastructure -- which provided the connectivity crucial for globalization -- created a million possible paths in place of the planned one. And entrepreneurs did the rest.

In under two decades, India has become a global force in computer software, business process outsourcing, R&D, and high-tech manufacturing. Before deregulation, no planner saw these as areas in which India could beat the world.

Computer software, India's most famous export, was hobbled by government policy for decades. In the 1980s, it took Infosys, now a star software exporter, two years to get a telephone connection and a computer import license. Politicians and trade unions opposed computerization as a threat to jobs. In the non-computerized economy, software engineers could not develop the skills they needed to compete. But they went to Silicon Valley, where they learned the business, then brought new abilities back to India, and established world-class companies. This was an unplanned success of non-strategy.

No planner imagined that hundreds of foreign companies would move back-office and technical services to India. General Electric's Indian subsidiary first tried this as a cost-reduction experiment, and it was such a dramatic success that multinationals galore soon followed suit. In the process, foreign companies found that India had not only low wages but untapped skills in everything from engineering and medicine to legal and audit services. Moody's and Standard and Poor's even shifted some of their rating operations to India.

The availability of highly skilled labor has also transformed India into a global R&D hub, attracting companies like GE, Suzuki, Intel, IBM and Microsoft. Renault-Nissan is even partnering with Bajaj, an Indian motorcycle specialist, to make a small car. Amazingly, Renault-Nissan has entrusted the R&D to Bajaj.

Most experts thought India would follow the labor-intensive export route taken by East and Southeast Asian countries like China and Vietnam. Alas, India's rigid labor laws made this strategy too risky. But to everyone's surprise, India became a world-class contender in high-tech areas like cars and pharmaceuticals.

All major Indian drug companies are now multinationals, making acquisitions across the globe. The government historically opposed strong patent laws, but the World Trade Organization forced it to accept them in 1995. Indian drug companies initially feared they would be wiped out, but soon found globalization an opportunity, not a threat. The end of the government's drug strategy was the start of global commercial success.

The automobile industry requires constant innovation, and Indian engineers and component manufacturers have proven that they can do it quickly and cheaply. American companies take three months to go from new concept to prototype to commercial production; Bharat Forge can do it in one month, and this helped make it the world's number two manufacturer of car parts like axles and engine blocks.

When the Indian economy opened up in 1991, many predicted that Indian companies would go bust or be taken over by multinationals. Nobody dreamed that one day Tata Steel would acquire Britain's Corus, which was six times its size, or that Tata Motors would acquire Jaguar and Land Rover, or that India's non-ferrous metals major, Hindalco, would take over Novellis.

Indian minnows swallowed foreign whales by borrowing massively from abroad. Until recently getting loans from abroad on such a grand scale was prohibited by rules intended to thwart irresponsible foreign debt. No planner realized that the prohibition was also preventing Indian takeovers of global giants.

In the 1980s, Sunil Mittal was a small trader importing portable generators. When the government banned their import, Mittal moved into push-button telephones. No planner, nor even Mittal himself, could have foreseen his meteoric rise to India's top cellphone magnate. His company, Bharti Airtel, is now worth $40 billion, and it's going global.

In 1983, Subhash Chandra, a rice merchant, was looking for plastic packaging at an international fair. Dealers told him laminated plastics were replacing aluminum tubes for toothpaste, and this accidental discovery helped transform Chandra from humble rice trader to owner of Essel Propack, the world's top producer of laminated plastic tubes for toothpaste, drugs, and cosmetics. Nobody planned that.

Many analysts, including Tarun Khanna of Harvard Business School, argue that China's success is largely government-driven, while India's is driven by private enterprise. So far, China has experienced more economic growth, but India may be better positioned for the future. In the long run, no other growth strategy is as good as no strategy at all.

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About the Author

Swaminathan S. Anklesaria Aiyar is a research fellow at the Cato Institute, and a columnist for the Times of India.