Monday, Oct. 29, 2012
In Search of a New India
By Akash Kapur

Not far from my home, across forests of acacia and groves of cashew, lies a canyon that cuts through the south Indian countryside. I used to play there when I was a boy. I remember a pristine canyon, deep and wrinkled and colored red from the iron oxide in the soil.

I recently went back to the canyon. It was not a pretty sight. A sprawling garbage dump had risen at its edge — plastic bags, rubber tires, beer cans and mineral-water bottles were strewn across the red soil. Clouds of smoke hovered over it all; the air was filled with a chemical stench.

What I found is common today in India. According to the Organisation for Economic Co-operation and Development, 40% of Indian municipal waste remains uncollected; the figure is considerably higher in rural areas. Sometimes it feels like the whole country has been reduced to a giant dumping yard. Increasingly, I have come to see this garbage crisis as a symbol of the nation's troubled engagement with modern capitalism — reflecting a new prosperity and consumer boom, yet a reminder too of the terrible price often exacted by that boom.

For over two decades, since the economic liberalization of the early 1990s, India has indulged in the gratifications and titillations of a market economy. The results have in many respects been deeply encouraging. But all along, there have been troubling signs of the damage being wrought by what Mahatma Gandhi once called "the monster-god of materialism." Capitalism has created new industries and world-class businesses and lifted millions from poverty. But it has also led to unprecedented levels of corruption and environmental degradation, and created new forms of deprivation and dispossession among those left behind by the economic reforms. If there is one thing India's experience has to teach, it is that development is a Janus-faced phenomenon — at once innovative and destructive, exhilarating and depressing.

India has largely turned its eyes from the seamier side of development. The nation has spent the past couple of decades in a state of willful blindness — celebrating its gains, reveling in its new prestige on the world stage. This is perhaps understandable: India was down for so long, and it would be churlish to deny it a moment of triumphalism. But now India feels like it is at an inflection point — increasingly disenchanted with its current trajectory, aware of the limitations in its current model of development, yet still grasping for a new model.

A recent Pew Global Attitudes survey revealed a striking decline in optimism among Indians — just 38% were satisfied with the country's direction compared with 51% a year earlier. Activists are up in arms over corruption, and citizens often block industrial and infrastructure projects in their backyards, rejecting what they perceive as the poisoned chalice of "development." The disquietude is telling — an indication that India is shedding the complacency and self-certainty of recent years,

What kind of country does India want to be? Does India want to continue down the path of rapid growth without regard for the social, cultural and environmental consequences? Or can India combine growth with justice?

At stake is the very idea of India — that distinguished (if somewhat nebulous) concept often cited by scholars and politicians as the glue that holds this fractious nation together. The past 20 years have pretty much shattered the postindependence concept of a nonaligned, socialist republic, bequeathed to India by its first Prime Minister, Jawaharlal Nehru. In many ways, the recent tumult can be seen as an attempt to forge a new idea of India — a cohesive set of values, a narrative to define the nation: India 3.0.

It isn't at all clear, at this moment of transition, that India will succeed in articulating this idea. The disparate and often inchoate movements of dissatisfaction lack a united vision, and could fizzle out. Yet the nation's search for a new identity matters deeply — not only to India but also to emerging economies around the world, many of which are similarly casting about for an alternative model of development. Even in the West, with capitalism in crisis and a sense of old certainties crumbling, India's search has a new salience.

For years, politicians have told Indians the nation is on the verge of ascending to its rightful place as a world leader. The instrument of ascension was to be economic dominance. India would, in effect, beat the West at its own game. Now the shortcomings of that game have become all too apparent. It turns out that India's claim to global leadership may ultimately rest on a very different achievement — on reinventing the game, with a sustainable, more equitable model of growth that can serve as an example for troubled economies around the world.


Monday, Oct. 29, 2012
What Must India Do to Realize Its Economic Potential?
Think Big. Act Bold
By Michael Schuman / Mumbai and New Delhi

Adi Godrej is optimistic about India, and for good reason. The chairman of the Mumbai-based Godrej Group has been a big beneficiary of India's economic miracle. The richer that India's 1.2 billion people become, the more Godrej-made refrigerators, furniture and vegetable oil they can buy. Last year Godrej set a goal of increasing sales 10 times in 10 years; so far this year the conglomerate's revenues have surged 30%. "I most definitely feel that India's long-term growth story is intact," says Godrej.

Not everyone shares his enthusiasm. "I wouldn't be bullish," says Vijay Shekhar Sharma, chairman of One97, a company based near New Delhi that offers mobile Internet services to big telecom companies. "Our business could be doing better." A retroactive tax introduced earlier this year on foreign transactions of Indian assets has discouraged investment. "Policy has been a big hurdle for growth," says Sharma. His customers have poor access to credit and often delay paying him for months. Sharma would like to take his company public, but with investor sentiment depressed, he has put off the idea. Such hurdles aren't specific to his firm, he says: "It's an everybody-has-a-problem problem."

That's a big problem for India. By any measure, India has been one of the world's great growth stories over the past two decades. Hundreds of millions have been lifted out of poverty, the entrepreneurial genius of India's business community has been unleashed, and the country has attained a level of influence in the global economy not seen in centuries. At the same time, India always seems to disappoint. Though the ranks of the middle class are swelling, India is still home to more of the world's destitute than anywhere else — 445 million people, a third of the population. While companies like Godrej excel both within and without India, they remain too entangled in red tape to drive the country's growth higher. The private economy, led by innovative firms like IT-services giant Infosys or carmaker Tata Motors, is rewriting the playbook of global business, but the public sector — inefficient, wasteful and corrupt — is incapable of supporting their efforts.

Godrej and Sharma represent a new two Indias: the India of burgeoning wealth that shows the nation's boundless promise and the India of frustrated expectations that exposes how fitfully that potential is being realized. For the country to truly become the world's greatest emerging market, those two Indias must become one. The issue "is not what India is doing, but what India is capable of doing," says Rajya Vardhan Kanoria, president of the Federation of Indian Chambers of Commerce and Industry (FICCI). "That is where the mismatch is."

Slow — and unsteady
To be fair, india has come a long way in a short time. in 1991, then Prime Minister P.V. Narasimha Rao and his finance chief, economist Manmohan Singh, were forced to tackle a debt crisis. They began dismantling India's byzantine web of regulations and permits known as the License Raj, under which business folk could not open a factory, launch a product line or import technology without the approval of overbearing bureaucrats. The reforms yielded spectacular results. GDP has grown on average by 6.5% a year since. Foreign investors from Citibank to Hyundai have charged into the expanding consumer market. India has become a proud member of Goldman Sachs' BRICs, the club of developing nations the bank believes will propel global growth for decades to come.

Yet the reforms have not gone far enough. The government has failed to provide the proper infrastructure and education to build a firmer foundation for rapid growth. Nor has the License Raj been fully put to rest as businessmen, both foreign and local, are still stymied by an intrusive bureaucracy. Next to its more directed (and authoritarian) neighbor China, India usually compares poorly. Last year foreign investment into China reached $124 billion; India earned $32 billion.

Progress is slowed or even halted by the country's fractious democratic politics, with some left-leaning parties ferociously opposed to further liberalization. In 2011, Singh, now Prime Minister in a coalition led by his Indian National Congress, attempted to open India's retail sector to big foreign hypermarkets like Walmart, but in the face of stiff resistance, both in Parliament and on the streets, he backed down. As the reform drive has stalled, so has GDP growth. In October, the International Monetary Fund downgraded the 2012 forecast for India to 4.9%. Flagging Western economies would kill for such a figure, but for India, that would be the slowest growth in a decade. Research firm Capital Economics even worried in an August report that India was suffering from stagflation — that destructive combination of high inflation and low growth. Citing political paralysis, ratings agency Standard & Poor's warned in June that India could become the first BRIC to lose its investment-grade status. That India needs rebooting is evident. Indeed, that's the theme of a World Economic Forum conference taking place in New Delhi in November. Says Anand Mahindra, chairman of Mumbai-based automaker Mahindra & Mahindra: "The last year [for India] has been the most challenging since the reforms [began] for anyone who sees himself as an optimist."

Spirit of '91
Can there be an India 3.0? The weight of the country's problems has moved Singh to alter course. In September, he reinstated the previously thwarted opening of India's retail sector and invited foreign airlines to invest in the nation's struggling carriers. Less than a month later, he increased the limit on foreign investment in Indian insurance companies. Now there is talk that the government will form a national investment board comprising several ministers to fast-track important infrastructure-and-industrial projects mired in an obstructive approval process. The Finance Ministry is also hinting it will revoke that sentiment-sapping retroactive tax measure. This time around, Singh hasn't melted as his opponents turned up the heat. He refused to retract his retail reform even after a party bolted from his ruling coalition in protest. "We are not backing off what we thought was the right thing to do," says Montek Singh Ahluwalia, deputy chairman of the government's Planning Commission.

Will this last? Since 1991, reform has often ebbed and flowed on the vicissitudes of democratic politics, and with elections slated for 2014, partisan posturing could quickly smother economic reform once again. "There is a lot of politicking," says Godrej, "something quite similar to what is going on in the U.S. right now, where politicians are allowing political differences to be above economic sense." And even once decisions are taken, the resistant bureaucracy doesn't implement the changes efficiently enough. "There is too much placed on just announcements," says N.K. Tyagarajan, CEO of business-services provider Genpact. "There are so many ifs and buts [with every reform], there is so much fine print, execution takes longer than it should."

The Road Not Paved
A lot remains to be done. the government must simplify procedures and clarify confusing regulations on everything from paying taxes to acquiring land in order to spur investment. The lingering remnants of the License Raj have to finally become history. Consulting firm McKinsey figures that building a power plant in India takes five to six years — roughly twice as long as in China — in part because of regulatory hurdles. Until such roadblocks are removed, the nation's decrepit infrastructure — roads, ports and power systems — won't get the serious upgrade it requires. Fearing an outage that would cripple his operations, Genpact's Tyagarajan has to absorb the burdensome expense of maintaining three backup electric-generation systems. "India should be worried its competitiveness will change," he says. Without further reform, "the costs of doing business will keep going up."

India's politicians often paint reform as a necessary evil, forced upon them in desperate times, not the route to a brighter future. "We need to sell the advantages of economic development to society," says FICCI's Kanoria. "The government has not sold reform as part of a dream." No other major economy might be poised for faster growth over the next several decades. Unlike China's, rapidly aging because of its one-child policy, India's population is young and growing, giving it a demographic edge. In a 2011 report, Citigroup economists forecast that India, not China, will be the largest economy in the world by 2050. Indians could also become the planet's most important consumers, and thus a key driver of global growth. The Brookings Institution, in Washington, D.C., has projected that by 2030 India's middle class will spend more than China's or the U.S.'s. "We look like we are muddling along, but we get back into the groove," says Mahindra. If and when India fully does so, then it will finally achieve its promise.

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Monday, Oct. 29, 2012
Million Dollar Question
By Bobby Ghosh / Bangalore

For years I have impressed Indian friends by telling them I was in the office of Infosys' founders one morning in 1991, when a phone call from the U.S. told them they had won their first $1 million contract, to build an inventory-management program for Reebok. In the context of the Indian IT industry, the experience is analogous to being in the room with Steve Jobs and Steve Wozniak when they sold their first Macintosh. The two Infosys founders I was visiting that morning included me in their celebration: N.R. Narayana Murthy, Nandan Nilekani and I toasted each other with cups of sweet, milky tea.

If I get props for that story, it's because, among Indians, Bangalore-based Infosys has a cachet not unlike that of Apple in the U.S.: Infosys is cool. The story of its founding in 1981 — by seven friends with $250 between them — was part of industry lore a decade later, at the time of that phone call. Infosys' revenue was just $5 million, but it was one of the standout performers in the Indian IT sector, then in its infancy. It was a new type of company for the country, not family-owned and -operated but created by executive entrepreneurs.

As the company's revenue has grown (it now exceeds $7 billion), so too has its reputation for good governance, social responsibility and people management. It is routinely ranked among India's most admired companies — and its greenest and most conscientious corporate citizens. In a country with few international business successes, Infosys is as much a symbol of the newly emerging India as it is its barometer.

India's economy is at a point where growth has slowed, and the next leap forward requires bold new strategies. Infosys finds itself in a similar predicament. For the first time in years, the company has had to revise downward its growth estimate: in July the company said sales would expand 5% in fiscal 2012 — 13, instead of the 9% it had previously predicted. When it reported disappointing operating margins for the quarter ending on Sept. 30, its share price slumped by 8.8%. "It's a challenging time," says S.D. Shibulal, who was on the other end of that famous phone call from the U.S. and who now runs the company. Infosys is hardly alone. Long the pacesetter for the Indian economy, the IT industry is struggling to keep up with its success over the past 20 years. The country's tech companies are collectively projected to expand 11% to 14% this year, half the rate of growth in the go-go years of the past decade.

On the surface, all Indian IT companies face the same set of problems. Their biggest market, the U.S., has slowed down, and their presence in places like Asia and Europe is too small to compensate. But there are also more-fundamental challenges at play. India's traditional advantage in technology services — its vast annual supply of English-speaking engineers willing to work for a fraction of what their Western counterparts are paid — is being eroded by a decline in the quality of education, higher salary expectations and stiffer competition from countries like the Philippines, Malaysia and Indonesia, where tech salaries are even lower. If the trend continues, it will imperil the business model that underpins India's IT sector.

Infosys believes it knows a way out.

for over a decade, foreigners seeking a glimpse into India's mighty IT machine made a pilgrimage to the Infosys campus a three-hour drive southwest of its Bangalore headquarters, where tens of thousands of young software engineers have been trained for world domination. When at full capacity, the campus can accommodate nearly 15,000 students, the majority of whom are put through six months of training. Most of them end up at the offices of Infosys' clients around the world, maintaining or improving existing IT systems.

Infosys spent over $450 million on this campus (a second, smaller one is in the western city of Pune), and the investment has paid off handsomely. The company's business model has depended on being able to produce huge numbers of skilled engineers, and its workforce is currently in excess of 150,000 employees. (Microsoft has fewer than 95,000.)

Last year, however, the company unveiled a business plan designed to enhance revenue by means other than simply training more and more engineers. The scheme was dubbed Infosys 3.0. In Shibulal's conception, 1.0 was the company in its start-up phase, and 2.0 the period of rapid global expansion in the late 1990s. The most ambitious element of the plan calls for the development of software products and platforms that can be customized for individual clients. So rather than have hundreds of engineers working separately on one-off software solutions for two banking clients, Infosys will develop an original software product both banks can buy. Each can then have smaller numbers of engineers customize the product to their unique needs. Rather than pay a one-time fee or an annual maintenance contract, clients will pay a subscription for the product and updates.

The plan, says Ashok Vemuri, who heads Infosys' U.S. operations, is the logical evolution from the manpower-intensive business model. "This way, we make the most of our intellectual capital and are not dependent mostly on human capital." Products and platforms would allow the company to capitalize repeatedly on each idea it develops and to differentiate itself from the legions of other companies (including its Indian rivals) that offer old-fashioned elbow grease. And, says Sanjay Purohit, who heads the new-products division, "the beauty of it is that if the client is more comfortable with 1.0 or 2.0 services, we still have the campus."

Infosys has already developed new products for sectors like banking and finance, energy, retail and manufacturing. Since the 3.0 plan was announced, the company says it has notched up 40 customers, with sales worth $350 million. That's still only a fraction of revenue, but Purohit says in five to seven years, he hopes products and platforms will make up a third of all sales.

industry analysts have responded to infosys 3.0 with some caution. After all, Indian IT companies have a poor record in software development. They are adept at working with businesswide platforms and customizing them for clients, but no Indian company has developed a product that has sold in large numbers. (This extends to retail software: there is no Indian equivalent of Microsoft's Windows or a globally popular Indian-made video game.) Infosys 3.0 may be entirely logical, but its execution is not guaranteed. "Infosys can develop some compelling platforms," says Bhavan Suri, an analyst who studies the company for William Blair & Co., a Chicago-based financial-services firm. "The bigger question is, Can they successfully sell these types of products?"

Shibulal acknowledges that getting clients to see Infosys as a maker of products won't be easy. But he says the company has overcome deeper skepticism: "In the 1980s, I used to go into meetings with potential clients in the U.S. with a map. I would point to India and say, 'This is where I'm from, I speak English, and I can solve your IT problem.'" That the Indian IT industry no longer has that hurdle is in no small part attributable to Infosys' success.

Can India pull off a 3.0 transformation too? Shibulal diplomatically evades the question. But it is instructive that change at Infosys has come from the top. Shibulal is the fourth of the seven founders to take the reins, and very likely he will be the last. When he moves on — the company requires its CEOs to retire at 60, and he will hit that mark in 2015 — Infosys will pass into the hands of a manager who wasn't present at its birth.

The first two CEOs have gone on to flourishing post-Infosys careers: Murthy is a much admired philanthropist and sought-after management guru, and Nilekani leads the Indian government's giant program to issue every citizen a smart ID card. Shibulal says he hasn't decided what he'll do next but feels the passing of the torch to professional managers will be good for Infosys. "It will be a chance for another refresh," he says. If that management change can consolidate a successful transition to Infosys 3.0, then the company will retain its status as a pioneer. India is in as much need of that as ever.

Million Dollar Question
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inserted by FC2 system