India After Gandhi: The History of the World's Largest Democracy

by Ramachandra Guha

  The voices of men like Spratt and Shroff were drowned in the chorus of popular support for a model of heavy industrialization funded and directed by the government. The 1950s were certainly not propitious times for free-marketeers in India. But from time to time their ideas were revived. After the rupee was devalued in 1966 there were some moves towards freeing the trade regime, and hopes that the licensing system would also be liberalized.3 However, after Indira Gandhi split the Congress Party in 1969, her government took its ‘left turn’, nationalizing a fresh range of industries and returning to economic autarky. Then, in the late 1970s, the socialists in the Janata regime spectacularly affirmed India’s economic independence by expelling foreign firms such as IBM and Coca-Cola.

  In 1980 Mrs Gandhi returned to power. The next year, the head of the Tata Group of Companies gave along interview to a leading newspaper. J. R. D. Tata said here that ‘the performance of the Indian economy from the mid-fifties to the mid-sixties reflected the soundness of the mixed economy as originally conceived’. Industrial production grew at a handsome 8 per cent a year. Then, in the late 1960s, the opportunity arose to open up the economy to competition. Had this been done, thought Tata, ‘employment would have grown more quickly in all sectors; production would have increased considerably and shortages removed; and government revenues too would have materially increased, which in turn could have been utilized for developmental programmes’. What actually happened, however, was that the government embarked on ‘the nationalization of major industries on an expropriatory basis’.

  Moving on from history to the present, the industrialist urged the government now ‘to free the economy and see the difference’. The recent economic success of countries such as South Korea, Spain, Singapore, and Taiwan was because these ‘newly industrializing countries rely mainly on private enterprise [which] their government’s economic policies are geared to[wards] encouraging and supporting’.4

  II

  In the 1980s the government of India did lose some of its antipathy towards business. Greater encouragement was given to private enterprise, with key sectors being delicensed. These were ‘pro-business’ policies that enabled Indian industry to become more productive and profitable. However, they stopped short of being ‘pro-market’ policies that removed impediments to entry and exit by Indian or foreign firms, thus encouraging competition and expanding consumer choice.5 It took a major crisis for the Indian state to work towards a fuller liberalization of the economy.

  This crisis was linked to the growing external debt of the government. India had long taken aid from multilateral institutions such as the World Bank. During Rajiv Gandhi’s tenure borrowings from the market also increased rapidly. In the summerofl991 the debt had reached $70 billion, of which 30 per cent was owed to private creditors. At one stage, foreign exchange reserves were down to two weeks of imports.

  The prime minister in 1991 was P. V. Narasimha Rao, a quiet, understated man who had lived and served in the shadow of Indira Gandhi and her elder son. Thrust into the top job after Rajiv Gandhi’s death, he revealed a boldness altogether at odds with what was previously known of his character. He appointed as his finance minister Dr Manmohan Singh, an apolitical economist whose previous jobs included finance secretary and governor of the Reserve Bank. Moreover, he gave him the freedom to carry out economic reforms as he saw fit.

  Before he became a public servant, Manmohan Singh had written an Oxford DPhil thesis suggesting that India move towards a more open trade regime. His thesis was written in the 1960s; now, three decades later, he seized the chance to put its recommendations into practice. The rupee was devalued, quotas removed for imports, tariffs reduced, exports encouraged and foreign direct investment welcomed in. The domestic market was also freed; the ‘licence-permit-quota-raj’ was substantially done away with, and the public sector discouraged from expanding. Finally, the reforms sought to curb the profligacy of the government. Measures were introduced to reduce the fiscal deficit, which was running at an alarming 8 per cent of gross domestic product.6

  A new industrial policy, framed in July 1991, made it clear that ‘industrial licensing will henceforth be abolished for all industries, except those specified, irrespective of levels of investment’. The exceptions were industries critical to the country’s defence, and industries hazardous to the environment and to human health, such as cigarette and alcohol manufacture. This was a dramatic reversal of the existing policy, which had reserved many industries to the state, and many others to the small-scale sector.7

  There was also a liberalization of the services sector, with private players being encouraged to invest in insurance, banking, telecommunications and air travel – sectors previously under more or less complete state control. Some economists thought that the reforms did not go far enough, noting, for instance, that the labour laws remained rigid (making it almost impossible for managers to fire workers) and that, while barriers to entry had been removed, barriers to exit remained (thus, entrepreneurs still needed government permission to close unprofitable units). The bureaucratic regime had been undermined but not completely dismantled. It still took weeks or months to start a business in India, whereas in China or Malaysia it took a matter of days.8

  Nonetheless, the changes introduced under the new regime constituted a major departure from past policies. Even a year or two before they were undertaken, such reforms were considered unlikely or even impossible. In a book published in 1989, a professor at the Harvard Business School identified the vested interests that kept the command economy going – which included politicians, bureaucrats and indigenous entrepreneurs. The apparently permanent hold of this alliance of interests, wrote the Harvard professor, had ‘served to diminish prospects for fundamental reforms of the nation’s economic policies’. In countries such as South Korea, the discipline of the market and the openness to foreign capital had led to a surge of wealth and productivity. In India, however, the state was ‘paralyzed’, and local entrepreneurs ‘blind to the need for reform. The prospect was grim, namely, that ‘the “miracle” growth achieved by these other industrializing countries will continue to elude India’.9

  III

  For years the Indian economy had expanded at what was derisively termed the ‘Hindu rate of growth’. The pro-business reforms of the 1980s had increased the growth rate, and the pro-market reforms of the 1990s augmented it further. The steadily improving performance of the Indian economy is captured in Table 29.1.

  * * *

  Table 29.1 – Indian economic performance, 1972–2002

  * * *

  Percentage growth in Percentage growth in

  Period gross domestic product per-capita income

  1972–82

  3.5

  1.2

  1982–92 5.2

  3.0

  1992–2002 6.0

  3.9

  * * *

  SOURCE: Vijay L. Kelkar, ‘India: On the Growth Turnpike’, K. R. Narayan Oration, Australian National University, Canberra, 2004.

  Naturally, the growth has been uneven, with some parts of the economy doing better than others. The most significant expansion has been in the services sector, which grew at an average of 8.1 per cent a year through the 1990s. Much of this was contributed by the software industry, whose revenues grew from a paltry $197 million in 1990 to $8,000 million in 2000. In some years the industry grew at more than 50 per cent a year. Much of this expansion was aimed at the overseas market. While in 1990 the Indian software industry’s exports were valued at $100 million, by the end of the decade the figure had jumped to $6,300 million.

  In the year 2000 there were 340,000 software professionals in India, with some 50,000 fresh engineering graduates being recruited annually. About 20 per cent of these professionals were women. In the first years of the new century the industry grew at an even faster rate. By 2004 it was employing 600,000 people, and exporting $13 billion worth of services.

  In both India and abroad the software industry is c
ommonly acknowledged as the ‘poster boy’ of the reforms. The industry is a largely indigenous product, with firms large and small owned by Indian entrepreneurs, employing Indian engineers trained at Indian universities. Yet the work they do is mostly for foreign clients, who include many of the Fortune 500 companies. Some of this work is routine – maintaining accounts and employee records, for example. Other work is more innovative, such as designing new software which is then patented and sold overseas. (I-Flex, a financial package developed by an Indian company, is now in use in more than seventy countries.) In its early years, the industry focused on ‘body-shopping’, sending engineers on short-term visas to work on site in European and American companies. However, with the development of satellite communications and the Internet, and the increasing sophistication of the work being done, the emphasis has shifted to ‘outsourcing’, to the codes being written within India and then sent back overseas.

  Software firms such as Wipro, TCS and Infosys are now household names in India. But they are also known and widely respected in business circles abroad. They are listed on the New York Stock Exchange, and own and operate subsidiary companies in many parts of the world. But there are also many small- and medium-sized companies in the business, and the market share of the largest firms has steadily declined over the last decade.10

  The software enterprises are clustered round a few major cities: Delhi, Madras, Hyderabad and, above all, Bangalore, which has acquired the sobriquet ‘India’s Silicon Valley’. Bangalore is home to India’s finest research university, the Indian Institute of Science, set up in 1909. After Independence the city became a hub of industrial units, with large state-owned factories setup to manufacture machine tools, aircraft, telephones and electronic equipment. When one adds to this rich scientific tradition Bangalore’s mild climate and cosmopolitan culture, one understands why it has emerged as such an attractive investment destination. Wipro and Infosys are both headquartered here, as are several other important players in the software industry.

  To explain the rise of the software sector one must invoke factors both proximate and distant. Success, said John F. Kennedy, has many fathers. In this particular case, however, all the claimants have truth on their side. Some credit is certainly due to the reforms of 1991, which opened up the foreign market for the first time. But some credit must also be taken by Rajiv Gandhi’s government, which gave special emphasis to the then very nascent electronics and telecommunications industries. Moving back a decade further, the Janata government’s expulsion of IBM allowed the development of an indigenous computer manufacturing and maintenance industry. But perhaps the story should really begin with jaw a harlal Nehru’s government, which had the foresight to set up a chain of high-quality engineering schools, and the wisdom to retain English as the language of higher education and of interest and intranational communication. For, as one respected analyst of the IT sector comments, ‘India’s greatest asset is a large, educated, English-speaking workforce that is willing to work at relatively low wages’.11 This is a delicious irony: that this showpiece of market liberalization was made possible by a man committed to a state-sponsored path of economic development.

  In addition to these other factors, a geographical accident has also contributed enormously to the boom – the fact that India is on the other side of the globe from the United States, so that work done in the Indian day is ready by the time the US client gets out of bed.

  The facility with English, and the luck to be five or ten hours ahead of the prosperous West, has led to other forms of work being outsourced to India. At the higher end of the value chain, medical tests of patients in US hospitals are sent to be analysed by Indian radiologists and pathologists. At the lower end is the mushrooming call-centre market in which young Indians are employed to stay up all night to take calls from holders of Western credit cards, or to book seats on Western planes and trains. Many of the employees in these centres are women, who can speak grammatical and easily understood English and who work harder than their American counterparts at one-tenth the cost. In 2002 there were more than 300 call centres in India, employing 110,000 people. The industry was growing at a staggering 71 per cent per year. It was estimated that by 2008 it would employ 2 million people, and generate $25 billion dollars annually, amounting to as much as 3 per cent of India’s GDP.12

  The outsourcing of Western work to Indian workers is taking ever more varied forms. English teachers in Kerala tutor American kids over the Internet in grammar and composition. Catholic priests in the US and Canada send prayer requests to their Indian counterparts. One can have a thanksgiving prayer said for Rs40 (roughly a dollar) in an Indian church, whereas in an American church it would cost five times that amount.13

  If less spectacularly, the reforms of the 1990s have also had an impact on the manufacturing sector. Increased competition and the entry of foreign firms has led to greater productivity and lower prices, benefiting the domestic consumer. Some Indian industries have seized on opportunities offered by the opening of international markets. Thus, top clothing brands such as Gap, Polo and Tommy Hilfiger all increasingly have their products made in India. India now exports some half-million motor vehicles a year, as well as many sophisticated components used in vehicles assembled elsewhere (one out of every two American trucks uses an axle made by an Indian firm). Another growth area is pharmaceuticals. Medicines exported by Indian companies were valued at $1,000 million in 2003 – these included drugs made according to modern pharmacopoeia as well as those following the indigenous Ayurveda system.14

  The opening of the economy also led to many foreign firms coming in to tap the Indian market. Between 1991 and 2000 the government approved more than 10,000 investment proposals by foreign companies; if all had fructified, they would be worth a staggering $20,000 million. They spanned the range from telecommunications to chemicals, and from food processing to paper products. Of the projects that actually got off the ground, the most visible brands were in the consumer sector: cars made by Ford and Honda, TVs by Samsung, phones by Nokia and drinks by Pepsi and Coca-Cola, whose advertisements and showrooms were now a noticeable presence in the major Indian cities. Less visibly, companies such as Philips, Microsoft and General Electric had also begun establishing research stations in India, which employed local as well as expatriate engineers in developing cutting-edge technologies for the global market.15

  The importance of foreign trade to the Indian economy steadily grew through the 1990s. Exports increased from 4.9 to 8.5 per cent of GDP, imports from 7.9 to 11.6 per cent. Yet, in the aggregate, this remained a relatively closed economy. In 1980 India accounted for 0.57 per cent of world trade; twenty years later the figure had inched up to 0.71 per cent.16

  IV

  One less obvious aspect of recent economic history is the change in the social composition of the entrepreneurial class. Once, the major capitalists in India came from the traditional business communities – Marwaris, Jains, Banias, Chettiars, Parsis. However, in the past three decades a range of peasants castes have moved into the industrial sector. Some of the most successful entrepreneurs of late have been Marathas, Vellalas, Reddys, Nadars and Ezhavas -from castes who for centuries have worked the land. Again, some of the best-known software start-ups – such as Infosys – have been initiated by Brahmins, a caste that traditionally served the state or the academy and regarded commerce with disdain. There have also been some very successful Muslim entrepreneurs, such as Azim Premji of the software giant WIPRO.17

  Meanwhile, the surge in economic growth has led to an expansion in the size and influence of the Indian middle class. The emergence of this stratum, writes the political scientist E. Sridharan, ‘has changed India’s class structure from one characterized by a sharp contrast between a small elite and a large impoverished mass, to one with a substantial intermediate class’. How substantial it actually is remains a matter of definition and interpretation. Defined most broadly, to include all households with an annual income in excess of
Rs70,000 (at 1998–9 prices), the middle class consists of as many as 250 million Indians. Defined most exclusively, to keep out all those who earn less than Rs140,000 a year, it consists of only 55 million Indians.18

  This new middle class is the prime target of the new products and services that have entered the Indian market in recent years. There are now more than 50 million subscribers to cable television in India, and at least 100 million Indians who own mobile phones. The spread of these services grows exponentially, as does the spread of that artefact most typical of the modern consumer economy, the motor vehicle. Bangalore, for example, has as many as 2 million vehicles on its roads, with 20,000 new ones being added every month.