June 2004

Insaaniyat

R Gopalakrishnan, executive director, shares his view on India's experience in balancing growth, entrepreneurship and social justice

R Gopalakrishnan
It is an honour to deliver the Sultan Singh Jain Memorial Lecture. From what I have read about the late Shri Sultan Singh Jain, he was a great entrepreneur and visionary, and contributed immensely to the management movement in the country. He belonged to the generation of people who helped free India to build up its basic repertoire of skills and capabilities. It is a fitting tribute to hold a memorial lecture in the name of such a pioneer.

Most of us try to understand a country through economists, historians and tour guides. I wish to present developments in India from a professional manager's perspective, which concerns itself greatly with the context of issues and its influence on the decision-making and strategic mindset. Nobel Prize winner Daniel Kahneman had studied the fuzzy way in which people in their daily economic lives perceive things. Mine is an attempt in the same direction (minus the Nobel Prize). It is flawed in its own way, but hopefully, it is different from the more common viewpoints encountered. Insaaniyat means humaneness, nobleness towards human beings. That is the central goal of all development, ushering in change with a human face, whether it is India, Zambia or South Africa. India is going through a tremendous experiment in economic and social development. What one observes is work-in-progress and it needs to be viewed in that perspective.

In management-speak, the term 'strategic intent' is used to connote three dimensions1 — a sense of destiny, direction and discovery. Put simply, this is tantamount to mindset. To truly understand what is going on, one needs to appreciate the changes in mindset, because that is what precedes agendas and actions. I will talk about the mindset at three inflection points in the last seven decades of India's development.

A. Mindset around independence
B. Mindset after central planning
C. Entrepreneurial mindset ahead

A. Mindset around independence
In 1930, Will Durant2 speaking about India noted that "the economic drain out of resources of the land… has reduced India to a land of famines more frequent, more widespread and more fatal, than any known before in the history of India or of the world". Not surprisingly, the priority of dealing with food shortage was fully grasped at the time of independence in 1947. At that time, Amartya Sen's thesis was not known3, i.e. that no substantial famine has ever occurred in any independent country with a democratic form of government and a relatively free press. However, it is entirely true to state that during the last six decades of independence, the exercise of political rights by the people of India has put pressure on the government, compelling it to respond to the acute suffering of the people. Potential famine has been prevented in India, often by creating countervailing employment.

It would be incorrect to derive the impression that avoidance of famine has been India's major achievement. The purpose of recounting the background elaborately is to illustrate how the mindset of a nation can be shaped by its experiences and images.

In the course of the freedom struggle, a nationalist economic platform had emerged in the country4. The leadership was acutely aware of the need for industrialisation to modernise the economy. The problem that some other countries faced was avoided, i.e. first, inadequate growth of food production and second, a lack of general economic growth due to an undiversified production structure. The nationalist economic agenda worked — imperfectly, but pragmatically.

B. Mindset after central planning
After independence, the country had little foreign exchange, not much industrialisation and was in quest of an appropriate development strategy. In those days, all intellectuals were smitten with socialism, and so was Nehru who was deeply impressed by his visit to the Soviet Union. The nation embarked on a centrally planned, socialist model of development, but fortunately co-existing with private enterprise. Unfortunately, the results were not good enough.

It was in 1991 that liberalisation began in most peoples' reckoning. Intuitionally, I have felt that liberalisation in India began in the 1980s with Mrs Indira Gandhi. The firmly shut door was eased open in 1981, but swung wide open later in 1991, I feel. She probably had felt scarred and battered by the experiences of controls and the planned economy to which she was witness.

As has been observed by The Economist5, the long-term growth in India accelerated from 3.5 per cent up to the 1970s to 5.4 per cent in the 1980s and 5.9 per cent in the 1990s. Expressed more dramatically, it took 57 years to double per capita GDP in the 1970s, now it takes only 18 years6. Due to the reduction of population growth, the per capita GDP has more than trebled from 1.2 per cent in the 1970s to 3.9 per cent in the 1990s. So the question does arise: when exactly did the transition to high growth happen? I came across a paper that demonstrates that the transition to high growth occurred around 1980, a full decade before the 1991 liberalisation to which much credit (and criticism) accrues.

Dani Rodrik and Arvind Subramanian7 argue that the growth transition of the early 1980s was grounded in an impressive increase in productivity. Amazingly, the total factor productivity in the period 1980-1999 surpasses that even of East Asia in the first 20 years of the East Asian miracle. So what caused this sudden jump in economic growth and productivity? Through their analysis, they rule out factors such as external liberalisation, public investment, green revolution and internal liberalisation. They explain the transition through certain elements. First, an attitudinal change on the part of the government. Second, this shift was pro-business rather than pro-competition. Third, these small shifts elicited large productivity responses because the Indian economy was operating well below its potential. Lastly, the already developed infrastructure for manufacturing played a key role in growth due to the stimulation of these factors.

So to summarise, I feel very persuaded by the argument that there was a mindset change around 1980. Just as there was a pre-independence mindset fashioned by the legacies of colonialism, there was an inflection in 1980, fashioned by the legacies of over 30 years of a centrally planned economy. Thirty years, in which a whole generation of Indians lived in a world of idealism, turning to their dreams to escape reality. This was very much in evidence in the social fabric of those times, especially in the films that were being made.

This point about mindset will reappear in the third and last part of my speech. After several years of the deregulation mindset, there is an entrepreneurial mindset driving the agenda for the next future.

C. Entrepreneurial mindset ahead
An entrepreneurial mindset is re-emerging in India. Unlike the generations before them, young Indians are no longer obsessed with India's poverty, but with its future. This gives India a fighting chance. I wish to make four points regarding entrepreneurship:

First, that it has been in the national gene. Second, that the openness to productivity ideas has been a strong driver. Third, that entrepreneurship is contagious and success attracts others in a virtuous cycle, a cycle in which India is now happily placed. And fourth, it is manifested in three examples I will use — in manufacturing, knowledge and microfinance.

It is noteworthy that right from ancient times until 1900, India had been entrepreneurial, outward-looking and had a foreign trade surplus. As late as the 1920s, India was ranked fourth in world trade with a market share of 2.5 per cent as against 0.7 per cent today. Trading took Indians to Africa, the Caribbean, Malaysia and the Arab world over the centuries. Therefore, the first point that I wish to make is that the colonial period apart, during the first few decades of independent India, central planning and socialist policies frustrated the natural entrepreneur — I say, frustrated, not suppressed! That centuries-old DNA of entrepreneurship and restlessness has once again started to find release — that is why Indian businessmen are again in a mood to go out and do business with the rest of the world.

The second point I wish to make is that the adoption of productivity techniques has been a strong instrumentality. For instance, until the 1980s, one would not find global consultants operating in India. Today, you would find McKinsey, BCG, A.T. Kearney, Accenture and several others, serving clients who are hungry to cut costs, improve margins and become competitive. Or look at the area of quality — the first time any Indian company got the Deming award was in 1998, but after that one in 2001, two in 2002 and five in 2003. Same with respect to the TPM Excellence Award — one each in 1995, 1998 and 1999. Thereafter, three in 2000, seven in 2001, eight in 2002 and fourteen in 2003. Of all the software firms in the world certified at the highest level of CMM level 5, three-fourths are in India! So, for sure, one can recognise some of the instrumentalities that have been responsible for the changes that are occurring.

The third point I wish to emphasise is that entrepreneurial behaviour8 is contagious, it creates a flocking mentality, a bit like gold prospecting. Idea entrepreneurs in knowledge industries create new ideas, new segments or entirely new markets. Thus, it was Texas Instruments which first set up a global R&D centre in Bangalore 20 years ago. Several others flocked and today there are 100 global R&D centres in Bangalore. Prior to 1995, venture capitalism was unknown in India. Venture investment in India in 1996-97 was $20 million, last year it reached $1 billion! Thus, there is a mindset change among VCs as well as entrepreneurs.

The fourth and last point is for me to illustrate this entrepreneurship through three anecdotal examples of manufacturing, knowledge and microfinance.

Manufacturing
Just a few years ago, the constant refrain of Indian industry to the government was that MNCs would dominate and protection was essential. In December 2003, the finance minister dropped the effective import duty by 5 percentage points. Between April 2003 and March 2004 the rupee appreciated by 9 percentage points whereas Indians have had 50 years' experience with devaluation. Both were noticed, but that was about it. Indian industry went ahead to attend to its agenda rather than crib or complain. Between November 2003 and April 2004, Indian companies have acquired 44 companies abroad worth two billion dollars9. A few years ago, Tata Tea acquired Tetley in the UK, recently Tata Motors acquired Daewoo Heavy Commercial Vehicles in Korea, Bharat Forge acquired a company in Germany, Reliance Infocomm acquired Flag Telecom and so the list goes on.

There is also something happening out there in manufacturing. Moser-Baer, a firm near Delhi is the world's largest optical media manufacturer, and the lowest cost producer of CD-recorders. Its exports are over a quarter of a billion dollars!10 Hero Honda is now the largest manufacturer of motorcycles in the world with a production of nearly 2 million vehicles per year. Hindustan Inks is the world's largest, single-stream, fully integrated printing inks plant with subsidiaries in the US as well as Austria. Essel Propack is the world's largest laminated tube manufacturer with a manufacturing presence in 11 countries. Tata Steel is the lowest-cost producer of hot-rolled steel coils in the world. It has been commented11 that "the key lesson from the economic performance over the past year or so has been the obvious recognition of India's competitive edge in numerous sectors… the Indian economy is rocking and rolling as it mounts a challenge to China's title for the world's fastest growing GDP". A bit hyped, but not entirely wrong, in my view.

Knowledge
The second illustration of entrepreneurship that I wish to use pertains to knowledge. India has a long tradition of knowledge. The world's first university was established in Takshila in 700 BC. The value of pi was calculated in India, as also the invention of quadratic equations. There are today 250 engineering colleges producing 150,000 engineers out of a world output of 900,000 engineers per year. We have over 900 management schools which turn out about 80,000 management graduates, about similar to the US and much more than say in Britain or Germany.

Admittedly, the quality is very variable, but the best are truly outstanding. The list of multinationals setting up R&D centres in India includes General Electric, Microsoft, IBM, Cisco, Intel, Astra Zeneca, Motorola and Texas Instruments12. Patent applications in India have shot up from 4,000 in 1995 to almost 15,000 last year. The Indian subsidiary of Intel filed for 63 patents engaging 1,500 professionals at its R&D centre in Bangalore in "engineering challenges as complex as any other project on the planet."13 Inadvertently, I should not give the impression that India alone has captured the world's intellect to the detriment of other countries. All I intend to communicate is that we have set out on a new journey in R&D. Sarnoff, an American R&D firm, has correctly argued that of the three requirements for developing an innovation-driven industry, India has two: the technical skills and access to capital. What is missing is an indigenous business model.

So, why are foreign companies, some of whom having budgets higher than India's R&D budgets, moving their R&D in part to India?14 There are several reasons. First, the cost of doing R&D is a fraction of that in the developed world. Second, there is a pretty robust technical educational system, producing some excellent manpower. Third, foreign companies are seeking access to high quality engineers due to problems of availability / costs in their home countries. Fourth, R&D globally has become multi-geographic with innovation-specific patterns of collaboration and diffusion. These regions permit GE to set up the John F. Welch Technology Center at Bangalore with 1,800 engineers engaged in fundamental research for most of GE's 13 divisions15.

So, as you can see, knowledge is a strong entrepreneurial force in India. What about R&D in IT, you may wonder. I did not cover it because IT is better known. Today, Bangalore has 140,000 IT professionals; 20,000 more than Silicon Valley! Research agency, Frost & Sullivan, has reported in April 2004 that the R&D outsourcing market for IT in India will grow at 32 per cent pa, from $1.3 billion in 2003 to $9.1 billion in 2010.

Microfinance
It is not just about entrepreneurship being unleashed through manufacturing and knowledge.

Ideas are being generated and experimented with in the most potent area of rural entrepreneurship through microfinance. Microfinance is the small loan given to the poor by NGOs to help start small businesses. The world over, microfinance is synonymous with Grameen Bank, Bangladesh. In India too, organised entities like Share Microfin, Andana, SKS are pioneering microfinance initiatives in some pretty backward areas of the country16.

Now, an Indian-born venture capital specialist from Silicon Valley and a Berkeley professor have conceptualised a sort of Marshall Plan for the reconstruction of rural India. It is called RISC: Rural Infrastructure Services for Commons17. The authors argue that $1 million is enough to provide power, telecom, transportation and financial infrastructures to 100,000 rural people. Hence, with $5 billion, one can create the infrastructure to liberate, infrastructurally speaking, 500 million rural people. The village / community society receives the investment directly on behalf of its 100,000 members. Entrepreneurs in that village society receive their loans directly based on a business plan. The authors feel that even if the economic output is raised by only 10 per cent, the project will pay back for itself. Of course, this is only an idea, but a rather engaging one, you would agree!

Conclusion
The sheer adventure of India's economic growth with social justice and entrepreneurship is staggering, yet providing a human face to development. You can focus on its beauty spots or its warts and moles. And let me state upfront, there are warts and moles: the high fiscal deficit of our government, the urgent need to take development programmes and jobs to rural areas, the inadequate state of our infrastructure and so on. These are real problems awaiting solutions.

However, no such experiment of balancing growth, entrepreneurship and social justice has been undertaken in human history by any other developing country on such a large scale. To borrow from a generalisation of Lord Keynes, one hopes that India is likely to do the rational since most alternatives have already been tried!

In the next few decades, India has the real possibility to be once more at the top of the league tables among the nations of the world, a position she held for centuries, but lost in the last few hundred years. The coming decades will be truly momentous, as the script for India's insaaniyat journey will continue getting scripted. That is why there is a palpable air of excitement in the country.

References

  1. Competing for the Future by Gary Hamel and C. K. Prahalad
  2. The Case for India by Will Durant, Simon and Schuster
  3. Development as Freedom by Amartya Sen, Knopf
  4. The Evolution of Economic Policy in India by P. N. Dhar, Oxford
  5. The Economist, India's Shining Hopes, February 21, 2004
  6. India on the growth turnpike, Vijay Kelkar, October 2003
  7. From "Hindu Growth" to Productivity Surge by Dani Rodrik and Arvind Subramanian, National Bureau of Economic Research, Cambridge, Massachusetts
  8. The Entrepreneurship Dynamic by CB Schoonhaven and E. Romanelli, Stanford University Press
  9. Charge of the Indian Brigade by Arun Shourie, Indian Express, April 2-4, 2004
  10. Listen to the New India by Arun Shourie, Indian Express, August 15-17, 2003
  11. India is feeling good, Aaron Chase, Institutional Investor, March 2004
  12. R&D: India's new star industry by Swaminathan Aiyar, Times of India, April 11, 2004
  13. Innovative India, The Economist, April 3, 2004
  14. From Brain Drain to Brain Gain by Dr. R. A. Mashelkar, Convocation Address at Pune University, December 26, 2000
  15. The Rise of India, Business Week, December 8, 2003
  16. Microfinance, Business World, April 12, 2004
  17. RISC: A Model for Implementing the Bicycle Commute Economy by Vinod Khosla and Atanu Dey, www.kpeb.com

Sultan Singh Jain memorial lecture delivered by R Gopalakrishnan on June 11, 2004, at the Meerut Management Association, Meerut.

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The leadership challenge: direction and destination: R. Gopalakrishnan, executive director, Tata Sons, explains the need for and importance of direction in today's business leader
Leadership — Some ethical challenges: R. Gopalakrishnan, executive director, Tata Sons, explores what it means to don the mantle of leadership, the responsibilities and pitfalls