The information revolution, is a revolution of free energy as well…free intellectual energy.
– Steve Jobs, 1987
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Free Intellectual Energy
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India Learns To Innovate
India is regarded as the world’s outsourcing center and a production powerhouse for generic drugs. Information technology and pharmaceutical companies have lent the India story a rich layer thanks to their reputations for efficiency. Aside from creating hundreds of thousands of jobs at home, these industries have helped train a domestic labor force that suffers at the hands of a broken higher-education system. Above all, Indians who have worked at these companies have been filled with a confidence to strike out on their own, and the seeds of cutting-edge innovation are now taking root in the Indian economy.
For a long time, India’s economy was starved for capital. Its best scientific talent went abroad because there were no opportunities at home. Monopolistic companies found their products to be in permanent demand because of artificial shortages created by government policy, so they never felt the need to invest in innovation. But business realities have changed dramatically over the last decade as India transforms into an urbanized, industrial economy. An increasingly discerning consumer base and competition in the marketplace are forcing companies to innovate for the home market. One example is Tata Motors, the builder of the $2,500 Nano car, which changed automobile design fundamentally and invented new ways for automobile manufacturing. Nano factories use “smart” technologies and automation to manage supply chains in real-time and minimize the consumption of energy and resources during production.
Economic turmoil in developed nations and stringent immigration policies have made the prospect of returning home more attractive for expatriate Indians. Vivek Wadhwa, who researches innovation, showed that more than 60 percent of the returnees to India cited better economic opportunities as a key reason for making the shift. These individuals bring with them not just experience and skills, but a culture and professional network that is catalyzing innovation in India. Indeed, moving up the value chain this way is imperative for the economy to maintain its growth momentum and create jobs.
Seeing the quality of people flocking to India, global investors have eagerly set up shop. India has never seen the availability of so much financial risk capital — yet it isn’t enough, and it is spread rather unevenly. Many investors believe that India is still limited when it comes to product innovation and are hesitant to back innovation-driven ventures. Instead, they choose to play it safe by focusing on outsourcing-oriented businesses, a formula that has been known to work well.
As an entrepreneur and venture capitalist in India, I see that my nation is at a tipping point. India has always failed to achieve its potential when it comes to commercializing technology, but with the return of talent from abroad and the emergence of a large domestic market, it now has momentum.
I have found that companies that create knowledge and commercialize scientific research can attract engineers and scientists from across the globe. Two companies that I’ve invested in include founders who used to be expatriates.
India can be a chaotic and difficult place to do business, consistently getting a low ranking in the World Bank’s reports on the ease of doing business. Opening bank accounts or working with the government’s tax and regulatory agencies entail mounds of paperwork and can drag on for weeks. Still, it makes sense to invest in innovation because of India’s superior capital efficiency, which mitigates financial risks. Niranjan Rajadhyaksha, an economist, has shown in his book “The Rise of India” that India requires four units of capital to generate one unit of output, while China consumes five units of capital to produce one unit of output.
There are lessons here for policymakers as well — competition for talent and capital is now global. Nations that champion openness and freedom will be able to compete and prosper, while those that remain insular will fall behind. A lot remains to be done to cultivate such an environment in India. Outdated labor laws constrain the development of manufacturing, and the higher-education system needs large investments for expansion along with a boost in autonomy.
India has rapidly moved on from its rigidly socialist past, setting the stage for more openness and freedom. An older colleague in his sixties remarked to me that my generation of Indians was fortunate to be able to build companies from the ground up. In earlier times, India’s economy remained so tightly controlled by the government that this would have simply been impossible. The government can encourage entrepreneurship by making it easier to run businesses, enhancing access to finance and building transportation infrastructure and new cities.
India doesn’t have to be just the world’s back office. It can also be the innovation engine.
Originally Published: The New York Times International Weekly
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Economic Freedom
In order for men to advocate anything, they must in the first place be able to earn a living.
– Milton Friedman
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Ending The Deficit
I could end the deficit in 5 minutes. You just pass a law that says that anytime there is a deficit of more than 3% of GDP all sitting members of Congress are ineligible for reelection.
– Warren Buffett
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Our Nation As A Startup
Doing business in India can be overwhelming for somebody accustomed to working in a more hospitable business environment. The World Bank’s Doing Business study ranks India 134th worldwide for ease of doing business, behind lesser-talked- about nations such as Tanzania and Ghana.
Besides the well-documented inadequacy of physical infrastructure, archaic corporate and taxation laws are yet to catch up with modern ways of structuring and operating new ventures. Yet India is able to register high rates of economic growth year after year.
U.S. President Barack Obama’s contention that India has already arrived is magnanimous — India is a startup with high potential but hasn’t made it yet into the pantheon of world powers. Like a startup, India is chaotic and unpredictable.
Democracy adds another twist in the tale. As the last three months have shown, Indian politics can turn on a dime and the perception of political stability can give way very quickly. India’s business model is contrary to how other Asian economies have developed: India continues to be services-driven and domestically-oriented instead of being heavy on export-led manufacturing.
This approach shielded the economy during the financial crisis. With growth driven by high-quality entrepreneurs who have been able to deliver despite a suspicious and often obstructionist state, it’s no wonder that investors continue to be bullish on India and tend to overlook major political and geopolitical risks.
But high growth brings with it many quandaries. Though a happy problem to have, a growing enterprise faces its own management challenges. At the very least, the capacity of India’s executives and government to manage growth has been somewhat disappointing. India chose (some would argue that it stumbled upon) a bottom-up development model based upon entrepreneurship.
We are now reaching a stage in the economic cycle where we need to push the envelop further, not negate the strategy that has served us very well over the last two decades. India saw two bursts of significant reform, from 1991 to 1996 under Prime Minister P.V. Narasimha Rao and again from 1998 to 2004 under Prime Minister A.B. Vajpayee. Since 2004, there has been virtually no reform initiated by the Congress-led United Progressive Alliance government in areas such as labor law, where the current regime is constraining growth in manufacturing. This is impairing the quality of India’s economic growth and limiting job creation.
Recently, Steve Jobs said that his company, Apple, is the world’s largest startup. It’s an interesting view given that Apple’s market capitalization, which is close to $300 billion, makes it one of the most valuable companies in the world. Apple also has zero debt and tens of billions of dollars in cash. From the brink of bankruptcy and irrelevance in 1998, Apple’s financial and competitive strength is now the envy of the technology industry.
When Mr. Jobs returned as Apple’s CEO, he had a straightforward mantra: To rebuild Apple as a pioneering innovator and rescue it from the morass of creating “me-too” products, as he put it. He felt that the company he founded had forgotten what it stood for. This was audacious for a company struggling to stay on its feet.
Indian administrators and policy-makers should also remember how high rates of economic growth have been achieved in the first place. Like a startup which has achieved a fit between product and market fit and is ready to scale up, India needs to continue providing its entrepreneurs with the space and environment to operate.
Apple lost its mojo because it abandoned the strategy that made it what it was. Curiously, that strategy itself was not rigid and inflexible but one of continuous innovation, where Apple would make its products irrelevant before its competitors could. A return to this thinking has ensured the company’s rise through the 2000s. India, too, needs to return to policies that have transformed its economy from anemic to blistering growth.
In Hindu philosophy, The Upanishads talk of the concept of “Atmanam Viddhi,” which roughly translates as “knowing oneself.” It turns out that self-knowledge is also a sound business strategy — to reach where you want to go, it’s first important to know how you got to where you are.
The government must realize what it is that has delivered high rates of economic growth. Negating the ideas and policies that are driving India’s economic development by delaying the next round of economic reforms could prove to be immensely damaging to India’s economic prospects. India needs a visionary leader to step up and push through some of the changes that most agree need to be implemented — but few have the political courage to execute — or else an opportunity may be lost again.
Originally Published: http://navam.in/1m5k6AE
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Connecting The Two Indias
Much has been made of the theory that there are “two Indias” – one that is experiencing rapid economic growth and progress, and the other that is being “left behind”, so to speak. The political rhetoric of these two images of India does find some resonance with an ever-increasing middle class which is usually at odds to explain this newly-found prosperity.
It has also never been more important to understand what caused the shift from anemic rates of economic growth to sustained economic performance, and more importantly, hope and positivity about the future – so much so that India is now witnessing a reversal of the brain drain, with the best talent flocking to it. This reverse brain drain will partly address the human capital needs that India will have as it moves to the next cycle of innovation-driven growth.
Most people agree that it was economic liberalization that unshackled India’s potential, but not all recognize what that means. The process of economic liberalization started in the summer of 1991 under Prime Minister P.V. Narasimha Rao and was carried forward by successive governments through that decade. Under the NDA Government led by Prime Minister A.B. Vajpayee, the liberalization push reached a new high. Government-owned companies were sold off for the first time in India’s history.
Much of the corruption we are witnessing in the housing finance sector would be eliminated if India’s financial industry allowed a more expansive role for private players, for corruption and government discretionary powers go hand in hand. Take away discretion, and corruption too would be eliminated.
The first step that should be taken to bridge the two Indias is to offer connectivity so that they can talk to each other. Roads and telephones, and increasingly high-speed Internet access and low-cost civil aviation, are the basic building blocks and tools required for the formation of what economists term “social capital”, without which we won’t be able to break the cycle of extremism and discrimination based on identity and religion. Bihar Chief Minister’s Nitish Kumar’s resounding victory should be seen in this context.
Have you wondered why the religion- and caste-based politics of the 1980s and 1990s is losing currency in the new, emerging India? Part of the reason is increased access and connectivity that is binding the nation together like never before. Today, Indians can travel across the country via road or air, explore the cultures and diversity that make India so unique and interact with fellow citizens from other parts of India. Never before has this been possible for an “ordinary” Indian before in our history, and it has an immense qualitative impact on creating a common sense of nationhood.
Roads, telephones, the Internet and aviation enable people to do business with and talk to each other. This basic infrastructure forms the bedrock on which economic development can take place, and development alone is the panacea for religious and identity-based extremism.
This too is driven by governance and public policy. During the NDA term, over 4.5 crore telephone connections were made in 5 years, compared to 2.3 crore the previous 50 years. The Highways Ministry built over 25,000 km of roads and highways, compared to less than 600 km (that’s not a typo) in the previous 50 years. In 2003-2004, for the first time India’s GDP growth rate exceeded 8%, a feat the then-Leader of the Opposition had termed “Mungeri laal ke haseen sapnay”, in response to the Government’s projection.
Today, 8% growth is considered to be a given and India’s true potential stands at 12%-plus.
Since 2004, the liberalization process has come to a virtual standstill. We cannot bridge the two Indias merely by populist economics of taxation and redistribution – what we need is massive amounts of wealth creation and liberalization to harness our demographic dividend.
A few days ago, editor of Outlook magazine Vinod Mehta was on television describing India as having a free-market capitalist economy. This is typical of the discourse in the mainstream media – nothing could be further from the truth. I have said before that there are large, important sectors of the economy such as railways, banking and mining that are still nationalized. Till they remain in the grip of the government, our economic performance will be constrained and we’ll never eradicate poverty and identity-based fundamentalism.
India has only taken baby steps towards a market-based economic system. There is no doubt that there are a large number of Indians who continue to suffer glaring poverty, but the cure is not less liberalization but more.
The longer our government delays liberalization and the more excuses it invents, the longer India will continue to be poor and the more fuel identity fundamentalists will gather. Only markets can connect the two Indias and transform the poorer India into a prosperous India, not government largesse.
Originally Published: http://navam.in/1pzv6wN