Now for the hard part A survey of business in l June 3rd 2006

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Now for the hard part Also in this section Virtual champions India’s IT stars are still rising fast. Page 2

If in doubt, farm it out But outsourcing rms are having increasing trouble nding suitable workers. Page 4

Few hands make work light Indian manufacturing is booming, but it won’t create huge numbers of jobs. Page 6

Still in the way Red tape continues to make life hard for business. Page 8

The long journey Why Indian business moves so slowly. Page 8 Indian business has much to celebrate. But, says Simon Long, it still faces huge obstacles if it is to lift India out of

Building blocks OT once in a decade. Not once in a well-known stars in its IT and other ser- India’s creaking infrastructure still needs a Nmillennium, says Manish Sabhar- vice industries, but manufacturers too, of lot more investment. Page 10 wal, boss of TeamLease, India’s biggest products ranging from motorcycles to foot- temporary-employment agency, of the balls, from medicines to steel. opportunity India enjoys in 2006. It’s These heady times were reected in the From top to bottom once in the lifetime of a country. The eu- stockmarket (see chart 1, next page)until There is a huge consumer market out there phoria is widely shared. Nearly six de- it crashed with a thud in May. In the three somewhere. Page 12 cades after independence, India at last years up to April, it had outperformed the seems ready to take the place in the world overall emerging-market index by 45%. Eponymous that its huge population should command. The successes of Indian companies For years it languished under a mixed helped, but the main reason was investors’ Are Indian companies ready to take on the economy that seemed to blend the worst readiness to pay more for their shares rela- world? Page 13 of socialist planning with the least produc- tive to their prots. The spectacular rise tive forms of private-sector competition. In had left the market vulnerable to a mood 1991, faced with an external-payments cri- change in global markets. sis, , then the nance All the same, signs of a boom are every- where. Some 5m new mobile-phone con- Acknowledgments minister, now the prime minister, began to Besides those mentioned in the text, the author would like open up the economy. But even in the in- nections are added each month. To meet to thank the many other people who helped in the writing tervening years India’s economic growth, the soaring demand, Nokia, the Finnish of this survey, including: handset giant, last year built a huge factory Saurav Adhikari, Mats Agriya, Anil Ambani, Sanjeev Arora, averaging about 6% a year, has paled be- Pradipta Bagchi, Harsh Barve, V. Chandrasekhar, Venkat side its neighbour China’s. India, says near Chennai in just ve months. Almost Changavalli, Sukanya Ghosh, Adi Godrej, Tarun Gupta, Cy- Nandan Nilekani, boss of Infosys, one of every city is seeing frenetic construction. rus Guzder, David Hudson, Shafaat Hussain, Pinky Jagtiani, IT Some 450 shopping malls are being built. Tony Jesudasan, Deepakshi Jha, Ashok Jhunjhunwala, Ro- India’s powerhouses, has always been hit Kapoor, Shravan Karpuram, Tarun Khanna, Vivek Kher, seen as a country of promise and poten- In Hyderabad, a gleaming new convention Deepak Khosla, Vivek Kulkarni, Arun Kumar, M. Udaia Ku- tial, but it has not delivered. Now, he centre shot up in 15 months. According to mar, Subash Lingareddy, Philip Logan, P.K. Madhav, S.Ma- Siddharth Yog, of Xander Real Estate Part- halingam, Saloni Malhotra, Sunil Mehta, Kamal Nath, Raju adds, even long-term sceptics are being Panjwani, Laura Parkin, S. Ramodorai, Girish Rao, Ketan converted: The worm has turned. ners, a private-equity investor, perhaps Samphat, Arvind Singhal, Deepak Sogani, Sowmya Sriram, For business, seen as the next one-third of India’s 60m-80m square feet P.S. Srivathsan, Tulsi Tanti, Vrinda Walavalkar, Ashley Wills big thing: China 15 years ago, as the saying (5.6m-7.4m sq m) of grade A oce space goes. No big international company can do has gone up in the past 18 months alone. A list of sources can be found online without an India strategy. Some multina- Flights are full, and prices of hotel www.economist.com/surveys tionals eye the country and see a vast do- rooms ruinous. Judging by the lodging al- An audio interview with the author is at mestic market about to take o. But even lowances set by America’s State Depart- www.economist.com/audio those who doubt that are impressed by its ment, a room in India’s information-tech- wealth of highly skilled, low-cost profes- nology capital Bangalore now costs $299 a Past articles on business in India are at sionals. Some Indian rms, meanwhile, night, as much as anywhere in the world. www.economist.com/indiaseconomy have become world-beatersnot just the Industry’s costs, too, are soaring: Lakshmi1 2 A survey of business in India The Economist June 3rd 2006

And yet the business optimism is largely and reducing the role of the state in the Roaring tiger 1 justied: over the next decade, both India’s economy. Second is the improvement of BSE Sensex stockmarket index domestic market and its rms’ weight in India’s woeful infrastructure, the biggest 1978-79=100 the world economy will grow rapidly. bottleneck in the race for growth. Third is a 14,000 But how rapidly? Is India now on a change in India’s labour laws, which act as path where economic growth of 8% a a serious obstacle to labour-intensive 12,000 yearseen for the past two yearsis sus- manufacturing. Fourth is education, 10,000 tainable, or even, as many would argue, which is not only failing to prepare the ru- easily surpassed, with 10% within reach? ral poor for work o the land, but is also no 8,000 Or is the present boom simply a cyclical longer equipping enough talented young 6,000 upturn around a trend that remains at graduates with the skills that have fuelled about 6% a year? Either way, business is the services boom. Across industry, the 4,000 bound to ourish. same lament is heard: it is hard to nd The higher rates of growth are essen- qualied people, and hard to retain them. 2004 05 06 tial, however, if India is to nd jobs for the Unlike in 1991, there is no crisis to help Source: Thomson Datastream 70m or so young people who will join the enforce change. That, in a way, may make labour force in the next ve years; if the it more dicult to introduce, because 2 Narayanan, boss of Cognizant, an IT-ser- 260m who live on less than $1 a day are to vested conservative interests will be vices rm, says the price of land next to be lifted out of poverty; if the benets of tougher to override. But without it, there one of his facilities in Chennai, needed for India’s business success are to be shared will be no burgeoning of the job-creating expansion, has risen by 180% in 12 months. by the 70% who live in the countryside; factories that India needs, making clothes, Internationally, India is on a high. Pres- and if India, in 15 years’ time, is to become handicrafts, shoes, processed food and so ident George Bush has made improving re- something like China today, in its living on. To provide work for those leaving the lations with India one of America’s central standards if not in its authoritarianism. farm, India needs to replicate in basic in- foreign-policy objectives. To that end, he dustry what it has achieved in software. 7 agreed in March to a highly controversial Opening the cage deal permitting American assistance to In- This survey will argue that Indian busi- dia’s nuclear programme, even though ness can play a big part in delivering faster India’s economy at a glance 2 that country has never signed the Nuclear growth, but only if the government helps. 2005* Non-Proliferation Treaty and has exploded The successes of the past 15 years have the bomb. At the World Economic Forum been, in a sense, the easy part. Many of the GDP growth 7.7% in Davos, Switzerland, in January, the Con- bars that caged the Indian tiger have been GDP $801bn federation of Indian Industry, a private- removed, leaving the beast free to roam GDP per head $728 sector lobby group, led a highly successful and roar. In particular, India has been able Inflation 4.2% national branding campaign. Its slogan to exploit its great comparative advantage Exports $89.3bn told no more than the truth: India every- in an era of broadband communications Imports $128.4bn where. and globalisation: its wealth of technically Foreign reserves $153.6bn† Struggling for air in so much froth, so- adept, English-speaking talent. Now, how- ber analysts will instinctively reach for a ever, further reforms are needed. Rupee/$ exchange rate (average) 44.1 pin. Certainly, some of the present exuber- First is more liberalisation, continuing Population 1.1bn ance is irrational, and some Indian mar- the good work of the past 15 years, opening Sources: Economist Intelligence Unit; *Estimates † ketsproperty as well as sharesmay pop. India’s markets even wider to competition national statistics; Thomson Datastream April 2006 Virtual champions

India’s IT stars are still rising fast

HREE of India’s six biggest companies, Last year, the industry, (including other the study reckoned that only one-ninth of Tby stockmarket valuation at the end of remote services, known as business pro- the potential for IT outsourcing, and one- March, were in an industry that scarcely cess outsourcing, or BPO) was estimated twelfth of that for BPO, has so far been existed in the country in 1991: information to have generated revenues of $36 billion, tapped (see chart 3, next page). technology. Youth helps explain their nearly 5% of GDP. A study by NASSCOM, This industry, says McKinsey’s astonishing success. They never beneted the industry’s lobby, and McKinsey, a con- Noshir Kaka, can do for India what auto- or suered from the protections and dis- sultancy, last December forecast that by motives did for Japan and oil for Saudi Ara- torted incentives of the licence raj. They 2010 it would contribute 7% of GDP and bia. In April, as the big Indian software have always competed in a global market, 17% of the growth between 2004 and 2010, companies announced their results for the thriving not thanks to any favours from the when its exports would be worth $60 bil- nancial year just ended, this vision government but under its benign neglect. lion a year. And there is a lot more to come: seemed almost plausible. The biggest, Tata1 The Economist June 3rd 2006 A survey of business in India 3

2 Consultancy Services (TCS), trumpeted a have to be very wary of contaminating our 36% increase in revenues, to a shade under business model. Wipro’s founder, Azim $3 billion. Wipro’s had grown by 30% to Premji, is blunter: Why buy yesterday? $2.4 billion. Infosys was up by 35%, at $2.2 The Indian rms’ fat margins have so billion. Mr Nilekani noted that it had taken far seemed remarkably resilient, but wage his rm 23 years to become a $1 billion costs are mounting. Indian software engi- company, and 23 months to double that. neers are also in demand by the many Wipro and Infosys each employ more smaller fast-growing Indian companies. than 50,000 people, and this year are plan- Big international software and technology ning to recruit, respectively, 15,000 and rms such as Microsoft, Intel and Cisco 25,000 more. TCS has 63,000 and plans to have announced huge investments in ex- hire 30,500 more. Similar rates of growth panding their R&D work. Then there are are being recorded in the next tier of In- the captive IT operations of other big dian IT rms with revenues around the $1 multinationals, chiey banks. A newly billion markSatyam, HCL Technologies minted software engineer graduating from and Cognizant (an American rm, but the elite Indian Institutes of Technology with 21,000 of its 27,000 sta in India). (IITs) is a highly coveted individual. Indian IT grew fat on the relatively Scarce and precious The industry’s fast growth is only partly humdrum software work needed to x the due to substituting highly paid jobs in the Y2K millennium bug at the end of the Indian rms, in other words, want to West with much cheaper ones in India. As 20th century. It then received a boost from take on the big boys. That may seem pre- important is speed to market: the avail- the dotcom bust, which in many rms in sumptuous. IBM Global Services employs ability of qualied and aordable sta in America (two-thirds of India’s market) and 190,000 people and has more clients than India enables rms to throw more people elsewhere caused information-technol- any competitor. Its annual revenues from at a project. Nobody ever has enough en- ogy budgets to be slashed, prompting global services are $47 billion; EDS’s are gineers to respond to client requirements, more outsourcing to India. Now, Indian $20 billion. But India has already trans- says Mack Gill of SunGard, an American - rms can match virtually every service of- formed IBM and other global companies. nancial-software developer. SunGard fered by the global giants of IT outsourc- IBM is expanding fast there, having ac- now employs more than 600 people in ing, such as IBM, EDS and Accenture. In- quired Daksh, a BPO rm, in 2004. Its busi- Bangalore and Pune, where, among other dia’s core business remains ADMthe ness in India grew by 55% last year and its tasks, they maintain BRASS, the trading application, development and mainte- sta there by 15,500, bringing the total to and order-management system used on nance of softwarewhich accounts for 38,500. EDS, meanwhile, is trying to buy New York’s NASDAQ stock exchange. about 55% of exports of IT services. But the control of MphasiS, an Indian BPO and It would be surprising if the demand rms also oer traditional IT outsourc- software rm. for Indian talent were not creating some ing, such as the remote management of Mr Nilekani says that because the In- scarcity: no educational system could re- whole systems, consultancy and research dian rms’ bigger rivals have huge legacy spond instantly to such a rapid growth in and development (R&D). sunk costs in the West, they are under demand. In IT, at least, this scarcity seems Satyam’s boss, B. Ramalinga Raju, who considerable pressure to justify their manageable for the time being, though this year holds the rotating chairmanship prices, and hence to send more work to In- there is a shortage of experienced project of NASSCOM, describes his company’s dia. The gung-ho Indian business press has managers. TCS, in releasing its annual re- growth as taking place in six orbits. First noted that the stockmarket valuations of sults, pointed out that 51% of its sta had came the simple body-shopping of the the Indian rms are so high that they could more than three years’ experience, and early 1990s, when Indian engineers were buy American outts with much larger that attritionthe proportion of employ- hired out to help develop software. Next, revenues. Mr Nilekani is cautious: We ees leaving each yearwas below 10%. thanks to huge improvements in telecom- Shiv Nadar, chairman of HCL Technol- munications, much of this work started to ogies, says there is no stang problem at be carried out remotely, on campuses in A gigantic opportunity 3 the entry level, but a short-term diculty India. Third was a technical transforma- Global technology industry, $bn at the mid-level. Infosys’s director for hu- tion, as rms shunned simple labour arbi- man resources, Mohandas Pai, estimates trage in a drive for quality. Mr Raju com- India 165 that only 100,000 people in the industry 135 pares the Indian industry with immigrant Others* have ve or more years’ experience. groups that feel compelled to outshine the 20 In response, the IT rms are inevitably indigenous population. Next came a paying their workers more. According to 15 global expansion as rms started building Mr Raju, Satyam expects to raise wages by development centres in third-world 10 18-19% this year. It is also investing heavily countries, and creating a global delivery 5 in training: a new Cognizant campus in model. By the fth orbit, the big Indian Chennai will include an academy capa- 0 rms were dealing with complex inte- Offshore IT BPO Offshore IT BPO ble of holding classes for 2,000 people grated projects. Now, for its sixth orbit, Current market† Potential market‡ simultaneously. And it is recruiting more says Mr Raju, the industry needs to dem- *Includes China, Ireland, Mexico, Philippines, Russia and eastern aggressively (or, rather, defensively) to en- onstrate a leadership mindset and the Europe †April 1st 2004 to March 31st 2005 ‡Forecast for 2010 sure it has enough sta to deploy on big ability to innovate. Sources: McKinsey; NASSCOM new projects. Infosys, says Mr Nilekani,1 4 A survey of business in India The Economist June 3rd 2006

2 has a utilisation rate of its workers culture. One example are changes in In- (when they are actually working, as op- CHINA dia’s tax rules. From 2009, the industry posed to being on the payroll) of 78-80%. will lose the exemptions from income tax PAKISTAN Cognizant’s Mr Narayanan says that he BHUTAN and customs and excise duties enjoyed by N E IT used to maintain a rate of 65-75%, but has Delhi P rms in software technology parks. The now cut it to 60-70%. The spare workers are A L change would raise Cognizant’s average sent for training or on holiday, or added as MYANMAR tax rate from 17% to 30%. Software rms unbilled extras to project teams. This looks Ahmedabad will be able to claim some tax breaks by INDIA Kolkata GUJARAT like a huge expense. But as Mr Nilekani Bhubaneswar setting up new special economic zones, points out, paying an idle worker in India ORISSA BANGLA- but these will be for new investments and Mumbai costs far less than in the West. Pune DESH will not help their existing facilities. IT Indian is also spreading out geo- Hyderabad India’s software industry can absorb a Bay of Bengal graphically, especially to places with engi- Arabian tax rise: it is not short of prots to invest. Its neering colleges. To the original IT hubs Sea more serious worries are threefold, accord- Bangalore Bangalore, of course, but also Gurgaon Chennai ing to Kiran Karnik, president of NASS- and Noida near Delhi, and Mumbaia sec- COM: a resurgence of the sort of protec- ond tier of Hyderabad, Chennai and Pune Kochi SRI tionist rhetoric about outsourcing that 500 km has been added, with Kolkata trying to LANKA coloured the 2004 presidential election in join them. And there is more to come. TCS, America; infrastructure that, in cities such for example, plans to expand in places as for example, worries about the rupee as Mumbai and Bangalore, seems certain diverse as Kochi in Kerala in the south, strengthening against the dollar. And Mr to get worse before it gets better; and, Bhubaneswar in Orissa in the east and Ah- Narayanan fears that the government’s ne- above all, human resources. If this last medabad in Gujarat in the west. glect might begin to prove less benign: that concern is causing some nail-biting in soft- Sta shortages are not the only cloud the IT industry might lose as the govern- ware rms, it is already a gnawing pre- on Indian IT’s horizon. HCL’s Mr Nadar, ment promotes manufacturing and agri- occupation in the broader BPO industry. 7 If in doubt, farm it out

But outsourcing rms are having increasing trouble nding suitable workers

N A survey of India two years ago, this heels. Elsewhere in the building, display port trying to book theatre tickets on his Inewspaper wrote about OceTiger, an advertisements are being designed for mobile phone, through a call-centre in In- outsourcing rm with most of its opera- shops and pizzerias to put in their local dia that thought he wanted a hotel room. tions in Chennai. At the time it had a sta American yellow pages. On another oor, Voice-based services remain an impor- of about 1,500. What has happened to the a proof-reader, formerly with a big Lon- tant part of the Indian BPO industry, but company since then is also the story of the don law rm, is training sta to read legal the processes being outsourced are becom- successful parts of India’s BPO industry. jargon for sense. ing ever more sophisticated, and include OceTiger has expanded hugely, to about There is a big business in litigation what some have taken to describing as 6,000 sta now, and broadened the range support for American multinationals knowledge process outsourcing (KPO). of services it oers clients. It has attracted such as DuPont. This might involve, for ex- Some analysts argue that this is qualita- investment from private-equity rms, ample, scrutinising thousands of docu- tively dierent from BPO, involving real made acquisitions and expanded interna- ments and e-mails for relevance to a par- judgment and analysis from the Indian tionally, with operations in Sri Lanka and ticular case. A research and analysis workers, rather than the mechanical appli- the Philippines as well as Britain and division acts as the back oce for, among cation of preset processes. But Joe Sigel- America. Most recently it has itself been others, MortgageRamp, an American - man, one of OceTiger’s founders and bought, by RR Donnelley, an American nancial-outsourcing rm catering to the chief executives, whose rm also special- printing giant, and is in the process of ab- commercial-property market which Of- ises in such judgment-based outsourc- sorbing the outsourcing business of an- ceTiger acquired last year. The analytical ing, recoils at both sets of initials, prefer- other Donnelley subsidiary, Astron. work performed in Chennai includes mas- ring professional services. If we want to In its newly built oce block in Chen- sively complicated cashow projections to sound sophisticated, why don’t we say it nai, sta are squeezed into every available support the securitisation of a mortgage. in French? he asks. corner and computer terminals are used For many people in America and Brit- Ananda Mukerji, who heads ICICI for an average of 2.2 shifts a day. In one ain, outsourcing to India is synonymous OneSource, one of the bigger BPO rms room, software is being used to change the with telemarketing and call-centres that with some 7,500 sta, also sees a contin- colours of the clothes worn by models in try their patience. Sujay Chohan, in Mum- uum between lower- and higher-end pro- the glossy catalogues of American retail- bai, formerly with Gartner, a consultancy, cesses. In all of them, says Sanjeev Sinha, a ersmuch cheaper than paying the model describes overhearing an exasperated business transformation ocer at the to change while the photographer kicks his Texan in cowboy boots at an American air- rm, customers have come to take cost-1 The Economist June 3rd 2006 A survey of business in India 5

2 savings for granted. So BPO rms are wow- ing them by improving the processes out- sourced to them. Mr Sinha says that ICICI OneSource proposed a change in dealing with a store-based credit card that saved a British retailer £1.5m ($2.7m) in a year. For another customer, a British mobile-phone service, the rm found out why many low- billing customers were switching to an- other provider. They wanted a payment plan that was self-limiting, so that it did not allow them to spend more than a given amount a month. The customer changed its charging structure and saw its churn The benets of a private education rate fall by 30% in the rst month. Mr Chohan identies this as one of the of it in America. As yet, only a tiny propor- revenue last year (though it hopes to pass issues the industry is only beginning to tion goes oshore. Mr Sigelman says that $1 billion in 2008); but even that modest tackle: as it matures, the Indian rms may the remorseless rise in law-rms’ fees is amount was more than double the reve- develop a better understanding of the out- now under scrutiny from his company’s nue of any other third-party BPO in India. sourced processes than their clients have. clients. India, with its English-language A big chunk of the BPO business, espe- The rms may do more than they are being skills and common-law tradition, is well cially in nancial services, remains with paid for, even creating intellectual prop- placed to secure a big share of the out- captive oshore operations. GE’s divest- erty. For now, they are using such innova- sourced market in, for example, drafting ment of Genpact was partly aimed at al- tions to preserve margins and win further patent lings and contract and loan docu- lowing the rm to develop non-GE busi- business from satised clients. In future, mentation. Forrester, a research rm, fore- ness. Mr Bhasin says it has already they may have to nd a way of charging for casts this will involve 35,000 jobs by 2010. acquired ten to 12 strategic customers them. Pramod Bhasin, boss of the biggest In pharmaceuticals, the market in out- who, he hopes, will contribute some 25% BPO rm, Genpact, agrees there is a tre- sourced clinical trials, for example, is ex- of revenues this year. Genpact is oering mendous amount of innovation, but ar- pected to reach $1 billion annually by clients such as Wachovia, a big American gues that, with margins of 25-30%, his rm 2010. Vasudeo Ginde, of iGATE Clinical bank, what it calls a virtual captivea is not undercharging. Research, one of several dozen rms com- unit in India that will look and feel like peting for a share of this cake, says that In- Wachovia and where it will have a greater Demand-led dia has always had three essentials: doc- say over things like hiring and ring than For the time being, however, this seems a tors versed in Western ways, good (in in the usual outsourcing arrangement. side issue. The bigger question is how the places) hospital facilities, and huge num- Genpact is trying to oer the best of both industry can cope with expected demand. bers of patients. In addition, since the be- worldsthe control oered by a captive The NASSCOM-McKinsey study forecasts ginning of last year there has also been operation and the cost savings third-party that Indian BPO export revenues will grow stronger patent protection for foreign med- outsourcing is believed to oer. from $5.2 billion in 2005 to about $25 bil- icines, so foreign rms are less nervous Captives, argues Wachovia’s Sanjay lion in 2010, a compound annual growth that conducting research in India will jeop- Gupta, face a particular diculty in retain- rate of 37%. There are two big trends. The ardise their intellectual property. As in ing and motivating sta without losing rst is demographic: despite the fears other outsourced businesses, speed is as cost competitiveness. This is the biggest about exporting jobs, labour shortages important as cost: if 500 diabetics are headache of all for the Indian industry as a in white-collar jobs are emerging in Amer- needed, they can be found much more whole: debilitating rates of attrition and ica and other rich countries. Second, the quickly in India. And there are more inop- diculty with nding qualied sta. At idea of the sort of work susceptible to out- erable cancers, because fewer are detected the top end, Pipal Research, a KPO subsid- sourcing seems to expand every month. at earlier stages. iary of ICICI OneSource that provides re- Genpact, for example, in March an- The expected growth in BPO of all sorts search and analytic work for nancial-ser- nounced a joint venture with NDTV, a tele- is spurring consolidation. Evalueserve, a vices and health-care rms, says it can vision channel, to oer services such as KPO and consultancy, reckons that of the expand its business only as fast as it can digitisation, video-editing and captioning. 400 or so Indian rms, the top 15 already hire. At the bottom end, life is even The biggest opportunities, however, are account for 60-70% of total business. As tougher. Mr Nilekani of Infosys tells of the still in the banking and insurance indus- the size and complexity of outsourced pro- boss of an ice-cream parlour desperate for tries, already the industry’s largest clients. cesses grows, larger rms with a presence English-speaking sta to man his counter There is also great potential in the nance in several countries have an advantage. As in Bangalore, so he sent his backroom and personnel divisions of other big com- Genpact’s Mr Bhasin puts it, clients like to workers on English courses. No sooner panies, and in law and pharmaceuticals, know they can sue. Yet the independent had they learned enough to sell ice creams where India has particular strengths. third-party BPO rms are still, by global than they found jobs in call-centres. The law illustrates just how much more standards, small companies. Genpact, a The biggest reason for India’s success in work might come India’s way. Worldwide subsidiary of General Electric (GE) until the IT and BPO markets is its wealth of suit- spending on legal services amounts to 60% of it was sold to two private-equity ably qualied people. According to the about $250 billion a year, some two-thirds rms in 2004, generated only $490m in NASSCOM-McKinsey study, it has 28% of1 6 A survey of business in India The Economist June 3rd 2006

2 the available supply in low-cost coun- and the higher wages they have to pay to ing education (kindergartens interview triesand they are still remarkably cheap. retain sta, are currently oset by lower three-year-olds) and on leaving it (a doc- According to Boston Consulting Group, a communications and other infrastructure torate might require a viva). typical annual salary for an Indian IT engi- costs, but will make themselves felt in two Mr Bhasin says the college curriculum neer is $5,000 and for a graduate with a or three years’ time. Genpact is training bears no relation to real work, and new masters degree in business $7,500about 6,000 to 8,000 people a year. BPO’s sta- graduates lack even the discipline to turn one-tenth of their American equivalents. ing problems are more acute than IT’s be- up at work on time. He wants the govern- cause the business is real-time. It touches ment to give colleges much greater free- The missing half-million clients every day. So any slippage in qual- dom to adapt their courses. NASSCOM has NASSCOM-McKinsey, however, also fore- ity shows up immediately. done its bit by introducing a national casts a shortfall, on current trends, of India produces 441,000 technical grad- testan assessment of competence for nearly 500,000 capable graduates by uates, nearly 2.3m other graduates and BPO workers. This may also reduce the risk 2010, with BPO much worse aected than more than 300,000 postgraduates every of crooks entering the profession. One IT. Already managers complain about the year. So why the shortfall? NASSCOM’s Mr danger for India is that a security scandal quality of education of many freshers. Karnik blames the varying standards of could stoke protectionist res. The problem is masked by the industry’s tertiary education concealed by these g- The NASSCOM test is also a market rapid expansion. At present, many BPO ures: one-fth world-class, one-fth pass- opportunity for private training institutes, rms face sta-attrition rates of 50% or able and three-fths lamentable. Also, he of the sort that have already sprung up to more. According to Evalueserve, the churn thinks that Indian education is bad at teach IT skills, so it ts in with the indus- rate for the industry as a whole is 30%ie, teaching two skills of particular impor- try’s past independence of government every year one in three BPO workers em- tance for both IT and BPO: teamwork, policy. It is not just IT and BPO rms, how- barks on a new career altogether. which in colleges tends to be seen as cheat- ever, that grumble about the public educa- Mr Bhasin says that the investment ing, and communication. He jokes that tion system. The shortage of suitable peo- rms have to make in remedial training, oral skills are only really needed on enter- ple worries manufacturers, too. 7 Few hands make work light

Indian manufacturing is booming, but it won’t create huge numbers of jobs

HETHER India will be a leading (16%) than IT does; it is the source of 53% of it is the norm for successful Indian manu- Wplayer in the coming century will exports (compared with 27% from ser- facturing as a whole. With liberalisation in depend to a large extent on how fast we in- vices); and it is the destination for four- the early 1990s came new competitive crease the scope of our industrial activities fths of foreign investment. pressures. A spate of overinvestment left and sell quality goods abroad, wrote the Mr Kirloskar would be justiably some manufacturers struggling with too late S.L. Kirloskar, a leading industrialist. proud of the rm now run by his grandson much capacity. But that has now worked Charity never gave anyone self-respect. Atul, with its headquarters in Pune, a cen- its way through the system, and the survi- Jobs do. And industry alone can create tre of Indian manufacturing. Kirloskar Oil vors have emerged leaner and tter. them on a mass scale. Engines Limited (KOEL) is a maker of me- Manufacturing has enjoyed healthy Even many of those full of admiration chanical equipment such as diesel en- growth of over 9% a year in the past two for India’s modern services industries gines, especially those used in water years, with exports last year growing by a would concur. The entire IT/BPO industry pumps for agriculture. In the past nancial quarter. Some sectors, such as carmaking, in India employs only about 1.3m people, year its prots increased by 46%. Its engine are growing at an annual rate of over 15%. out of a workforce of more than 400m. On sales topped 10 billion rupees for the rst the NASSCOM-McKinsey projections, this time, and its total exports 1 billion rupees. World class will increase to 2.3m working on exports One would have thought, therefore, In industry as in services, India has pro- alone by 2010. But even allowing for the that it was generating large numbers of duced world-beaters: in pharmaceuticals, number of indirect jobs each directly jobs. But as Atul Kirloskar tells it, apart steel (where Tata Steel is the world’s low- employed person creates (in shops, trans- from a hiring splurge in 1994-95, when it est-cost producer), in cement and in auto- port, household services and so on), this is added about 100 people, it has not taken motive parts. Huge foreign investments still a drop in the ocean. on workers since 1982. The average age of are plannedin a massive steel plant in No other country in Asia, not even its 2,000-strong workforce is now 47. Its Orissa and in a $3 billion semiconductor high-ying service hubs such as Hong success is not a result of the deployment of fab in Hyderabad. But, by and large, the Kong and Singapore, has climbed out of large numbers of low-wage Indian work- successes capitalise on India’s strengths as poverty or lower-middle-income status ers. It comes from continuous automation a high-value rather than a low-cost pro- without a manufacturing boom. Boston and improvements in productivity. In the ducer. The distinction is one made by Baba Consulting Group has pointed out that, de- most extreme example, one worker is Kalyani, who runs another highly success- spite manufacturing’s low prole in India, responsible for 27 machines. ful Pune-based manufacturer, Bharat it contributes a much higher share of GDP KOEL’s strategy is not unusual; indeed, Forge. This is now the world’s second-big-1 The Economist June 3rd 2006 A survey of business in India 7

2 gest maker of forgings for car-engine and chassis components, behind Thyssen- Krupp of Germany. Like the IT rms, Mr Kalyani competes in the global marketplace. Two-thirds of his sales are overseas. In the past two years, he has bought six companies in four countriesBritain, Germany, Sweden and, most recently China, where Bharat Forge late last year acquired control of the forg- ings division of First Automobile Works, the country’s largest carmaker. Mr Kalyani says he was early to realise Fertile ground for recruitment that India could not be a success relying on cheap labour to produce cheap goods. the big IT rms. At LG, a Korean maker of years of schooling, has to bring in some of Prices were uncompetitive and quality domestic appliances with two factories in its workers 100km (about 60 miles) by bus. low. In 1989, he changed Bharat Forge’s India, bosses say that salaries for its exec- Some analysts predict that India is business model, investing in brand-new utive cadre are going through the roof. In about to see a boom in labour-intensive facilities and new technology, some of it Pune, says Mr Kalyani, more than twice as manufacturing similar to that in the Chi- developed in-house. Then he realigned many engineers were hired last year than nese countryside in the 1980s. In a report his workforce into a white-collar, techni- graduated from the many collegesand at- last October entitled From White Collar cally adept team. The company soon trition among employees in their rst two to Blue, Sanjeev Sanyal of Deutsche Bank gained sales in India and outgrew the mar- or three years, at 25-30%, is as high as in the argued that India’s skills-driven growth ket, so it had to become a global business. service industries. Others say that manu- trajectory is about to change. The small but Bajaj Auto, a maker of scooters, motor- facturing, despite its recent surge in popu- highly educated middle class is rapidly re- cycles and three-wheelers, has had a simi- larity, still has a less glamorous image than pricing itselfDoes this mean that the In- lar experience with liberalisation. If you IT, which makes it harder to attract talent. dia story is about to end? No. In our view, can sell here, says its chairman, Rahul Ba- Employers in the retail and hospitality the country is about to benet from a new jaj, you can sell abroad. Last year the industries struggle even more. dynamica primary-education revolution rm produced 2.4m vehicles with 10,500 that will soon make available a mass of workers. In the early 1990s it was making Bangalore bug cheap low-skill labour. 1m vehicles with 24,000 workers. Mr Bajaj A working paper produced by the IMF in Both halves of this argument are sus- draws a comparison between the com- January suggested that the very fact of pect. The re-pricing of the urban middle pany’s policy now and before 1991. Then, skill-based development in fast-growing class is undeniable, but India’s demo- he would never change its models: what states may impede labour-intensive de- graphic and other advantages are such that was the point, when the rm had a ten- velopment because of the rise in price of this need not take a toll on growth for a year waiting list? Now, so hot is the market skilled labour. It called this an Indian while yet. Second, the revolution in that my sons bring out new models every variant of Dutch disease (Bangalore bug, primary education is patchy at best. There four months or so. so to speak), reducing the protability of are still parts of the country where teach- Despite manufacturing’s remarkable labour-intensive manufacturing in an era ers, let alone pupils, rarely go to school. A success, the number of jobs in its organ- of global supply chains with wafer-thin charity working in a part of the southern ised sector, ie, rms employing more than prot margins. state of Andhra Pradesh where, according ten people, has hardly changed since 1991, India’s leading universities, which are to the census, there is 100% literacy, in fact at just above 6m, out of a total of about already having trouble meeting the de- found 45% illiteracy in the 15-45 age group. 48m in manufacturing as a whole (com- mands employers are making of them, The ocial national literacy rate of 61% in- pared with more than three times that now face a new danger. The government is cludes many who are able to write their number in China). Astute Indian industri- threatening to introduce even larger-scale names but are functionally illiterate. alists such as Mr Kalyani have moved into positive discrimination in admissions A labour-intensive manufacturing capital-intensive production. Yet capital in policies than is already provided under boom needs not just the job opportunities India has tended to be in short supply and the constitution. It has proposed reserv- but also the people equipped to take them, expensive, whereas labour has remained ing about one-half of all the places in cen- and some industrialists argue that India is plentiful and cheap because so many peo- trally nanced educational institutions, simply not capable of producing them. Su- ple need work to escape from rural redun- which include the world famous IITs, for nil Mittal, boss of Bharti, a mobile-tele- dancy. There are many reasons for this par- members of diasdvantaged castes. phony giant that is branching into agri- adox, including regulatory problems and Yet, for all its limitations, India’s tertiary business, thinks horticulture oers a better India’s woeful infrastructure. But in this education is a relative success. A bigger dif- chance of creating large numbers of jobs, area, too, sta, or the shortage of the right culty is delivering basic education to the because India has plenty of farmers, and sort of it, is one of the biggest constraints. villages, to equip potential workers with fruit and vegetables are far more labour-in- At the high endMr Kalyani’s white- the elementary literacy and other skills tensive than rice or wheat. Mr Kalyani collar shop oor, saymanufacturers are needed to leave the land. Even in the well- thinks jobs will be found in construction: competing for the same talented young- educated southern state of Tamil Nadu, one undeniable need in India is for a huge sters who might seek a career with one of Nokia, which seeks people with at least 12 amount of building. 7 8 A survey of business in India The Economist June 3rd 2006

Still in the way

Red tape continues to make life hard for business

N A ranking of 155 countries by ease of As China has shown, a degree of com- now and 2050the demographic divi- Idoing business in 2006, the World Bank petition among dierent parts of a country dend that is raising such big hopeswill and its aliate, the International Finance can be healthy in attracting foreign invest- come in UP and three other northern states Corporation, list India at 116, two places ment. Mr Bajaj, however, is scathing about with rotten infrastructure, education sys- below Iraq, 56 below Pakistan and 25 be- the distorting eect of some regional in- tems and, mostly, governments. low China. This seems unfair. In part it re- centives available in India. His company, Bad state governments compound an- ects India’s diversity, and the huge dier- Bajaj Auto, has decided, in his words, to other disincentive to investment in manu- ences between its individual states and the do the wrong thing for India (but the right facturing that is partly the central govern- way they are ruled. Some governments, thing for its shareholders) by building a ment’s fault: the indirect tax system. A such as those in Tamil Nadu and Andhra factory in the northern state of Uttaran- 2002 study found that India’s cascading Pradesh, are praised by many would-be in- chal to take advantage of scal incentives. import duties, excises, sales taxes and oc- vestors as welcoming and even helpful. Mr Bajaj is also critical of the new spe- troi (a tax on goods in transit) accounted Others are not. cial economic zones, where exporters will for nearly one-half of a price disadvantage The latter category includes the most enjoy breaks on customs duties and a ve- of roughly 30% suered by manufacturers populous state, Uttar Pradesh (UP), whose year income-tax holiday, followed by a compared with their Chinese counter- 170m-plus people would make it number further ten years of concessions. Infosys’s parts. Since then, most states (but not UP) six in the world if it were a separate coun- Mr Nilekani is another sceptic who be- have introduced a value-added tax at a try and include 8% of the world’s poor. In a lieves that tax breaks for his industry centrally set rate, and a transition to a na- new study of the state-level investment cli- should go, along with all other exemp- tional goods-and-services tax has been an- mate, Priya Basu of the World Bank says tions. But having shareholders’ interests to nounced. But the lack of a single market in that the lack of reliable and aordable in- safeguard, he, like Mr Bajaj, has no option India causes unnecessary delays and ex- frastructure, especially electricity, is the but to follow the handout. pense for industry (see box). single most important bottleneck. But she What is more worrying in India than The central government itself, despite also nds that while the ‘licence raj’ has such distortions, however, is that some the prime minister’s fame as a reformer, been substantially reduced at the centre, it parts of the country deter investment be- has to pursue further liberalisation dog- still survives at the state level, along with a cause they are so badly governedand gedly and at times by stealth. In every an- pervasive ‘inspector raj’, imposing heavy those parts are very big. Some 60% of the nual budget, for example, more industries costs on rms in UP. increase in India’s population between are taken o a list of those reserved for1

Why Indian business moves The long journey so slowly

O ILLUSTRATE the eect of the short- with . By then the border is least it can cross at night, making a credit- Tcomings of both hard and soft in- closed for the night. able 350km in one day. So by day ve, the frastructure on Indian business, Vineet At 5am the following morning, the lorry is in Maharashtra, the state of which Agarwal, of the Transport Corporation of lorry joins the border queue. It takes two Mumbai is the capital. India, a freight rm, describes the hours for the documents to be cleared, However, the lorry still has to pass a 2,150km (1,340 mile) journey of a typical and the same time again to cross a sliver further 12 toll booths and inspection cargo between two of India’s great met- of Jharkhand. After another two-hour points after the 14 it has already negoti- ros, Kolkata and Mumbai. queue, it enters Orissa and enjoys a rela- ated, so it takes another two days to get to The lorry is loaded at 2pm in central tively uneventful 200km. But then it has Mumbai itself. The driver then has to tele- Kolkata. But it cannot leave until after to stop for the night, because the road is phone the octroi agent and get this tax 10pm, because heavy vehicles can use closed to avoid the danger of attacks by processed, which takes all night. It is the the city streets only at certain times. By bandits or Maoist insurgents. morning of day eight before he reaches then, there is a jam and it is 4am before Day four begins again at 5am, and his customer in Mumbai, having the lorry hits the National Highway 6. It after 12 hours on the road the lorry achieved an average speed of 11km per takes a good 14 hours to travel the 180km reaches the next border, with Chhattis- hour and spent 32 hours waiting at toll- to the border of this state, West Bengal, garh. Here it queues for four hours, but at booths and checkpoints. The Economist June 3rd 2006 A survey of business in India 9

2 small companies, a policy that has pre- vented many rms from achieving the economies of scale they need to compete internationally. There are three especially contentious areas of reform where even stealthy gradu- alism is dicult. First is privatisation. The sale of protable government enterprises to strategic investors is not on the cards. Even disinvestmentthe sale of minor- ity stakes in the stockmarketraises hack- les. Second is foreign direct investment. Here, the main battleeld at present is re- tail trade, the most important of four industries where all foreign investment is banned. In many other businesses, how- ever, including air transport, banking, in- surance and telecommunications, there are caps on the level of foreign investment that the government will allow. Perhaps most sensitive of all, however, are labour laws. Manish Sabharwal of Dyeing for a job TeamLease, who campaigns for their re- form, feels that, for much of Indian indus- These are precisely the sorts of jobs that In- casts that by 2010 the industry can gener- try, they are a thorn in the esh, not a dag- dia needs in the greatest number: for peo- ate $40 billion in annual exports and pro- ger in the heart. The labour laws have ple who have had no more than a basic vide 12m additional jobs (on top of about become an extra costfor example, in education and may be only barely literate. 35m now, ie, the vast majority of jobs in bribes paid to inspectorsbut not a huge India’s textile-and-garment industry as unorganised manufacturing). barrier to business. a whole was presented with an historic In January, CITI wrote to India’s - Yet in most conversations with manu- opportunity at the start of 2005 when quo- nance minister, giving warning that this facturers, labour laws still loom large. The tas covering imports into America and Eu- target would be in jeopardy if the industry most notorious is Chapter 5B of the 1947 rope were lifted under the Agreement on could not hire workers on short-term con- Industrial Disputes Act, which bars estab- Textiles and Clothing. Optimists hailed the tracts (of ve or six months). It pointed to lishments with more than 100 workers dawn of a new era when Indian exports the government’s agship policya na- from laying o employees without the would be free to soar. Pessimists, for their tional rural employment guarantee permission of the state government. This part, fretted that even Indian industry’s ex- scheme that promises 100 days’ work at deters employment. Mr Sabharwal, point- isting market share was in danger of being the minimum wage at the state’s expense ing to a rm that bought machines rather eroded by Chinese competition. to every household in poor districts. Many than give permanent employment to 16 The evidence so far supports the opti- textile and garment rms, it wrote, would tea-boys, says it encourages the substitu- mists. Last year, Indian exports of gar- happily give 150 days’ employment if they tion of capital for labour. ments to America rose by 26% and to Eu- were free to let surplus sta go. rope by about 20%. Globally, says Mr It is not just garment factories that face Labouring the point Hinduja, Indian garment exports reached diculties. Jukka Lehtela, who runs the On a bigger scale, Bharat Forge’s Mr Kal- about $7.5 billion in the past nancial year, new Nokia factory outside Chennai, yani cites the same reasonsarchaic la- out of the country’s total textile exports of would like to be able to scale up and down bour laws and the lack of political will to $17 billion. Impressive though that sounds, week by week, but the labour laws get in change themfor his high-value busi- it is sobering to contrast it with China’s the way. They also, in eect, force the fac- ness model. But it is in labour-intensive performance: $107 billion of textiles ex- tory to work eight-hour shifts, because industries, or rather the relative lack of ports last year, including $40 billion of anything longer attracts compulsory over- them, that the pernicious eect of the rules clothing, despite the imposition of safe- time rates. Nokia would like to work 12- is most apparent. Rajendra Hinduja, a di- guard quotas on some items. India, de- hour shifts, compensating its sta with rector of Gokaldas Exports in Bangalore, spite its long tradition of expertise in tex- more days o. That might well appeal to India’s biggest exporter of ready-made tiles, its plentiful supply of cheap labour the workers too, because many are com- garments, says labour laws are his pro- and its wealth of both cotton and man- muting long distances. blem number one. made bres, is missing out here. Mr Sabharwal, whose rm is currently His business is seasonal, but he is loth For many global retailers, India has be- providing about 42,000 workers on back- to take on extra sta to meet surges in de- come the favoured second-choice textile to-back contracts with employers, and is mand because he cannot lay them o in supplier: a useful defence against renewed adding about 3,000 a month, clearly has slack periods. Gokaldas employs about sanctions imposed on Chinese exports, an interest in seeing the laws relaxed. 42,000 workers and is adding about and a sensible diversication of procure- TeamLease is already dancing at the edge 5,000-6,000 more a year. Were the laws ment risks. The Confederation of Indian of what is allowed. Yet it pays its workers changed, it might add an extra 2,000. Textile Industry (CITI), a lobby group, fore- generously, at an average of three times1 10 A survey of business in India The Economist June 3rd 2006

2 the minimum wage, and half of them liamentary support of Communist parties, lic sector. One foreign manager, monitor- move on to permanent jobs. which are beholden to the trade unions. In ing the costs his reputable international One provision hampering its growth eect, this means that the unemployed building contractor was incurring in con- bars companies from employing contrac- and even most workers in the unorgan- structing a new oce block, describes his tors on core and perennial activities: so a ised sector are being held to ransom by horror at some of the prices. He called all manufacturer can hire contract security the tiny minoritysome 30m, or about the contractor’s suppliers and subcon- guards, for example, but not shop-oor 7%in organised employment. tractors to his oce, along with some inde- workers. A factory outside Delhi built by Mr Hinduja, of Gokaldas, says his rm pendent competitors, and held an open LG, a Korean rm, manages to employ is one of dozens building special econ- auction. That saved him $2m in a single 1,000-1,400 casual workers to meet sea- omic zones for themselves and other gar- day. Collusion between contractor and sonal demand for its air-conditioners by ment and textile rms. In these zones, state vendor is so common it is probably not deploying them in subsidiary jobs, such governments can exempt rms from the even recognised as corrupt. as packing and loading. most onerous of the labour laws. Labour is This is an aspect of business that no- Even for non-core workers, however, a concurrent subject under India’s con- body likes to talk about, except to say that there are regulatory hurdles. G4S (formerly stitution, which means that responsibility at least things are getting better. That may Group 4 Securicor) has been a remarkable for it is shared by the central and state gov- be true: Mr Yog, for example, of Xander, success story in India. It now has 92,000 ernments. Mr Sabharwal argues that states the property fund, thinks that last year’s workers, all of them permanent employ- should be given the freedom to make and opening of the property market to foreign ees. So it is providing long-term jobs where enforce their own labour rules. The unions investment has already had a salutary ef- either no such jobs existed before or where fear a race to the bottom. But it might be a fect. In a business especially prone to they were lled by casual employees with race to create jobs. black money (undisclosed cash) trans- no rights. Yet the government now wants actions, for the purposes of laundering, the rm to comply to the letter with section On the take tax evasion and bribery, foreigners help 12 of the Contract Labour Act of 1970 and As you would expect in a system where so clean things upor sometimes nd them- obtain a licence for each establishment in much is at the discretion of government of- selves unable to compete. The new breed each location where it provides labour, ie, cials, corruption is endemic. As Ms Basu of Indian multinationals too, listed on for every single customer. notes of UP: Entrepreneurs have to spend American or European stock exchanges, Labour-law reform, despite its obvious signicant time in dealing with permits, have high ethical standards. But contrac- benets, has always been politically di- clearances and inspections, and end up tors seeking their business say that, even in cult, and is an especially big headache for paying substantial ‘rents’ to the inspec- those companies, the kickback culture sur- Mr Singh’s government. It relies on the par- tors. Nor does this apply only to the pub- vives at lower levels. 7 Building blocks

India’s creaking infrastructure still needs a lot more investment

HEN Nokia was scouting for a place is often clogged and the journey can take diculty of converting government plans Wto build its Indian factory, the choice three times as long. For now, the factory is and spending commitments into actual was surprisingly limited. Its rst require- running on its own electricity generators. building, have not been able to x it. ment was an international airport with It will take power from the grid, but only Virtually every aspect of India’s infra- enough capacity. That eliminated every- when it is condent that its own systems structure requires urgent attention. Per- where but Delhi, Mumbai and Chennai. A can stabilise it. Not only are there frequent haps the most acute crisis is in electricity, new airport is being built at Hyderabad, power cuts, but such electricity as is sup- where peak supply falls 11% short of de- and another is planned for Bangalore, but plied is subject to surges and microsecond mandand the demand gure ignores, neither would open soon enough. Chen- breaks, which could play havoc with No- among much other suppressed appetite nai has a seaport, which is important be- kia’s expensive imported equipment. for electricity, the 56% of households with- cause Nokia intends to make network Late last year a study by Morgan Stan- out connections. Generating capacity is equipment as well as handsets. The city ley, an American investment bank, con- woefully inadequate. About one-third of also boasts a number of engineering col- cluded, like many before it, that the single what is generated is lost or stolen in trans- leges and a high proportion of English- most important macro constraint on the mission, and a further fth is distributed speakers. The state government (of Tamil Indian economy, holding back its average almost free to farmers. Nadu) was far more helpful than the rest. growth, is the low spending on infrastruc- The slow progress made by the lorry For many investors in India, infrastruc- ture. Foreign and local businesses, an- from Kolkata to Mumbai (see box in previ- ture determines where to build, and is the alysts and politicians alike have long re- ous article)along a big national arteryis biggest operational challenge. The Nokia cognised this truth, especially if they have just one indication of the poor state of In- factory is about an hour’s drive out of visited China. But India’s governments, dia’s roads. Although India’s road network townat the right time of day. But the held back by their relatively low tax reve- includes 65,000km of national highways, road, with only one lane in each direction, nues, high scal decits and the obstinate only 9% of these have two lanes in each di-1 The Economist June 3rd 2006 A survey of business in India 11

2 rection. A big eort has been made to com- The same is often true for Mumbai, In- governments were in the red to the tune of plete the Golden Quadrilateral of high- dia’s commercial capital and a would-be another 3.7% of GDP, and there were o- ways linking Delhi, Kolkata, Chennai and regional nancial hub. From the south of budget subsidies for the oil price and the Mumbai. At the other end of the scale are the city, its old heart, at certain times of day electricity boards that took the total up to the one-third or more of Indians whose the airport is more than two hours away. just under 10% of GDP. So, although the villages are not connected by all-weather About 1,400 people a year die on Mum- government clearly sees the need for roads at all. The government has promised bai’s commuter railways. Last August, the higher spending, it is not obvious where it $11 billion of investment by 2009 in road city more or less shut down for a week, will nd the resources. connections for all villages with popula- after (admittedly unprecedented) rainfall Two relatively successful examples of- tions of more than 1,000. revealed how little had been done to main- fer some hope. The ports, where the gov- Domestic air travel in India is growing tain its ageing storm-drains and sewers. ernment has allowed privatisation since by about 25% a year, and ve new carriers Large areas of protective mangrove forest 1996, have attracted investment from both have entered the market in the past three had been razed and developers had built Indian and foreign rms. According to years. It is perhaps not surprising that the on wetlands, clogging natural drainage Morgan Stanley, the average turnaround airports cannot cope. At Delhi’s, the sec- channels. Riverbanks had been reclaimed time has declined from about eight days ond-busiest after Mumbai’s, incoming and turned into slums. then to just over three now. ights often have to circle for 30 minutes or Second, mobile telephony has mush- more in a queue to land. As in Mumbai, the Paying for it roomed. Sanjeev Sharma, of Nokia, attri- air-trac control system is operating at Despite the desperate need, Morgan Stan- butes this to enlightened regulation and a more than twice its design load. ley’s sums show that India’s annual willingness to change policy in mid- The railways have traditionally subsi- spending on infrastructure as a share of stream. High taris and licence fees were dised passengers by charging exorbitant GDP sank to a 33-year low in 2003just inhibiting the growth of the market, so in rates for freight. Partly for this reason, their 3.5%, or $21 billion. The obvious compari- 1999 India moved to a revenue-sharing ar- share of the freight market has fallen from son is with China, where spending on in- rangement, where the operator pays 80% in the 1950s to about 30% now, and frastructure that year ran to 10.6% of GDP, 10-15% of revenue as a licence fee. Since they have suered from a lack of invest- or $150 billion. Under the present Indian then, taris have fallen to 7-8% of their for- ment. Now, however, the government has government, which came to oce in 2004, mer levels. Mobile networks now cover decided on an ambitious project to build a infrastructure has been made a priority 38% of the population, and Sunil Mittal, freight corridor. and spending has already increased. But it boss of Bharti, the biggest, expects that g- The problem of poor infrastructure is is unlikely to come close to the $100 billion ure to go up to 50% by the end of the year, particularly acute for labour-intensive a year that Morgan Stanley estimates will covering 5,200 towns. industries. But it is also impinging on the be needed by 2010 if India is to achieve In other areas of infrastructure, there is successful service industries, many of sustained annual growth of 8-9%. a new emphasis both on public-private which have built their own. The IT indus- Indeed, it is hard to see where such partnerships and on attracting foreign in- try in Bangalore, for example, has been at sums could come from. The government is vestment. In February, the handing over war with the state government for its ne- committed to trimming its budget decit. of Delhi and Mumbai airports to private glect of the city, where trac jams, power At 4.1% of GDP in the past nancial year, consortia for much-needed modernisa- shortages, full hotels and a congested air- this looks deceptively modest. But, as Mor- tion caused a row with the Communist port have made doing business a trial. gan Stanley’s Chetan Ahya points out, state parties allied to the government and prompted a strike. To the surprise even of its supporters, the government stood rm. Despite a legal challenge raised by a disap- pointed bidder, the privatisation is now proceeding. Infosys’s Mr Nilekani sees the govern- ment’s determination to press on with pri- vatisation as a turning point for India, comparable with the failure of the air-traf- c controllers’ strike in America in 1981, or Margaret Thatcher’s confrontation with the miners in Britain in 1984. He may be too sanguine about the resil- ience of the political will the government showed on that one occasion. But he is right about the importance of the issues at stake. Only if the government is seen as fully committed to providing private inves- tors with the security and incentives they need to put money into infrastructure will it get built at anything like the pace India needs. Manmohan Singh has appealed for When shall we meet? as much as $150 billion of foreign invest-1 12 A survey of business in India The Economist June 3rd 2006

2 ment in infrastructure over the next ten after the state electricity board stopped Krishna Reddy. It has interests in thermal- years. He has said that airports and rail- paying the extraordinarily high taris the power generation, hydro-electricity, toll ways will require $55 billion over the next company had set, and started generating roads and hotels, and is building a shop- decade. Power and telecoms will need $75 electricity again only last month. ping mall. When he built his rst luxury billion and $25 billion respectively in just But there are also successful examples hotel in Hyderabad, in time for his son’s the next ve years. of foreign and private involvement in in- wedding reception in 1984, he says he was Foreign investment in infrastructure ac- frastructure. The consortia that won the mocked for his pretensions. For the rst quired something of a bad name in the Delhi and Mumbai airport deals were few years his occupancy rate was only 40- 1990s because of a massive $2.9 billion both led by Indian rms based in Hyder- 50%. Now Hyderabad is bursting at the power project in Maharashtra state pro- abad, and included foreign airport manag- seams. Its room rates are second only to moted by Enron, an American energy ers. GVK, the rm that won the Mumbai Bangalore’s, and he is scrambling to build giant that has since suered a spectacular concession, was born and brought up in more capacity. He built it and they came. If demise. The project shut down in 2001 infrastructure, says its founder, G.V. only more of India had done the same. 7 From top to bottom

There is a huge consumer market out there somewhere

RRIVING before the start of the morn- volts, but in India they are built to operate India is already Nokia’s fourth-biggest Aing shift at LG’s factory in Noida, out- within a range of 170-340 volts. Its televi- market, behind China, America and Brit- side Delhi, is like entering another coun- sions are also tweaked for the Indian mar- ain. It is expected to be the second-biggest try. In front of the enormous hangars ket, featuring big speakers with a thump- by 2010. But with a 40% market penetra- housing the production lines, workers are ing bass. In India, television is not for a tion of mobile phones in the biggest cities, doing their physical jerks, nishing with quiet night in. and 20% in urban India overall, that will re- some chanting, clapping and a vicious Indian business is full of legendary quire an expansion of the market in the punch into the air. Everywhere the walls marketing coups. There is the high penetra- countryside, where the penetration rate is are covered in uplifting mottoes. Great tion gained by McDonald’s in a country only about 2%. Customers, Great Products! Zero Idle where most people are beef-shunning Despite much excitement in the West Time! My Job, My LG, My Family. Hindus, through its Veggie and Chicken about an Indian middle class said to be LG has imported a little bit of its South Maharaja burgers. There is the individ- 300m strong, the consuming class, with Korean homeland, along with its disci- ually wrapped one-rupee biscuit and the discretionary income to splash about, is plined work ethic. As LG tells it, the work- one-wash sachet of shampoo, both luxu- much smaller than that. Suhel Seth, a mar- ers here are so pampered that none has ries for the rural consumer. keting expert and boss of Equus Red Cell, even tried to form a trade union. The rm Nokia, which has a remarkable share of an advertising agency, puts the gure at employs 2,800 people in India, in this fac- nearly three-quarters of the GSM mobile- about 150m. Within that, the relatively tory and another one in Pune, and in a na- handset market, has a similar tale to tell. Its well-o are a fast-growing minority. With tionwide distribution and marketing net- biggest success in India was a purpose- rising incomes and a consumer borrowing work. According to Kwang-Ro Kim, the built model, featuring a torch, a dust-resis- spree, a nation of hoarders becomes a na- rm’s boss in India, the country is now, tant keypad and an anti-slip grip for humid tion of consumers, in Mr Seth’s words. with Brazil and Russia, LG’s second- conditions, as well as an ability to support It is still, however, primarily a nation of equal market, behind China, accounting . It became a bestseller despite being farmers. Two-thirds of its people live in the for 5% of global turnover. 30-40% dearer than the cheapest models. countryside and more than half the labour The company has 25-30% of the Indian force works in agriculture. Even pockets of market in air-conditioning units for auence in such a multitude make up an homes; 27% of the colour-television mar- Must-haves 4 important market (see chart 4). And for ba- ket; 35% in washing machines; 30% in re- Purchase of “non-essential” consumer goods sic consumer goods, the bottom of the frigerators; and 40% in microwaves. Yasho 2000, % share of population pyramid is vast. Verma, an LG director responsible for hu- Rural Urban Indian business, however, is now look- man resources, puts these achievements 0 20406080100 ing at the villages not just as a potential down to a combination of Indian brain- market, but as a vital and neglected part of Black & white TV power and South Korean focus. Analyti- its supply chain. Mukesh Ambani, chair- cally, he suggests, Indians are the best in Cassette recorder man of Reliance Industries, an oil, petro- the world. But execution is poor. Ceiling fan chemicals and textiles giant and India’s But LG’s is also, like most successes in Motorcycle largest private-sector company, intends the Indian consumer market, a triumph of Colour TV to bring the world to the Indian farmer. adaptation. In most parts of the world, LG This is part of an astonishingly ambitious Shampoo appliances built for a 220-volt electricity plan to build, in the next four years, a na- supply would have a tolerance of 200-240 Source: Boston Consulting Group tionwide retail network of 1,000 hyper-1 The Economist June 3rd 2006 A survey of business in India 13

2 markets and 2,000 supermarkets with a hundred million people just don’t change ITC, the former Imperial Tobacco Com- distribution system to supply it: an inte- like that. And even a huge venture such as pany still one-third owned by BAT, a Brit- grated farm-to-fork supply chain. that planned by Reliance would leave ish tobacco behemoth, has equipped more So defective is India’s cold chain and so most of the 600,000-plus villages un- than 6,000 villages with a computer and a arduous its inland transport that, at touched. Still, satellite television, mobile satellite connection to the internet. This is present, as much as 35-40% of fruit and telephony and slowly improving roads are its e-Choupal initiative, part of its agri- vegetables grown in the country rot before nibbling away at the rural-urban divide. business procurement network. (Chou- they can be eaten. Reliance would not en- Consumer-goods rms, such as Hindu- pal is the word for the traditional village ter the farming business itself. Land, says stan Lever, a 51% subsidiary of Unilever, meeting place.) Farmers can use the com- Mr Ambani, is too emotional an issue. In- an Anglo-Dutch giant, recognise the poten- puters to check prices for their products stead, it would be the o-taker of last re- tial of a market where only 15% of people and, if they wish, sell online, freeing them sort, relieving the farmer of risk. use shampoos, and are seeking new ways from the tyranny of middlemen who have Much of the Indian countryside, be- of doing business among the rural poor. Its long taken a big cut of farm earnings. cause it is so poorly connected with the Project Shakti extends its marketing ef- Once a commercially viable way has modern world, has been very resistant to fort by recruiting women to self-help been found of providing a village with an change. Might companies such as Mr Am- groups which are able to oer tiny loans internet connection, it has many other po- bani’s achieve what no Indian govern- microcreditto support a direct-to-home tential uses: government, sales, education, ment has managed and drag India’s vil- distribution network. It already reaches entertainment and so on. In Andhra Pra- lages into the 21st century? R. Gopala- 80,000 villages, and by 2010 expects to desh, Byrraju, the family foundation of Sa- krishnan, an executive director of Tata employ 100,000 Shakti entrepreneurs, tyam’s Mr Raju, has even set up two rural Sons, India’s biggest , agrees covering 500,000 villages. BPO operations, employing 100 people that Mr Ambani is a visionary kind of Businesses, as well as some charities, each, in tasks such as data entry. Attrition guy but is sceptical of megaplans. Six are also trying to put the villages online. rates, he says, are very low. 7 Eponymous heroes

Are Indian companies ready to take on the world?

EW observers, when the reforms began winners in the present buoyant mood. Fin 1991, could have predicted the sea Tata’s Mr Gopalakrishnan is far more cau- (Almost) all change 5 change that Indian business has under- tious than many in India about the coun- India’s top companies by market capitalisation gone since. It is a fair bet that the next de- try’s prospects. More than half the cur- Rupees bn March 31st 1992 cade and a half will see a transformation rent optimism, he says, is in the human just as sweeping. mind. A new generation that has never State Bank of India 229 Ranked by their stockmarket value, experienced global growth of 4% a year be- Tata Iron and Steel Company 138 only three of India’s top ten companies at fore, he thinks, is getting carried away. ITC 91 the end of the 1991-92 nancial year were After all, the world is full of big uncertain- Reliance Industries 67 still on the list at the end of March 2006 ties: terrorism; America’s scal and cur- Hindustan Lever 64 (see table 5). Two are big consumer-goods rent-account decits; their mirror image, Tata Engineering and Locomotive Company 53 rms, ITC and Hindustan Lever. The third China’s export dependency; and so on. It is Associated Cement Company 49 is Reliance Industries (RIL), from which a unlikely, he says, that India can sustain Century Textiles 40 big chunk, now known as the Reliance- growth at 8% a year, or move on to 10%. ADA group, was hived o after a bitter Yet even he thinks that there is no in- Grasim Industries 37 public battle last year between Mukesh dustry that is not going to boom. The dis- Tata Tea 35 Ambani and his younger brother, Anil. memberment of the sprawling Reliance March 31st 2006 The new arrivals illustrate three trends empire seems to prove the point. Besides in Indian business since 1991. One is the its grandiose retail plans, RIL this April re- Oil and Natural Gas Corporation 1,867 emergence of the new industries of IT, ceived record commitments for an IPO of Reliance Industries 1,110 BPO and telecoms (TCS, Infosys, Wipro shares to help nance the building of an- National Thermal Power Corporation 1,105 and Bharti). Another is the partial with- other oil renery. The parts of the empire Tata Consultancy Services 919 drawal of the state from the parts of the that are now in Reliance-ADA include Infosys 818 economy it used to dominate (ONGC, In- companies in some of the fastest-growing Wipro 795 dian Oil and the National Thermal Power industries: communications, nancial ser- Bharti Airtel 781 Corporation are all state-owned compa- vices, entertainment and utilities. The ITC 731 nies, listed on the stockmarket since 1991). communications arm alone claims a 20% Indian Oil Corporation 682 Third, and overlapping, is the huge impor- market share of the mobile-telephone Hindustan Lever 599 tance of the energy industry. market, which is expected to grow to 500m As for the next 15 years, it is hard to pick users in the next decade. Source: The 1 14 A survey of business in India The Economist June 3rd 2006

2 However broad-based the boom, it is not a caucus race, where everybody will win and all must have prizes. Only a few Indian companies are fully ready to com- pete internationally, with professional managers independent of the owners’ meddling. Most Indian business is still in the hands of family rms, and most people take it for granted that this will continue. The boss of a big manufacturing rm, asked at a business conference about suc- cession planning at his (listed) rm, did not miss a beat. The important thing, he said, was not to allow minor relativesneph- ews, cousins and so onto run their own Ambani family values departments or subsidiaries. Much better to set them up in rms of their own and will drive competitiveness in the coming ers. Typically, they have spent some time give them contracts. A senior Citigroup ex- decades, and argues that all play to India’s being educated abroad and are full citizens ecutive dealing with smaller rms says strengths. The rst is globalisation, where of a global world, holding panoramic these are doing so well they are running both in terms of labour (through its own views of economic trends and of India’s out of uncles to lead new businesses. diaspora and through the legions working role in them. But typically, they are also pa- Most of the companies mentioned in in outsourcing) and in terms of the capital triots and philanthropists who see it as this survey are family concerns. The board markets, India is well integrated. The sec- part of their duty to make things better for of Gokaldas Exports, the garment-maker, ond is technology, where India now plays Indian society. includes three brothers and three of their a part at the cutting edge of global research Of course the failings of Indian society sons. Atul Kirloskar is proud to run a and development. The third is demogra- also have an impact on business. In Banga- fourth-generation company. Both phy, where the supply shortages reported lore in April, after the death of a 77-year- branches of the Reliance family stress their in this survey should blind no one to the old much-loved lm actor, Rajkumar, tens continuity with the legacy of the Reli- fact that 23% of the increase in the world’s of thousands took to the streets to honour ance group’s founder, the father of Anil working-age population over the next ve his passing; but the mourning soon turned and Mukesh Ambani. Tata Sons is still run years will be in India. Where else, as Mr into ugly rioting in which eight people by the head of the clan, Sir Ratan Tata. Even Ambani asks, could anyone contemplate died. The city, jewel in India’s IT crown, Wipro is largely owned by Mr Premji, the sort of recruitment his retail plans en- was largely closed for business for two whose father founded the rm. visage? Lastly, there is democracy, which days as an excluded underclass took the might pose short-term obstacles, say to the chance to vent its spleen. Business leaders Family ties reform of labour laws, but provides a long- know that including the excluded major- It used to be argued that the reluctance of term stability and resilience that China, for ity in the rise of modern India is essential families to cede control of Indian compa- example, has yet to demonstrate. for social harmony, and ultimately for the nies prevented them from becoming inter- For all four reasons, it is hard not to be success of their rms. They also know that national successes. That may well be true optimistic about Indian business. A fth is compared with improving their bottom of many smaller rms. The larger ones, the high calibre of some of its present lead- lines, this really is the hard part. 7 however, are being forced to become more transparent and professional by the de- Oer to readers Future surveys mands of the stockmarket and of globali- Reprints of this survey are available at a price of sation. The dismemberment of Reliance £2.50 plus postage and packing. Countries and regions by sibling rivalry rather than by commer- A minimum order of ve copies is required. Pakistan July 8th cial pressures seems to belie this. But in the France October 28th nine months after the demerger, the con- Corporate oer Mexico November 11th stituent parts of the former group saw Customisation options on corporate orders of 500 Business, nance and economics and ideas their market capitalisation rise by some or more are available. Please contact us to discuss your requirements. Logistics June 17th $25 billion. It was hard to feel sorry for the Climate change September 9th benighted minority shareholders. Send all orders to: The world economy September 16th A study of Indian companies by the In- The Rights and Syndication Department Talent October 7th stitute of International Finance, a think- 26 Red Lion Square Telecoms October 14th tank in Washington, DC, concluded that London WC1r 4HQ corporate government in India was Tel +44 (0)20 7576 8000 above average, and that some compa- Fax +44 (0)20 7576 8492 nies, such as Infosys, serve as examples of e-mail: [email protected] how equity markets reward well-gov- Previous surveys and a list of forthcoming erned companies. The best Indian com- surveys can be found online panies are well placed to take on the world. www.economist.com/surveys Mukesh Ambani lists four forces that