Grassroots Capitalism Thrives in India

Chapter 3 Grassroots Capitalism Thrives in India

Barun S. Mitra

ndia, among today’s fastest growing econ- Reinforcing the pluralist democracy is a Ingenuity, a spirit of omies, averages over 6 percent annual free press. Notwithstanding the ideological enterprise and innova- Igrowth. Its potential to emerge as an eco- fervor of the intelligentsia and the rhetoric tion, has helped most nomic giant is now acknowledged, as is its of the political class, there is a point beyond Indians, particularly rise in the arena of information technology which the government cannot impose rigid (IT). The present debate over outsourcing economic regulations. Where such regula- those at the bottom only emphasizes India’s enormous human tions are indeed laid down, there is a point of the socioeconomic capital and its ability to compete with the beyond which enforcement agencies cannot ladder, survive stran- best in the world. We’ve come a long way. implement the laws on the ground. gulating economic There is still some distance to be covered, That is the way it has always been. While policies. though. India remains a poor country, with a the dominant political party adopted the per capita income of around US$550 (around doctrine of a “socialistic pattern of develop- US$3,100 in purchasing power parity). At the ment” in the mid-1950s and sought to imple- same time, however, it is rich in potential—a ment Soviet-style five-year plans, a large part potential that is fueled by the real stars of the of the Indian economy continued to func- Indian economy, the ordinary Indians who tion virtually outside the scope of the law. have survived the heavy hand of govern- Today, 15 years after economic liberalization, ment that has sought to control almost every experts estimate that 30 percent–40 percent aspect of economic activity since the 1950s. of the Indian economy continues to be in Ingenuity, a spirit of enterprise and inno- the informal sector. This informal economy vation, has helped most Indians, particularly reflects India’s true economic potential. those at the bottom of the socioeconomic ladder, survive strangulating economic policies. Spinning Wheels Being a pluralistic democracy has actually If the world is impressed with India’s helped to moderate some of these economic success in outsourcing, it would be fasci- policies, allowing people to bend oppressive nated by the extraordinary lengths to which regulations. entrepreneurs in India have gone to escape

39 oppressive government regulations in the a position to assemble a motorized mini manufacturing sector. truck in about two weeks’ time. Operating Almost a century after Henry Ford from small workshops, they can assemble a revealed the economic power of the assem- whole vehicle from scratch right under the bly line, Indian grassroots entrepreneurs roadside tree. In many parts of north India, have shown that their hand-made automo- these homemade vehicles are called jugaad, biles can and do beat the competition from slang for “quick fix.” more modern counterparts in rural India. The flourishing auto-parts market in In the 1930s, India became one of the first Delhi generally provides used car parts like countries in the developing world to man- gearboxes, radiators, wheels, and steering ufacture automobiles. However, since the wheels. The mechanics start with an 8–12 1950s, the automobile has been viewed as a horsepower agricultural diesel engine of the luxury item by Indian policymakers, and the sort typically used to drive a water pump Meeting the short- automobile sector has been heavily licensed, or other farm equipment. Then the chas- haul needs of small controlled, and punitively taxed. The duties sis is welded, the engine is mounted, and towns and villages on imported vehicles, even second-hand the gearbox is connected to power the rear within a radius of ones, continue to be prohibitive. Indeed, wheels. With a rudimentary bench as seat, the latest scam in India’s automobile sector the vehicle is ready to chug along at around 50 kilometers, these is the import of luxury cars, supposedly as 20 kilometers an hour, carrying around 25 vehicles ferry children tourist taxis, which attract significantly less people. To save on fuel, electric lights and to school, carry pro- import duty, but actually for use by the rich horns are often eliminated. The vehicle costs duce or farmers and and powerful. from US$1,000 to US$2,000. Compare this local traders to nearby The automobile sector has seen gradual to the price of a basic small car (800 cubic markets, or carry cows deregulation over the past two decades, and centimeters), which seats only four and costs about a dozen international car manufactur- about US$5,000. to the local veterinar- ers now operate in India. In a country of one Out in the countryside, these unorthodox ians. billion and counting, the annual sale of auto- vehicles easily hold their place between bul- mobiles is around 900,000 vehicles, around lock and camel carts at one end and regu- three-quarters of them in the small-car seg- lar cars and trucks at the other. Meeting the ment. Of the 65 million vehicles on Indian short-haul needs of small towns and villages roads today, two-thirds are two-wheelers; within a radius of 50 kilometers, these vehi- the rest include cars, buses, and trucks. cles ferry children to school, carry produce or India has one of the lowest vehicle densi- farmers and local traders to nearby markets, ties in the world. Most Indians still cannot or carry cows to the local veterinarians. afford cars. In addition, the public transport And now a farmer-turned-innovator has sector is dominated by loss-making public- designed an award-winning, low-cost small sector corporations, which are a further bur- tractor that is ideally suited for the small land den on the taxpayers. Consequently, there holdings of a typical Indian farmer. He has is a tremendous and largely unfulfilled sought to patent it and would like to send demand for transportation, particularly in the vehicle for conventional road testing so rural areas. that he can manufacture it commercially. Over a third of Indian households do Unfortunately, he has been unable to raise not own any form of private transporta- the money necessary to get the tests done, tion; over 43 percent of people own just a which could cost quite a bit more than the bicycle. Draught animals continue to play US$2,000 he has spent on assembling one of a huge role in the transportation sector. The his prototypes. gap between the bullock cart and formal- None of these vehicles currently quali- sector transportation is filled by a unique fies for registration, and under the law, none breed of village mechanics. Having learned can run on public roads. Nevertheless, keep- the trade of maintaining and repairing vari- ing to the Indian tradition, law enforcement ous kinds of farm equipment over the past agencies tend to look the other way, since three decades, these mechanics are now in the economic and political costs of actually

40 2006 Index of Economic Freedom stopping these vehicles are too high for the import duties on PCs are down to zero and the government. hidden tax burden on branded PCs is down to about 10 percent–15 percent, the informal Virtual Hardware sector continues to hold its ground. India’s manufacturing revolution extends The competitive informal-sector assem- beyond the low-tech production of home- blers have ensured that most first-time buyers made vehicles. There is also the Indian IT invariably buy a locally assembled PC. The revolution—a revolution that might not have biggest advantage that the informal-sector been possible without the informal-sector assemblers have is their flexibility to assem- technicians who assemble computers. ble a PC tailored to the customer’s needs and India’s IT services sector is among the fast- financial constraints. For almost every major est-growing in the world. One estimate holds component, they provide a range of options, that while IT services revenue increased less balancing quality and price. And, of course, than 2 percent from 2000 to 2003 worldwide, they also provide on-site repair options. I am often asked India’s IT services industry experienced a 22 Hewlett Packard (HP) is the largest seller a question, says percent revenue growth, a pace comparable of branded PCs in India today, holding 12 Hotmail’s co-founder: to that of Hong Kong’s electronics industry percent of market share. Senior executives “Could you have done during the 1970s.1 Over 80 percent of India’s at companies like HP acknowledge that the Hotmail in India?” And IT services is exported. informal sector has played an enormous role However, this sector stands on a shallow in expanding the market. By familiarizing my answer has inevi- foundation. The official number of personal their customers with personal computers, tably been, “No!” Had computers sold in the country in 1997 was just the informal assemblers have paved the way I attempted to cre- over 500,000; today, it stands at 3.6 million. for these customers to buy branded comput- ate Hotmail in India, The level of PC penetration jumped tenfold ers the second time round. somebody would have between 1997 and 2005 but stands today at As noted, however, government policies come to me claiming barely 12 per 1,000 people. Internet subscrip- have generally been inimical to the spread tions are only 6.6 million, although the total of IT in India. Sabir Bhatia, the Silicon Val- that I was taking away number of users stands at over 52 million.2 ley entrepreneur and co-founder of Hotmail, the revenues of phone These numbers have to be viewed within says: or fax companies! the context of Indian reality. Just as in the automobile sector, the success of Indian IT In my travels around the world, I am often has come about in large measure despite asked a question: “Could you have done efforts by the government to curb it. Typi- Hotmail in India?” And my answer has inev- cally, during the 1980s, tariffs on PCs were itably been, “No!” Had I attempted to cre- set at 300 percent to 400 percent, stifling the ate Hotmail in India, somebody would have growth of the hardware sector. come to me claiming that I was taking away Enter the informal PC assemblers: skilled the revenues of phone or fax companies!3 technicians who maintain and repair the country’s small but high-value PCs. By the late 980s, there was an army of techni- People Power cians assembling lower-cost PCs for a large The major impediments to economic number of consumers. Increased demand growth in India are in the infrastructure sec- naturally led to the rise of a huge network tor, where one finds glaring shortcomings in of traders who smuggled components into the state of roads, ports, electricity, and the the country, avoiding tariffs. Whole markets like. There is also a crying need to improve developed in major Indian cities that spe- the social infrastructure, such as the coun- cialized in supplying imported components try’s education and health facilities. needed to assemble the PCs. Per capita consumption of electricity in Even today, 60 percent–70 percent of PCs India is 1/20th of per capita consumption are assembled by this “grey” market. Typi- of electricity in the United States. Over half cally, an assembled PC sells at 25 percent less of India’s nearly 200 million households do than its branded equivalent. Today, when not have electricity. Around 70 percent rely

Chapter 3 41 on traditional, non-commercial fuel such the government declared as unauthorized a as firewood, cow-dung cakes, and other whole upper-income neighborhood in Delhi. agricultural waste to cook their food. Most This area houses many of the city’s rich and Indians experience power outages as routine powerful; as a result, for all its illegal status, blackouts, either for a few hours every day no houses have been demolished. The gov- or for days at a time. ernment, however, does not provide ame- Electricity is still considered a natural nities like electricity. Consequently, every monopoly in India. Most of the generation house in the area has installed a generator. and distribution is controlled by public- Over time, service providers have come into sector organizations. Typically, rather than the picture, installing larger generation units looking at growing demand as a potential to power whole blocks. Typically, the cost of business opportunity, these service provid- electricity in this area is about four times the ers tend to blame consumers for their insatia- rate charged by the public utility. Such examples, cover- ble appetite. Here too, Indian entrepreneurs, Such examples, covering both the top and ing both the top and particularly those in the informal sector, bottom ends of the socioeconomic strata of bottom ends of the have stepped in to answer the demand. society, provide two lessons: (1) consumers socioeconomic strata In Delhi, private entrepreneurs provide are willing to pay for reliable electricity, and the electricity needs of consumers. At the (2), given an opportunity, entrepreneurs can of society, provide top end, many households, housing societ- expose the myth of natural monopoly even two lessons: (1) con- ies, and whole neighborhoods have installed in sectors as conventional as electricity. sumers are willing to backup electricity generators to supply the Perhaps the best example of private-sec- pay for reliable elec- energy when the utility fails. tor entrepreneurialism in wiring is cable tricity, and (2), given Officially, private generation of electric- television. Since the early 1990s, cable TV in an opportunity, entre- ity stands at 18 percent, but this captures India has been dominated by independent only installations of over one megawatt. If private entrepreneurs in almost every urban preneurs can expose all the household, commercial, and small locality. In 10 years, they connected 30 mil- the myth of natural industrial installations that have their own lion urban households—much more than monopoly even in power backup are counted, it is between the public-sector telephone companies had sectors as conven- one-fourth and one-third of all power in the managed to connect during the previous 50 tional as electricity. country—again, despite all manner of regu- years. In fact, India today has the unique dis- lations against such generation and taxes on tinction of being perhaps the only country in installing and generating private power. the world where more homes have cable TV Even more interesting is the local paral- than telephones. lel grid being run in many parts of urban Nor are these informal infrastructure India. Shop owners have set up businesses services restricted to electricity or cable along roads and, without the sanction of the TV. Urban waste recycling is mostly in the civic administration, collaborate to set up hands of a million men who make a living kerosene or diesel generator sets to supply gathering and sorting waste material. Virtu- lighting during the evening shopping hours. ally nothing that can be recycled or reused is Typically, an entrepreneur wires 50 to 100 left behind. Even in the case of water supply, shops or vendors in one neighborhood or at there is evidence of a flourishing and diverse an informal marketplace. The fee charged is water market in rural and urban India. Natu- usually based on the number of light bulbs rally, all of this operates peacefully outside that are connected for a certain number of the purview of the law. hours each evening. While the cost of electricity is much higher than it would be if it were Mass Education available from the grid, the vendors have the Perhaps the most unrecognized phenom- flexibility to decide whether the benefits of enon in India is the role of the informal sec- attracting customers during peak shopping tor in providing basic education. Since the hours outweigh the high unit costs. 1950s, education has truly been a sacred cow; At the top end, the arrangements are the role of the state in providing primary, quite sophisticated. Recently, for example, secondary, and higher education has never

42 2006 Index of Economic Freedom been questioned. For instance, in Delhi, to set other hand, numerous surveys have pointed up a school recognized by the government, out the serious problems with public school- almost 40 permissions are required to satisfy ing in India. Lack of facilities, lack of account- the authorities that the education being pro- ability, teachers’ absenteeism, and truancy all vided meets the best standard. constitute part of the problem. The record of public education, however, Thus, even when a public school is with- particularly at the primary level, has been in easy reach and free, many impoverished anything but credible. Almost 60 years since parents prefer paying around US$1 to US$2 India gained its independence from British a month to send their children to informal rule, literacy rates have barely exceeded 60 private schools in their neighborhoods. percent. The number of illiterate Indians Typically, these informal schools are run today exceeds the total population of the by families from the community. They will country in 1950. The paradox is even greater have 50 to 00 students—often students when one considers that while some Indians in different grades attending a common Even when a public are carving out a niche in the Information class under a common teacher—and are school is within easy Age, many more are deprived of the three frequently operated in two or three rooms reach and free, many R’s of education. of a house owned by the principal teacher. impoverished parents The definition of literacy itself has under- They may hire local boys and girls who may prefer paying around gone some changes. Just being able to sign have completed high school or even have one’s name is considered adequate to qualify a college degree to act as additional teach- US$1 to US$2 a month one as functionally literate. While the educa- ers. More often than not, they operate under to send their children tion bureaucracy and budget have inflated, extreme competition from other educational to informal private and while the number of children enrolled entrepreneurs in the vicinity, so there is some schools in their neigh- at primary levels has reached 95 percent, accountability. borhoods. the number of children slipping through the official education net has remained high. The All That Glitters? probability of dropping out increases as the The world finds the Indian love affair child moves through higher grades. with gold perplexing. A poor country with As can be expected, entrepreneurs have an apparent shortage of capital, India is the entered education in a big way too. India world’s largest consumer of gold. At current always had some of the world’s best private market values, gold accounts for 10 percent– schools, but what has not been appreciated 15 percent of the Indian household balance is the scale of educational service provided sheet. Therefore, while Indian GDP is about by the informal sector. According to some 1/20th that of the United States, India’s gold estimates, about 50 percent of the poorest consumption is one-and-a-half times that of children in urban India are attending private the U.S. India accounts for a huge 18 percent neighborhood schools, some run by chari- of the annual global gold demand, while table organizations and the majority run by India’s share of nominal global GDP is only local entrepreneurs. 1.6 percent. The Indian experience forces one to draw According to some estimates, Indians the conclusion that many of the poorest hold over 15,000 tons of gold, most of it in families not only value education, but also private hands. The total value of this gold are willing to pay for that service. And they equals roughly a third of India’s approxi- have a reason: Independent studies have mately US$750 billion GDP. Interestingly, shown that students in these informal pri- this enormous private asset has been built vate schools routinely outperform those in despite government efforts to persuade peo- government schools.4 ple to give up their gold through a series of State-sponsored schooling is virtually carrot-and-stick policies. free in India. The government provides the Last year alone, the demand for gold in books, often the school uniform, and often India increased by more than 17 percent to one meal as part of its effort to induce par- about 643 metric tons. Some analysts believe ents to send their children to schools. On the that the growth in demand came from inves-

Chapter 3 43 tors in other assets, such as real estate and sector’s reach has been very limited. equities, booking their profits and shifting Additionally, gold has been an attractive to gold. It is estimated that about 15 percent asset in the face of inflation, which has often of gold is for investment, with the rest being surged well past the rate of return on any used for jewelry and coins. financial assets. For the poor Indian who has This involvement with gold is not new. In no access to banking, the easy liquidity of the economically challenged 1960s, the gov- gold, provided by jewelers and pawnshops ernment instituted a draconian Gold Control in the smallest towns, has made it a highly Act in an attempt to discourage people from prized asset. In other words, gold often accumulating a nonproductive asset. Imports replaces financial services, such as savings of gold were prohibited, and the price dif- and loans, or other investments that are dif- ferential between domestic and international ficult to access. prices of gold widened. Not surprisingly, As import bans cre- from the 1960s to the 1980s, Indians turned Money Transfers ated a vast network of gold smuggling into an art form. Smuggling When people find barriers in their path, smugglers and illicit became the theme of countless Bollywood they usually find a way to circumvent or dealers, restrictions films showing the exotic ways the yellow reduce the impact of those barriers. This also metal was being brought into the country. creates unintended consequences. on gold ownership In the 1980s, 150 to 200 tons of gold were The demand for gold in India bumped turned virtually every smuggled annually into India. against one of the world’s most restrictive Indian household into As import bans created a vast network barriers: controls on the foreign exchange de facto violators of smugglers and illicit dealers, restrictions market that are intended to stem capital of the law, and this on gold ownership turned virtually every flight. India’s huge appetite for gold needed widespread breach of Indian household into de facto violators of a foreign exchange market. For gold to be the law, and this widespread breach of an brought in, money had to be sent out. So, an unsustainable set unsustainable set of laws corrupted law despite the restrictions, capital flight still of laws corrupted law enforcement agencies. Fortunately, the trade characterized the Indian economy until the enforcement agencies. in gold and a wide range of commodities was early 1990s. significantly liberalized in the 1990s. One This example illustrates one of the biggest can only imagine what catastrophic effects paradoxes faced by many poor countries: such a criminal–corrupt official nexus would national economies need productive invest- have in today’s world where terrorists could ment to climb out of endemic poverty, yet leverage the existing criminal networks. economic policies are rarely conducive to Yet, after all the deregulation and liber- attracting investment. Rather than reassess- alized trade, roughly 40–50 metric tons of ing the wisdom of policy instruments affect- gold continues to be smuggled into India ing investments, most governments prefer annually. One corollary of India’s insatiable instead to go after the miscreants. demand for gold has been that jewelry mak- It was in such an economic climate that ing has become a vast cottage industry. The the informal hawala system of international skills of Indian artisans have attracted the money transfers was born and perfected attention of the world. In 2003, gold account- in the 1960s, particularly in South Asia. In ed for 21 percent of India’s non-oil imports, Urdu, a language spoken primarily by the and jewelry accounted for 18 percent of total Muslim population in India and Pakistan, merchandise exports. hawala means “in the air.” In Arabic, it gen- Given that the opportunity cost of invest- erally translates as “transfer.” In other words, ing in a nonproductive asset like gold can be hawala is an invisible transfer of money from huge, why does the average Indian house- one country to another. hold not replace even part of its gold hold- Hawala also leveraged the gap between ings with financial assets? The answer is that the market and official exchange rates that gold provides basic economic security, even is caused by government restrictions on for- to the poor. Two-thirds of the demand comes eign currency transactions. But hawala is not from rural India, where the formal banking money laundering. Money laundering is an

44 2006 Index of Economic Freedom attempt to camouflage the source of funds by hindered by India’s high regulatory costs, processing them through a number of inter- restrictions on foreign exchange, and resul- national transactions, almost always through tant low level of competition. banking and other formal-sector financial channels, while hawala is based primarily on Poor Man’s Bank a private network of dealers operating across According to the 2001 census, barely 50 countries and continents and working most- percent of urban households and only 30 ly outside the formal banking system. percent of rural households avail themselves Initially, it was a response to rigid foreign of banking services in India. The paperwork currency regulations in South Asia and the involved in opening a bank account, coupled very high transaction costs of dealing in for- with low income levels and the fact that most eign currency. The rapid, worldwide spread Indians operate in the informal cash economy, of South Asian expatriate communities that mean that maintaining a bank account is not wanted to send money home reinforced the an attractive proposition for most people. The banking sector’s need. Microfinance is the new mantra for the ability to provide Assume, for instance, that a taxi driver in governments and banks because it provides such low-cost service New York wants to send some money home them a high-visibility scheme, showcasing is hindered by India’s to his mother. He approaches a hawala agent their intention to deal with poverty. However, high regulatory costs, in his neighborhood, who decides on a sim- very little has been done to make formal-sec- ple commission, typically about 0.25 percent, tor banking accessible to the large population restrictions on for- or offers an exchange rate that is 10 percent in the informal economy. Consequently, the eign exchange, and to 15 percent higher than the official rate. The informal sector has improvised to provide its resultant low level of agent then informs his counterpart in India own credit and savings facilities. competition. about the transaction, and the counterpart For instance, at almost every commer- ensures that the money is delivered within cial complex in Delhi, people at the lowest 24 to 48 hours to the mother, usually in cash, income levels have tried to band together in since the recipient probably does not have a small groups, led by a reliable coordinator. bank account. The members are typically 10 to 100 peo- Despite economic liberalization and the ple working in the vicinity, or people who spread of communication technologies, have known each other for a long time. They a wire transfer from one bank to another agree on various savings schemes in which takes days. Relying on trust, the network, the members may put in, say, US$1 a week and using simple codes, the telephone, fax, or US$5 a month. The coordinator acts as a e-mail, and now SMS text messaging, the mobile bank, carrying the cash in his pocket hawala system is able to provide faster ser- and ready to disburse a loan on the spot. vice at a lower cost. There are about 20 mil- Every member has the opportunity to with- lion Indians living abroad, and it is believed draw his contribution or to take a loan. The that most of them have used the hawala sys- interest rate is determined by the members of tem at some point. the group themselves and is typically 2 per- Countering hawala would mean figur- cent–5 percent per annum. ing out ways to lower the transaction costs Members join these groups for differ- of foreign exchange transfer so that the 90 ent reasons. Some want to save in a simple percent of transactions now taking place and convenient way so that they can buy through hawala are absorbed into the formal something that they want, perhaps a TV or a system. For that to happen, however, the for- refrigerator. Others join so that they can get mal banking channels must be able to com- a loan to help meet the cost of a child’s edu- pete with the low-cost hawala network. Even cation or a daughter’s marriage. Such inde- though most hawala transactions involve pendent groups, operating outside the scope relatively small amounts, legitimately earned of microfinance institutions, are quite com- and saved, being sent by ordinary people to mon in rural as well as in urban India. Shop- their family and friends, the banking sector’s keepers in low-income neighborhoods often ability to provide such low-cost service is provide daily or weekly savings schemes

Chapter 3 45 to help their clients buy goods from them. • There are 59 taxes, compliance with which Women in villages often join such groups takes about 264 hours; and in order to save small amounts, which they • Overall, some 40 procedures and 425 days can then withdraw in rotation to meet family are required for a contract. expenses. No one actually knows the precise number The “rigidity of employment” index, of such independent schemes operating in which relates to difficulties in hiring and fir- India, but they far outnumber the 100,000 or ing workers, ranks India 62nd on an index so recognized microfinance schemes. This is of 100—by far the highest in the region. And another example of grassroots entrepreneur- while starting a business is obviously diffi- ship in the informal sector. cult, closing a business is likely to be even One reason why formal banks have not more so. According to this report, bankrupt- stepped forward to cater to this segment is cy procedures take 10 years in India.6 If these grassroots that they have not figured out how to lower Some formal-sector competitors com- capitalist entrepre- the cost of processing clients who transact in plain that those who are involved in the neurs were freed low amounts of money yet have higher fre- large informal sector in India have an edge from the shackles quency of transaction. This indicates that the because they avoid paying taxes and do not level of competition in the banking sector is bear the full cost of economic regulations. of bureaucratic eco- not high enough to motivate banks to inno- On the other hand, the single biggest obsta- nomic regulations, vate and reach out to new clients. In addi- cle to the informal sector is its vulnerability they could well take tion, the banks do not yet have the freedom to extortion from law-enforcing agencies. India to the top of the to charge higher interest rates to compensate Strictly enforcing some of the regulations development ladder. for the higher perceived risks associated with would gravely affect some of the poorest informal-sector clients. sections of society who are engaged in the whole range of informal economic activities. Grassroots Entrepreneurship Political upheaval would inevitably follow. These are only a few examples of the all- Because India is a democracy, its govern- pervading spirit of enterprise, particularly ment has to maintain a balancing act. among people at the bottom of the economic The other cost that the informal sector ladder, in India today. They exhibit an uncan- has to bear because of its extra-legal status ny ability to identify an unmet need and then is the inability to raise the capital necessary find a way to supply that demand. Relative to expand businesses even if they are com- lack of formal education and training, or of petitive and have successful products or ser- capital and technology, are not obstacles. vices. This inability to capitalize assets, and The biggest obstacle faced by Indian the consequent underutilization of capital grassroots entrepreneurs is the govern- for economic development, has been well ment’s attempts to outlaw their businesses researched by Peruvian economist Hernan- or impose regulations. The World Bank’s do de Soto in his book The Mystery of Capital.7 annual “Doing Business 2006” survey, which A corollary to this problem is the formal sec- measures the ease of doing business in a tor’s difficulty in taking advantage of suc- country, ranks India 116th out of 155 coun- cessful informal-sector players’ managerial tries surveyed. New Zealand leads the rank- and technical expertise by integrating them ings, followed by Singapore.5 into their operations. Despite recent economic reforms, starting This brief survey provides a glimpse of a formal business in India requires 11 proce- the culture of entrepreneurship that pre- dures and 71 days (down from 89 last year). vails in India. If these grassroots capitalist In addition: entrepreneurs were freed from the shackles of bureaucratic economic regulations, • Dealing with licenses requires 20 proce- they could well take India to the top of the dures and 270 days; development ladder. It would not be too far- • Export procedures take 36 days; fetched to suggest that there is hardly any • Import procedures take 43 days; country in the world today where informal-

46 2006 Index of Economic Freedom sector economic activity is as diverse and as widespread as it is in India. This activity is an unrealized potential just waiting to be harnessed.

Endnotes

1 Pratyush Bharati, India’s IT Services Industry: A Comparative Analysis (Boston: University of Massachusetts, January 2005). 2 India: Internet Users and Subscribers 1998–2005 (New Delhi: National Association of Software Service Companies, 2005). 3 M. Raja, “Online Businesses Grow in India,” Asia Times, August 31, 2005, at www.atimes. com/atimes/South_Asia/GH31Df04.html. 4 James Tooley, The Enterprise of Education (New Delhi: Liberty Institute, 2001). 5 World Bank, Doing Business 2006, available at http://www.doingbusiness.org/. 6 Ibid. 7 Hernando de Soto, The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else (New York: Basic Books, 2000).

Chapter 3 47