Grassroots Capitalism Thrives in India
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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 lad- der, 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.