STRATEGY
Emerging Markets: India Arrives
September 8, 2006
Christopher Bjorke

From the September 2006 edition of Exchange magazine

An Asian country with a billion-plus population, emerging from decades of socialist economic policy, kindles a capitalist fire in its population and achieves a luminous growth rate: Heard this before?

China's ascent from isolated communist country to a world economic power by becoming the magnet for the world's manufacturing production is among the most important events of the early 21st century. But India, the other enormous Asian emerging economy, is embracing the world market like never before and is being pegged as the next big Third World success story, even, some business people and economists venture to say, the next China.

"As far as countries that are emerging markets, it is probably the most talked about, the most heavily expected to become the next China," said Joseph Greco, director of the Center for the Study of Emerging Markets at California State University, Fullerton. "When it comes to India, it's sort of up there on a pedestal as being a model for outsourcing."

But India is more than China: The Sequel. Beyond the surface similarities in population, growth rates and outsourcing, India is a story all to itself. Its new growth and global integration seems irreversible at this point, but its progress into world markets is not the linear model that China adopted and has diligently followed for three decades. It must overcome staggering systemic obstacles to its success, but over the long run, it may be building its future on a more solid foundation than its East Asian counterpart.

Emerging dynamo

There is ample reason for optimism about India. It has posted annual growth rates around 8%. Foreign direct investment there has been forecast at $9.5 billion for 2006, according to the Economist Intelligence Unit. Global corporations like GE and IBM have announced huge investments there. In a perpetually poor country such as India, such statistics mark a great turnaround.

"No big international company can do without an India strategy," the Economist declared in a recent survey of the country.

China powered its development by becoming the factory of the world. India has famously become the call center of the world, or the back office of the world, employing a large population of well-educated English speakers in business process outsourcing (BPO) for foreign companies. It also has made great strides in information technology and science. But the country's growth is based on more than just BPO.

"I would argue that it's very broad-based right now," said Ashok Wadhwa, a founding partner in Ambit Corporate Finance, a leading Indian investment bank based in Mumbai (formerly Bombay).

"It is being driven by a much more liberal environment. And it is being driven by the recognition in India that it has a lot to contribute to the global economy," Wadhwa said. "The growth is not being solely driven by the local economy dominated by a few companies and a few business houses. Because the growth emanates as much from selling goods to a global customer, it's being driven by many, many more Indians, and therefore there is far more dissemination of wealth."

As in China, the spark of India's growth has come in part by the government allowing greater participation in the economy. The country's move toward liberalization was given a boost in 2004 when Manmohan Singh, an economist and former finance minister, became prime minister.

"Some of the measures the government has taken to liberalize the economy, move away from the old central planned system, pull the government out of the commercial activities have seen some very striking results," said Gregory Fager of the Institute of International Finance. "We're seeing areas emerge where India is really integrating parts of its sectors very closely into the world economy and benefiting from that new activity."

A long road

That is the good news, the signs of where India is going. The other part of the story of India is that the journey is slow and the path is not necessarily straight.

Two of the biggest hindrances to growth and difficulties that foreign companies are likely to face are infrastructure and bureaucracy.

India is a developing country and needs a great deal of investment in roads, ports, power generation and distribution. Despite the exciting changes in India, there is still plenty to remind the visitor that more work needs to be done.

"Terribly deficient. Antiquated," Fager said of the infrastructure. "The prime minister even said they need one and a half trillion dollars in infrastructure investment."

India made significant improvements in its telecom infrastructure and is building an interstate highway system, but many other areas need work.

"I would say power is the most desperate at this stage. We really need significant investment in the power sector," Wadhwa said. "I would believe ports are another one, but ports are showing very decent signs of investment and growth. I would say creating many, many more airstrips and airport infrastructure is another important piece, and creating a stronger road network so logistics management is better serviced."

Seth Hishmeh is chief operating officer and co-founder of USAS Technologies, an IT consulting company with offices in India and China. He has had ample experience negotiating the challenges of the Indian business environment.

"They have a lot of problems they're dealing with, with infrastructure, with roads, with electricity," Hishmeh said. "We have to have generators in the offices when the electricity goes out multiple times during the week."

Bureaucracy abounds

As a principal in a small business-about 40 employees, depending on business volume-Hishmeh has also experienced some of the deficiencies of the bureaucratic and regulatory environment. Navigating the paperwork and getting established can be especially challenging for those who are not IBM or Hewlett-Packard.

"The only way we did it was through building relationships with some people who were familiar with that process," Hishmeh said. He originally partnered with a local company, which he later folded into his own.

"It takes months and months to get things registered, send letters back and forth. It's kind of an old-fashioned process. You don't go online and register," Hishmeh said.

Another challenging area, depending on a company's size and resources, is staffing. India's human capital is a large part of its allure for foreign companies. For a developing country, it has a large number of highly educated English speakers who have benefited greatly from foreign companies' outsourcing. However, the demand for these workers is starting to put pressure on the supply.

"To get the right people that are very well educated, communicate very well, and are very skilled, they're very expensive and in very high demand, and there's a shortage of people like that," Hishmeh said. "The smaller company you are, the more difficult it is to retain employees."

Though India has a billion people, it is still largely a rural country, and English-speakers with engineering and accounting degrees are still a small fraction of the population.

"In some of the key areas, in computer software, in the financial sector, these areas that have been booming, there are shortages. There is poaching. There are sharply rising wages, these kinds of strains," Fager said. "There is not an unlimited pool of labor at this point, and again, India has not had to adjust to this kind of growth performance or these kinds of demands, so it's lagging. The surplus labor is being taken up."

World economy

Despite its rickety infrastructure, its slow bureaucracy and the many problems of a developing country, India has established itself as an important component in the world economy, in part because of its human capital and in part because of its one billion humans.

Though it remains a poor country, the new wealth being generated is spreading to more parts of the population and creating more middle class consumers.
"Any economy where the GDP is growing by between 8 and 9% clearly offers a significant opportunity," Wadhwa said. "It's not just a question of more wealth, but it's also a question of better distribution of that wealth, so there's not such a disparity in income."

Apart from a place to sell products, Wadhwa said India can occupy an important place in companies' global strategies, even those that already include China.

"The two countries bring very varied but complementary strengths to the table. China is volume-driven. India is value-driven," he said. "Therefore, in anything that needs intellectual capital India has a significant edge. The best example is a shirt should be designed in India and manufactured in China."

Though its size and brain power make India an important part of a global strategy, it is important to be aware of the structural problems that stand in the way of the country's development: Fiscal imbalances, dependence on imported oil, the threat of terrorism, a growing population and stop-and-start economic reforms.

"Really what we've seen is that there is a tremendous entrepreneurial spirit in India, and that has been unleashed and unlocked by the reforms, but we don't really see the government making great strides in a number of areas," Fager said.

Perhaps the key difference between India and China is the fact that China is a single-party authoritarian state, while India is a vibrant democracy-the world's largest. China can tailor an economic strategy for foreign investment by fiat, while the Indian government has to reach consensus among the many constituencies contained in a vast, diverse population.

"You've got to remember that the federal government is ruling with the support of the left party," Wadhwa said. "And to that extent, the influence of the left, which tends to be socialistic, is driving a significant amount of industrial policy, particularly as it relates to foreign investment."

Though India is not the investment magnet that China has turned itself into-tariffs and limits on foreign ownership are still a hurdle-its democracy may make for a stronger foundation than China's tumultuous mix of economic liberalization and political control.

"I think in many ways people look at the India-China story as the tortoise and the hare. The jurisprudence system established and the democratic process established in India provide it with the longevity to deal with a growth path that works and is sustainable," Fager said.

India's engagement with the world is still a work in progress, and vulnerabilities remain in its economy, but it has the many opportunities of a huge nation that is beginning to live up its potential.

"The bottom line is that I would live with these vulnerabilities and risks and take the chance to be in India."

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