BUILDING A BETTER INDIA
1. Who is India’s enemy?
2. Is the current situation so bad?
3. What are the plans for the future?
4. Building a better India
WHO IS INDIA’S ENEMY?
In the afternoon of March 20th 2003, a group of MIT MBA students and I were having
coffee with A.P.J. Abdul Kalam, President of India, and one of the most impressive
persons I have ever met. During our conversation with the President, he mentioned an
anecdote that happened to him when talking to some high-school students in the north of
“I asked the students a simply but powerful question: Who is India’s enemy?
Some of the students said Pakistan, others China. Then one of the students stood up and
said: Our enemy is poverty”
For the President, as for the child, it is clear that the main challenge of India is to cope
with underdevelopment and poverty. I completely share his vision, and this is why this
paper is focused on how to build a better and more developed country, and how to end
By the end of the meeting, the President asked us:
“And you, the leaders of tomorrow, what are you going to do to solve this problem?”
During the rest of the trip I was thinking continuously what I could do to help. I loved
India. I loved its people, its culture and its traditions. I think that India has a lot to teach
the world and a lot of value to add to our whole society. This is why it hurts me so deeply
to see it underdeveloped.
IS THE CURRENT SITUATION SO BAD?
Yes, for two reasons:
a) India’s current macroeconomic situation is weak compared to its key competitors
b) The perspective in the future is not much better
A. India’s current situation
By the beginning of the 1990s, China and India were almost in parity in terms of
economic indicators. In 1991 India suffered an important balance of payment crisis. The
crisis was a painful but valuable wake-up call. It was the driving force behind an
ambitious reform program undertaken during the following years. The reform program
included a significant industrial and trade liberalization; financial deregulation;
improvements to supervisory and regulatory systems; and policies encouraging foreign
India made impressive progress over these years:
• GDP growth averaged 6 percent a year, led by strong advances in the services
sector. The IT industry was particularly dynamic and is now of global renown
proving that India is perfectly capable of competing and succeeding at the top
• Poverty dropped significantly, from 55 percent of the population in 1974 to an
estimated 26 percent in 2000. Life expectancy increased from 55 to 63 years; the
infant mortality rate dropped from 108 to 70 per thousand live births; and literacy
rose from 45 to 68 percent for men and from 29 to 45 percent for women.
• The external position also strengthened: since the 1991 balance of payments
crisis, official reserves have risen steadily and now stand in excess of six months
of goods and services imports.
Unfortunately, the economic momentum achieved through the early part of the 1990s has
not been maintained. Growth has been slowing since 1997. While a number of external
causes can be pointed to — droughts, high energy prices, the earthquake in Gujarat — it
is more plausible to attribute the growth slowdown fundamentally to a slackening in the
pace of reform.
Moreover, China, India’s main competitor in terms of foreign investment destination and
regional preponderance, has done significantly better than India, and now almost doubles
it in economic terms:
Key Economic Indicators (2001) India China
GDP (US$ billion)
GDP per head (ppp US$)
GDP growth (%)
Current account balance (% GDP)
External debt (% GDP)
Population growth (%)
Growth during the past decade has not been sufficiently broadly based. Despite the
impressive performance of the services sector, industrial growth — which still has the
greatest potential to provide high-wage employment for the 70 percent of the labor force
still working in agriculture — has slowed sharply since the middle of the decade.
India's appalling infrastructure has also been a major constraint to higher rates of growth.
Although recent government pronouncements have increasingly emphasized the need to
secure investment in major infrastructure projects, real progress has only been made in
the "new economy" telecommunications sector. Power shortages amounted to 6% of total
demand, rising to over 12% at peak times. Official targets for increased generation
capacity have been set below required levels for decades, and even these have not been
An unwieldy fiscal deficit makes things worst. It reached 6.6% of GDP in 1991/92, when
India experienced a payments crisis. Sustained attempts at fiscal restraint brought it down
to 4.1% in 1996-97. The succession of weak coalition governments that followed raised it
to about 5.9% in 2001/02. The states run another 1.5-2% of deficit. As a consequence of this underdeveloped economic situation, about 260 million Indians
still live below the official poverty line.
B. Future perspective
Roberto Rigobón, Professor of Macroeconomics at the Massachusetts Institute of
Technology, used to tell us that the best way to evaluate the future perspectives of a
country is to talk to the people at the streets: taxi drivers, shop sellers, etc.
So that is what I did during the trip…
I asked all the people that I met what was their perspective for the future: the CEOs of the
biggest Indian Corporations, the hotel room service, the poor people at the street, the
shop sellers, the taxi drivers, the business students, the politicians, the policemen and the
There were two clearly different views of the future of India:
• The view of politicians and top executives: they shared an optimistic view of the
country potential. Nevertheless, they were afraid of the increasing threaten of
• The rest of the people had quite a pessimistic view of their future, what hinders
consumption and private investments.
Foreign investors also share a pessimist view on the future of India, which contrasts
dramatically with their optimism about China’s growth. Investors believe that India will
be an important player in the service outsourcing sector, but will not held a significant
internal demand or exporting manufacturing capacity. They think that very few Indian
companies will become big international players. This perception, together with higher
that average import duty and indirect taxes, discourages foreign direct investment: $35
million in 2002, compared to $50 billion for China. International markets have a clear
winner — China — and are betting for it.
WHAT ARE THE PLANS FOR THE FUTURE?
India has a long tradition of economic planning, starting just after its independence. The
quality of its planners and policymakers is widely recognized:
“In some countries, a speaker from abroad can bring fresh analytical insights and
experience to bear, and frame the domestic debate. That is not really the case in India.
Indian policymakers know full well about the important impediments to stronger growth
[…]. Economic policy discussions in India are at a high level. Indian government
commissions and reports are generally highly professional and highly relevant to the
issues at hand. On the question of how to increase India's growth to 8-9 percent per
annum — rates that are entirely possible at this stage of economic development — there
is no better guide than the excellent report in February last year of the Prime Minister's
Economic Advisory Council, which laid out an impressive and comprehensive agenda for
second-generation reforms.” (Stanley Fischer, IMF, Special Advisor to the MD)
In December 2002, the Planning Commission of the Government of India issued “India
Vision 2020”. This is a roadmap of policies and reforms aimed at providing sustained
growth and self-reliance for the nation for the next two decades. It focuses on the
following key development areas:
• Agriculture and food processing: with a target of 360 million tones of food and
agricultural products in a year. Including other areas of agriculture and agro-food
processing that bring food security and prosperity to rural people and speed up
• Education and healthcare: aimed at increasing the employment potential leading
to social security and population control.
• Infrastructure development: including reliable and quality electric power for all
parts of the country, vital for all core sectors.
• Information and communications technology: promoting education in remote
areas and creating massive employment and national wealth through export
The “India Vision 2020” roadmap envisions key economic reforms in these areas, from
industrial deregulation to labor market reforms, agriculture reform and modernization of
Priorities include eliminating preferences for small-scale producers, further easing
constraints on foreign direct investment, streamlining regulatory procedures, and
revamping bankruptcy legislation.
Privatization of key industrial sectors is expected to increase dramatically its
Labor market reform
The repeal of legislation blocking layoffs in medium- and large-sized firms, plus
legislation to ease constraints on the hiring of contract labor will also foster
competitiveness and productivity:
Controls on the prices, trade and movement of agricultural commodities will be
abolished. A sharp reduction in the role of government procurement agencies and the
dereservation of agricultural processing would also be sensible. The costs of the existing
system are visible in the growth in government food stocks, which represent a significant
drain on the fiscal accounts and which far exceed what is needed for food security.
Reform of the power sector
This is primarily the responsibility of the states. But the central government will have to
help them by making funding conditional on necessary reforms. For example, metering,
energy audits, commercialization of distribution, and the raising of tariffs to
economically sensible levels.
BUILDING A BETTER INDIA
After reading all the articles and plans about India’s development that I could find, there
were some specific areas which I would like to tackle here. I would expose my personal
beliefs on overpopulation, government structure and investment policies that are, in
certain way, quite different to the existing thinking about India.
During the whole trip, none of the leaders that we met mentioned overpopulation as one
of the biggest problems for India’s development. Nevertheless, I strongly believe that this
is one of the main issues that hinders development, as it limits the GDP growth per capita
and the development of a strong internal demand for goods other than food.
China, for example, launched several national initiatives, that reduced dramatically the
population growth and had a positive impact on the income per capita:
India is the largest democracy in the world, and discussing openly about birth control in
democracies is usually a risky exercise for the politicians. I don’t think that India
Government should issue the same kind of top-down laws and policies as the China
Government, but should definitively commit publicly on strong measures on this front,
through mass education and the media. For instance in Venezuela, a very successful birth
control program was backed by the most popular soap operas, that started educating the
population on the poverty and problems associated to having too many kids.
Government structure inefficiency
India currently has a delicate balance between the Central Government and the States.
The fact that the governing party needs the support of local parties creates a situation
where the Government is not able to apply the right policies and reforms, because of the
pressure from certain states and minority parties.
Prior to launching an ambitious strategic program of economic reforms, India should
establish a political and governing structure that allows these reforms to be successfully
In my opinion, local parties should not run for the India’s parliament, but only for the
state ones. This system would incentivize the parties to look for the interest of the whole
nation, and not only of a particular region.
To carry on with its planned growth rate, India needs to sustain an enormous investment
effort. The Government has selected some preferred sectors for these investments, where
India possesses a competitive advantage versus other countries.
In addition to this sector-selective investment policy, I believe that India should focus its
investments on certain regions. This would allow to develop good infrastructures in same
key areas and to boost the internal demand in these markets. The returns on these areas
could be lately used to develop other regions. This method was used in China, where
most of the foreign investment was directed to five key developing areas.
It can be argued that this method produces strong inequalities among regions. This is true
in the short term, but the reality is that the fast growth of the preferred areas is contagious
in the medium term to all the surrounding regions. This is why, from the twenty fastest
growing regions in the world, sixteen belong to China.
A former director of IIT Madras explains this argument with very simply and powerful
“Suppose you have three children. Would you give for Diwali a new shirt for only one
child, and nothing for the other two? Almost definitely not! That would be unfair.
However, suppose, you have money for only one shirt, and no more. Which would you
prefer - to stitch a shirt in turn for the three children, or give all three of them a banian
each year? Think!
This is a problem in queuing theory. The way traffic lights operate provides the solution.
At any one time, traffic lights halt traffic in all but one direction. However, they rotate the
green light to let through traffic in all directions by turns. It would appear at first sight
highly undemocratic to prefer one direction over all others - to halt traffic in all other
directions. However, as we all know from bitter experience, when traffic is allowed
democratically from all directions, the result is utter chaos. Nothing moves.
India's development is in a similar predicament. Investment is spread everywhere and too
thinly to be viable. […] When resources are spread thinly, change will occur in a number
of small steps, often too small to be progressive. They could actually obstruct progress -
the way our congested roads do. On the other hand, when we plan development like
traffic lights, progress is swift. Facilities are installed in one go. There will be less risk of
damage to quality. Thus, we can guarantee proper progress but only by taking different
locations by turns.” (P.V. Indiresan, former Director of IIT Madras)
SOURCES OF INFORMATION(During the Spring of 2003, about two dozen MBA students from MIT Sloan School of Management enrolled in a Special Course related to India and spent 10 days in India. Dr. Amar Gupta, Co-Director of the PROFIT Initiative at the MIT Sloan School, served as the Faculty Advisor for this course. The student papers dealt with a wide variety of topics including Finding Profit Opportunities in the Indian Fast Moving Consumer Goods Market, The Business Process Outsourcing Industry in India, A Rich Diaspora, The Hindu Growth Dilemma: Talented Apathy?, Overview of the Indian Power Sector, Biocon India: A Market & Non-Market Strategy, The Role of Microfinance in Reducing Poverty, Steps for India to Spur Economic Growth, Patent Law Changes in India - Effect on the Pharmaceutical Industry, Building a Better India, Comments on India's Future Economic Development Strategy, ICICI: Indian Financial Services for the Future, Hindustan Lever and the Challenges of Rural Marketing in India, Opportunities, Challenges and Innovations in Marketing Consumer Goods to Rural India: Observations of a First-time Visitor, and Indian Banking: History of Reform and Personal Observations from Recent India Trip and will be published in upcoming issues of Lokvani newsletters. )
• “India Country Profile 2002”. The Economist Intelligence Unit, 2002.
• “India Commerce Report 2002”. The Economist Intelligence Unit, 2002.
• “India Vision 2020”. Planning Commission Government of India, 2002.
• “India’s China problem”. Business Week Articles, 2002.
• “China - India, Comparison on Economic & Social-Economic factors”. "China
Daily", Beijing edition 2000.
• “Breaking Out of the Third World: India's Economic Imperative”. Stanley Fischer,
Special Advisor to the Managing Director. India Today Conclave, 2002.
• “Vision for 2002”. Dr. A.P.J. Abdul Kalam. The Nation, 2003.
• “Are we only a paper tiger?”. Financial Times, 2002.
• “India, from emerging to surging”. McKinsey Quarterly 4 2001.
• “India and China: Asia’s non-identical twins”. McKinsey Quarterly 2 1995.
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