India’s Unmet Domestic Development Needs

Listener: April 16, 2011

Keywords: Political Economy & History;

In 1947, newly independent India embarked on a strategy of economic self-sufficiency in which domestic industry was protected from external competition behind high barriers. That reflected the fashion of the times, but also that Indian industry had had a pretty rough deal under colonial rule.

It was a similar desire for independence and self-sufficiency that led to the proposal to make Hindi the sole official language. Nonetheless many regions of India are not Hindi-speaking. Tamil-speaking Tamil Nadu (formerly Madras state), where more speak English than Hindi, even threatened to leave the union. Common sense prevailed; as well as Hindi the constitution mentions 21 regional languages, plus English as a second official language, with the expectation that students will learn at least three. (Accuracy requires mentioning that many Indians’ “Hinglish” is incomprehensible to the English-speaking visitor, and vice versa.)

What the founders of independent India did not predict was that one day the Indian economy would open up to the world, and the English they almost rejected would be integral to that engagement. The Indian dominance of international call centres could not operate without it.

Indian liberalisation has been slower than China’s. The key player has been the Prime Minister, Manmohan Singh, who was minister of finance in the early 1990s. The result has been some impressive internationally oriented businesses.

For instance, Rane Group, based in Chennai (Madras city), makes automotive components – including the precision forging of engine valves and tappets. It started a century ago as an importer, and evolved into manufacturing in the 1950s behind protective barriers. But it has now become more outward-directed, and exports to 25 countries, including supplying Volkswagen in Germany. That requires high-quality manufacturing and effective delivery, something the Indian service industry does not always attain. (Virtually every Indian hotel bath-room I have used showed poor workmanship.) As international competition pressured it, the firm switched from “inspect and reject” to total quality management, which requires a higher involvement by its workers in the production process. Today it wins Deeming awards, which celebrate the founder of modern production management.

Or take the giant software company Infosys, founded in 1981 by seven Indian engineers with about $300 between them. Initially they made little progress because Indian banks were not interested in switching from their traditional labour-intensive manual systems. Liberalisation allowed a few specialist foreign banks into India; they hungrily bought the company’s services, forcing the slumbering domestics to follow. Today Infosys is among the world’s top 10 software companies, with 60% of its revenues earned offshore. Its main campus, in Electronic City, Bangalore, employs 25,000 mostly engineering graduates drawn from all over India, a third of whom are women.

As much as they are shining lights in the economy, companies like Infosys do not have strong links to the traditional economy. The campus has only about 5000 non-graduate employees – cooks and cleaners – although its staff also hire service workers for their personal domestic needs.

Rane Group, which recruits its workers from more modest social groups – including the children of farmers – requires successful high school education and good character. It trains them in local technical institutes, offering the young people a life opportunity different from the traditional ones of their parents.

Given the size of the traditional sector, such career paths are welcome, but they are small compared with the need. Analysts talk of a “two-speed” India, with growing inequality. In the 2004 election the Government campaigned on “India Shining”, and lost office. Democratic India’s politics are so confusing it is hard to interpret the result, but undoubtedly a large proportion of the population did not buy into the shining that had passed them by.

Manmohan Singh is right. India needs to engage with the world, promoting firms and industries like Rane Group and Infosys. But that will not be enough. The urban service sector has to modernise, too, and, most of all, the rural economy has to lift its performance.

This is the third of a series on India, made possible by a travel grant from the Asia New Zealand Foundation.