The India Model

Gurcharan Das

From Foreign Affairs, July/August 2006

Summary:  After being shackled by the government for decades, India's economy has become one of the world's strongest. The country's unique development model -- relying on domestic consumption and high-tech services -- has brought a quarter century of record growth despite an incompetent and heavy-handed state. But for that growth to continue, the state must start modernizing along with Indian society.

GURCHARAN DAS is former CEO of Procter & Gamble India and the author of India Unbound: The Social and Economic Revolution From Independence to the Global Information Age.

Indian entrepreneurs also still face a range of obstacles, many of them the result of lingering bad policies. Electric power is less reliable and more expensive in India than in competitor nations. Checkpoints keep trucks waiting for hours. Taxes and import duties have come down, but the cascading effect of indirect taxes will continue to burden Indian manufacturers until a uniform goods-and-services tax is implemented. Stringent labor laws continue to deter entrepreneurs from hiring workers. The "license raj" may be gone, but an "inspector raj" is alive and well; the "midnight knock" from an excise, customs, labor, or factory inspector still haunts the smaller entrepreneur. Some of these problems will hopefully diminish with the planned designation of new "economic zones," which promise a reduced regulatory burden.

Economic history teaches that the Industrial Revolution as it was experienced by the West was usually led by one industry. It was textile exports in the United Kingdom, railways in the United States. India, too, may have found the engine that could fuel its takeoff and transform its economy: providing white-collar services that are outsourced by companies in the rest of the world. Software and business-process outsourcing exports have grown from practically nothing to $20 billion and are expected to reach $35 billion by 2008. The constraining factor is likely to be not demand but the ability of India's educational system to produce enough quality English-speaking graduates.

Meanwhile, high-tech manufacturing, a sector where India is already demonstrating considerable strength, will also begin to expand. Perhaps in a decade, the distinction between China as "the world's workshop" and India as "the world's back office" will slowly fade as India's manufacturing and China's services catch up.

RISING DESPITE THE STATE

It is an amazing spectacle to see prosperity beginning to spread in today's India even in the presence of appalling governance. In the midst of a booming private economy, Indians despair over the lack of the simplest public goods. It used to be the opposite: during India's socialist days, Indians worried about economic growth but were proud of their world-class judiciary, bureaucracy, and police force. But now, the old centralized bureaucratic Indian state is in steady decline. Where it is desperately needed -- in providing basic education, health care, and drinking water -- it has performed appallingly. Where it is not needed, it has only started to give up its habit of stifling private enterprise.

Labor laws, for example, still make it almost impossible to lay off a worker -- as the infamous case of Uttam Nakate illustrates. In early 1984, Nakate was found at 11:40 AM sleeping soundly on the floor of the factory in Pune where he worked. His employer let him off with a warning. But he was caught napping again and again. On the fourth occasion, the factory began disciplinary proceedings against him, and after five months of hearings, he was found guilty and sacked. But Nakate went to a labor court and pleaded that he was a victim of an unfair trade practice. The court agreed and forced the factory to take him back and pay him 50 percent of his lost wages. Only 17 years later, after appeals to the Bombay High Court and the national Supreme Court, did the factory finally win the right to fire an employee who had repeatedly been caught sleeping on the job.

Aside from highlighting the problem of India's lethargic legal system, Nakate's case dramatizes how the country's labor laws actually reduce employment, by making employers afraid to hire workers in the first place. The rules protect existing unionized workers -- sometimes referred to as the "labor aristocracy" -- at the expense of everyone else. At this point, the labor aristocracy comprises only 10 percent of the Indian work force.

No single institution has come to disappoint Indians more than their bureaucracy. In the 1950s, Indians bought into the cruel myth, promulgated by Nehru, that India's bureaucracy was its "steel frame," supposedly a means of guaranteeing stability and continuity after the British raj. Indians also accepted that a powerful civil service was needed to keep a diverse country together and administer the vast regulatory framework of Nehru's "mixed economy." But in the holy name of socialism, the Indian bureaucracy created thousands of controls and stifled enterprise for 40 years. India may have had some excellent civil servants, but none really understood business -- even though they had the power to ruin it.

Today, Indians believe that their bureaucracy has become a prime obstacle to development, blocking instead of shepherding economic reforms. They think of bureaucrats as self-serving, obstructive, and corrupt, protected by labor laws and lifetime contracts that render them completely unaccountable. To be sure, there are examples of good performance -- the building of the Delhi Metro or the expansion of the national highway system -- but these only underscore how often most of the bureaucracy fails. To make matters worse, the term of any one civil servant in a particular job is getting shorter, thanks to an increase in capricious transfers. Prime Minister Singh has instituted a new appraisal system for the top bureaucracy, but it has not done much.

The Indian bureaucracy is a haven of mental power. It still attracts many of the brightest students in the country, who are admitted on the basis of a difficult exam. But despite their very high IQs, most bureaucrats fail as managers. One of the reasons is the bureaucracy's perverse incentive system; another is poor training in implementation. Indians tend to blame ideology or democracy for their failures, but the real problem is that they value ideas over accomplishment. Great strides are being made on the Delhi Metro not because the project was brilliantly conceived but because its leader sets clear, measurable goals, monitors day-to-day progress, and persistently removes obstacles. Most Indian politicians and civil servants, in contrast, fail to plan their projects well, monitor them, or follow through on them: their performance failures mostly have to do with poor execution.