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Where is India's boom?

A new leader promises a new direction for a tech-savvy nation that has been left far behind by its economically powerful neighbor, China. Can he do it?

By , Staff Writer

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    Employees walk in front of a pyramid-shaped building at the Infosys campus in the Electronic City area of Bangalore, Sept. 4, 2012. Infosys Ltd, once a bellwether for India's $100 billion-plus IT outsourcing industry, is losing its cachet as the employer of choice for a generation of young IT workers, with staff leaving at an unprecedented pace as the Bangalore-based company struggles to regain ground lost to rivals.
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Two days before Narendra Modi was sworn in as India’s new prime minister, proclaiming a bold new vision for a resurgent nation, the last Ambassador rolled off the Hindustan Motors production line outside Calcutta.

For decades the clunky sedan, generally painted cream, was the automobile of choice for India’s political elite. But nearly 60 years after its first appearance, it has become a dated relic of a bygone age, outclassed by jauntier models.

A more apt metaphor for the senior bureaucrats and politicians who once rolled around New Delhi in the car’s back seats could hardly be found. And the timing of the Ambassador’s death is striking. For at the heart of Mr. Modi’s pledge lies the prospect that this time, after years of disappointment, India will finally take a new broom to its ossified, corrupt, and inefficient state.

Recommended: How well do you know India? Take the quiz.

India’s bewildering diversity produces a society with a thousand dimensions and disparities. But the most glaring discrepancy is not, perhaps, the contrast between rich and poor. It is between the energetic industry and ingenious initiative of ordinary Indians and the dead hand of a government system that more often paralyzes progress than inspires it.

If it were only a question of entrepreneurial energy “we could be going at 100 miles an hour,” says Rajeev Chandrasekhar, who made millions from his cellphone company before becoming an independent member of the upper house of Parliament. “But we are slowed down to 30 m.p.h. by a monolithic and unsympathetic bureaucracy.”

“India grows at night,” adds Gurcharan Das, a former chief executive officer of Procter & Gamble India, quoting the title of his latest book, “while the government sleeps.”

• • •

India has not grown as much as it might have done over the past few years. At the dawn of the 21st century, people spoke of an economic race between India and China, the two Asian giants. No longer.

In 2000, China’s economy was about twice as big as India’s; it is now more than four times as large. Over the same time span, China boosted its per capita gross domestic product sixfold; India’s grew at half that rate.

The two neighbors have taken radically different approaches to their economic development. China’s authoritarian Communist Party has directed policy from the top down. Democratic India has grown from the bottom up.

China has powered its astounding growth with heavy investment in infrastructure and by making itself the “workshop of the world,” giving hundreds of millions of people jobs in factories making goods that are sold around the globe. India’s growth has come largely from its white-collar services sector – most notably information technology – as it has transformed itself into the world’s computer keyboard, offering back-office services and world-class software that now account for a quarter of its export earnings.

That high-tech boom has transformed Hyderabad, the capital of the southern state of Andhra Pradesh, once known mainly for its rice paddies. On the city’s western edges, a gleaming new suburb christened “Cyberabad” has sprung up, which is home to Microsoft’s Indian headquarters and a host of other international IT firms.

Their sharp-edged glass towers and impeccably trim campuses, rivaling anything in Silicon Valley, stand in stark contrast to the chaotic hurly-burly of Indian street life outside the gates. They have put Hyderabad on the global high-tech map, along with Bangalore and other such centers.

The man who made this possible when he was chief minister of Andhra Pradesh, N. Chandrababu Naidu, is proud of his achievement. “We turned the state around with IT and services,” he says. “And that generated revenues to pay for welfare.”

 • • •

Mr. Naidu and Modi are in many respects similar. Both regard themselves as CEOs as much as political leaders, both are reform-minded, and both have a blunt reputation for cutting through red tape and getting things done. Naidu’s experience may offer some insight into where the new prime minister will take India.

Naidu bet heavily on IT and pharmaceuticals as the quickest path to make a difference. “That created visible development and a global image, but it did not create enough jobs,” says K. Nageshwar, an independent member of the state legislature. “He made a model sector, but he lost the support of the masses.”

At the time, in the late 1990s, many Indians were beguiled by the possibility that their country could move from being an agrarian society to a 21st-century service economy in one smooth step. It has not worked out that way.

Naidu was turned out of office after two terms. Today, after 10 years in the wilderness, he is back as the newly elected chief minister of a truncated Andhra Pradesh, split in two by central government fiat, and bereft of Hyderabad.

Starting from scratch in a new state, Naidu is taking a wider view of what must be done to revive India than he once did. Now, he says, he will focus on “inclusive growth” to give jobs to the people who have not benefited from India’s patchy IT revolution. This time, he explains, “I want to go for hardware as well as software, and that means manufacturing in a big way.”

• • • 

That is a lesson that Modi has already learned as chief minister of Gujarat. He has not ignored farmers (providing them with water, reliable electricity supplies for irrigation pumps, and decent roads), nor has he put all his eggs in the high-tech basket. Studying the way China and South Korea grew rich by moving farmers into factory jobs, he has focused on making Gujarat a business-friendly state.

Now he plans to scale that approach up to the national level, and nobody is more excited about the prospect than Amitabh Kant. He heads the Department of Industrial Policy and Promotion at the Ministry of Commerce and Industry in the capital, Delhi.

Sitting behind an enormous wooden desk that is a distinguishing privilege of all top bureaucrats in Delhi, Mr. Kant says Modi won his landslide victory in the recent elections because “he realized that this is a young, aspirational India and people want to move to the cities.”

With a million Indians a month leaving school and looking for work, he adds, “we have to move from an agricultural economy to an urbanized economy with labor-intensive manufacturing as the key driver of growth.”

India would seem to have a lot going for it: the second largest market in the world (and a growing consumerist middle class), cheap labor (an unskilled worker earns one-quarter less in India than in China), and robust legal protection of intellectual property.

“I can imagine iPhones being made in India,” says J.A. Chowdary, the man who first set up Bangalore’s Technology Park. “Foxconn [the Taiwanese firm that assembles many Apple products in China] could expand here, and it would be more cost effective for them.”

But outside investors are hardly lining up to put their money in India. Foreign direct investment plunged by 50 percent last year because of the country’s reputation for government indecision, a tangled bureaucracy, and creaky infrastructure.

“We are 10 years behind when it comes to railways and ports and roads,” says Mr. Chandrasekhar. “It will take some heavy lifting, but there is no way of escaping that we have to do what it takes to make us relevant in manufacturing.”

• • • 

It is going to take a lot. As he surveys one of the finest views in Hyderabad from his office, overlooking the greensward of the Indian Army polo field and nearby woods, industrialist Devendra Surana admits that he and his peers have felt “a huge sense of despair” in recent years.

Hemmed in by high taxes, expensive electricity (industry pays twice the market rate to subsidize government offers of free power to farmers), and interest rates of 14 percent a year, Mr. Surana sighs, “I probably wouldn’t be doing this if I had not inherited my factories from my father.”

At a recent 20th reunion of his classmates from the Indian Institute of Management, one of the country’s top schools, Surana found that he was one of only a handful of graduates still in manufacturing. Almost everyone else had gone into services, founding companies that took less investment to set up and that could operate without being besieged by an army of land-use regulators, customs officers, boiler inspectors, pollution monitors, and other minor government officials.

India’s state bureaucracy is a British colonial legacy compounded by the country’s socialist past, and it is universally acknowledged to be a nightmare.

The Andhra Pradesh government is not unaware of the corporate world’s impatience with red tape, and says it is doing something about it. The man in charge of attracting investment to the state, Pradeep Chandra, claims that a new “single window” system allowed Cadbury to get all the official clearances it needs to set up the largest chocolate factory in the Asia-Pacific region in just three months.

But the man who is building the factory for Cadbury, with prefabricated concrete slabs, beams, and columns, tells a very different story.

“The major challenge that I have found is that the lag time between having an idea and making your first rupee takes forever,” says Satish Gottipati, who launched his company, Preca, three years ago.

Under a boiling sun in the parched, tree-studded countryside an hour’s drive outside Hyderabad, Mr. Gottipati shows a visitor the prestressed concrete production line, shaded by a high steel roof but open to the occasional breeze, where he has installed technology new to India.

Then, clutching a surveyor’s plan, he walks across a nearby stretch of wasteland where he envisions a second shed that will allow him to double his production. Eight months after he applied to use the land for industrial purposes, he is still waiting for approval. He hopes he will have only another three months to wait.

“They say they have a single window, but unless you follow your application up all the time, it doesn’t go anywhere,” he complains. “I have to send a man to the government office every day to push.”

At every step of his company’s journey through the bureaucratic maze – and Gottipati recounts 22 different stamps, seals, and signatures he needs before he can start building – an official has to be “impressed,” he says. Does that mean bribed? Gottipati smiles knowingly.

• • • 

Few men know the ins and outs of the Indian bureaucracy like K. Padmanabhaiah, a gray-haired urbane patrician who was once the most senior civil servant in the country’s senior ministry, the Home Ministry. Retired now from active duty, he works from the comfort of his cool, airy villa in his hometown of Hyderabad, advising the government on civil service reform.

So far, he admits, he has not had much luck. He persuaded the last government to set up a performance-monitoring committee that was meant to publish its annual findings as a spur to efficiency, he says, “but the prime minister did not have the courage to publish them. He’s been dithering.”

Simplifying the Indian bureaucracy and making officials accountable, Mr. Padmanabhaiah acknowledges, is “a herculean job.”

“But if anyone can do it,” he adds, “Narendra Modi can because of his personality.”

Modi’s reputation as chief minister in Gujarat precedes him as he takes up his new task. Businessmen say they encounter less corruption there, and they appreciate his no-nonsense style of firm leadership, so sorely lacking in the central government for the past decade.

The new prime minister swept to power on a promise of “minimum government, maximum governance,” a slogan reflected in his decision to appoint a slimmed-down cabinet. It has 45 ministers compared with the 71 members of the outgoing government.

Modi also radiates optimism despite the scale of the challenges he faces. “I am a very optimistic man,” he told his Bharatiya Janata Party legislators as he was sworn in as the head of the parliamentary party. “Only an optimistic man can bring optimism to the country.”

That outlook resonated well with voters tired of a rudderless government mired in corruption scandals and whose indecisiveness had left more than 700 major industrial projects, worth about $132 billion, in limbo. But whether Modi will have “enough strength to overcome the historical lethargy and corruption that Delhi represents” remains to be seen, warns Chandrasekhar. This is especially true since the Hindu nationalist son of a tea seller has alienated some of the liberal, secular elites who have long dominated Indian politics.

Also unclear is how Modi will deal with the coterie of crony capitalists who make up a large part of the Indian business elite, and who have used their close ties with politicians to amass fortunes, as a string of recent scandals has revealed.

Big business clearly favors Modi, and large companies are believed to have backed his multimillion-dollar parliamentary campaign. Still, India’s new leader may also find himself constrained by politics. Though his party’s landslide election victory frees him of the need to forge the sort of coalition that has weakened Indian governments for the past 30 years, Modi does not have a majority in the upper house of Parliament.

• • • 

He has promised to “bring everyone along” with his policies, and to be an inclusive leader. But that has not yet quelled doubts among Muslims, who make up 15 percent of India’s population. Modi’s close ties to a Hindu supremacist group, the RSS, and the fact that only seven of his party’s 482 election candidates were Muslim (none of them won) is cause for concern among the country’s largest minority. Only one member of the 45-strong cabinet is Muslim.

But Modi seems much more likely to focus on economic growth than on religion, and his unprecedented invitation to Nawaz Sharif, the prime minister of longtime enemy Pakistan, to his inauguration suggests he will put economic benefits, such as trade, above political and religious differences.

Modi won the election because voters believed he could deliver on his one key promise: development. To do so he will have to ungum the system and put the parts that work back together again.

“All the parts are there,” insists Chandrasekhar. “They just need to be glued together by leadership.”

From his picture window office in Hyderabad, Surana agrees. “If the government will just point us in the right direction,” he says, “people will start moving.” ρ

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