Love’s Labour’s Lost

Part 1 – Much Ado About Nothing

Fortunately, not all talented Indians leave the country or are content with working in a cushy job at a prestigious firm. Some of them are crazy enough to start their own companies.

The India story has been driven by entrepreneurs from the start. At a time when it is impossible to talk about economic development without using the words “inclusive” and “aam aadmi” or common man, it is instructive to recall a few examples of effective Indian entrepreneurship from typical “common men.”

Reliance group founder Dhirubhai Ambani started his career working at a petrol pump in Yemen. Returning to India in 1958, Ambani found that there were government licenses, controls and rations for establishing and expanding business.

Mr. Ambani went about working the system in a way that is now the stuff of Indian corporate legend. Obsessively quality-conscious and unabashed in his desire to grow, he did not think profit was a dirty word like India’s first prime minister. Through ingenious and sometimes controversial financial engineering, Reliance paid zero corporate income tax till 1996. The Minimum Alternate Tax, increased to 15% in this year’s budget, was introduced in that year to get companies like Reliance to pony up tax.

From scratch, Dhirubhai built the first Indian private company to enter the Fortune 500. Against all odds, he created vast wealth for millions of Indians – since its public offering in 1977, Reliance shares have risen at a compounded annual rate of over 25%, beating even Warren Buffett’s Berkshire Hathaway record. Reliance has shaken up every sector it has entered besides its core petrochemicals business, be it telecoms, retail or entertainment, bringing down prices for consumers and growing the market for everyone. In a few decades, Reliance has become bigger than Indian business houses that have existed for centuries.

Dhirubhai was an aam aadmi, and Dhirubhai was an entrepreneur. The growth of Reliance has included Indians from all sections of society.

In the last decade, sectors such as telecommunications which have seen market-friendly policies being implemented have seen exponential growth. The vital role of prudent policy-making has been under-appreciated in the telecom growth story – for instance, in the 2000 government budget, import duty on mobile phones was slashed from 25% to 5%. The National Democratic Alliance government did not take the view that mobile telephony was a luxury good that should be taxed heavily. Instead, it allowed vibrant competition that has today ensured that every aam aadmi can afford a cellphone.

The positive network effect of cheap and ubiquitous telecommunications on the Indian economy is staggering and incalculable. Sunil Mittal, founder of Bharti Airtel Ltd. who started his career selling bicycle components, is recognized worldwide for the innovation fostered by his company.

Foreign investors from Japan, Singapore and the Middle East to Russia, Norway and the United Kingdom are scrambling to get a piece of India’s telecom pie, desperate to have every Indian farmer use their cellphone service. That India would have almost 500 million cellphone users was unthinkable in 1999. That it actually does, is not an accidental tryst with destiny but the product of prudent policy coupled with effective entrepreneurship.

More recently, civil aviation has also seen a revolution of sorts. Reforms in the sector and the mushrooming of airlines have brought down ticket prices for consumers and dramatically enhanced air connectivity, knitting India closer together. Like mobile telephony, air travel was once the purview of the rich. Today, as an advertisement for a low-cost airline poignantly portrays, almost every am aadmi can afford to fly.

The lesson is that promoting industry and high-technology through economic reforms should be high on the government’s agenda, rather than initiating venture capital funds for poultry and innumerable other welfare programs. The government should have a mindset of empowerment and skill enhancement, instead of making people dependent on handouts and freebies. Free markets alone can liberate India’s masses from perpetual poverty. India must not take economic growth for granted.

India has many entrepreneurs with the skills and aptitude of Mr. Ambani and Mr. Mittal, some of whom are probably working for Google or DuPont. Without appropriate policy, the danger is that potential entrepreneurs might just spend their careers as content professionals. That would make for an epic Greek tragedy for India’s aam aadmi or mango people, to borrow a phrase from a recent Bollywood blockbuster.

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Much Ado About Nothing

Reading the business press in India can be much like reading a Shakespearean tragicomedy. I recently came across a news item that talked of the agriculture ministry’s efforts to set up two billion rupee poultry venture capital fund. According to an agriculture ministry official, capital subsidy, in the form of venture capital, was better than providing interest-free loans to farmers in the poultry sector.

Elsewhere, an article published on the same day by a business newspaper spoke of how Intel’s latest Xeon processor was designed completely at the company’s Bangalore research center. Noshir Kaka, director at consulting firm McKinsey, says none of the major product companies who have an R&D presence in India can do without these development hubs. In fact, conducting cutting-edge research and expanding product development in India is high on the agenda of companies such as Google, Cisco Systems, DuPont, Renault and General Electric.

Such is the dichotomy of the Indian growth story. On the one hand, the government appropriates the vocation of venture capital to provide capital subsidy for the poultry sector, and on the other hand talented Indian engineers are noted to be busy at work developing next-generation technology for global corporations.

Indians create the fundamental technology for global firms which is re-imported back to India as a finished product, and the benefits of which are reaped in the long-run by the foreign shareholders of the companies, not Indian citizens. The global firms are enticed to set up shop in India usually with a slew of tax breaks, possibly contributing less to the government exchequer than Indian firms of a similar size.

Shakespeare would smile at this comedy of errors.

Not to be protectionist or to blame India’s engineers, because they are merely responding rationally to incentives. India has the capacity and talent to compete with the world’s technology leaders, but the government disincentivizes entrepreneurship.

Even though the Finance Minister acknowledged in his budget speech that the growth from 2004-2008 was driven by private investment, there was precious little to reward that achievement in what is considered to be the government’s economic policy statement.

It’s anything but easy being an entrepreneur in India, which ranks 122 on the World Bank’s Ease of Doing Business Index, behind both Serbia and Pakistan. Starting a business in India takes on average 12 procedures and 34 days costing 47% of per capita income, the World Bank says.

The average medium-sized company in India also has to pay some 60 different kinds of taxes. Many people would probably throw in the towel just picturing the administrative burden of the paperwork. The effective total tax rate on profit, including central sales tax, corporate income tax, social security contributions and excise duty, amounts to 71.5%, the World Bank notes.

Indian labor laws are antiquated, and continue to be a serious impediment to the growth of industry and manufacturing. Companies having over 100 employees can only retrench with government approval.

The Indian banking sector remains dominated by government-controlled banks, and financial sector reforms have been long overdue. The bank nationalization of July 1969, praised munificently by the Finance Minister in the budget speech, politicized control over credit and loans and cemented the government’s grip on the economy, strangulating entrepreneurs.

Despite the impressive growth of the IT sector and emergence of major manufacturing firms such as automotive components maker Bharat Forge Ltd., the stark reality is that the agriculture sector continues to employ 60% of the workforce while generating just 16% of GDP.

Six decades of socialist economic policy have kept farmers in a time warp. The more the plans fail, the more the planners plan. A country that creates cutting-edge microprocessors prays for sufficient rainfall every year, and political parties craft populist policies precisely because of the disproportionate number of people dependent on agriculture. Not that these policies really help the intended recipients, if history is any guide, but populism usually never fails to win elections.

One has to ask the question whether this condition is inescapable or self-inflicted. Is there a way to break this vicious cycle?

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