Will the Rains Come? Reflections on an India at the Point of Economic Renewal

May 14, 2014 Posted by India Briefing Reading Time: 5 minutes

Op-Ed Commentary: Chet Scheltema, Manager, Dezan Shira & Associates

Monsoon rains sweep across India during the summer after several months of hot, dry weather, turning parched earth into lush and tropical landscape. Besides bringing eagerly awaited relief from the heat, these rains play an important role in sustaining the vibrancy of the Indian sub-continent’s life. Most of its vast population remains rural and highly dependent upon the land’s yield for sustenance. And the wealth of its large urban population depends entirely on the steady surge of India’s river waters flowing from the Himalayan heights. Lacking monsoonal renewal, India’s agriculture production may fail and its water resources dwindle – all with potentially dire consequences. So while traveling in Delhi and Mumbai these past weeks, it was little surprise to hear Indian’s ask this time of year, “will the rains come?”

And Indians’ yearning for monsoonal renewal is also felt keenly in a different way in this year’s political elections. Many Indians insist they face a parched economic landscape in desperate need of refreshing to unleash India’s great promise. They reflect on a decade of lost opportunity in which Indian leadership failed to move India forward and stifled Indian vibrancy. They almost seem to shout for a leader who will decisively confront India’s challenges and renew growth. It appears the new leader will be Narendra Modi, former Chief Minister of the widely heralded economic miracle of Gujarat. Can he bring the rains of renewal? Hopes are certainly high. Whether Narendra Modi or another, India’s next leader will face the following tremendous opportunities in the soil of India as well as the following daunting challenges.

As I struggled to communicate my destination to the poor Indian rickshaw driver in Delhi this past week, he seemed to finally comprehend my meaning and we settled on a price of 200 Rupees. Thirty minutes later I was comfortably back at my hotel. One of India’s dramatic points of comparative advantage is a remarkably English-literate populace. Whether stumbling through simple negotiations with a taxi driver or discussing high-level business with Indian community leaders, the prevalence of at least basic English skills makes life much easier in India. An obvious legacy of English colonialism, Indians have wisely deemed it worth preserving. Elsewhere in Asia, despite the most determined efforts, it has to be acknowledged that if one lacks local language skills, communications can become immensely frustrating – and business will be affected. Too many Chinese Joint Ventures have failed because of an inability of the foreign and domestic partners to effectively communicate and resolve differences.

Another of India’s comparative advantages is its ability to birth highly skilled business leaders with great entrepreneurial spirit. By way of example, some of the United States and United Kingdom’s most visible business leaders are Indian by birth. The CEO of Microsoft, Satya Nadella, was born in Hyderbaad. Vikram Pandit, former CEO of Citigroup, was born in Maharashtra (State in which Mumbai is located). Arun Sarin of Vodafone hails from Madhya Pradesh. And Indian talent has performed exceedingly well in many professions. According to the Forbes article, “Indian Americans: The New Model Minority,” although constituting only one percent of the U.S. population, they amount to three percent of the U.S.’s engineers, seven percent of its IT professionals, and eight percent of its physicians (and surgeons). When admitted for surgery myself some years ago in Cambridge, England, I was surprised to be introduced to two Indian surgeons (By the way, the surgery was successful and I was able to walk and run again). Not surprisingly, median income of U.S. households headed by an Indian American have recently been notably higher than those for East Asians and whites.Whether a result of self-selection in immigration patterns or other factors, the reality is that the Indian talent has been demonstrated in highly competitive environments, and one is left to wonder what would be the limits of India’s economic potential if such talent were to be fully unleashed at home.

While India boasts a tremendously talented population and the foundations of a globally competitive economy, there remain deep, intractable problems. One of the most important of these is India’s fractionalism. Other East Asian economies have resorted to strong central authority to drive well-coordinated economic development through infrastructure investment and manufacturing-based export that leveraged a cheap and docile labor force. India and its population have heretofore demonstrated a low propensity toward such centralization and docility. In reality, Indian society is comprised of innumerable, distinct, and independently-minded people, groups and regional political and economic bodies. Discussion and debate is raucous and decision-making difficult. Yet it is the Indian way, and it seems unlikely to change any time soon.

Another consequence of franctionalism is failed land reform and ineffective urbanization. A condition to the success of the Asian development model is that, in order to facilitate the collection of low-cost labor in urban centers where manufacturing can take place, India would likely need universal land reform to incentivize rural labor to migrate and remain in the cities, such as was been done in China on a massive scale over the last thirty years. And it would also need to build an urban infrastructure that could effectively support such a massive urban population. But such reform would require widespread consensus across India and is unlikely to happen without extraordinarily strong central leadership. And Indians readily acknowledge that lack of infrastructure development continues to plague India and may continue to challenge her for the foreseeable future.

Another unfortunate consequence of fractionalism is that it prevents India from communicating in a unified voice to foreign investors. Indians typically agree they profit immensely from foreign investment, especially the kind that includes technology transfer, but Indian authorities often send deeply mixed messages. While on the one hand verbally welcoming foreign investment, Indian authorities have taken contradictory decisions like the following: the Indian legislature passed a law in 2012 to retroactively tax and collect billions in dollars of tax revenue related to international mergers.

In conclusion, unleashing and directing India’s tremendous talent and entrepreneurial energy is certainly the key to a vibrant Indian future. And Perhaps India will chart a path different from its East Asian neighbors and bypass the stage of economic development requiring centralized infrastructure development and massive urbanization of its vast rural population. Many are deeply confident that the next leader of India, likely Narendra Modi,understands what needs to be done and will do what it takes to successfully drive India forward in its own unique way.

How he and India address these deep challenges over the course of the next few years may well determine whether India joins the growing cast of Asian economic miracles or is regarded as having missed its window of opportunity.

Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email india@dezshira.com or visit www.dezshira.com.

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