01 Jun 2006

India Arrives

Economic reforms and a young, entrepreneurial workforce have lifted India into the global economy and raised its hopes for social development. HBS alumni talk about doing business in a country that has captured the world’s imagination.
by Julia Hanna


Photographs by Christopher Brown/Redux Pro

Not even a nighttime arrival in Mumbai, India’s bustling commercial capital of nearly 13 million people, can mask the collision of old and new that now grips the world’s largest democracy. Planes circle the airport, each waiting its turn to land on one of the airport’s few runways. On the ground, there’s traffic congestion of an entirely different sort. Cars, trucks, three-wheelers, bicycles, rickshaws, and even a couple of horsemen jockey for position on a road far too small to accommodate such a volume and variety of traffic. Human accommodations fall short, too. India’s struggle with poverty comes into clear view on the taxi ride downtown: Crowded slums with makeshift housing hug the roadway, and entire families settle down for the night on the city’s sidewalks.

Also visible are signs that reveal India’s newfound status as a rapidly developing economic powerhouse. In the evening light, silhouettes of high-rises under construction punctuate the modern skyline, and a gleaming urban mall stands ready to serve Mumbai’s growing, consumer-oriented middle class.

This is the India that staked its claim to the global spotlight at this year’s meeting of the World Economic Forum in Davos, Switzerland. Business and government officials arrived in force to talk up India’s growth, exceeding an annual rate of 6 percent for the last fifteen years. GDP growth hit 7.6 percent in 2005 and is expected to increase slightly this year. “India — the world’s fastest-growing free market democracy” read posters and banners all around the Swiss resort, while Indian success stories such as Infosys Technologies were the talk of movers and shakers at swank soirees. The spotlight continued to shine on India well into the spring with cover articles appearing in major news magazines. Then came a state visit from U.S. President George W. Bush (MBA ’75) in March, the same month HBS inaugurated its global research center in Mumbai (see sidebar, page 29).

“Everything you hear about India is true; in one sense, the attention is overdue,” says Anand Mahindra (MBA ’81), vice chairman and managing director of Mahindra & Mahindra, a $3.2 billion manufacturer of cars and farm equipment with divisions in IT, infrastructure, auto components, and finance. He cites a confluence of factors that augur well for India’s continued growth, including a stable, relatively pro-business government and an energetic young population and growing middle class that make no secret of aspiring to a better quality of life, complete with all the consumer goods such an existence entails.

The downside, however, is just as apparent, with an estimated 800 million of India’s 1.1 billion citizens surviving on less than $2 a day. Education remains inaccessible or insufficient for millions, and the country has the world’s second-largest HIV-positive population. Mumbai’s airport is emblematic of the country’s crumbling infrastructure and its negative effect on the free flow of goods and services. Progress is slow, and estimates are that it will be years before any substantive change is seen. Some even fear that India’s escalating population will overwhelm any improvements.

“India has very good software in its people and very bad hardware in its infrastructure,” remarks Ashish Dhawan (MBA ’97), founder and senior managing director of ChrysCapital, a private-equity firm based in Mumbai.

Even so, Dhawan believes that a growing awareness of the outside world and a sense of competitiveness in the Indian populace will continue to drive change. “We now benchmark ourselves against other countries,” he says. “There’s the feeling that India will be left behind if it doesn’t improve its infrastructure — it has no choice.”

In any discussion of India’s economy, China is an almost inevitable subtext. With its high-rise cities, new airports, modern highways, and fantastic growth — exceeding 9 percent for the past three years — China sends a clear message to the world of progress and power. The country’s singular focus on economic development has been shaped by top-down government control that extends into ownership of most major enterprises. By contrast, India touts its open society and “messy,” yet functioning, market-based democracy as a more conducive environment for long-term development. Its Western-style legal system and transparent financial systems encourage a chaotic, bottom-up approach to growth. “The Chinese model will lead to greater, more efficient production,” Mahindra observes. “Ours, I think, will lead to more exciting innovation. Think of it as a giant brainstorming session. It’s difficult to do with too many rules.

“India is one of the world’s greatest experiments,” he continues. “The challenge is to lift a huge percentage of humanity out of poverty, and to do it in the context of a very freewheeling and open democracy. It could be a huge example for the world.”

The primary catalyst for India’s economic growth can be linked to sweeping reforms instituted in 1991 under Prime Minister Narasimha Rao and Finance Minister (now Prime Minister) Dr. Manmohan Singh.

Up until that time, government controls on production (referred to as the “license raj” or “permit raj”) created a stagnant environment for competition and entrepreneurial activity. MBAs who came home during this period found few opportunities to apply their learning in a protected economic climate that managed business by issuing a limited number of permits in each industry and dictated production quantities.

“When I started in business in the 1960s, many of our companies didn’t have a profit plan; instead, we had a production plan,” says Ratan Tata (AMP 71, 1975), chairman of the Tata Group, a $22 billion conglomerate with 93 companies operating in areas as diverse as IT and communications, steel, financial services, hotels, and consumer goods ranging from tea to china to automobiles. “There was also very little focus on strategy. None was necessary, unless it had to do with how to make it through the various government gateposts in order to obtain a license.”

The story of Sunil Mittal (OPM 27, 1999) illustrates the challenges entrepreneurs faced in the years before the government loosened its regulatory hold on business. In 1983, Mittal saw a successful enterprise disintegrate overnight when the government banned the import of the Japanese portable generators he’d been selling in India. When Mittal traveled to East Asia in search of new ideas, he saw push-button phones in Taiwan (most Indian phones were rotary dial at the time). Government regulations forbade the import of consumer products, so Mittal worked around the restrictions by bringing in components piecemeal and assembling the phones in India. The business was a huge success, creating the early foundations of what would become Bharti Tele-Ventures, India’s leading private-sector telecom with a market value of $13.4 billion.

After economic liberalization policies took effect in 1992, new companies inundated the marketplace. By the middle of the decade, the effects of overcapacity and a flood of imported consumer goods led to many companies declaring bankruptcy. “There was a huge amount of pain at the time,” recalls Niraj Bajaj (MBA ’82), managing director of Mukand, India’s largest producer of specialty steels. As part of the Bajaj Group, Mukand also works on infrastructure projects and manufactures machinery equipment. “The upside is that the focus shifted to improving quality while reducing costs; companies learned they had to become competitive or die,” he says. “Now manufacturing is back. We can compete with the best in the world because we tightened our belts during a difficult time.”

“The economy has truly opened up,” Mittal remarks. “The main challenge of operating in India today is to scale up the business in the absence of an enabling environment, be that infrastructure, bureaucracy, or lack of established benchmarks in India’s corporate environment.”

Less regulation clearly has unleashed market potential. Bharti, for example, has aggressively pursued the estimated 250 to 300 million members of the middle class. “Five million users are joining the mobile network every month,” says Mittal. “Mobile phones have moved from an aspirational product to a mass product in a decade.”

At the Tata Group, engineers are at work on a $2,000 car, the next step up for the millions of Indians who use bicycles, scooters, and three-wheelers for transport. And this year, Tata launched Ginger Hotels, which promises clean, no-frills accommodations at around $21 per night. “These are consumers who didn’t exist just a few years ago,” observes Ratan Tata.

Economic reforms also have made it possible for firms to grow by acquiring foreign entities. Godrej Industries, for example, recently purchased a UK consumer-products company, says managing director Nadir Godrej (MBA ’76), who oversees business divisions in the areas of chemicals, foods, and medical diagnostics. More such acquisitions will take place in the future, he believes, as Godrej expands its worldwide distribution beyond the forty countries where its products are sold currently.

In addition to its growth in manufacturing, India began grabbing headlines in the United States a few years ago for its sudden surge as a center of offshore IT work and business process outsourcing (BPO), industries unto themselves that have reshaped companies and changed workers lives in both countries. From 2000 to 2004, India’s offshoring industries grew from $4 billion to $12.8 billion, accounting for 6 percent of the increase in its GDP during this period.

As founder and chairman of Satyam Computer Services, B. Ramalinga Raju (OPM 19, 1993) is one of the earliest pioneers in offshoring, heading a services company that provides end-to-end technology solutions to over 150 Fortune 500 clients. With 28,000 employees located in 54 countries, Satyam, founded in 1987, had revenues of $1 million when it went public in 1992. In 2005, that figure topped $1 billion.

Satyam’s ascent mirrors the dramatic rise of BPO as the primary driver of the new Indian economy. In 1990, the company was focused primarily on businesses in manufacturing, textiles, and infrastructure — its technology arm had been operating for only a year, and Raju was hesitantto even include the word “computers” in a summary of Satyam’s activities. Then, in 1991, Raju suggested to an Illinois client that Satyam move its twenty associates back to India, where they would perform the same work but be paid in rupees, at a savings to both parties. The client requested that Satyam first simulate the same conditions (such as connectivity) at a “Little India” just outside town limits. At the end of a six-month trial, the experiment was declared a success.

“We’re very proud to have been at the forefront of offshoring,” says Raju, who sees his company’s growth as representative of a broader development. “There’s a growing realization that wealth creation has nothing to do with nations so much as it does with companies, professionals, global consumers, and global capital,” he notes. “Boundaries between nations are becoming thinner; companies are acquiring a global character.”

Another prime indicator of India’s emergence as an economic powerhouse has been the rise of the country’s private-equity and venture-capital industries over the past five years. When Renuka Ramnath (AMP 156, 1999) was appointed managing director and CEO of ICICI Venture Funds in 2001, she recalls that many wondered if the new job was a “punishment posting” or perhaps a move that signaled her desire for a slower-paced lifestyle after a fifteen-year career in various areas of ICICI Bank.

“There were no visible indicators that signaled the potential for private equity in India,” she says. “The notion of value-added private capital was not understood or believed. Before people saw and understood the real results of private-equity involvement, 75 percent of my time was spent establishing my credentials.” From 1988 to 2001, she notes, ICICI raised $150 million in private equity; from 2001 to 2005, that figure rose to $1.5 billion.

The venture-capital industry is growing as well, but more slowly. “India doesn’t have the same ecosystem for venture capital as the United States,” notes Ashish Dhawan of ChrysCapital. “There isn’t as much money available for early-stage ventures, because Indian companies still face more barriers getting started here.” His firm, which focuses primarily on growth companies with $50–$200 million in revenues, recently closed a $556 million fund for cross-sector investment in India’s domestic market (the fourth completed fund since ChrysCapital opened its doors in 1999). Returns posted from earlier investments make it easy to understand why the industry has generated such sudden interest. ChrysCapital’s $10 million investment in Spectra-mind in early 2000 saw a return of $60 million when the firm was sold to Wipro in 2002; its $20 million stake in infrastructure company Gammon was sold for $100 million after just one year.

“Private equity has become more acceptable than it was five years ago,” says Dhawan. “At one time, entrepreneurs were afraid that taking money would mean a loss of control.” As the number of success stories grew, however, and global firms like Goldman Sachs and Warburg Pincus set up shop, the general impression of private equity matured.

Another happy ending for ChrysCapital (and Ramnath’s ICICI Venture Funds) was an investment in Baazee, the Internet auction site founded by Avnish Bajaj and Suvir Sujan (both MBA ’98) that was sold to eBay in 2004 for $50 million. Recently, Sujan launched a venture- capital fund with two partners. “The top U.S. firms have a lot of knowledge that we don’t have — but they’re not on the ground yet,” Sujan remarks. “I realized that if I wanted to work in venture capital in India, I’d have to start my own firm.”

Opportunities abound, observes K.P. Balaraj (MBA ’97), founder with HBS classmate Sumir Chadha of WestBridge Capital Partners, a leading VC firm established in 2000 that focuses primarily on Indian or India-oriented companies. He describes a shift in confidence and a growing appetite for risk that is driving entrepreneurial activity at a pace not seen before.

“The IT industry created tremendous growth, but it also changed people’s perception of what they can achieve in business,” Balaraj observes. “People look at companies like Infosys and say, ‘If those guys can compete with IBM, why can’t I do the same in my industry?’ The entrepreneurs who come to us are also far better prepared than they were five years ago. They tell us who their competitors are around the world, which is a reflection of their own ambitions.”

Growing Internet usage and changing social behavior have also created opportunities. WestBridge has invested in Travelguru, an online travel portal founded by Ashwin Damera Venkata (MBA ’05) and Ganesh Rengaswamy (MBA ’06). The company hopes to capture the thriving India travel market, expected to reach $32 billion by 2008. It also has a stake in Shaadi.com, India’s largest matchmaking service, where revenues have grown by 100 percent every year for the last four years.

“It was an unheard-of concept in a country where many marriages are often still arranged, and it’s a private, family affair,” Balaraj says. “There are 30 to 40 million active Internet users in India who are progressive in their thinking and have the ability to influence their parents’ behavior. That number should grow to 100 million in the next three years, with 300 million on mobile networks.”

The growing middle class has arisen in the context of changes that took place in the late 1990s, notes Manish Kejriwal (MBA ’95), who heads the India office of Temasek Holdings, an Asia-focused private-equity player with $2 billion invested in India. Companies that stripped out costs in the more competitive environment were able to compete and grow; those that didn’t went bankrupt. That created new opportunities for financial services, Kejriwal adds. “When I came back ten years ago, mortgages didn’t exist — you had to put down cash if you wanted to buy a house,” he says. “Today, there is a huge market for ten- or fifteen-year mortgages. These markets are being created as we speak. It’s phenomenal.”

If money isn’t an obstacle, management talent and experience often is. Sujan says that Indian start-ups can face a shortage of the leadership talent and expertise required to build an organization. “There is a worldwide acceptance of Indian goods and services,” he remarks. “The challenge is to think big and achieve scale. We need global Indians who have been abroad to come back. Many are working in branded multinational corporations; the question is, how to get them out?”

For many Indians educated abroad, returning home is a tough decision, but one that may be getting easier. “They say the challenge of being Indian is that your heart pulls you back, but your head tells you not to return,” says Dhawan of ChrysCapital. “Yet it was always clear in my mind that I would return. It became an easier decision in the late 1990s, too, once the macroeconomic reforms of 1991 and 1992 began to filter down.”

With so much good news come concerns that India could be overvalued, or even headed for a crash. Yet most believe such a downturn, if and when it does come, will be cyclical. “The growth we’ve seen is a self-sustaining proposition based on a global competitive advantage in particular industries,” says Ramnath of ICICI, while citing the ever-present challenges of infrastructure bottlenecks and scarcity of management talent. “There’s also the possibility that unprecedented competition will create a fragmented market in which nobody makes any money,” she adds. While acknowledging these concerns, as well as the daunting realities of poverty and overpopulation, Ramnath and others reaffirmed an unshakable belief in their country’s future.

A good measure of that faith is based on the energy of India’s people. With 500 million citizens under the age of 25, India has the youngest population in the world — and the potential to create a powerful engine for future growth, if those millions can be educated and leveraged as a skilled global workforce. With a shortage of qualified teachers and access to quality education still limited in many parts of the country, that condition remains a significant barrier. “If the Indian government privatized education, it would attract a substantial amount of capital,” says K.P. Balaraj. “The need is massive, and no Indian is going to compromise on his child’s education.” Subsidized loans for education and specialized training would be another option.

There’s hope that a new awareness and lack of complacency in the general population will drive reforms in this area. In the meantime, Indians are taking advantage of the new opportunities immediately available to them with a drive and determination that has impressed the world. “Many investors are willing to take the pain of dealing with our infrastructure because of the work ethic and honesty of Indian workers,” remarks Balaraj. “A worker earning a salary of $100 a month will work seven days a week if that’s what it takes to get the job done. It’s a huge competitive advantage.”

Multiply that level of commitment by a factor of several hundred million and it’s easy to envision the change India is capable of in the coming years. “Those young people could be the country’s demographic dividend,” says Ravi Venkatesan (MBA ’92), chairman of Microsoft India. “India is at an interesting point in time. We have a historic, twenty-year window of opportunity to become a truly developed country,” he observes, noting that Microsoft offers a unique platform for using technology as an educational tool to help close the gap between rich and poor. “When you talk to business leaders today, you will find all the usual enthusiasm that you’d expect in a growing economy,” he says. “But there are also a number of people who believe we have an incredible mission to create a positive change in India. I have a sense of a much greater, national purpose. If this generation doesn’t pull this off, we may not get another chance.”


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