India: Can Singh Spread the Shine?Published: June 02, 2004 in Knowledge@Wharton
For Congress, though, forming a new government wasn't easy. Fears that the party would have to join hands with left-leaning parties -- which include well-known critics of India's liberalization policies -- in order to form a viable government raised question marks over the future of the country's economic reforms. Investors panicked, and on May 17 the stock market crashed; Mumbai’s SENSEX index dropped 17%, its biggest one-day drop in 12 years, though it made up ground later. To add to the uncertainty, some Hindu nationalists railed loudly against the fact that Sonia Gandhi, widow of former Indian prime minister Rajiv Gandhi, is Italian-born.
On Tuesday, the page-turner continued: Sonia Gandhi declined to head the new government. She tapped former finance minister Manmohan Singh, an Oxford-trained economist and the principal architect of the economic reforms that set India on its current growth trajectory in 1991 -- to become the prime minister. As the news spread, the markets reversed course and the SENSEX recorded its biggest one-day gain, soaring more than 8%. According to The Economic Times, India's leading business daily, the SENSEX index crossed 5,000 on Wednesday, May 19, gaining more than 371 points over Tuesday, its biggest gain since 1992.
The same day, India's president, Abdul Kalam, asked Manmohan Singh to form the new government. According to a Reuters report, "Flanked by Sonia Gandhi, the woman who stepped aside for him, Singh pledged to continue the economic reforms he kicked off more than a decade ago and make 'the 21st century... the Indian century. We have always said that economic reforms, with emphasis on the human element, will continue,' a smiling, blue-turbaned Singh told reporters after meeting President Kalam to claim power following Congress's surprise election win last week."
What do these developments mean for global companies that increasingly have been turning to India as a destination for cost-effective offshoring of activities ranging from call centers to back-office operations? Can the new government take India ’s much-touted dominance in IT and translate it into economic growth for the rest of the country? E xperts at Wharton and elsewhere offer this assessment: In the short run, economic reform in India may slow a bit, but it will not stop. Over time, though, the key to sustaining economic growth and political stability in India will depend on one key issue: Whether the country succeeds in making its economic revolution inclusive of the 700 million people whom the high-tech boom may have left behind, but who still made their voices heard through their votes this month.
Staying the Course
Considering Manmohan Singh's track record, most observers agree that major shifts in policy are unlikely. Wharton management professor Jitendra Singh believes that reforms will continue in much the same manner as before with the new government at the helm. How these policies are communicated, however, is important. “There are interesting opportunities (and significant dangers) here for leaders in the incoming administration to signal to the business community, both in India and globally, their intentions and policies at the earliest opportunity,” says Singh.
Although the Congress campaign blasted Vajpayee’s administration for leaving most of India behind, “it is difficult to deny the progress the Indian economy has made in the last 13 years,” says Singh. “Foreign reserves are at an all time high, more than $100 billion, compared with less than $1 billion in 1991 before the reforms were initiated. Last quarter, India's GDP grew at 10.4%, faster than China's. The important challenge, going forward, will be to continue the reform process and keep growing the Indian economy, while paying more serious attention to redistribution of the gains in the economy. This is necessarily a goal that will take some time to achieve."
What impact will the elections have on the pace of reform? "Indications that the left-wing parties will not actively participate in the government may lower pressures for populist programs that could lead to greater deficits. But the same pressures may come from other coalition members, who will have their own favored themes. This will be a great challenge to the Congress leadership," says Singh.
Of course, the mainstream Indian left-leaning parties are rather different from traditional left wing parties, notes Sam Pitroda, former adviser to prime minister Rajiv Gandhi and first chairman of India ’s telecom commission. “The Communist parties have the interest of the poor at heart, but they understand that foreign investment is important. I don’t think they will be against the policies, even if they have some different ideas on what to privatize and so forth.” For example, the New York Times recently reported that West Bengal, a state that has had a Communist Party-led government for more than 25 years, has been making efforts to woo companies like IBM to help build the state's software industry.
At present, companies that are outsourcing functions to India have little to worry about from the power change, Singh notes; it’s investors who need to feel reassured. "Much will depend on whether the government finds itself in a strong, stable coalition or in a more unstable, weak position. The latter will certainly influence their ability to act decisively and in positive ways to reassure portfolio investors who have invested sizable amounts of money in Indian financial markets. This is the 'hot money' that can leave the country rather quickly, if better conditions are perceived elsewhere. The outsourcing relationships tend to be more medium- to long-term, and are less likely to be influenced in the short term."
Ravi Aron, a professor of operations and information management at Wharton, says that the impact of the new government may take time to be felt. “An immediate concern is: How will the new government’s policies affect infrastructure enablers of globalized services – such as telecom, power, and transportation?” he says. “Assuming the government is not doctrinaire and doesn’t choke down because of ideological reasons, the impact will be minimal at the moment. But if scarce resources like power are given away without regard for optimal and efficient use, then there could be serious consequences. On the positive side, removing barriers on supply and distribution in sectors like telecom would be a huge enabler.”
India also needs to respond to the growing clamor for protectionist policies elsewhere, says Aron. “As the U.S. faces mounting domestic pressure over outsourcing, India needs to be able to negotiate agreements to make sure that opportunistic government behaviors – like anti-outsourcing legislation in a U.S. state – can be struck down. But to do that, India absolutely has to offer something in return – for instance, opening up insurance, retailing, banking, aviation, etc. to the outside world. The question is, will the government be willing to open up these public-sector enclaves?”
Mukund Ramaratnam, director of business transformation at Advanced Micro Devices, a company that has significant IT operations in India, agrees that the country is unlikely to stray far from the road it’s on. “We believe future governments will support the strides made. Certainly people may pause in making decisions, but the growth path is so clearly laid out. Those growth engines are not going to stop.”
Wanted: A More Inclusive Revolution
Keeping the engines of reform running while making serious efforts to improve conditions for the majority of Indians will be far from simple, especially if there is a return to some level of government intervention. “The key issue that helps explain the election results is that the public at large has not seen the benefits of India's gains as much as perhaps the middle- and upper-income segments have,” says Singh. “This will be a key challenge going forward. Important themes ought to be better education at the primary level, better health care, and greater development of the parts of India that are lagging behind. However, it would be a mistake to see this in opposition to the goal of continuing economic reforms. The direction to pursue is continued reforms, including privatization of the more viable public sector firms. This will help the economy grow in the aggregate, and the government can, through its policies and their implementation, work on furthering the redistribution of the gains. It will not be easy, but it is possible."
As voters seem to have expressed, outsourcing and IT, after all, may boost the economy but don’t directly feed a hungry mouth. “Now that we have gained some confidence, the key is, how do we effectively focus on sanitation, the environment, education, and health?” says Pitroda. “A lot more attention must be paid to these needs, and we’ll have to create more jobs in these areas.” Part of the solution, he adds, may be to focus more on the local level. “We need to push for more district-level development, and decentralize more and more of it. There’s great news coming out of cities like New Delhi and Bangalore for the international community, but it’s the local areas that need more attention.”
Still, it’s important not to lose sight of the actual numbers, says Aron. “India saw many lower middle class jobs created, many people lifted out of poverty, and a great decline in inequality in the last four years. If you turn your back on growth and say the government was voted out with a mandate, the great danger is that you will end up lifting fewer people out.”