News reports this week have focused lots of attention on U.S. president George W. Bush’s visit to India and the controversial nuclear power agreement between the two countries. The debate following the announcement of that so-called “historic agreement” has overshadowed discussion about another key issue: the growing economic ties between the two countries. As Bush and Indian prime minister Manmohan Singh — and the group of Indian and American CEOs who have been working together since Singh’s visit to the U.S. last July — have noted, India’s economy is booming, its growth fueled in part by investment from U.S. firms such as Intel, Microsoft and Dell. During the past decade, American firms have invested more than $5 billion in India. Such investments are speeding up economic growth in India even more.

No longer content to rest on its laurels as the world’s back office, India has launched an aggressive plan to make good on the promises of the past several years — especially for its neglected rural and impoverished citizens. For several years now, India, along with China, has enjoyed an ever-increasing spotlight on the world stage. But a well-fed IT sector does not a country make: Rampant poverty, a looming HIV/AIDS crisis, and creaking infrastructure can hardly be pushed under the rug in favor of the shiny PCs on Bangalore desks. At the recent annual Wharton India Economic Forum, experts did praise the country’s progress to date — but they also outlined very specific and urgent strategies for making its strides forward even more rapid.

From Knowledge to Action

The honeymoon has been fun — but now it’s time to buckle down and get to work. Such was the sentiment of the conference’s speakers, who advocated clear plans for India to advance in the near term. Sam Pitroda, often called the father of the Indian telecommunications industry, described the recently launched National Knowledge Commission, which he chairs. “Recognizing the success of the last decade, the prime minister of India formed this commission to focus on the creation, production, and dissemination of knowledge,” he explained.

In its regular meetings, he said, the commission emphasized several key areas. “First, we’ve talked about access to knowledge — the networks, portals, libraries and so on that open up access to large numbers of people. A lot of work needs to be done in this area — we need to modernize our libraries, expand science and technology labs, etc.” The second point of focus, said Pitroda, is education. “We need to think about primary and secondary education, and about distance learning. We need a good liberal arts school. We have the IITs and the IIMs [Indian Institutes of Technology and Indian Institutes of Management] — so the peaks are high — but the average is low. We have to broaden the base, improve vocational training and provide quality teachers.”

The third area of concern is intellectual property and trademarks, while the fourth is applications — bringing knowledge to bear on agriculture, health and industries. “Lastly, we must look at e-governance,” Pitroda said. “We can’t just computerize the processes of the past, but think about where citizen services can play an important role. We need to redesign the infrastructure and standardize the processes, as well as encourage private participation.” For all these needs, Pitroda noted, there are no quick fixes: “We hope that what we launch will take root in the next three to five years. It’s a huge task but we are set to begin on it very soon.”

Echoing Pitroda’s words, Swaminathan Iyer, consulting editor for The Economic Times, noted that while significant improvements had been made in bureaucratic reforms and the financial sector, some very basic needs were still glaringly unmet. He listed several that he felt should be a priority: “Take electricity — electricity boards keep on getting rescued by the central government. There’s a huge gap in education between the upper and lower castes. HIV/AIDS is a huge problem that needs to be addressed. Although no one talks about it much, Maoists are starting to get out of control in certain areas. Some members of Parliament have criminal records, and we don’t have an independent police or prosecution system. We need an independent police commissioner who is not under the home minister. Once that is unlinked, there will be a huge improvement in law and order.”

Indeed, Avnish Bajaj, chairman of eBay India, stated that India had to integrate its rural and urban economies if it wants to dominate the road ahead. “I’ve spent a lot of time in the villages,” Bajaj said. “We have areas with hyper unemployment and an aspiring but frustrated youth population.” He stressed the need to address and go beyond the “BSP” issues of infrastructure (in Hindi, bijli means electricity, sadak means road, and pani means water). “The rural communities need access to information and markets, and cheaper financing. You can’t sustain a big English-speaking middle class without thinking about what’s happening in rural India.”

Bajaj encouraged a “co-creation of value” model to help improve the situation, with government partnering with the private sector. “The government should look at roads, immigration, power, education — but we also should look at vocational training. Translation services, manufacturing jobs and infrastructural build-out projects will act as a multiplier on the economy and job creation. In the rural markets we can aggregate supplies for artisans, create agricultural futures markets and efficient labor markets. We should encourage microfinance and rural credit schemes, which provide people freedom from the vicious grasp of local moneylenders and unleash true entrepreneurship.”

The Neighbor Next Door

No discussion of India’s economic activity and progress can be held without comparing it to China. Charles Kaye, co-president of Warburg Pincus, gave conference attendees a detailed, point-by-point match-up of the two countries. “In China, the macro story is more powerful, but the micro story is not. It’s been eye-popping to watch the cities grow in China — even the outer cities — from year to year.  In India, it’s the opposite: It’s easy to find great micro elements — managerial talent, quality enterprises, and soft infrastructure,” said Kaye. “In China, capital has been plentiful, so economic development has been rapid but it has not instilled in businesspeople a sense of the cost of capital. In India, on the other hand, the real rates of interest have been high, so businesses have become adept at using what little capital they have had access to. That skill set will accrue to India’s advantage over time.”

In China, Kaye noted, the manufacturing sector makes up more than half the gross domestic product, while in India, the services sector accounts for the greater part of GDP. “China has debt markets, but its equity markets have not been so functional,” he added. “India has government debt markets and nascent corporate debt markets, but its equity markets function quite well. The regulatory mechanisms work well, and it has a healthy domestic banking sector. When foreign banks come into India, most hire Indian CEOs, which says something about which way the management expertise flows,” said Kaye. In China, the perception has been ahead of reality, whereas in India perception has been behind reality.

As far as stability goes, “it’s not inevitable that China will have some kind of disruptive political transition,” Kaye noted. “Don’t mistake the lack of democracy in China for lack of accountability, and don’t underestimate its ability to have a peaceful and benign transition.” In India, Kaye said, the economic reforms are durable — “it’s just a question of pace.”

Startup India

If you’re thinking about starting a business in India, what should you know? Experts on the “Fostering Entrepreneurship” panel gave audience members concrete advice on launching a new venture. Vinod Ganjoor, CEO and chairman of EurIndia, a private equity firm, noted several differences between what Indian and Western venture capitalists look for. “In India, by and large we’re focused on services companies,” said Ganjoor. “While the private equity landscape is evolving, the classic VC in India is still services-dominated. Also, the CEO in an Indian outfit rarely changes, while in [Silicon] Valley a CEO might change three times in 18 months. Indian VCs don’t typically take majority stakes. So they’re really backing a horse — we have to be sure that he can change or that the team around him is complementary. We value the ability to really bond with an entrepreneur, and we have to know that the person we’re backing has a high level of integrity.” There are definitely more businesses being started now than before, added Ganjoor, and more people are becoming repeat entrepreneurs.

Unfortunately, many highly qualified Indian professionals are still unwilling to try their hand at starting a business, according to eBay India chairman Bajaj. “There’s never been a better time to take the plunge, but society still celebrates a more traditional form of success. We need, as a society, to celebrate college dropouts more,” said Bajaj, referring to the idea that entrepreneurial talent isn’t always recognized or lauded.

To figure out what businesses might succeed in India, would-be entrepreneurs need only look to the U.S., said Bajaj. “Ask yourself: Is it in the U.S. already? Is it transferable? For example, there’s no business in India right now. There’s no site that really lets you do strong comparison shopping. If Yahoo!, Amazon, etc. were Web 1.0, then Google and its kind are Web 2.0 — but in India we never even had Web 1.0. Not enough time has been spent developing local business models. There’s also an enormous clicks-and-bricks opportunity in India, because it isn’t just about the Internet alone. We don’t have a national bookstore chain, for example.We’re just now getting low-cost airlines. So ask yourself, ‘Will it work there?’ and then, ‘Do I have the right people to make it happen?'”