China and India Not So Different After All

Whether the economic tumult in China in recent weeks represents an overdue market correction or a more significant inflection point is a matter of debate.  But one clear message is just how profoundly wrong is the long-running argument that China enjoys a decisive “autocratic advantage” while India is excessively burdened by a “democratic disadvantage.”

The most basic lesson of the Chinese and Indian cases does not turn on the differences between political systems.  Rather, it is about the common difficulty of enacting systemic reforms in large, complex countries outside the crucible of intense crisis.

Indeed, the danger now in Delhi is that the current growth pickup will permit official hubris to crowd out good policy intentions.  One detects more than a whiff of overconfidence when Jayant Sinha, the minister of state for finance, declares that “It is India’s moment” or boasts about India being on the verge of leaving “China behind as far as growth and development matter.”  These statements are not only at odds with the more somber sentiments of the Indian business community, but are all too redolent of the easy talk about the coming “Indian Century” that the Singh era specialized in.

Read the full essay at Asia Sentinel’s website.

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Foreign Companies Catch Sight of “The Tomorrow Ahead” in India

Make in IndiaThis analysis is cross-posted on the website of Geoskope, a business intelligence firm focused on key emerging markets, at which I serve as chief knowledge officer.

The previous issue of Datapoints explored just how difficult the politics of economic reform are in India.  This point underscores one of Geoskope’s core messages about the country: The business climate is challenging to say the least.  It’s no surprise, for example, that a just-released survey by the World Economic Forum ranks India as one of the worst places in the world for small business owners.

Ditto for the judgment expressed last month by Gurcharan Das, a former CEO of Procter & Gamble India, that “India remains a hostile place to do business.”  Or that the World Bank’s country director for India stated just today that “the stark reality is that India remains a difficult place to do business.”

But it’s also worth noting that a number of high-profile foreign businesses in recent weeks have expressed confidence about India’s long-term opportunities.  Their example highlights another of Geoskope’s basic messages: Companies in search of future sources of growth cannot afford to overlook India.  As the global CEO of Roche, the giant Swiss pharmaceutical company, put it a few days ago: “We always keep India on our radar.  The country is so big that you cannot ignore it.”

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Leading the parade is Amazon, which is determined not to repeat its experience in China, where the online retailer failed to move fast enough and has now been crowded out by home-grown companies like Alibaba.  India, which has a booming e-commerce sector, is Amazon’s second biggest investment country after its U.S. home market, and Diego Piacentini, the company’s global consumer business chief, calls India key to its future success.  He states:

We need to look at the long term. The kind of massive infrastructure and partnerships we are building in this country is huge. The US and Europe after some point will have a different growth trajectory.

Jeffrey Immelt’s, GE’s chairman & CEO, seconds the thought, stating that “India is a growth engine for Asia, and we see huge potential for the country in the manufacturing space.”  GE has doubled its investment in the country over the past five years and is looking to do even more.

Virginia Rometty, IBM’s CEO, declares that “the 21st century will be the Indian century and will have technology at its heart.  I’m very optimistic about the tomorrow ahead and this is a fact-based optimism.”

CNBC quotes emerging markets guru Mark Mobius as saying “GDP will go higher in coming months; India will probably achieve what China did 5-8 years ago.”

And the head of the Indian unit of LG, the South Korean electronics giant, believes “there is huge potential that India can take business away from China and export products to other countries.”

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Confidence in the long-term future is reflected in surging levels of foreign direct investment.  Nomura, the Japanese brokerage, estimates that India will receive nearly $35 billion in FDI flows in the current fiscal year (April 2015- March 2016), a more than 60-percent jump from the previous year.  Much of the FDI funds have gone into the ecommerce and manufacturing sectors.

According to the global consulting firm Bain & Company, private equity investors channeled $9.5 billion into the ecommerce sector in the first half of this year.  Bain’s India chief states the inflow is “primarily because investors believe that India will get back on the growth cycle again and it represents an attractive destination compared to other large emerging markets.”

Amazon is reportedly pouring in an additional $5 billion to broaden its presence in India, after pledging an initial $2 billion just a year ago.  And the company last week announced that it has opened seven new fulfillment centers to help the sellers on its online platform in India stock products that are shipped to customers through the company.  With the addition of these new facilities, Amazon now operates 20 such centers spread across 10 states in India.

Baidu, the web services company that dominates the internet in China, is also making a concerted effort to raise its profile in India.  The company, which is often called the “Google of China,” says the number of its users in India is one of the highest outside of its home market.  One of its executives notes that “India is important to us, given its 1.25 billion people, 19-percent internet penetration, and government policies that are favorable to promoting internet penetration.”

The Business Standard newspaper reports that the ecommerce boom has just put four young-ish entrepreneurs into India’s billionaire club.  And a leading business association last month released a study projecting that the start-up sector, including online ventures, will likely produce at least a dozen billionaires and score of millionaires by 2020.

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The tech manufacturing sector is also receiving lots of foreign attention, with many companies taking advantage of the investment incentives offered by the “Make in India” initiative that New Delhi has set up with the aim of making India a global manufacturing hub.

Leading the way on this front is Foxconn.  The Taiwanese company, which is the world’s largest electronics manufacturing service provider, made its name assembling Apple gear in China.  It now has big plans for India, where it says it intends to set up 10-12 plants and employ a million workers by 2020.

Terry Gou, the company’s founder, stated in a recent interview that “India is so big.  Maybe in 10 years, we can have a factory in every” of the country’s 29 states.  He added that “We are not in India only for assembling, but we want to be in the whole supply chain, key components and technology transfer.”  Foxconn envisions the country as an export platform to Southeast Asia, the Middle East and Africa.

The company is one of the most aggressive foreign investors in India, pumping billions into the ecommerce and solar power sectors (see here and here).  Last month it announced a $5 billion investment to set up a semiconductor manufacturing facility in western India that would employ some 50,000 workers.

Xiaomi, the giant Chinese phone maker that is sometimes called the “Apple of China, signaled last month that it would launch, in partnership with Foxconn, a new smartphone plant to in southern India.  India is the world’s fastest-growing smartphone market and has rapidly become Xiaomi’s largest market outside of China.  Xiaomi’s India head, a former Google executive, says that India “will someday be as big as China.  We are coming into India with full force.”

Lenovo, a prominent Chinese tech company, announced plans to establish an assembly facility in eastern India that will produce up to six million smartphones a year and employ 1,500 workers.

Even Phicomm, a minor Chinese smartphone maker, is getting into the act, with plans to invest $1 billion over the next few years.  A senior executive explains that outside of China, “India is our second largest potential market and that’s the whole reason why we have decided to come with a full-fledged plan.”

And Sony, after a decade of relying on imports, has begun local manufacturing of Bravia televisions.  The company ended local manufacturing in 2004 when it concluded that the existing size of the Indian marketplace did not justify a production facility.

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Big things are happening in the auto manufacturing sector, too.  With its growing consumer class, India is expected to become the world’s third-largest car market by 2020.  Companies are also increasingly attracted to the country’s low-cost but skilled manufacturing workforce.

General Motors has signaled its plans to invest $1 billion over the next few years to turn India into a global export hub.  The company’s international operations chief says, “With this investment we plan to tap India’s potential as a market and as a low-cost manufacturing base for the future.”

U.S. auto company Ford is making India an export platform and plans to export over 200,000 cars by 2020 to countries in Europe, the Middle East, Africa and elsewhere in Asia.

The Swedish company Volvo announced plans to begin exporting buses to Europe by the end of 2015.

The Economic Times, an Indian business newspaper, reports that Mexico, which is itself an emerging global hub for auto manufacturing, has become the largest export market for the Indian auto industry.  Volkswagen, Europe’s largest carmakers, ships some 55,000 vehicles a year from India to Mexico, while General Motors sends some 45,000 units.

According to the Society of Indian Automobile Manufacturers, auto exports have doubled from 1.8 million units in 2009-10 to 3.57 million in 2014-15.

European car makers Mercedes Benz, BMW and Audi also have sharply ramped their sourcing of Indian-made component parts.  Per the Automotive Component Manufacturers’ Association of India, component exports have grown from $4.2 billion in 2009-10 to $11.2 billion in 2014-15.

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In related manufacturing news, Boeing announced earlier this month plans to markedly increase its sourcing of India-made products.

And Siemens, the German industrial conglomerate, unveiled plans to invest an additional one billion euros in India over the next few years and add some 4,000 jobs to its existing Indian workforce of 16,000.

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Is India really the “New China”?

In vivid contrast to just a few years ago, when Jim O’Neill, who came up with the BRICs concept, wanted to drop the country from the acronym in favor of Indonesia, India has now emerged as the undisputed queen of the emerging markets.  Along with this development comes a new mantra: “India is the New China.”

But how true is this assertion?  Like everything else related to India, the answer is complicated and equivocal.

Given the stark economic problems in other major emerging markets, India is looking good in comparison.  It has now displaced China to assume the mantle of the world’s fastest-growing major economy.  The stock market is outperforming those in the other BRICS nations.  India also received $7.1 billion in private equity funding for the first half of this year, 38 percent more than the same period in 2014.  In volume terms, the number of deals jumped 62 percent vis-à-vis the corresponding period last year.

The CLSA brokerage and investment banking agency encouragingly reports that:

Our recent meetings with investors in Singapore and Hong Kong reveal that India continues to be a ‘favored’ market among regional investors.  While some investors have reduced India weight, most investors believe in sharp 2HFY16 earnings recovery and focus on the long-term structural positives, retaining their overweight.

And a number of foreign companies have recently shown their faith in India’s prospects by announcing major expansion plans. I’ll have more to say about these in the next issue of Datapoints, but the logic driving all of them was pretty much summed up by a Mumbai-based entrepreneur and investor quoted in the Financial Times: “India is the last billion-person market left.”

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But because the politics of economic reform are much more challenging in New Delhi than in Beijing, India will never be able to replicate China’s meteoric economic rise over the last 30 years.  The past few weeks have offered ample illustration of this statement.

There is no denying that last summer’s hopes that Narendra Modi’s landslide election as prime minister would jump-start a quick economic renaissance have now faded.  The hype overlooked two key points: 1.) The country does not do rapid transformational change; and 2.) the “I” in India stands for “incremental.” 

Mr. Modi can claim that he brought about major changes in the northwestern state of Gujarat where he wielded unchallenged political authority during his long tenure as its chief minister.  The experience earned him accolades from the global business community and engendered a good deal of hubris on his part, such as when he confidently declared following his May 2014 election triumph that “ten years is all that is needed” to modernize the country.

But the dynamics of economic reform play out very differently on the national stage, given the growing fragmentation of the Indian political system.  And Modi has now run headlong into a truth that Montek Singh Alhuwalia, the distinguished economist and policy official, advanced many years ago:   The norm in India is “a halting process of change in which political parties which opposed particular reforms when in opposition actually pushed them forward when in office. The process can be aptly described as creating a strong consensus for weak reforms!”

This is an insight into the reform process that every entrepreneur and investor, not to mention prime minister and Cabinet official, should never cease bearing in mind.  Indeed, the just-concluded summer session of the Indian parliament demonstrated it in spades, as the Congress Party, the main opposition party, stalled progress on two key items on Modi’s economic reform agenda.

The first item is replacing the fragmented system of indirect taxes the central government and the states currently levy at different stages of the supply chain with a nationwide goods and services tax (GST), India’s version of the value-added tax.  The measure would help create a more unified market in India, increase productivity and enable higher GDP growth. UBS bank recently estimated that “The introduction of the GST is a key reform measure that could have immense macro implications for India’s growth potential.”

But consideration of the measure was shut down in the parliament’s upper chamber, which is controlled by the Congress Party and its political allies, even though the party supported the measure when it controlled the central government just a short time ago.  As ironically, Mr. Modi and his political party, the Bharatiya Janata Party (BJP), opposed the legislation when it was then out of power but now lines up foursquare behind it.

The BJP now decries the disruptive tactics employed by Congress though they are the same ones the BJP used when it was in the political wilderness.  Indeed, the feisty Sushma Swaraj, who is currently Mr. Modi’s foreign minister, was a major thorn in the side of the Congress Party when she led the BJP caucus in parliament’s lower house.

Another causality of the partisan bickering was Modi’s effort to simplify the lengthy and legally-convoluted process of acquiring farmland for much-need infrastructure projects and industrial projects.  The prime minister wants to amend the land acquisition act passed by the previous central government two years ago, which is widely judged to have substantially increased project development costs.

Political machinations surround this issue, too.  The BJP cynically supported the 2013 land legislation since it wanted to court India’s vast reservoir of rural voters in the run-up to last year’s parliamentary elections.  Once in office, however, Prime Minister Modi has expended much political capital on revising the legislation but so far to no avail.

I noted in a recent issue of Datapoints that Modi was close to abandoning the effort and this point appears now to have been validated.  Anxious to avoid being tagged as “anti-farmer” in the run-up to important state-level elections in Bihar, Tamil Nadu, West Bengal and Kerala, the prime minister and his BJP colleagues have punted on the issue.  Four months ago, Modi’s finance minister declared that the land reform bill would “determine a very large part of the progress India makes.”  Now he’s taken to encouraging individual state governments to move forward in lieu of action by the central government.

This is a tacit but clear acknowledgement that Modi’s momentum is dissipating.  The prime minister’s Independence Day address on August 15, delivered two days after the parliamentary session ended, said it all: Unlike last year’s speech, which brimmed with confidence and energy, his remarks last week were tepid and defensive.  Reuters quoted an unidentified member of the prime minister’s inner circle as saying that Modi was “upset about failing to further his reforms agenda and decided to ‘keep his head down’ and focus on improving performance.”

The GST reform is not dead, though if enacted in the next year or so it will likely be in a much diluted form that erodes the economic jolt it delivers.  The land reform effort, on the other hand, is in a deep coma.  At a minimum, it will take several years for the politics to line up with meaningful movement on this issue.

The past weeks underscore two key, reinforcing lessons about the politics of economic reform in India: 1.) The election season, and thus the political pandering to certain voter blocs, never ends; and 2.) There is no national consensus on the imperative of economic modernization.

In a report last month Moody’s Analytics pegged India’s true annual growth potential at near 10 percent.  It cautioned however that the “jury is still out on Prime Minister Modi, but the government’s failure to deliver on promised reforms is a major impediment to a broader economic growth momentum in the country.”  This week Moody’s warned that it might need to lower its growth forecast for India:

One main risk to our forecast is that the pace of reforms slows significantly as consensus behind the need for reform weakens once the least controversial aspects of the government’s plan have been implemented.

This analysis is cross-posted on the website of Geoskope, a business intelligence firm focused on key emerging markets, where I serve as chief knowledge officer.

I invite you to connect with me via Facebook and Twitter.

Will the Real Indian Consumer Please Stand Up?

Getting an accurate handle on socio-economic conditions inside India and their implications for aggregate consumer behavior is a difficult task, as a slew of reports issued over the past few weeks demonstrate.

Two of these reports delivered sober wake-up calls for government policymakers and business executives alike.  The Indian government released data providing the first detailed look at the country’s socio-economic makeup in decadesThe findings show that the rural population, which constitutes much of the overall Indian population, is poorer than expected.  Specifically, half of the rural population lacks regular sources of income, does not own any farm land, and survives mainly from casual manual labor.  In aggregate, 70 percent of rural households survive on less than US $4 a day.  And according to a media report, data that has not yet been unleashed shows a third of urban households live beneath the poverty line.

The second wake-up call came via a Pew Research Center analysis about the global middle class.  It concludes that while India was successful in slashing the poverty rate in the 2001-2011 period, there was little resulting growth in the ranks of the middle class.  The share of the low-income population (defined as living on US $2-10 per day) increased significantly – from 63 percent of the overall population in 2001 to 77 percent in 2011, but the share of the middle class (defined as living on US $10-$20 per day) rose much more slowly – from 1 to just 3 percent in the same period.  In contrast, the share of Chinese who are middle class jumped from 3 percent to 18 percent in that time frame.

The report notes that there is no burgeoning middle class in India as is commonly made out and that a vast number of Indians are “still a ways from the transition to middle-income status.”  It chalks up these findings to the lack of deep and far-reaching economic reforms in the country.

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But the research gurus also delivered good, if contradictory, news.  A report by the India unit of Fitch Ratings offers a dynamic and optimistic portrait of the rural economy.  As it sees things, the decline in the share of farm-generated income in the rural economy has been driven by the growth of the industrial and service sectors in non-urban areas over the last decade, resulting in a number of beneficial outcomes:

  • The rural economy is now less dependent upon the vicissitudes of the annual monsoon season
  • The rural economy’s share in overall GDP has rebounded from its decades-long decline and now constitutes well over half of national GDP.
  • Rural consumer spending on discretionary items has risen markedly.

Tata Motors, part of the iconic Tata conglomerate, is convinced that the rural economy holds the keys to the future.  It plans to open more than 1,000 new car outlets over the next four years in smaller cities and towns, and expects the rural market will grow faster than the urban one in the future.  Its latest annual report states:

Growing wealth in the rural markets of India also provides an added opportunity to expand sales reach and volumes. Sales from areas that were earlier considered rural are growing year-on-year and the overall gap of automobile purchase between rural and urban areas is narrowing.

Snapdeal, one of India’s largest online marketplaces, is also thinking along similar lines.  It has plans to install e-commerce kiosks in thousands of rural areas by the end of the year and is assessing other opportunities for tapping into the rural market.

An Economist Intelligence Unit study estimates that overall consumer spending in India will increase from US $1 trillion in 2013-14 to US $2.4 trillion in 2018-19.  It reports that “the rapid growth in personal incomes combined with a more open domestic market will make India an increasingly attractive market for foreign companies.”  It adds, however, that even middle-class households will continue to have sharp limits in disposable income.  “Higher-quality products certainly appeal to the country’s consumers, but price remains the main determinant of the level of demand.”

On a related note, a recent piece about how Amazon missed out on China but now sees India as its next big opportunity, quotes a Morningstar analyst as saying:

India represents a potentially lucrative consumer-spending market. India’s population could surpass China within the next 10 years, and urbanization and wage rate trends suggest a long consumer spending tailwind.

Wealth-X, a consultancy focused on the ultra rich, reports that the rise in Indian wealth creation has been particularly impressive over the past year, with the number of millionaires jumping 27 percent.  Accompanying this was an equally substantial increase in luxury consumption.  It forecasts that India will continue to generate new millionaires at a rapid pace, a development it attributes to rising levels of education and entrepreneurship.  The report concludes:

[India] has a young, well-educated population with high levels of entrepreneurship and business ownership, underpinned by a well-developed legal system. As such, wealth creation opportunities will be great, with a comparatively benign macro environment.

A study commissioned by Visa spotlights the growing affluence among India’s youthful population.  It pegs the average annual household income of the country’s affluent consumers at 1.5 million rupees, or approximately US $24,000, with an average age of 34 years, younger than their peers in most Asia Pacific markets.  It states that a strong majority of these are optimistic about the country’s economic prospects.

Underscoring the point is this media report on how young entrepreneurs are flocking to India’s first luxury goods mall located in South Delhi.  It quotes the mall’s vice president as saying:

There is a lot more new money because a lot more people are self employed, even the women are employed and you find that the pay packages are so much better, there is a lot more disposable income.

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Confused by the conflicting data?  The World Bank offers some perspective, noting that while per-capita income in India rose nearly 10 percent in 2014, the country nonetheless ranks a dismal 169th in terms of per-capita income levels in the world.

This analysis is cross-posted on the website of Geoskope, a business intelligence firm focused on key emerging markets, where I served as chief knowledge officer.

I invite you to connect with me via Facebook and Twitter.

Connecting the Dots in India’s Business Portrait

The notes and observations below about India’s business climate are cross-posted at the website of Geoskope (geoskope.org), an intelligence company focused on key emerging markets, where I serve as Chief Knowledge Officer.

The following media items caught my attention this week, since they underscore two of Geoskope’s core messages about India: 1.) The country is a exasperating place to do business but also a potentially rewarding one if you are prepared to put in the effort; and 2.) There’s no substitute for getting out and seeing what is happening on the ground in India.

The first truth was expressed in an article in the New Delhi-based Business Standard about the lessons expatriate managers have garnered from their time in India.  It quoted the president of Panasonic India as saying, “One of the things that I have learnt while working in India is the virtue of being patient and having a sense of humility.”  An executive at the Indian subsidiary of Altran, the French technology consulting company, added that though the challenges are bigger than in Europe so are the opportunities: “You always have this feeling that everything is possible.”

Toronto’s Globe and Mail carried a good overview of the export opportunities for Canadian businesses in India.  Among other things, it stressed that patience and persistence were needed in order to capitalize on them.  It quoted the CEO of a Canadian software provider as saying that success requires a long-term commitment and that “Companies have to think in terms of years, not quarters.”

Part of the reason for this, according to Export Development Canada’s chief representative in India, is that the country has a “family-oriented” culture which places high value on personal relationships.  As a result, foreign companies have to spend time in the country to show local players they’re serious, all the more so now that India has once again become an emerging market darling.  The representative emphasized that “This is a hot market and Indian companies have lots of choice.  They are not going to answer your emails.  They are going to want to meet with you three or four times through the year.”

Reinforcing this last point, the Business Standard has a good article about the continuing prominence of family-run companies in India.

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New Delhi’s municipal government reports that per capita income in India’s capital rose 13.5 percent in the April 2014 – March 2015 period and that income levels there are three times higher than the national level.  Economic data issued by Indian government agencies are a bit suspect these days.  But the figures about New Delhi jibe with new projections by Oxford Economics.  According to the consultancy, Delhi will be the fastest-growing urban economy in Asia over the next five years and that overall five Indian cities will occupy places in the top six of the rankings.  All the more reason to focus on the Indian marketplace despite its many challenges.

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The importance of regional differentiation is another core Geoskope theme when it comes to the vast and variegated Indian marketplace.  Hindustan Unilever, the country’s largest fast-moving consumer goods company, has underscored this point by adopting a new strategy aimed at “serving many Indias.”  The approach segments the domestic market into 14 consumer clusters.

On a related note, McKinsey last year issued a good report on “Understanding India’s Economic Geography.”

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Speaking of the sensitivity to on-the-ground conditions in IndiaA Financial Times article about how transplanted Western business models have not fared well in the Indian ecommerce sector quoted Shailendra Singh, India managing director for US-based venture group Sequoia, as saying:

In India, clone businesses tend not to work well. What India needs are mutants, meaning businesses with the same underlying DNA as those that have worked elsewhere but which come with extra powers and abilities, or entirely new species suited to local conditions.

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Acquiring land in an efficient manner and at a reasonable cost has long been a huge challenge for many foreign companies with India ambitions, as IKEA’s on-going experience demonstrates.  A Forbes article on the problems dogging the Swedish retailer’s big plans for the Indian market quotes an executive: “Buying land has proved to be more difficult than we initially predicted…” The company has been forced to bring on more people in order to focus on complex real estate issues.  As things stand, IKEA believes it will take another two years before it can open its first store in the country.

Reform of the land acquisition process is key to Prime Minister Narendra Modi’s grand plans to resolve India’s vast infrastructure challenges and make the country into a global manufacturing powerhouse.  But his land reform legislation has stalled in parliament and in a recent media interview he seemed to signal he was done expending political capital on the issue: “This is not a matter of life or death for me. And neither was it the agenda of my party or the government. The initiative was in response to a demand from the states, and being a federal structure it was my duty to respond.”

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Another bane to Modi’s “Make in India” manufacturing initiative is New Delhi’s infamous red tape.  For years, surveys of business people rated India as having the worst bureaucracy in Asia and the World Bank’s Ease of Doing Business index ranked India this year at 142 out of 189 countries.  (For a more amusing perspective, see here.)  Modi has taken some steps to improve things and says he wants to do more.  But then the Indian commerce minister reports that 25 government ministries have their hands in “Make in India” policymaking.  Good luck with that.

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Speaking of choking red tape….

India is in a start-up frenzy.  Innovation guru Vivek Wadhwa wrote recently that “India is about to experience an entrepreneurship boom that will make America’s dot-com boom seem lame.”  And Indrajit Gupta, founding editor of Forbes India and a good friend of Geoskope, writes about the remarkable growth of entrepreneurship among India’s young people.

But here’s the bad news: Indian tech startup are moving overseas, mainly to Singapore and the United States, due to concerns about domestic regulatory burdens.  The Hindu newspaper quotes a Facebook executive as saying that the $22 billion acquisition of WhatsApp, the instant messaging firm, in the US was easier to do than last year’s $10 million purchase of an Indian software startup.  The executive explained that “the red tape and ambiguity in Indian rules and taxes were overbearing.”

The Indian government is moving to ease these encumbrances, but according to the Wall Street Journal “Indian startups might still prefer listing in the U.S. as investors there seem to appreciate the growth prospects of online businesses and are less concerned about present profitability.”  And even with the regulatory changes, Singapore-based firms like Flipkart, which is one of India’s hottest e-commerce companies, might not find it worth their trouble to engage domestic capital markets.

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Still, the Modi government must be getting some things rightFDI inflows into India jumped 22 percent in 2014, for a total of $34 billion, even as global FDI flows fell 16 percent.  The increase meant that India placed ninth among FDI-attracting countries last year, as opposed to 15th in 2013.  The United Nations Conference on Trade and Development, which compiled the data, believes that “FDI inflows are likely to maintain an upward trend in 2015” in the country.

Bloomberg also reports that 350 private equity transactions, worth $12.69 billion, have taken place in India so far this year, as opposed to 315 deals amounting to $10.39 billion in all of 2014.

And India comes out on top of this year’s Baseline Profitability Index, which measures the relative attractiveness of 110 countries and territories when it comes to foreign investment.  The index’s compiler attributes the result to a combination of favorable growth forecasts, perceptions of decreased government corruption and better investment protections following Mr. Modi’s election as prime minister.

Finally, according to a JP Morgan survey, India is the most attractive of the BRIC markets for North American investment professionals.  A bank executive adds that “The prospects of long-term economic growth, favorable demographics, BJP’s reform agenda, numerous investment opportunities and a democratic legal system have been cited as the most attractive factors for investing in India.”
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Mumbai Avengers and Other Tales from the Indian Security Establishment

The launch party for a fictional book this past weekend in New Delhi featured a number of noteworthy assertions about the real-world dimensions of the India-Pakistan rivalry and the inside workings of India’s national security machinery.

Mumbai Avengers is a new thriller about a retired Indian army general who puts together a crack team of free-lance agents to roam the world tracking down the perpetrators of the horrific November 2008 terrorist attacks in Mumbai.  For its part, the book’s release party assembled a real-life retired Indian army general (V.K. Singh) and a retired senior police official (Neeraj Kumar) who together stole the limelight with their remarks.

Consider the comments by General Singh, a former Indian army chief (March 2010-May 2012) so colorful and voluble that a novelist could easily pattern a fictional character after him.  Singh, who spent much of his military career in the special forces, had been involved in plenty of bureaucratic intrigues as he worked his way up the army hierarchy as well as putting in a cameo appearance in a Bollywood film.

Once he landed as the army chief, he used his time in office to wage war on his civilian masters.  To start, he took them to court in an unsuccessful bid to extend his tenure, an affair that also included jitters within Prime Minister Manmohan Singh’s government that a military coup was underway.  The general also raised hackles by airing a convoluted allegation about corruption in a procurement matter that the defense minister supposedly turned a blind eye to, and penning a letter to the prime minister (which quickly found its way to the media) asserting that the army was in decrepit condition and the special forces were “woefully short of essential weapons.”  Adding to the drama, a report surfaced during these ructions about the defense minister’s office being bugged.  (Fuller details here.)

At the book launch, Singh, who currently serves as a headline-grabbing junior minister in the foreign ministry, proclaimed that the “Indian army is very capable.  Given a task it will execute it in a much better manner than the Americans did [in the Abbottabad commando raid that killed Osama Bin Laden four years ago].”  This claim is entirely at odds with the depiction in his letter to the prime minister three years ago regarding the overall shape of the army in general and the special operations forces in particular.  Nor does it accord with what is known about India’s capacity to pull off a daring commando assault deep inside Pakistan.

Indeed, a series of technical, operational and political constraints all but rule out such an operation.  First, the Indian capacity for sophisticated, multi-dimensional (combining on-the-ground operatives, satellite reconnaissance and communications intercepts) tracking of terrorism suspects is virtually non-existent.  As Stephen P. Cohen and Sunil Dasgupta note in their recent book, India’s external intelligence service, the Research and Analysis Wing (RAW), possesses a good reputation for covert action but performs poorly with actual intelligence gathering and analysis.  V.P. Malik, one of General Singh’s predecessors as army chief, points to the pervasive lack of coordination among the various parts of India’s national security machinery as a major obstacle to launching cross-border commando raids: “In India, the armed forces, the foreign service, the intelligence agencies, the national security advisor operate in watertight compartments. One does not consult the other, and they do not know what the other is doing.”

The embarrassing inability to mount a speedy airlift of National Security Guard commandos the 850 miles from New Delhi to Mumbai during the November 2008 terrorist strike likewise calls into severe question India’s operational capacity to launch complex, lightning-fast airborne assaults far inside hostile territory.  (By the way, the NSG is reportedly still plagued by severe manpower, training and transport challenges.)  And one important reason that U.S. helicopters flying out of Afghanistan were able to arrive at the Bin Laden compound undetected is that the bulk of Pakistani air defense systems are oriented toward India.  So even if Indian military forces did possess the means for rapier-like, long-distance assaults, they would have to be prepared to engage in a continuous fight from and on their way home once Pakistani authorities discovered the intrusion.

Finally it is very difficult to believe that highly risk-averse political leaders in New Delhi would even countenance a raid that has the all but certain probability of sparking a large-scale clash with Pakistani forces, which in turn could escalate more broadly.  Hawkish commentators have long condemned the political class for perpetuating India’s image as a “soft state” and for lacking the will for bold, decisive action to defend the country’s security interests.

Singh alluded to these political constraints when he acknowledged that significant factors, including the economic consequences, prevent India from retaliating against Mumbai-style attacks.  For his part, Neeraj Kumar, who retired as the Delhi police commissioner two years ago following criticism of his handling of a notorious December 2012 gang-rape case, had a much blunter assessment, averring that India is a “soft state” even when it comes to “thinking” about retaliation.

During his career, Kumar spent a long stint at the Central Bureau of Investigation, the central government agency that handles major criminal probes, and oversaw the investigation of a series of bombings in Mumbai in early 1993 that left over 300 people dead and some 1400 injured.  At the book release, he drove home his point about India being a “soft state” by relating that the CBI had formulated a plan to use “non-state” actors “to get at a certain gentleman in Pakistan,” presumably a reference to Dawood Ibrahim, the head of a powerful criminal syndicate in Mumbai who orchestrated the 1993 bombings and who is now reportedly being sheltered in Karachi by the Pakistani security service.

Kumar continued …

Everything was done. At the last day we thought we would inform the political bosses or shall I say the boss but he said ‘no, we are not Pakistan, we are India’ [emphasis added].

If Kumar is to be believed, it’s astounding that the Indian security establishment was on the verge of launching a high-stakes covert operation, one that risked serious blowback from Pakistan if discovered, when someone determined almost as an afterthought that it might be wise to seek authorization from the country’s elected leadership.

Critical reports have emerged in recent years about the frightfully dysfunctional state of the national security establishment (see here, here, here, herehere and here).  Yet Kumar’s words highlight the most dangerous problem of all – the lack of democratic accountability.  In this respect, at least, India may well be on the way to becoming more like Pakistan.

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