India-Pakistan Relations: Everything Old is New Again

Midnight’s Furies, Nisid Hajari’s new book about the violent division of the British Raj in India, has garnered much praise for its focus on how the decisions taken by Mohammad Ali Jinnah and Jawaharlal Nehru in the 1946-1948 period embittered India-Pakistan relations right from the very start.  But one of the volume’s under-noticed contributions is highlighting how bilateral security issues with plenty of modern-day resonance were also present in spades at the creation.

Read the rest of the essay on Asia Sentinel‘s website.

One of the issues I examine in the essay is the peril of catalytic war — that is, the danger of freebooting non-state groups mounting operations aimed at provoking inadvertent conflict between New Delhi and Islamabad as a way of advancing their own interests.  I argued in a post last month that a number of militant attacks illustrate this menace, and the Indian government seems to be believe that this week’s terrorist attack in Gurdaspur in the Indian state of Punjab may yet another example.

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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.

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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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India, Pakistan, and the Problem of the Sorcerer’s Apprentice

The National Interest website has posted my essay questioning whether the deterrent signals India is sending toward Pakistan these days are all that relevant to the gravest terrorist threats India faces from that direction.

India’s commando raid into Myanmar the other week has generated a great deal of debate about the propriety of New Delhi’s chest-beating and its utility to the specific challenge of jihadi attacks emanating from Pakistani soil.  Some criticize the Modi government for seeking domestic political gain while embarrassing the regime in Myanmar which clearly wants to keep its anti-militancy cooperation under wraps.  Others question the wisdom of highlighting operational details about an instrument of state power that should properly remain in the shadows.  And still others doubt whether a similar special-forces mission can even be undertaken against Pakistan-based targets.

Unexamined in the discussion, however, is the critical question of whether the deterrence signals India is transmitting are even applicable to the threats emanating from Pakistan.  The bombastic attitude in New Delhi these days fails to differentiate between jihadi groups over which Pakistan has some control and uses to its own strategic purposes as opposed to the large number of outfits that operate in defiance of the Pakistani state and see triggering unintended conflict between New Delhi and Islamabad as a way to advance their own interests.

Last fall Reuters quoted an Indian security official as acknowledging that “It has been clear for some time that there is no [jihadi] group that is fully within [Pakistan’s] control. They are all itching for independent action, some want to have a go at us immediately.”  Yet so far, Mr. Modi’s government shows no evidence of even recognizing the resulting deterrence conundrum.   But the failure to do so could well lead to military conflict neither country intends.

Indeed, the challenge of preventing mass-casualty attacks by Pakistan-based jihadi groups may not even be one well addressed by threats of punitive retaliation – either in the military realm or by suborning terrorism inside Pakistan as the Modi government has suggested (see here and here).  Rather, the priority might better be placed on bolstering India’s domestic counterterrorism apparatus, whose woeful state was laid bare by the November 2008 Mumbai attacks (see here, here, here and here) and whose repair remains unfinished (see here, here and here) more than six years later.

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India and the Limits of Effective Deterrence vis-à-vis Pakistan

By emphasized the resort to covert action in response to another major attack on Indian soil from Pakistan-based militants, did India’s defense minister implicitly acknowledge the sharp limits of conventional deterrence vis-à-vis Pakistan?

Read the rest of the essay via The Diplomat.

See here for an earlier post on the problems of Modi’s hard line toward Pakistan.

[UPDATE, June 9: The Indian army today carried out an airborne commando assault on two militant camps in neighboring Myanmar.  The operation, which reportedly inflicted “significant causalities,” was in response to a militant attack a few days ago that killed nearly 20 Indian troops in Manipur, a state in northeastern India that is afflicted by insurgents sheltering in Myanmar.  The Indian action was also motivated by “specific intelligence” pointing to more imminent militant attacks.

Some analysts argue that the Indian strike “is not likely to go unnoticed in the neighborhood” and will have a salutary effect on Pakistan’s behavior.  This is most probably not the case, however, since today’s operation was launched with the permission of the Myanmar military and focused on targets located a few kilometers inside that country.  In contrast, a cross-border raid aimed at Pakistan-based jihadis would be a much more difficult and risky undertaking, so much so as to give pause to Indian political leaders.]

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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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