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Last Updated: Wednesday, 27 February 2008, 23:34 GMT
India still Asia's reluctant tiger
By Zareer Masani
Presenter, BBC Radio 4's Analysis

Offices in Bangalore
Bangalore's hi-tech enclaves are an oasis of excellence

With its economy growing at more than triple the speed of Britain's, India has become a global leader in information technology and other hi-tech products.

But how has this been possible in a country where poverty is so widespread and where more than a third of people are still illiterate?

In the words of Nobel laureate economist Amartya Sen, "the danger of India moving in the direction of being half California and half sub-Saharan Africa is a real one."

The contrast between hi-tech, silicon enclaves such as Bangalore and the primitive conditions of many Indian villages and urban slums strikes even the most casual tourist.

So is the dramatic rise of Indian IT firms just a Californian bubble in the sub-Saharan deserts of Indian poverty? Not according to Anand Mahindra, managing director of a family business, Mahindra and Mahindra, that has grown into one of India's largest conglomerates, producing everything from tractors to telecommunications.

If you want to make a million Barbie dolls, this is not the place to come
Anand Mahindra

"The IT sector was a kicker to growth," he says. "Its impact was psychological. It signalled to the world that India was much more than its old historical stereotypes.

"It suddenly in an exaggerated manner, if you ask me, made the world think that every Indian was smart and could fix their computers.

"But that helped entrepreneurs in India from all industry segments, because it gave them a more receptive environment in which to do business."

The number of Indian IT professionals has leapt from 56,000 in 1991 to a million today. That's still tiny relative to a population of over a billion, but a rare achievement in a global market where IT has traditionally been the preserve of advanced industrial economies.

Reliability costs

But how do hi-tech Indian companies survive and prosper in an environment where even basic infrastructure like transport, power and water is so notoriously unreliable?

Phiroz Vandrevala, executive director of Tata Consultancy Services, India's oldest and largest IT firm, says: "What we've actually done is within our own environments created global circles, oases of excellence.

Growth of IT sector in India

"So if we build any facility, we create a 24-hour power back-up," he says,"or if you employ x number of people, you actually transport everybody from their home to their place of work."

"But it certainly is a cost to doing business."

While IT firms are cocooned within their oases of excellence, poor infrastructure can be a crippling cost for other sectors, such as large-scale manufacturing.

Anand Mahindra, whom many consider the sub-continent's most thoughtful businessman, warns that India cannot live by IT alone.

"Even Bill Gates when he came to India said, 'IT is not the answer for employment. You're going to have to emulate China and its manufacturing sector, because that's where the jobs are and that's where the multiplier effect is the highest,'" says Mr Mahindra.

"So it was a nice, sobering thought to come from the Messiah of IT himself.

"If you want to make a million Barbie dolls, this is not the place to come. Then you go to China. This is not a widget-making manufacturing economy, and that is largely and possibly only due to our poor infrastructure.

"We simply don't have the power in terms of energy to meet such high capacities. We don't have the port infrastructure and the transportation infrastructure to ship out such a high volume of goods in a reliable and timely manner."

Education, education

So instead of making widgets, Indian manufacturing is currently building on its comparative advantages in engineering-intensive goods, which require versatility, flexibility and innovation.

One example is carmaking, with domestic and foreign firms now investing an estimated $6.6bn in new Indian factories.

GM India plant at Halol
Manufacturing is the backbone of India's strong economic growth

But growth in these high-value sectors is also running up against a skills shortage fuelled by lack of what's called social infrastructure - primarily good education.

Although Indian universities churn out three million graduates a year, only 15% of them are suitable employees for blue-chip companies.

That's nowhere near enough for Phiroz Vandrevala of Tata Consultancy Services.

"We have a tremendous amount of availability, but the suitability quotient is slightly low. If you look at about a hundred engineers from different educational institutions, in a company like ours about 20% make the cut," says Mr Vandrevala.

"Every industry is going to have to make significant investments in training for their own skills."

Despite growing investment in education, India still lags way behind its Western competitors. Thirty-five per cent of its population is still illiterate; only 15% of Indian students reach high school, and just 7% graduate.

Change is messy

Privatisations, or at least public-private partnerships, are now widely seen as the way to open up essential infrastructure like education, transport, power and even water to competition and new investment.

But local delivery depends on the quality of local leadership and its willingness to cut back its own powers.

Indian democracy undoubtedly makes structural change a lot slower and more messy than in China, but there is genuine optimism among Indian economists that the system will eventually deliver.

"Our confidence in rapid growth is quite recent, because rapid growth itself is recent, and so for the state to gear up to provide the infrastructure that's appropriate for 8 to 9% growth is taking a while," says Suman Bery, head of a leading Delhi think-tank called the National Council for Advanced Economic Research.

"We're not one of these countries like France or China which does things in advance and pre-emptively.

"The shoe has to pinch before we get round to it.

"Infrastructure strikes me as an issue that will solve itself. It may hold growth back a little bit, but I don't think it's fatal."

BBC Radio 4's Analysis: India: The Reluctant Tiger will be broadcast on Thursday, 28 February, 2008 at 2030 GMT on BBC Radio 4. You can listen to the programme again after it is has been broadcast at Radio 4's listen again page or download the podcast here.

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