Conquering the Chaos: Win in India, Win Everywhere

India should be viewed less as a difficult market where strange things are happening,
and more as a market that is simply ahead of many other markets in its evolution …
If we don’t figure out how to win in India, we could end up losing in a lot of other
geographies around the world. Conversely, if we can win in India, we can win everywhere.

—STEPHEN ELOP, CEO, NOKIA

India appears to be at a tipping point. Global success in information technology,
a decade of growth, and some excellent public relations enabled the country to change
people’s perception of it. After decades of being equated with Pakistan, India has
increasingly come to be associated with China in terms of potential. However, the
past couple of years have been devastating. Massive corruption scandals, weak kleptocratic
political leadership, divisive politics, stalled reforms, and a decelerating economy
are making Indians and foreigners alike question the future. Gone is the hubris that
dared India to think it could do better than China or even some developed countries.

THE PLUSES.
That said, India does have many things going for it. One is the large pool of talent.
It may be getting harder and costlier to find and keep good talent, but India remains
one of the most important places in the world to do knowledge work, ranging from managing
business processes to running information technology systems, and for engineering
work ranging from drafting and testing to sophisticated design and analysis. Shifting
those processes to India has the ability to change companies’ cost structures and
add several hundred basis points to their profitability. Some, such as IBM (142,000
employees in India as of 2012), Honeywell (20,000), and Dell (28,000), have leveraged
this effectively, but others, particularly European and Japanese companies, have yet
to harness the IQ and energy of young Indians. (Offshoring and outsourcing are well
covered elsewhere, and I will not spend much time on them; my focus in this book is
the Indian market.)

The second plus is the intrinsic strength of the economy. It is difficult to ignore
the progress that India has made over the past three decades, albeit in fits and starts.
In his book,
India Grows at Night
, Gurucharan Das says that “India grows at night … when the government sleeps,” suggesting
that the country has done well despite, not because of, the state. India is a story
of private success trumping public failure.
Figure 1-1
, a graph of India’s GDP growth from 1980 to 2010, illustrates this quite dramatically;
what’s impressive is the country’s sustained economic growth despite many different
governments in power, some more effective than others (see
figure 1-1
).

Several reasons account for these economic gains, such as the ambitions and drive
of India’s youthful population—the so-called demographic dividend. A healthy savings
rate as well as rising rural incomes driven by pricing support for crops, significant
improvements in literacy and education, a culture of entrepreneurship and improvisation
(although not quite innovation as it is commonly understood), a competent managerial
class, a reasonably sound banking system and capital market, and a fair and activist
Supreme Court have contributed as well.

Moreover, India has become more federal, with power shifting to the state governments
from the central government. Growth is increasingly powered by the states rather than
by policy decisions in Delhi, and the states’ economic performance, even that of perennially
backward Bihar, has been encouraging. Above all, there has been an irreversible awakening
of the aspirations of a billion people. The growth genie is out of the bottle, and
India is on an irreversible course of development.

Mukesh Ambani, India’s richest businessman, puts it well: “India is a bottom-up not
a top-down story.” No country except China has the same medium- and long-term economic
potential as India. Even in a scenario of modest 6 percent to 7 percent GDP growth,
by 2030, the country will have the largest middle-class population and share of middle-class
consumption in the world. India’s progress has prompted frequent comparison with the
aerodynamically challenged bumblebee, which theoretically should be incapable of flight.
Yet, both continue to defy the odds.
²

THE MINUSES.
Nearly fifty years ago, John Kenneth Galbraith, the US ambassador to India and an
ardent Indophile, called India “a functioning anarchy.” In that one respect, not much
has changed. Negating the considerable intrinsic strengths of India is corrupt and
incompetent governance at all levels of the nation: central, state, city, and village.
Nearly 25 percent of the members of India’s lower house of Parliament have had criminal
cases filed against them, ranging from kidnapping and murder to extortion and robbery.
Unbounded greed and corruption have resulted in politicians, bureaucrats, and businesspeople
becoming predatory to an extent seen only in some African dictatorships and the post–Soviet
Union era in Russia. Well-connected industrialists, politicians, and public officials
have conspired to carve up India’s natural resources, ranging from mineral resources
to land and the telecom spectrum.

However, the system of patronage and crony capitalism has been paralyzed, as its workings
stand exposed by a mixture of fearless activists, Supreme Court interventions, government
audits, a feisty media, and the public itself, angry over graft and drift. Scarcely
a month goes by without the exposure of yet another scandal, such as the 2G telecom
scandal in 2010, which
Time
dubbed the second-biggest scandal after Watergate.
³
Other scandals have since come to light in the power and mining sectors, as well
as several land deals.
⁴

Corruption in India isn’t limited to crony capitalism. Graft has permeated the fabric
of Indian society, and at every step, officials harass individuals and companies,
whether it is to register a land transaction, renew a multitude of licenses, clear
a shipment through customs, or win a public tender. Companies find themselves continuously
extorted by inspectors who handle pollution control, labor laws, and indirect taxes,
and they must comply with arcane regulations dating back a century or more. Their
choice is between spending countless hours defending themselves or paying one more
tax to individuals so they can focus on business.

The ineptness of the government in driving essential policy reforms has also become
legendary. Maimed by arrogance and corruption scandals, a coalition government, led
by the Congress Party, has struggled in recent times to pass unpopular measures because
of opposition from coalition partners and political rivals. For example, the government
tried to open up the retail sector to foreign investment in 2011, only to reverse
itself because of the opposition of its political allies. In December 2012, a frustrated
but determined prime minister finally used all his political capital to push the measure
through Parliament, but left the final decision to each state. Global retailers must
negotiate licenses with each state they wish to enter.

Acquiring land remains tricky, and obtaining environmental clearances can take years.
According to G. V. K. Reddy, whose company was responsible for the recent overhaul
of Mumbai’s airport, the developer had to deal with over 220 cases over property,
environmental, and labor disputes in the process. Creating a one-stop shop for project
approvals and unifying regulations across state borders would smooth the road for
developers. However, India’s land acquisition law has not been modified since 1894,
and Parliament has held up a new law for months, as lawmakers struggle to find the
middle ground between industrial development and defending the rights of small landowners.

For these and other reasons, critical infrastructure projects have been delayed. Despite
the government’s ambitious aims of attracting $1 trillion in infrastructure investments,
India is littered with stalled projects while Indians endure pothole-filled and garbage-laden
roads, congested ports and airports, creaky railways, overflowing drains, and the
absence of clean drinking water. Power plants stand idle, crippled by shortages of
fuel, while 600 million Indians were stranded without power for two days in July 2012
and the citizens of the southern state of Tamil Nadu endure daily power outages lasting
twelve hours or more. The list of woes when it comes to infrastructure is endless.

A final issue, one that has become a Frankenstein monster, is taxation. Not only is
the tax regime complex and deliberately ambiguous, but to fund the massive fiscal
deficit caused by unsustainable welfare programs, the revenue authorities have collection
targets. They have unprecedented discretionary powers, which they wield like a blunt
weapon. All companies face harassment, but multinational companies make particularly
easy targets, as companies like Vodafone, HP, Shell, Nokia, Microsoft, and Nestlé
will attest. The most dramatic example is the bruising dispute between the finance
ministry and Vodafone, India’s largest foreign investor, over a disputed $2 billion
capital gains tax bill. To get around a Supreme Court ruling in Vodafone’s favor,
the finance ministry wanted to amend the law retroactively to April 1962! Whatever
the final outcome, the incident has dented India’s image in the eyes of investors
everywhere, while raising serious concerns among business leaders and governments.
A key economic adviser to the prime minister comments: “A government that changes
the law retrospectively at will to fit its interpretation introduces tremendous uncertainty
into business decisions, and it sets itself outside the law. India has missed an excellent
opportunity to show its respect for the rule of law even if it believes the law is
poorly written. That is far more damaging than any tax revenues it could obtain by
being capricious.”
⁵

The Vodafone case, the harassment of respected companies and professionals, and the
proposed General Anti-Avoidance Rules (GAAR), an ambiguous attempt to prevent tax
evasion, are creating uncertainty, anger, and anxiety at a time when the government
desperately needs to attract more foreign investment. One CEO of a multinational,
who asked not to be named, says the unpredictability of the tax regime puts India
at par with the Democratic Republic of the Congo, adding that it is contradictory
when the Indian government says it needs foreign investments but creates investor-unfriendly
policies at the same time.

All these factors have together made India one of the most challenging countries in
which to operate. Ratan Tata, the chairperson of the Tata Group, cautioned that if
the government didn’t step in and uphold the rule of law, “there was every possibility
that India could become a banana republic.”
⁶
Sunil Mittal, the highly influential and cautious chairperson of telecom operator
Bharti Airtel, didn’t mince his words either: “This has been the most destructive
period of regulatory environment I have seen in 16 years,” he publicly stated in May
2012.
⁷

The numbers bear him out. According to the World Bank, India ranks 133 of 183 countries
in terms of ease of doing business (falling from 120 in 2007), 169 in terms of taxation,
and, despite the public outrage against corruption, matters may be getting worse as
India sank 11 places to number 95 in 2011. The Indian economy has slowed to a new
Hindu rate of growth of 5 percent compared with the earlier 3 percent.
⁸

Given the realities of dynastic rule and coalition politics, confidence in the government’s
abilities to tackle the enormous challenges is low. Ramachandra Guha, a historian
and writer on Indian affairs, argues that instability may be India’s destiny. He says
that bad politics, corrupt leaders, and weak and politicized institutions mean that
instability and policy incoherence may be a long-term feature.
⁹

Indian companies may have no choice but to operate in the country, but multinational
companies do. Dave Cote, chairperson and CEO of Honeywell, a company with twenty thousand
employees in India and an ardent advocate of the country, recently told the
Wall Street Journal
: “Foreign companies are starting to become scared here [in India]. I worry that the
Indian bureaucracy is becoming stultifying. I will hire people here, but I will be
a lot more reticent about investing in India.”
¹⁰
Cote’s dismay reflects the growing sentiment among global business leaders, who are
increasingly disillusioned and pessimistic about India’s prospects and rapidly prioritizing
investments elsewhere.

It would therefore be logical to conclude that global businesses shouldn’t bother
with India, at least not in the short run. Or is there something that multinational
corporations are missing by jumping to that conclusion?