The Indian economic development in a nutshell

I recently started to write a book and I will publish parts in the coming months on this blog. The working title of the book will be: Orchestrating the IT value chain and provides my experience and vision on improving the performance of IT and alignment with the business. This blog is about the effects globalisation had on the country I lived in for an year: India.

After the fall of the Berlin Wall, countries such as India, China and Russia began to open up their economies to the world. This enhanced collaboration across the globe and kick started an unprecedented economic growth within India.

Until the 1980s, Indian policy makers enforced a strict industry policy which resembled in many ways the ‘plan economies’ of communistic countries. By nationalizing companies and regulating the amount of output a company or industry could produce, the government tried to develop the country from a society of farmers to an industrialized country. In line with this policy imposed the government very restrictive rules on foreign investment and international companies desiring to enter the Indian market. With a few exceptions like electronics manufacturer Philips, were international companies effectively banned from doing business in India for several decades.

It took however the payment crisis of 1991 to really kick start the current wave of liberalization and deregulation. To solve the financial imbalances created by its economic policies, India was forced to take loans from international organizations. These organizations then put pressure on policy makers to remove industrial licensing and  reform policies on foreign trade and investments.

Since 1991, India has been pursuing economic liberalization and strengthening its infrastructure, legal system and solve financial problems like low foreign exchange reserves and high inflation. Removing the barriers has resulted in an increase in foreign direct investments (FDI) from $233 million to $3.300 million during the 1990s. Two of the industries which reflect the tremendous benefits the changed economic policy has are automotive and, of course, IT.

The domestic automotive industry was until the early 1980s protected with high import tariffs and a ban on foreign investment. This left consumers with the choice between two obsolete cars. In 1983 the Indian government permitted Japanese automaker Suzuki to partner with Maruti Udyog. As a result the car production grew by 13% per year from 1983 - 1993, compared to 1% per year in the decade before. In 1992 the Indian government implemented further liberations resulting in more than twenty major international car manufacturers operating in India today. 

Domestic manufacturers are also gaining momentum with Tata and its one Lac (100.000 rupees) Nano being one of the most well known. The number of people employed today keeps par with the IT industry and is estimated to be more than ten million of direct and indirect jobs.

The IT sector provides today some 2,3 million Indians with a job and accordingly to NASCOM another 8 million indirect jobs. The importance of the IT industry is also reflected in the Indian GDP. It has grown from 1,2% of GDP only two decades ago to 6% today. Where Indian IT companies were initially seen by Western companies as providers of low wage employees (value proposition: labour arbitrage) are Indian IT vendors transforming themselves into providers of advanced technological solutions (value proposition: lower cost and innovation).

Think of the domestically developed Tsunami Early Warning System (TWES) which is installed in India’s national emergency response center and detects, processes and monitors seismic activities in real time allowing it to issue tsunami warnings for coastal areas. Another example is the relationship between sports car manufacturer Ferrari and Tata Consulting Services (TCS). TCS has created a dedicated development centre for Ferrari in Madras and supports it in the areas of software development, production techniques and quality assurance. Many other companies have in the meantime discovered that Indian workers can do more than repetitive tasks and setup Research and Development centres or outsourced complex, added value activities to Indian service providers.

To become a truly global player, India still has to overcome some challenges however. A considerable part of the students which graduate from universities have a very strong accent, which makes it difficult for them to operate within an international context. Furthermore is there the notorious culture of corruption and bureaucracy within the government and investments in infrastructure which considerably lag the required levels.