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April 19, 2007
Doing Business in India Part I : The Colonial Legacy
I start today a series to discuss an issue the outside world has very much in their mind, what it takes to do business in India in an effective manner, the risks and its rewards. The consistent growth performance and prudent inflation management in India has made the world to sit up and take notice of the awakening of a giant economy from slumber. Asia is no longer only Japan and China, Indian growth story is now household knowledge the world over. Missing India today is like coming to the station and letting the train go by. In other words, one cannot afford to ignore India.
And yet, when it comes to the practical reality of doing business in India, even the most ardent exponents from the world of business find themselves in a difficult pitch and many a times make mistakes in reading, to borrow from A.L. Basham, "the wonder that is India". My series thus will focus on various dimensions of the multifaceted democracy, its promises and its traps, its expectations and its disappointments.
The first of the series discusses three specific aspects that modern India has inherited from its colonial legacy. Read on..
India's Colonial Legacy
India's colonial past has weighed heavily in her development since independence in 1947. Colonialism led to the complete but complex integration of India's economy with the world capitalist system. An integration in a subservient position , the colonial structure led to India's exploitation and mass poverty. Known as "drain of wealth" ( a term coined by Dadabhai Naoroji) and also as "the development of underdevelopment "( by Gunder Frank, much later), the process characterized an Indian economy that sold raw materials like cotton jute and minerals at cheap prices only to buy back polished and finished products from British industries at a much higher price. Capital formation of Indian industries remained stagnant in a process that saw burgeoning wealth of British industrial sector. When India became independent, it carried the fear psychosis of external exploitation. The planned development process that was initiated by Jawaharlal Nehru was influenced by this fear psychosis, and was inward looking , import substitution industrialization. The colonial legacy ensured that India ignored its export potential far too long . Scepticism about foreign capital, thus is well entrenched in the Indian mind and despite being a significant driver of growth, foreign participation is looked at with suspicion even today.
The Inherited Bureaucracy
Colonialism gave India its mammoth structure of governance, a huge bureaucracy. Basically authoritarian in nature, the bureaucracy nevertheless operated in the framework of democracy, independent judiciary and a responsive media. The bureaucracy has remained over decades, its rent seeking nature continued and many regard corruption in India quite high compared with other emerging markets.
Land, the key asset ..
Agriculture , though it has a share of about 18 per cent in Indian GDP today, was traditionally the key activity in India. Even today 60 per cent of the population depend on agriculture for livelihood. Land, the principal asset in an agrarian economy, is thus extremely important to Indians. As a matter of fact, in late colonial era, the nationalist movement , deeply influenced by egalitarian ideology, assigned critical importance to land distribution in their egalitarian agenda. When the nationalists came to power, a series of measures were taken to redistribute land from the rich to the poor. Any land acquisition programme in India has faced stiff resistance from the weaker sections and has become a place of political interference.
Protected Industrialisation..
Home grown industrialists benefited in a closed economy , securing huge profits in an environment that insulated them from competition. Factor productivity remained low as domestic market acted as assured markets for Indian industry. Infusion of competition since the beginning of economic liberalization in India changed the scenario significantly leading to high productivity growth in Indian industry. But the protectionist mentality still pervades the minds of bureaucracy and media that places domestic industries in an advantageous position in India.
To survive in India, thus, businesses need to be acutely aware of the colonial legacy and try to operate not just by rules but by an improved understanding of the Indian psyche.
Posted by sunandoroy at April 19, 2007 09:45 PM
