India and Its Role in International Business: The Sleeping Giant Is Still Waking from Its Overregulated Past

Updated Title August 29, 2020 – See: What Is Socialism? Why I Changed the Subtitle of My Previous Post


© 2020, Farok J. Contractor, Rutgers Business School

Note: To see the PowerPoint slides and also listen to the voice narration, click on the link at the end of the post to download the slide presentation.
Just three countries are likely to dominate the 21st-century economy: the US, China, and India. These nations already comprise 40 percent of the world’s gross domestic product (GDP) and population. Indians (at 1.38 billion) will soon outnumber Chinese to become the most populous nation. Already, using the World Bank’s purchasing power parity (PPP) exchange rate, India has the third largest GDP.

In the accompanying narrated slide presentation from the recent Academy of Management (virtual) conference,[1] I outline India’s shining potential, as well as the legacies of its socialist past and a slow-moving democracy that still hold that nation back, stifling the natural entrepreneurship and talent in large segments of the Indian population. (Imperfect as it is, there is no substitute for democracy, in which all segments can feel they have some say and sense of participation.) Arguably, India is also the most diverse country on the planet, with 22 official languages and 3,000+ dialects covering 36 states and territories.

India’s Comparative Advantages

India is blessed with several comparative advantages: a burgeoning middle class; low labor rates between $0.92 and $1.45 per hour; around 80 million people with basic English-speaking ability; a 2,000-year history of international commerce; abundant sunshine and rain; and a diaspora of 23–25 million that facilitate the flow of talent, ideas, technology, business opportunities, investment capital, and reputation between India and the rest of the world. Indians occupy leadership roles in giant companies, academia, and the professions in the US and Europe.

A Comparison That May Be Invidious

In 1970, India and China were comparable emerging countries, with most below the World Bank’s grinding poverty line.[2] But while China has regained its historical role in the world’s commerce and economy, and has virtually eliminated grinding poverty (only 30 million Chinese live below that line), India still has 260 million poor.

As the slide presentation shows, in 2019 India’s GDP and incoming foreign direct investment (FDI) were around one-fifth, and its exports to the rest of the world only 13 percent, that of China’s. In my narration, I mention a poignant example where, over the past two decades, millions of plastic injection-molded images of Hindu deities sold to the Indian public are imported from China instead of being manufactured in India itself.[3] The bazaars of India are awash in Chinese-manufactured goods, ranging from garments to watches to padlocks to mobile phones (where Chinese makes dominate the market), despite transportation costs over 8,000 kilometers.

What Holds India Back?

With all its comparative advantages, including labor costs one-quarter to one-fifth those of China, what is holding India back? Every five years, around 65 million new male Indian jobseekers turn age 18, aspiring to begin their careers. In China – currently holding the title of “Factory for The World” – its population has plateaued and is aging, so that Chinese companies themselves are seeking other countries to shift their labor-intensive operations to. Hence, it would seem logical that India should take over the mantle of mass-manufacturing for the world market. Alas, in 2019 Indian exports (mainly commodities and services, with only small amounts of manufactures) were only $0.32 trillion compared with China’s $2.49 trillion.

So, what is holding back India from its potential? In my narration, I mention several factors such as archaic labor laws that stifle entrepreneurship and force businesses to stay uneconomically small, more than 16,000 labor unions, and 69,233 bureaucratic regulations passed by a bloated bureaucracy at the federal and state level. (The number of government employees in India exceeds 21 million, and this is not counting approximately 4 million military and law-enforcement personnel.) Sinecures are not merely an artifact of former socialist governments – they also stem from the compassionate traditions of Hinduism and Buddhism, and to some extent from patronage that is endemic to all regimes.

With a land surface only one-third that of the US or China, every square meter (except for the most arid deserts) is occupied. But with a compassionate tradition that has not yet used eminent domain laws to evict residents, industry finds it difficult to find space for factories and offices with access to infrastructure (which itself is deficient). Indian roads, ports, and airports are being slowly augmented; but according to most observers, they fall short of the needs of international business and domestic logistics. (In my narration, I mention that moving one ton of cargo from Guangzhou to Mumbai, an 8,000-kilometer sea journey, costs only 10 percent more than moving the same cargo from Delhi to Mumbai, 1,050 kilometers by truck.)

Renewed Calls for Self-Sufficiency and Self-Reliance

The current Indian government, like many others since 2016, has reemphasized a spirit of nationalism. With the advent of Covid-19 in the past six months, New Delhi has also resurrected the old socialist themes of self-sufficiency (Atmanirbhar) and self-reliance (Swaadharit Tantra). Nationalism, self-sufficiency, and self-reliance are, on the face of it, virtues. But in economic life, anything carried too far beyond an optimum point can become detrimental and inefficient – especially dangerous in a country that has not yet shed all its former inward-oriented, protectionist, socialist thinking.

The Modi government’s “Make in India” campaign not only makes eminent sense, but it is a crying need in a nation where 13 million men turn age 18 each year and need jobs. (What about the 13 million women who turn 18 each year? My narration also touches on the gross underrepresentation of females in the organized workforce in India.) At the same time, I show a list of world-class Indian firms that are internationally competitive in research and development (R&D) and marketing, elements of the value chain that are more profitable than basic manufacturing or assembly work.

Conclusion: Much Reason for Optimism

All in all, my conclusion is optimistic. The current government is taking steps to shed the baggage of the past in areas such as labor laws, land acquisition, uninterrupted electricity supply, infrastructure, and limiting the “nay-saying” power of the bureaucracies. India should slowly regain its place in the world – and have a very bright future.


[1] To see the PowerPoint slides and also listen to the narration, click the link below to download the slide presentation. © Copyrighted Material 2020 – usable free of charge only after receiving written permission from the author. Contact Me for permission or more information.

[2] Currently $1.90 per day per person (periodically adjusted for inflation).

[3] An embarrassment to the current government that is worse than importing “Coals to Newcastle” because of its Hindutva emphasis.

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