© 2022, Farok J. Contractor, Distinguished Professor, Management & Global Business, Rutgers Business School
Ordinarily, I do not do book reviews. But The Struggle and the Promise: Restoring India’s Potential by Naushad Forbes (2022, HarperCollins) struck a note with me because it covers most of the important issues facing the future of developing countries, and it does so in a comprehensive and neutral way. Anyone concerned with economic and social development in emerging nations, and not just readers of Indian origin, should find this book of considerable interest. Many of the same problems – unemployment, the heavy hand of the state, internal diversity of opinion, poverty, the temptations of protectionism and excessive nationalism, the role of the country in global supply chains – afflict most developing countries.
As an emerging nation, India is a particularly relevant example with one of the world’s fastest growth rates in recent years. It is already the fifth largest economy using current exchange rates and the third biggest using purchasing power parity (PPP)[1] exchange rates. In 2022, India has the world’s largest population with 1.41 billion persons, so its already large domestic market can become much more interesting in the future as more Indians join the middle class.
For the most part, economists, industrialists, and government policymakers dwell within their own separate worlds and mindsets, with the result that countries often adopt suboptimal national policies. Dr. Naushad Forbes (Stanford Ph.D.), co-chair of the Forbes-Marshall industrial group in India, former President of the Confederation of Indian Industry (CII), and collaborator with some of the world’s leading economists, has written an incisive book on the future progress of India in an encyclopedic sweep encompassing most necessary aspects of economic, social, and institutional factors that make for a progressing nation. Forbes treats India’s policies toward trade and foreign investment, supply chains, education, the perils and advantages of democracy, youth unemployment, innovation, and many other issues comprehensively and in simple language with minimal jargon. His book is one that all thinking persons should read, in India and abroad.
What really struck me is the absence of polemics and a refreshing balance of views. Even when writing about sensitive issues such as the regulatory hand of government and the “license raj” (a term that describes excessive regulation of industry where investment decisions to be made by the private sector have to first receive a license or permission from the government), the reader gets a sense of fairness and wisdom. This is a book written by an optimist about India’s potential. But that does not prevent the author from gently pointing out areas where policy needs to be redirected.
Wander the dusty by-lanes of Indian towns and villages, and you may encounter a shop selling small images of Hindu gods and goddesses made from plastic resin and colorfully decorated, selling for a few hundred rupees ($3–$4) each. Millions of these, present in Indian households, were made in China[2] (see more on this below).
Images of the Hindu Deities Saraswati, Laxmi, and Ganesh (approximately 3 inches high, retailing for $3–$4) – Photo Credit: Farok J. Contractor
The same shop may also sell joss sticks (incense; Indians call them agarbatties) made in Vietnam, at least until 2019 when India restricted their import (see more on this below). Another example: Legally or otherwise, many of the garments sold on India’s sidewalks and bazaars may have originated outside of the country.
These examples immediately raise an inconvenient question: Why can’t Indians make their own devotional objects and clothing domestically? This book provides some insights.
At the same time that basic goods are being imported into developing countries, we find chronic unemployment or underemployment of millions in India who could be put to work making these basic items. A World Bank report cites studies estimating that between 150 and 210 million Indians live in abject poverty, earning less than $2.15 per day.[3] Add to that the seasonal agricultural worker or the seller of balloons on the street, typifying the “informal” employment sector, as the author puts it, and the total may swell to as many as 350 million Indians.
On my last visit to India, I ordered some toothpaste and bars of soap, worth two hundred rupees, from the nearby kania or kirana – typically, a small neighborhood shop serving the local community with home delivery. The “delivery boy” (actually a 23-year-old man) spoke flawless English and was manifestly intelligent. He was happy to accept the Rs 20 pittance (equivalent to 30 US cents) I gave him as a tip. When I visit India, I like to engage such “informal” employees in conversation to talk about their economic lives. I have discovered, for example, that some taxi drivers have bachelor’s degrees.
A waste of human talent? Yes, but in those hundreds of millions of un- or under-employed also lies a bright promise for India’s future. The country has the potential to take the title “factory for the world” from China or Vietnam (which have much higher wages than in India). As a reminder, the author, an optimist, uses these two words – “promise” and “potential” – in the title of his book.
How can India use its untapped human capital and become the low-wage manufacturer for other countries in the world while at the same time employing talented former “delivery boys”? Average Indian manufacturing wages are half those in Vietnam and one-quarter those in China. So why is India’s manufacturing output at $412 billion roughly one-tenth that of China’s $4,000 billion?
The answer lies partially in the scale of operations, marketing savvy, supply chain networks, and automation. Aided by Indian government policies that encourage small-scale enterprises, many joss sticks, or agarbatties (see above), are made by hand.
Source: 5 Important Things To Know (about) Agarbathies
By contrast, Vietnam makes machines that automatically spit out the wood or bamboo core of the sticks at the rate of one every 0.7 seconds. In fact, such Vietnamese automated joss stick machines are advertised and sold in India (see the video below). A factory in China making images of Hindu deities (see the discussion above) may have 70 injection-molding machines to the Indian factory’s two or three. Supply chains are (or, until COVID-19, were) so efficient that the shipping cost from Guangdong to Mumbai (7,322 kilometers) per item was only 10 percent higher than a truck transporting equivalent cargo from Mumbai to Delhi (1,148 kilometers).
Source: Shree Hari Traders Rajkot
Happily for India, the “license raj” mentioned above is in retreat. Forbes’ book mentions this diminution, in passing, as a hopeful sign. But this remains a reason why India presents obstacles to the growth of small and medium enterprises. A friend of mine who owned an electronics parts factory in India said he was happier, and still made enough money, by maintaining his factory at fewer than 99 employees – in other words, he decided his business should remain stagnant and not grow. Becoming bigger would have posed headaches, such as labor laws that kick in with more than 100 employees, acquiring additional land, applying for permits, and enduring more frequent visits from “inspectors.”
Often in developing nations, government “inspectors” do more than just check for compliance with labor, safety, or effluent laws – they extend their hands to receive petty bribes. India and China have a roughly equivalent middling rank in world indexes that track corruption. But in China, where corruption occurs at higher levels, day-to-day operations are not much affected, whereas in India the upturned hand is pervasively manifest daily in every inspection or petty transaction, from buying materials to paying the electric bill, creating obstacles to progress.
This book presents several positive developments that can improve India’s institutional integrity. Current governments at the central and state levels have taken small steps to reduce obstacles to growth. In some cases, simply eliminating certain rules or regulations removes the intervention of the state and scrutiny by regulators for many transactions.
But the private sector in emerging nations can overcome obstacles and accelerate growth in two other ways. When a company is big, it can afford internal means, tactics, and lobbyists or “fixers” that overcome regulatory barriers. Smaller firms cannot muster such resources. Indeed, India is seeing the unprecedented rise of giant firms (e.g., conglomerates such as Reliance and the Tata Group), encouraged by state and central governments – the old suspicion of “big business” is mostly gone. A second approach is even better: to allow greater access by multinational companies to the Indian market and encourage them to use India in their supply chains.
Why could this be an even better approach? By harnessing the technology and international best practices that multinational companies bring with them to a host country – including higher standards of production, quality control, design, ethics, sustainability, and global supply chain networks – these techniques and standards can be learned, spread, and diffused to local companies. Notice I use the word “harness”: that is to say, a carefully constructed policy can encourage foreign firm participation in areas where the multinationals clearly bring net technical and social benefits to the host nation.
But what about the fears expressed by local firms about competition from foreign companies? Seventy-five years after independence from Britain, enough local Indian firms can not only compete on equal terms with foreign rivals, but can become global players in their own right by learning the advanced techniques and international standards from their competitors – as many companies from Reliance, Tata, Vedanta, to the pharmaceutical firms have already done.
To some, the designator “supply chain partner” suggests servitude, simple or boring screwdriver assembly, or being a minor cog in a global wheel controlled from outside the country. True, at the beginning, many employees of supply chain partners in China, Africa, or India do basic, repetitive tasks. For instance, workers in India’s Wistron work long shifts assembling iPhones. Yet such jobs, however boring, can employ the developing nation’s underutilized millions. Is that not better than sitting idle on farms? And later, such jobs can mature into more skilled work. But the far larger benefit from supply chains is that engineers and senior management in the participating firms pick up and learn cutting-edge technologies and design.
Apprentices can become global masters. Recently, my wife and I bought a microwave/convection oven (for approximately $250) made by a company called Galanz, a brand only recently introduced to the US market. Thirty years ago, Galanz was an unknown startup in Guangdong with little technical knowledge, but it began to receive manufacturing orders from Europe and the US to produce ovens under established European, Japanese, and American brand names and designs. Having learned and mastered the technology, Galanz is now one of the biggest makers of microwave ovens in the world (sold under many western brand names) and is also establishing its own brand name globally. Why did we buy this oven? Because it uses less electricity (giving it high environmental, social, and governance [ESG] standards compliance) and has extra technical features superior even to those in Korean and Japanese brands. This is why participating in global supply chains can lead to “learning and moving up the skill ladder to become global players.” The supply chain apprentice can eventually become a global rival to its former multinational buyers.
“Learning is central to innovation,” the author writes pithily. Indian companies are equally capable of learning and becoming global players. The regulatory body, business environment, and infrastructure in India need to facilitate, even more, this cross-border flow of ideas and knowledge – an objective that the Indian government stated in its “Vision 2047.” The opposite policy to “openness to international business” is to turn inward, impose import restrictions and tariffs, and adopt a protectionism policy. As Forbes’ book gently points out, there remains the danger of overdoing protectionism, shutting out international business partners, and going back to the failed pre-1991 Indian import-substitution policies. The author asserts that there is no record of a nation growing rapidly with rigid import-substitution policies.
Dr. Forbes demonstrates through his writing a nimble, fertile, and wide-ranging mind. The book touches on a delightfully broad spectrum of topics, all relevant to national progress, such as market reforms (sometimes stymied by vested interests), India’s great asset of 110 million persons with English language abilities, social capital, and the value of mutual trust[4] (although exhibited in India only within traditional business communities, such as the Banias or Marwadis).
The author’s musings also range over primary education, the advantages and drawbacks of democracy, and diversity. India has “… around 400 main languages and dialects of which 22, in addition to English, are officially spoken in Parliament.”[5] These 22 official languages and thousands of dialects cover three major language families: Indo-European, Dravidian, and Sino–Tibetan/Kra, as well as minor isolates such as the Dai and Austroasiatic languages. For me, the broad sweep of the book is impressive, but frustrating, because I would have liked to bite more deeply into each morsel of thought.[6] Other readers may become a bit bewildered or lost in some of the wide-ranging chapters.
Language Diversity in India
Graphic Credit: © Vishal Alvi
Overall, the book is deeply reasoned. All of Dr. Forbes’ recommendations are on target and exhibit balanced judgment. In a recent speech, Dr. Raghuram Rajan, former head of India’s central bank, correctly identified a current, quicker job-growth opportunity for India in the export of services.[7] And yes, growth of manufacturing output, being fraught with more regulatory and institutional obstacles, is more painful and protracted. But as Forbes’ book quietly implies, there is no way the services sector can increase jobs for more than a few million persons – certainly not for the 300-odd million un- and under-employed.
Manufacturing, however, can. From nothing in 1978, Galanz today employs 55,000 manufacturing workers. It did take China decades to get where it is today. But slowly, over the thirty-year span 1989–2022, in one of the biggest economic migrations in human history some 250 million Chinese left their village homes and families, even leaving their children behind with grandparents, and moved to the eastern coast of China, where most of that country’s manufacturing and exports take place. Indians do not like this comparison and correctly argue that messy democracies cannot be compared with autocracies. But starting from an equal poverty footing in 1970, China today is a middle-income nation with a per capita income five times that in India. All of this was led by manufacturing job creation, at first in low-end, basic goods; but later, learning from multinational companies,[8] they climbed the knowledge ladder from making toasters to producing sophisticated aircraft. Over most industries, China has made the transition from imitator to innovator.
Many Indians are actually proud that in 2022 India is the world’s biggest nation by population (which portends a huge domestic market and international clout in the future). But the much-vaunted “demographic dividend” could become a demographic timebomb. More than a few revolutions have been started by frustrated, unemployed youth. I do not think this will happen, not least because wise thinkers such as Dr. Forbes, Dr. Raghuram Rajan, and senior government officials are now alive to the problem.
To conclude, any student of economic development in emerging nations, any fan of India, anyone who cares for progress in developing nations, and anybody concerned with the destiny of humankind should make this book necessary reading.
NOTES
[1] Purchasing power parity (PPP) theory is a simple but powerful idea: that, in the long run, an exchange rate between two currencies will reflect their relative purchasing powers, money itself having no value except what it can purchase. If 100 units of currency X can purchase a basket of items (say 12 mangos, 5 bananas, 1 haircut, etc. – or, even better, several hundred items for good measurement) in country X, but the same basket in country Y costs 300 units of currency Y, then, in theory, the exchange rate should be 1.0 currency X = 3.0 currency Y. The corollary is that a currency experiencing higher inflation (i.e., loses purchasing power faster) will see that currency devalue against other currencies that do not have as high an inflation rate. The PPP exchange is theoretical, and in the short term it deviates from the actual exchange market rate. But in the long run, it really works. See the example of the Argentine peso in my earlier blog post The Purchasing Power Parity Theory Works – Illustrated by the Sad Tale of the Argentine Peso.
[2] Contractor, Farok (2018). Thousands of Hindu Gods – Made in China: Seven Reasons Why India’s Manufacturing Competitiveness Lags China’s, Rutgers Business Review, vol. 3, no. 1, pp. 1–15. Also see my blog post Thousands of Hindu Gods – Made in China: Seven Bottlenecks to Indian Manufacturing.
[3] World Bank (2022). Correcting Course: Poverty and Shared Prosperity 2022. See page 35.
[4] A tight-knit business community or caste, where members trust each other, considerably facilitates business success because community members support each other’s businesses, lend each other capital, give advice, and constitute a closed, mutually supportive network.
[5] Public Broadcasting System (PBS): The Story of India.
[6] Perhaps Dr. Forbes will consider writing separate essays on each of these subtopics relevant to India’s growth.
[7] MoneyControl (2022). Raghuram Rajan says India’s job situation ‘really alarming’, needs equal focus on services. October 27, 2022.
[8] It was only as recently as 2013 that, for the first time, purely Chinese-owned companies’ exports exceeded exports by multinational company affiliates in China. Before 2013, China’s exports were led or dominated by European and US multinationals’ subsidiaries and affiliates. As long as it took, the Chinese, with quiet, long-term determination, gleaned or extracted knowledge from their multinational partners to eventually become global rivals.
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