India: Banking on the future

I never imagined I would find myself cross-legged among a group of Indian women farmers, the so-called 'poorest of the poor' in a country besotted with categorisation, learning about how financial access had transformed their lives. It’s not as if banking is new to India, however. After all, these are the people who gave the world the mathematical 'zero'.

In 'My Early Life', Winston Churchill acknowledges the role bankers played in the
India of the Raj. An 'irrecoverable' debt of 13 rupees is listed against the name of 'Lieutenant WLS Churchill' (of the 4th Queen’s Own Hussars) in the minutes of the Bangalore Club of 1 June 1899.

Today that entry takes pride of place in the entrance hall in the old world club, where visitors are addressed as 'Sah!' and a note at the bar explains the 18 types of rifle on the walls. Churchill later wrote: 'Native bankers... found them most agreeable; very fat, very urbane, quite honest, and mercilessly rapacious.'

After some years of hibernation, these 'native bankers' and entrepreneurs have again been able to put their considerable skills to use. In The World is Flat, Pulitzer Prize-winning author Tom Friedman argues how increasingly affordable and ubiquitous telecommunications are erasing obstacles to international competition, 'flattening' the world for those adaptable and skilled countries and entrepreneurs.

Friedman’s book owes its title to a meeting he had with Mandan Nilekani, co-founder of India’s second largest IT company, Infosys. Nilekani, who by 2009 had taken a government job to rollout a national ID card, pointed out that countries like India could now compete for the global knowledge industry as never before since the world had been levelled by the internet and market forces. India is at once dynamic and chaotic, and quite inspirational. It shows what can be achieved if people are given half a chance by government.

Until the early 1990s the pace of India’s economic development was stunted by its isolation from the world economy, and by the inefficiency of its government systems – the so-called 'Licence Raj' –, which sought to control the economy.

The reforms of the early 1990s initiated by then Prime Minister P.V. Narasimha Rao, finance minister P. Chidambaram, (now prime minister) Manmohan Singh and Montek Singh were based on the (partial) withdrawal of the government from interfering in the economy. The rupee was (partially) floated, state subsidies were reduced, and the economy was opened up to foreign investment, attracted by the large pool of people, talent and low incomes.

The overall results of India’s liberalisation have been spectacular. Over six per cent annual average (real) GDP growth since 1991 has lifted around 100 million people out of poverty and into the middleclasses. India has moved on light-years in little more than a decade. You could have a choice of cars in India in the 1980s: A white or black Hindustan Ambassador, based on a 1950s
Morris Oxford. India has been continuously producing Enfield 'Bullet' motorcycles, a 1931 single cylinder design, in its Chennai (Madras) factory since 1955; while Leyland’s buses and trucks, once the pride of Harold Wilson’s nationalised car industry, are also still in production.

Fifteen years ago, travel in India was courtesy of government services. Where Air India inefficiently dominated the skies, today the now-struggling national carrier has to compete against a whole gamut of private airlines. Or as Prakesh Rao, the head of the Electronics Industry Association of India, puts it, 'The best thing the government did was to get out of business. And the best example of this is in the IT sector.'

India’s IT industry grew from US$100 million in revenue in1992 to more than US$40 billion in 2007. Bangalore is the epicentre of this flat world. Its software industry accounted for 98 per cent of the state of Karnataka’s US$13 billion worth of exports in 2007. Bangalore has enjoyed economic growth averaging more than 10 per cent, making it the fastest growing metropolis in India, the home to more than 10,000 dollar millionaires by 2010.

The presence of government-funded space, aeronautics, machine tool and electronics firms spawned a legion of sub-contractors and necessary skills. This has leapfrogged into other sectors, notably bio-tech. Nearly half of India’s 265 biotechnology companies have their headquarters in the province, including Biocon, the country’s largest biotech company.

This ability of India to take up the opportunities presented by globalisation and domestic liberalisation were related to its skills base. Despite high levels of illiteracy (nearly 40 per cent, or 300 million people), its skills base is impressive.

Today India produces 2.5 million graduates and 350,000 engineers each year. Its graduate pool is 1.5 times the size of China’s, and India produces more than five times the number of engineers as the United States. The pace at which Indians were able to make best use of these new opportunities relates, also, not only to the skills possessed but the inducements.

Whatever the Indian educational system's drawbacks, more than a billion people striving to make a living and get ahead provides a certain competitive element. Competition has been heightened by the slow dismantling of the caste system. 'Reservation' of educational opportunities for so-called lower castes has pushed up the grade requirements for others. No student can now be guaranteed a place in the sciences without a score of more than 90 per cent.

One hour’s flight to Bangalore’s north, Hyderabad was known as the City of Pearls, where dealers still cluster around Laad Bazaar near Charminar. But it too has become a major biotech centre. It has also developed into a major IT and film industry hub, home to the world’s largest film studio, Ramoji Film City.

But hi-tech is not the only story in India – far from it. Two hours’ driving west of Hyderabad, past the futurist buildings of Cyber World, is the Gramapanchayat (village) of Konapur. There the 300 (of 366 families) judged to be poor or 'poorest of the poor' are part of Self-Help Groups. Numbering about 10 women each, originally instigated by the UN Development Programme in the 1960s, since 2000these groups have been part of the Indian government’s Self-Empowerment Rural Poverty
Programme (SERP). Better training, voluntary enforced savings and access to banking finance has transformed the lives of the ten women in the Vasundara SHG.

Meeting each Monday, their weekly 10 Rupee (R1.66) contributions to their communal
'thrift' fund are carefully tucked into their pink notebooks. They vote and prioritise requirements of their members, usually given to food over luxuries. Electricity is less important, they tell me, than rice.

They are benefiting for the first time from the system Churchill tapped into 100 years before. Access to finance has changed their lives, improving their economic conditions, giving them more power in decision-making in their families, and ensuring their children’s education and better health care.

Ten million women from 35,000 villages are organised in this way across Andhra Pradesh province in a scheme that has seen monthly income per family grow in ten years fivefold to $50.The government can only do so much – and where it cannot assist, it is learning to leave it to the private sector. Every one of India’s 600 000 villages with populations of 5,000 or less has cell phone coverage, but fewer than a half have an electricity connection. When I asked a meeting of 30 women, all classified 'poorest of the poor', in rural India how many had cell phones, 10hands shyly went up.

Technology can help to reduce corruption, extend health care and improve transparency and competition. The private sector both can help to extend this, and depends on it for its survival in being competitive in global markets.

While the Green Revolution of the 1960s transformed India from a food-deficit to a food-surplus economy, the smallholder farmer was left behind by these initiatives – one measure being the high number of farmer suicides (199,132 between 1997-2008) driven to desperation by debt, drought and disease.

Farmers would have to borrow from moneylenders at exorbitant rates of interest, sometimes 100 per cent. Now they have scheduled repayment schemes at 12 per cent interest, on which there is zero default. The women themselves meticulously keep the books, and have plans to lease more land and diversify their sources of income.

There is no doubt that much remains to be done in India. It’s a land living in three centuries simultaneously, from the quaint turn of phrase in 19th century English to 20th century infrastructure and (just in some cases) Western standards, and the 21st century Hitech sector

More than 250 million people still live below the poverty line, 150 million lack access to decent drinking water and 650 million to decent sanitation, and half of all Indian children have unacceptable nutrition levels.

While 10 million new jobs are needed each year, just 1 million have been created annually at most. The infrastructure is inadequate, despite massive improvements over the past 60 years since independence, and some of its cultural idiosyncrasies are out of synch with the functioning of a modern economy: the cows ambling on the freeway for example, less Hare Krishna than Hara-kiri.

Thirty years ago there were only five million cars in India, but now there are more than
75 million. No wonder India has the highest number of road fatalities worldwide annually: Experts predict that more than 150,000 Indians will die in traffic accidents in 2010, and 200,000 in 2015, by which level it will probably be India’s single main cause of death, costing as much as three percent of GDP.

The US has six times more vehicles than India, but its road toll is about a third. While India’s vehicles have increased a hundredfold to 30 million from 1960, the road network has increased in density just eight times. Bangalore, for example, still does not have its own power plant, one of the reasons for perennial blackouts.

Also, less than half of solid waste is collected; the remainder is dumped on open spaces in and outside the city. Without more than just catch-up investment, this is likely to get much worse. Only 30 per cent of Indians currently live in the cities, but this has been increasing at between four per cent and five per cent each year, doubling the urban population around every 16 years. Despite the huge pool of graduates, India still does not have a world-class education system, with just two universities in the top 500 in 2005.

Estimates put just 25 per cent of Indian engineering graduates as globally competitive. No wonder that 12 percent (more than four million people) of the country’s unemployed have a university degree. This and the high level of illiteracy are reasons why India’s labour productivity is about 10 per cent of US levels, and one third, at best, of a Chinese equivalent.

Fearing politicians’ short-term narrow interests, the government prefers to hand out subsidies (around 14 per cent of GDP) rather than make tough long-term decisions in the public interest. Corruption is endemic, from top to bottom, reducing GDP growth by as much as 1.5 per cent per annum, worsening inequality in an already highly unequal society. The old social, caste, divisions still persist even under a hi-tech regime.

However, the results of the transition from its paltry rate of growth before the liberal reforms of the early 1990s are impressive. India is now the fourth largest economy in the world. Its reforms encouraged entrepreneurship, the lifeblood of every economy. And the outlook of its entrepreneurs has put it closer to the global economy, better positioned to benefit from trade with the richer world outside.

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* Dr Mills heads the Brenthurst Foundation and is now researching in India. This article was first published in the Sunday Tribune on 7 February 2010.
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