India’s Services Model

[via Yuvaraj] Stephen Roach (Morgan Stanley) visited India recently – his first, after 25 visits to China since 1997:

Its tempting to make the China-India comparison — trying to figure out which of these two Asian giants has the better approach to economic development. I see no reason to frame this in such black and white terms. In fact, I am inclined to argue that its not China or India but, in fact, China and India. Each of these two nations has a distinctly different recipe for economic development — recipes that are complements rather than substitutes as they fit into the broad mosaic of globalization. To be sure, China has come first in the sequencing, but this breakthrough has served India well. As the rest of the world has finally come to accept the China miracle, that realization has opened the door for acceptance of the India miracle. As one Indian leader put it to me, Its the flying-geese pattern of Asian development.

As China is to manufacturing, India is to services. Thats an over-simplification but it is the key conclusion that I take away from this journey. Manufacturing prowess is typically the yardstick that is used to measure the prosperity of emerging nations. As seen from that standpoint, theres no comparison. China has plowed its huge reservoir of domestic saving — about 40% of GDP — into some of the best infrastructure you will see anywhere in the world. And it has been brilliant in attracting massive inflows of foreign direct investment as the means to acquire technology, managerial expertise, and factories on a scale and scope that is hard to believe. China has, in fact, leapt to the fore as the largest recipient of FDI in the world — some US$53 billion per year in 2002-03.

India suffers in comparison basically from having none of the above. Thats an exaggeration but not all that wide of the mark. India has a 24% national saving rate, a little more than half that of China. As a result, it has far less in the way of internally-generated funds available to plow back into infrastructure. And it doesnt take much traveling around in India to experience first-hand the serious deficiencies of its infrastructure. The India Infrastructure Report 2004, put out by the 3iNetwork of Indias best and brightest engaged in this field, says it all, even relative to our income, our failure in water, roads, sanitation, schooling, and electricity is woeful. Nor can India hold a candle to China on FDI. Chinas inflows in 2003 were more than ten times the US$4 billion that went into India.

But thats not the lens through which India should be viewed, in my opinion. Indias strength is elsewhere — namely, in an extraordinary stock of human capital. And it has deployed that strength into the creation of world class IT-enabled service companies such as Infosys and Wipro and the service subsidiaries of large conglomerates such as Reliance and Tata. I spent time with each of these companies and was staggered by what they had accomplished in the relatively short time span of the past 10-20 years. The push into IT-enabled services sidesteps what I believe are Indias greatest impediments on the road to development — its infrastructure and FDI deficiencies. Self-sufficient in electrical power — all big companies have back-up generating capacity — the only infrastructure requirement in services is telecom. And, here, the Indian government has gotten out the way — focusing on telecom deregulation and facilitating connectivity both in domestic markets and to overseas destinations.

It is important to stress that contrary to widespread impressions there is far more to Indias success in services than an attractive cost arbitrage in low-valued processing tasks. Yes, the cost saving is enormous — like-quality Indian talent goes for about 15% to 20% of the Western norm. But the strength of Indias IT-enabled services model is not about the inroads it has made in attracting easily commoditized data processing and call-center operations. The successful IT-enabled service companies have been quick to move up the value chain into a wide range of BPO (Business Process Outsourcing) activities including purchasing and order functionality, procurement, accounting, insurance management, e-based corporate learning management, human resource and benefits management, and a vast array of internal corporate control functions. More recently, Indias BPO efforts have moved into medical, actuarial and legal functions. And then theres Indias natural strength in a broad array of IT applications — from software programming and multi-media platforms to systems support and network management.

For Indian IT companies, the real breakthroughs come from the development of customized integrated systems solutions. The BPO business is basically the Trojan Horse — driven initially by the cost arbitrage that makes outsourcing extremely attractive as a means to enhance corporate efficiency in high-cost countries. But Indias IT-enabled service companies have been quick to take this opportunity to the next level — going beyond the functional silo approach that has long plagued corporate structures and exploiting the synergies that can be realized through collaborative solutions that span previously segmented functions. And they attack these integrated systems problems with seamless global networks that pass the management and control functions around the world every 24 hours.

Roach disagrees that manufacturing holds the key to India’s future: “Repeatedly, I heard the argument that manufacturing is critical to resolving Indias long-term unemployment problems. I find this response puzzling. Over the past 50 years, technological change has spurred capital-labor substitution and turned manufacturing into an increasingly labor-saving activity. Services, by contrast, are far more labor intensive, especially in the knowledge-based production activities of the Information Age. For a huge country like India, a services-driven development model seems tailor made both to its greatest strengths (human capital) and its greatest needs (employment and coping with poverty). And the new IT-enabled tradability of services is the icing on the cake.”

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Rajesh Jain

An Entrepreneur based in Mumbai, India.