by Rakesh Mohan
Abolition of licensing in most areas—including in technology—eliminated the need for Indian companies (including software companies) to run to Delhi and wait in the corridors of Udyog Bhawan several times a month for over two to three years. In fact, I have not been to Delhi to get an import licence approved since 1991. This meant we could spend that time in our boardrooms planning and strategizing. It also meant we could get into new technologies and build services around these technologies quickly. It removed the uncertainty in planning for growth-leveraging new technologies. We could be ahead of our customers in installing state-of-the-art technologies and, thus, compete effectively with our global competitors. The market had become the determinant for our success, rather than patronage from Delhi.
The economic reforms brought back the facility for multinational companies (MNC) in technology to own 100 per cent equity in their Indian subsidies. Union Industries Minister George Fernandes, of the Janata government during the period 1977–80, had insisted that every MNC should dilute their equity holding in their Indian subsidiary to 40 per cent. Many MNCs such as IBM, ICL and Coca Cola left India while some like Unilever and Bosch complied. But most technology MNCs were not interested in entering India due to this restriction. India was the loser in this scenario. The Rao government realized this and removed the restriction, allowing MNCs to hold 100 per cent equity in their subsidiary. The result was the entry of leading-edge technology companies such as IBM, Microsoft, Motorola, Oracle, SAP and Accenture. This was a godsend for the Indian software services companies for a very interesting reason: these companies were not competing with us for the market, since we were not focusing on the small-sized software-services market in India. These MNCs were selling their hardware and software products in the Indian market. Our competition with these MNCs was for talent, which these companies were attracting away from us. In fact, one of my friends remarked that fledgling companies such as Infosys would soon need to wind up their operations since companies like IBM would attract our talent. We had three options. First, we could have used NASSCOM, our industry association, to lobby our government to keep the MNCs out. But I believed in competition and, therefore, did not take that option. Second, we could have accepted our fate and resigned to being a small player in the market. This again was not acceptable to us. Third, we could have found out what these extraordinary MNCs did, learn from them and fight the battle on their turf. I am glad we chose the last option. Our analysis showed that employee attraction and retention generally depended on three factors—competitive compensation, good career growth and good workplace environment with modern technology. Thanks to liberalization, we could satisfy all three of these requirements. Since our revenue was low and we could not give competitive salaries, we created one of the world’s best Employee Stock Option Plans (ESOPs) and distributed over 35 per cent of our equity valued at over $15 billion today. This is large even by US standards. We created the country’s first and world’s second software campus with conference rooms, green lawns, libraries, shops, video-conferencing rooms, modern computing and communications technology, a cafeteria and comfortable commuting facilities. Our HR function created career growth paths for employees in every function—technical, sales and business-enabler. In an unaided recall survey among students of engineering schools in the country, our rating—which was zero in 1992—moved to 18 per cent, a full 7 per cent ahead of IBM and Unilever, by 1996. The rest, as they say, is history.
The fourth area of liberalization was in the capital markets. Till 1991, an officer called Controller of Capital Issues (CCI) sat in Delhi—which had a very small stock exchange—and decided on the pricing for the initial public offer (IPO) of companies. This officer was a generalist and had no idea what capital markets were. IPO pricing is all about the future prospects of a company—future revenue and future profits. Investors look at the net present value of the future cash flows and decide on the current value of the company. But this officer would be quite uneducated in the technicalities of capital markets and decide the IPO price based solely on past data. The result was very little enthusiasm among entrepreneurs to list their companies on stock exchanges since that would mean giving away a large part of their hard-earned equity to raise small sums. For example, when Infosys went to the CCI in 1990, we were allowed to list our shares (with a par value of Rs 10) at Rs 11. Dr Manmohan Singh realized the folly of this scheme and decided to abolish the office of CCI. He allowed the companies to fix the IPO price based on their future prospects, in consultation with specialized investment bankers. Infosys went public in 1993 with an IPO price of Rs 95.
Along with these major reforms that benefitted businesses—particularly those in the IT sector—N. Vittal, the then secretary of the Department of Electronics, pushed the envelope even further by establishing Software Technology Parks (STP) and decentralizing the decision-making of his department. STPs also provided satellite-based data communications to software-export companies so that these companies could connect their computers with customer computers, making it easy to develop and maintain software for customers. STPs also operated as the single window for interaction between software-export companies and the central government. An STP unit is a virtual concept so that each software company could create one on its own premises and derive all its benefits.
In short, these five areas of reforms and a host of others that followed have influenced Indian businesses in a number of ways. First, it enabled our business leaders to spend their time in focusing on customers and markets, and innovation and employees rather than spending their time lobbying in the corridors of Delhi. Second, it removed uncertainty in business decisions forced by bureaucratic delays and whims. In other words, post-reforms, businesses are much more in control of their own destiny than before. Today, there is no climate of helplessness in the boardrooms. The market is the primary determinant of success of companies. Third, reforms reduced the tyranny of rent-seeking and corruption to a large extent. Fourth, these policy changes made it easy for the entry of world-class multinational companies (MNCs). Since Infosys focused those days on global markets, such entry of MNCs did not have any impact on our customer acquisitions. However, over time, the competition for employees heated up. As a result, we had to improve our focus on attracting and retaining top-quality talent. Frankly, this focus on employee attraction and retention is a very important gift of reforms to my company.
The reforms of 1991 disproved the long-held Indian belief that any major policy change in democratic India requires long deliberations and cannot be implemented in a hurry. They also disproved several other myths that most bureaucrats had held for a long time: for example, most of my civil servant friends believed that the classical theories of economics did not hold good for a large developing country such as India. They believed that slackening the control on foreign-exchange outflows would lead to capital flight. They also believed that economic policy solutions that worked well for smaller East Asian countries would not work in India. The economic progress made by India since 1991 disproves all these myths.
Let me present some data to demonstrate the benefits of reforms on Infosys business. Between 1982 and 1992, the Infosys revenues grew from a paltry $1,30,000 to $1.5 million, a factor of just twelve on a small base over a period of ten years. However, after the reforms, our revenues have grown from $1.5 million in 1992 to nearly $10 billion in 2016, which is a factor of 6600 over a period of twenty-four years! Today, we are listed on the New York Stock Exchange (NYSE). We operate in thirty-nine countries and have over 1,70,000 employees belonging to ninety nationalities. We have created over 200 dollar-millionaires and about 20,000 rupee-millionaires through our employee stock-option plans. We have beaten every well-known MNC in India to be voted the best employer, the best-managed company, the best in corporate governance and the best in investor focus. No wonder we pride ourselves as a shining example of all the good things that came out of the economic reforms of 1991.
My own industry grew from a trifl
ing $100 million in revenue in 1992 to more than $100 billion last year. Prior to the reforms, the country had foreign-exchange reserves of just $600 million, barely sufficient for fifteen days of essential imports. The easing of controls has swelled that kitty to more than $350 billion today. Contrary to the popular belief that any slackening of foreign-exchange controls would deplete our reserves due to illegal capital flight, today, we see more and more Indian companies bringing in larger and larger hard-currency funds into the country through exports. Thanks to global investor interest in Indian companies, our businesses have raised their level of corporate governance. Thanks to the competition introduced by the entry of MNCs, Indian businesses have stepped up to the plate and demonstrated that they can compete with these world-class MNCs in customer, employee and investor focus.
What are the lessons from the reforms for us, the Indian businesses? There are many. The reforms showed that it is possible to run businesses legally and ethically in India; that it is possible to compete with the best MNCs and succeed; that it is possible to benchmark with the best global practices, improve on them, and create next practices; and that following the best practices of corporate governance will attract the best global investors and enhance our market capitalization.
What are the major lessons from the 1991 reforms for our politicians and bureaucrats? First, it showed that courage is the first attribute of a great leader. It showed that leaders who believe in the adage ‘a plausible impossibility is better than a convincing possibility’ can indeed achieve extraordinary results. Second, it demonstrated that even in an argumentative and noisy democracy like India, quick and decisive leadership is likely to get accepted better than the prolonged, vacillating and hesitant one. Third, the reforms proved that most of our fears and assumptions that led to the command-and-control economy were wrong. Finally, it reaffirmed that sound economic policies practised by developed nations do work even for a developing country like India.
The next set of reforms will have to focus on state-level issues such as introducing flexible labor policy, enhancing agricultural productivity, and improving physical infrastructure, the quality of basic and higher education, healthcare, nutrition and housing. Much has been written about them. I will not go into the details here.
What are the next set of reforms for my own industry—the software-services export industry? Innovation is the key to the success of this industry. Creating new technologies, creating new products for the global user community, and becoming creators of next practices will require innovation. Such innovation will only come from creating a mindset of proactive problem recognition and solving among our children and youth. Such a mindset requires that we revamp our education systems right from the primary level to help our children focus on understanding the nature around them using formal lessons taught in the class, to become curious, and to solve problems around us using what they learn in the classrooms when they enter higher levels of education. Such a transformation is possible only if the government becomes just a standard-setter for education rather than interfering in the affairs of running schools and education. It is somewhat strange that even after twenty-five years of irrefutable data on the benefits resulting from reforms to the industrial sector, we keep arguing about why government should continue to exercise control over education. The sooner the government moves from being a controller to a catalytic regulator of education (primary, secondary and higher education), the better it is for the country. There are umpteen examples of the benefits from such reforms in countries that have performed better than India in education.
In what way should the Indian software companies improve? The Indian software companies must invest more in R & D to generate new technologies and platforms. They must create organizational structures and invest sufficiently to develop products. If we have to create globally usable products, then the requirements specification and user interface of these products must be defined in the most developed markets with the design and programming work done in India. Given that advances in technology are rapid, we have to invest heavily in continuous training, starting from the entry level.
Becoming a product company requires that Indian companies invest heavily in creating global brands. A brand is a trust mark. If Indian companies have to create highly impactful and mission-critical products like SAP has done, then we have to raise the trust of our prospects in us. That is why branding becomes very important.
One area where Indian companies have lagged seriously is in becoming multicultural organizations. I do not know of any globally successful large corporation that is not multicultural. Diversity is very important to enhance innovation. The extreme dependence of Indian software companies on H1-B and L1 types of visas to recruit only Indians does not augur well for the future of Indian companies. Similarly, the Indian software industry is at an early stage in gender diversity, particularly at the senior levels. This has to be corrected with a sense of alacrity.
The current per capita revenue productivity of Indian companies, at around $60,000 (including the productivity component abroad—also called on-site rates), is low and has to be improved if we want to recruit talent from developed nations, invest in R & D, training and branding. Such a transformation from being reactive techies to consultants who can provide and enhance business value addition requires better revenue productivity. In fact, our smartness lies in demonstrating business-value leverage that we can bring to the table.
While the initial set of reforms has helped the country improve the lives of middle- and upper middle-class Indians, it has not impacted the poor significantly. We have the largest mass of illiterates in the world. Our agricultural growth rate has come down from 3.2 per cent prior to 1991 to about 2 per cent today. Thus, our villagers have not seen any benefit from the reforms and globalization. The disparity is increasing. While the number of billionaires in India is growing rapidly, the poor are getting poorer. The buzzword today is ‘inclusive growth’. Inclusive growth is about extending the benefits of reforms to the vast majority of Indians who are poor. The hope is that our prime minister is a firm believer in inclusive growth.
I believe lessons from the 1991 reforms can be used to bring inclusive growth in our society if we understand what the poor want. It is instructive to ponder on the difference in lifestyles of the middle class and the elite in India on one side, and the poor in India on the other. The starkest difference is that the middle class and the elite have very little interface with the government. They mostly use services and facilities—schools, colleges, hospitals, banks and shops—in the private sector, while the poor depend on the government for these services.
Since the rich and the powerful citizens in India do not use any of the government services except where there is no alternative, these services have remained inefficient and unaccountable. Hence, inclusive growth requires that we do one of two things: keep government services away even from the poor, or bring efficiency, transparency and accountability to government services in India. I believe that neither is an easy task, given the various sociopolitical decisions we have taken in the last seventy years. Hence, we have to devise a hybrid mechanism of privatizing some of these services while improving efficiency, transparency and accountability in those services that cannot be privatized. Nothing short of this will achieve much inclusivity.
I am an optimist, and I believe that the Indian political leadership, both at the Centre and the state levels, will make these changes happen and make India convert its potential to reality.
Notes
Foreword
1. Dennis Kux, Estranged Democracies: India and the United States (New Delhi: Sage Publications, 1994).
2. Khrushchev Remembers was published by Little, Brown in 1970, and the posthumous sequel Khrushchev Remembers: The Last Testament appeared in 1974, shortly before the Kissinger trip. I was not allowed back into the USSR for the following six years.
3. Gary Bass, The Blood Telegram: Nixon, Kissinge
r, and a Forgotten Genocide (New York: Alfred A. Knopf, 2013).
4. I have told the story of the strategic dialogue in Engaging India: Diplomacy, Democracy, and the Bomb (Washington, D.C., Brookings Institution Press, 2004), also published by Viking/Penguin, New Delhi.
5. See Lewis’s own book, Quiet Crisis in India—Economic Development and American Policy (1962); Alan Berg and Robert J. Muscat, The Nutrition Factor: Its Role in National Development (1973); and Fred H. Sanderson and Shyamal Roy, Food Trends and Prospects in India (1979).
6. The Schaffers’ latest book, published this year by the Brookings Institution Press, India at the Global High Table, is an integrated analysis of India’s global vision, its foreign policy, and the negotiating practices that link the two.
Introduction
1. Shankkar Aiyar, Accidental India: A History of the Nation’s Passage through Crisis and Change (New Delhi: Aleph Book Company, 2012); Jairam Ramesh, To the Brink and Back: India’s 1991 Story (New Delhi: Rupa Publications, 2015); Vinay Sitapati, Half-Lion: How P.V. Narasimha Rao Transformed India (Gurgaon: Penguin Random House, 2016); Sanjaya Baru, 1991: How P.V. Narasimha Rao Made History (New Delhi: Aleph Book Company, 2016).
