Potential vs politics: can India rise above to become a powerhouse?

So here are some staggering statistics:

By 2030 India’s urban population will reach 590 million. That’s almost twice the entire population of the United States. The number of urban middle-class households will rise by over 300% to 91 million and the working-age population will increase by 270 million people. What’s more, in order to meet forecast demand from India’s cities, US$1.2 trillion of capital investment is required.

India has made some spectacular progress.

According to the World Bank, from 2005 to 2012, poverty declined by 2.2% per year, seeing 137 million individuals lifted out of poverty and the country’s poverty rate fall from 37% to 22%. Even better, the country’s poorest 40% are increasingly participating in the fruits of economic growth.

Investors and corporations, too, have profited. An index of 50 Indian companies (nicknamed the Nifty Index — National Index for Fifty) has risen 140% over the last 10 years. Nevertheless, as you can see from the graph below, the index has been on the downtrend since the end of 2010.

A downward trend

There are a number of reasons for this. India’s GDP has been contracting, and just this year the Indian Rupee has depreciated 14% against the US Dollar. Furthermore, business confidence has declined to the worst level in four years according to the HSBC Purchasing Manager’s Index.

With so much growth potential, increasing household wealth and consumer demand, what is holding India back?

A Game of Thrones

Well, politics, for one. India’s political arena is convoluted to say the least, and this has, I would argue, significantly hampered its economic potential. Award-winning journalist and editor-in-chief of The Indian Express, Shekhar Gupta, has, throughout his career, made some poignant observations about his home country’s government. He calls it “an every-man-for-himself government…of at least a dozen prime ministers, where any minister with a mind of his own can do his own thing.”

In theory, political authority in India is supposed to be concentrated in the Centre (Delhi) and streamlined down across various states and union territories, of which there are 35. Within these jurisdictions there are 40 active political parties, with each state having its favoured party and thus each party motivated by different social, economic, cultural and religious objectives designed to appease its supporters. The one thing they all have in common is a desire to be the Centre’s ruling party. So think Game of Thrones give or take another 30 contenders for the top-spot at King’s Landing and replace the superfluous bloodshed with lots and lots of red tape — and you get an idea of the Indian political structure.

India’s political tug-of-war has filtered down into the every-day feasibility of running a business in the form of over-bearing bureaucratic restrictions and out-dated policies. The World Bank has found that the greatest obstacles faced by small businesses in India stem from copious red tape. For example, they are “subject to largely outdated personal bankruptcy laws” which result in their inability to reach stages of solvency. Excessive compliance procedures is another example. Small businesses can be subject to up to thirty central, state and municipal clearances, which are both costly and time consuming for entrepreneurs. In fact, compliance procedures have proven so arduous that they have incentivised firms to remain smaller than their potential so as to avoid “repeated and unpredictable [compliance] visits”. The list goes on.

Entrepreneurs, where do you go my lovely?

And yet, this is the country that is launching two new startups every single day!

What’s more, the entrepreneurial Indian population is overcoming deep-set cultural obstacles of status and class. Shekhar talks of the rise of the HMT (Hindi Medium Type), the “new, small-town, modestly brought up but ambitious, hard as nails Indian” whose aspirations for education and success have seen India’s entrepreneurial engine shift gears from “upper-crust” snobbery to a sought after meritocracy.

Shekhar attributes this shift, though, to forces beyond India. The rise of the HMT, he argues, is a product of the “free market, globalisation of our minds, worldwide competition and worldwide opportunity, access to the finest universities, the best employers in the world who do not care which school you went to as long as your SAT scores were better than that of the others. Nor who your father or uncle was.”

So India is creating entrepreneurs, but is it keeping them?

Already we have seen large Indian corporations such as Tata, Mahindra and Birla moving their investments out of their home country, and over the last ten years there has been a 256% increase in the number of Indian students moving abroad.

With a fractured and hyper-factionalized “democracy” in place, over-bearing bureaucratic burdens on entrepreneurs, and ebbing foreign direct investment, I wouldn’t be surprised if much of India’s top talent is moving abroad. Indeed, an incredible 14% of Silicon Valley startups are founded by Indian immigrants. Imagine if they had the resources, infrastructure, support and clearance to realise their visions back home!

But there may be some light at the end of this tunnel. The World Bank is forecasting a recovery in Indian GDP, (up 4.7% in 2014 and an impressive 6.2% the year after) and foreign direct investment should follow. More importantly, perhaps, is that the recent downtrend in India’s economy has hopefully provided its government with an incentive to bolster reforms.

Authorities have already put forward a few significant initiatives aimed at strengthening the business environment (by tackling corrupt business practices through enforced transparency and corporate accountability) and attracting more foreign direct investment (by raising the ceiling on maximum FDI for various sectors).

The opportunity for making business practices more tenable for local entrepreneurs is also rife, as this will go hand-in-hand with remodelling the Indian economy as a business- and investor-friendly environment.

India’s potential is there in abundance, but success will come down to top-level execution, and for that we can only hope.