Business Today Latest Issue August 24, 2008 COVER STORY Prahalad’s plan August 6, 2008 As the celebrations of India

@60 wind down and as the national attention is consumed with problems of the moment—price of energy, inflation, debt relief to farmers, political realignment in the states—it is hard to focus attention on the future of India. The urgent is likely to drive out the important. Moreover, it is easy to get carried away by growth statistics of the past five years and feel “we have arrived”. C.K. Prahalad Leadership, however, is about the future, about hope and change. Leaders must elevate the national debate and focus on the potential of India. A shared view of India@75, for example, can provide a framework for building a multistakeholder consensus and making choices that are directionally consistent with that goal. Unless we are clear about the potential, it is very difficult to undertake an arduous journey. I believe that India has the potential to actively participate in shaping the emerging world order. This demands that India must acquire enough economic strength, technological vitality and moral leadership to do so. Just economic strength and technological maturity is not enough. We know that the Soviet Union and Nazi Germany had economic and technological muscle. They failed. Morality is an integral part of leadership. We should emphasise all three dimensions, in equal measure, in India‟s march to Her destiny. The potential of India Let us imagine the potential of India without constraining ourselves by the record of India during the first 60 years of independence. In an important sense, India got her second freedom.the freedom to grow only during the early 1990s. Let us also not constrain our thinking by the problems of the present. Let us first imagine this future. India turns its population into a distinct advantage. India has the potential to build a base of 200 million college graduates—a portfolio of educated people in every discipline. This is just 16 per cent of India‟s population. Further, I would like to see 500 million certified and skilled technicians. Implicit in this future is universal literacy. This is possible in 15 years, if leaders focus on this goal as a priority. Think about what this means. India will have the largest pool of technically-trained manpower anywhere in the world. This must be the starting point for global leadership. If India fails in its educational mission, the rest of my vision for India cannot be realised.

India‟s strength: The country‟s demographic advantage can be turned into a competitive advantage India must become the home for at least 30 of the Fortune 100 firms. I know this is an audacious goal but it is possible. India accounts for 10 per cent of global trade. India can. We have to change our mindset. In fact, Indians took a lot of pride when India was not affected by the 1997 Asian crisis. I said, at that time, that it is a sad commentary because if India was connected with the rest of the world, she would have felt the impact of the crisis. India must become connected with the rest of the world—a critical step in influencing others and, more importantly, the basis for learning from others. India becomes a source of global innovations—new businesses, new technologies and new business models. The early evidence is already in. Increasingly, India is becoming home for new business models—very low capital intensity, extremely low fixed costs, and conversion of fixed costs into variable costs (as in the case of Airtel). The bottom of the pyramid, the 800 million Indians, can become a major source of breakthrough nnovations. India needs to focus on the flowering of arts, science, and literature. Why can‟t India have 10 Nobel prize winners? I want to add that it would be all the better if it was for the work done in India—not just Indians getting the Nobel Prize for the work done elsewhere. India becomes the world‟s benchmark on how to leverage diversity. It becomes a benchmark for the practice of universality and inclusiveness. India has the opportunity as she is home to all the major religions, 15 major languages and hundreds of dialects, and a complex range of cultures, food habits and rituals—all the diversity one can hope for. If India is not the laboratory to practice diversity and inclusiveness, nobody else is. India is the laboratory to the world. India‟s manufacturing prowess: Cars manufactured in India are getting shipped out from a port One could add to the list. The six big opportunities that I have identified, when accomplished would significantly improve the quality of life of all Indians; it will also change the influence of India around the world. India has the potential. If this potential intrigues you, then we can move on to the next interesting question: How do we realise this potential? What are the principles we have to start with? Can we do this? I would agree that the goals for India@75 are very ambitious. Therefore, it is easy to dismiss them as impractical. Yet, consider India‟s struggle for freedom. In 1929, when Congress declared Poorna Swaraj as the goal, did it seem likely? Could anyone at that time have articulated the details of how it can be accomplished? The key was that it was a worthy goal. All Indians could relate to it. But the means had to be discovered. If one had applied the test of

availability of resources and the record of the previous two hundred years of British ascendency, including the results of the first War of Independence in 1857, the goal would have looked impractical. The successes of India in food production—the Green revolution, the White (milk) revolution— and the development of space technology are all worthy of note. The Club of Rome in their Limits to Growth predicted that “catastrophic” food shortages in India and Africa may turn into “apocalyptic” famines by 2010. The green revolution made India self-sufficient in food. Underinvestment in agriculture for over a decade has resulted in current food problems all of which are reversible. India today is the largest producer of raw milk. Did anyone believe in 1980s that India would be a credible player in space and launch 11 satellites simultaneously? India‟s low-cost engineering wonder: Ratan Tata at the launch of the Nano Let us look at India‟s gains during the last 15 years. I can relate to these changes at a very personal level. When in 1994, I suggested to a select group of CEOs that they must build multinational firms from India (Indian MNCs) rather than be paralysed by the entry of multinationals in the Indian market, it looked far fetched. Very few, if any Indian, CEOs thought it was possible at that time. Today, Indian MNCs are a reality. Similarly, 10 per cent growth and 10 million new jobs per year (10/10 programme) looked impossible in 2000. The idea was ridiculed. One was reminded of the traditional Hindu rate of growth of 3-5 per cent. But India is growing at close to10 per cent; some states are growing at 15 per cent plus. India is yet to generate 10 million new jobs a year. But that can happen if we put our mind to it. The poor of India were seen as a burden. Converting the poor into micro-consumers and microproducers—recognising the fortune at the bottom of the pyramid—has changed the character of the economy. Yes, there are still 200 million Indians who live in abject poverty. But the cell phone revolution, two-wheelers, consumer finance, and consumer goods of all kinds are fuelling the economy and changing peoples‟ lives. Cell phones have shown that there is a huge untapped market. Amul, ITC eChoupal, Jaipur rugs, EID Parry and Reliance Fresh are showing us that we can creatively connect subsistence farmers to regional and national markets. Microproducers can get a chance to improve their livelihoods. It was just 10 years ago that most managers and politicians had declared manufacturing in India as a dead end. “We have no hope against China” they said. Today, manufacturing is alive and well and growing rapidly. India is becoming a manufacturing hub. Exports of manufactured goods are at $91 billion (Apr. ‟07-Feb. ‟08) and growing at more than 15 per cent. Others are taking note. Investments by Hyundai, Nissan, Ford, and Nokia are a small indication that not just Indians but others also believe that India can build excellence in manufacturing. India was not known for its quality. Today, many Indian firms have demonstrated that they do not lag behind anyone in quality—be it in software development, manufacturing fine chemicals for pharmaceutical industry or in automotive component manufacturing.

These examples of extraordinary accomplishments suggest that India can change its developmental trajectory. These accomplishments also allow us to extract principles behind these accomplishments against all odds and conventional wisdom. What are the principles of “game changing accomplishments”? 1. Focus on the future and not on the past, or on the trajectory of the past: Building Indian MNCs or developing private sector solutions to alleviate poverty are clear departures from the past. Decide on the desired outcome, put a stake in the ground and then develop the means to get there. Start with a clear goal and focus on discovering the means. We don‟t have to know the details of “how to” before we commit to these goals. It is enough if we can identify key milestones. This process is not about becoming more efficient but becoming different. 2. Aspirations must exceed resources: Entrepreneurship and innovation are the key elements behind every one of the accomplishments described above. The goals must, by design, exceed resources. This mismatch, by design, is at the heart of innovation. Therefore, the often-asked question: do we have the resources that are inappropriate? The questions should be: how do we accumulate resources rapidly? How do we learn at low cost? How do we leverage available resources? And most importantly, how do we change the game to our favour? 3. Imagination is more important than analysis: We tend to analyse and often use past data to justify future direction. But imagination is about amplifying weak signals, connecting the dots, and seeing a new pattern of opportunity emerge. We have to imagine a new India; India@75 that is not just continuation of the developmental path that got us to India@60. What data analysis could have led us to believe that India could boast of MNCs or that we would have 300 million cell phone users? India has one further advantage. All the problems that India faces—in primary health, education, farming, water, pollution, corruption, or in infrastructure— are very well researched and documented. India can, therefore, focus on finding creative solutions. We have to move away from, “We have all these problems and, therefore, we can‟t accomplish these stretch goals” to a mindset that says, “We know all our problems, therefore, we can solve them”. The socio-political context for innovation Nobody starts with a clean sheet of paper. Neither does India. The innovations that are required for reaching the potential of India@75 must be undertaken within the socio-political system that exists today. We have to isolate the critical principles that define the context and to which we can all subscribe. We must then embrace them as constraints within which we have to operate. Innovation, in India‟s development, must be “innovation within broad constraints”. Let us understand what these are: India‟s focus should be on inclusive growth 1. Not poverty but inequality: Rapid economic development can get people out of abject poverty fast. However, the economic benefits of rapid growth are spread unevenly. The educated IT workers get the benefits of rapid growth. However, the uneducated— rural and

urban—may not participate equally in the benefits of growth in the short term. Inequality of opportunity, incomes, and social and economic mobility is a consequence. Inequalities can create social tensions. Therefore, the first constraint that development must take into account is the need to moderate inequalities. Inclusive growth should not just be a slogan but an important operating principle for entrepreneurs, politicians and bureaucrats. 2. Changing the price-performance envelope: Inclusive growth requires that we pay attention to building awareness of products and services, creating access for all, ensuring affordability, and continuous availability. The 4As of emerging consumer markets is fundamental to building the economic strength of a country such as India. This means that western models do not easily fit with the needs of Indian markets; especially as we focus on straddling the economic pyramid. The challenge is to build “world class products and services” at a new price-performance level (new value equation) that has never been tried before by established MNCs. India has a very large number of examples—$30 cataract surgery (Aravind Eye hospital), $2,500 car (Tata Nano), $0.01 cell phone minute (Airtel), $0.01 shampoo in a sachet (Hindustan Unilever), or $25 micro loans. Many such experiments demonstrate that we can straddle the pyramid and that this can be done commercially. We can “do good and do well”. This approach and mindset is critical to converting India‟s demographic liability (large and poor population) into a demographic dividend. Micro-producers and micro-consumers that can fuel the economy cannot be built unless we build business models that dramatically alter the price-performance equation. Its burgeoning middle class augurs well 3. Universal access to high technology solutions: Focus on reducing inequality and making participation universal by straddling the pyramid requires that we focus on high technology solutions. Whether it is biotechnology to improve the productivity of subsistence farmers, or helping rural poor get world class healthcare through telemedicine, or improving the farm-city logistics with RFID tags and advanced IT systems, a critical ingredient is to harness the benefits of modern technology. We must start with the view that India should not replicate the development process of the West or China. India must leapfrog. Simply stated: avoid land lines, go wireless; avoid paper ballots, go electronic; avoid bank branches, go mobile and digital. We already have experienced the ability of technology to make progress inclusive. 4. Economic growth and ecological vitality: Imagine a billion people consuming products and services at a minimum level of quality—be it milk, fruits and vegetables, or fish. Similarly, a billion people living in homes with electricity, sewage system, TVs, and hopefully PCs and other such devices. A billion people who move around. The production and consumption of an economy of this magnitude will put enormous pressures on all ecosystems— water, waste management, pollution and resource use. Ecological vitality is already being compromised— be it deforestation, pollution of waterways and rivers and cities. Innovations are required to provide this economic growth and at the same time avoid harming the environment beyond repair. Alternate sources of energy, new modes of transportation, building of hundreds of selfcontained cities to cope with rural-urban migration, better traffic management and healthcare will all be needed. Ecological issues will be of paramount importance. Ecological sensitivity is

needed in conjunction with increasing consumption and production. It should not be “either-or”; it must be rapid economic growth and ecological stewardship. Agriculture should become more productive 5. Focus on governance: India as a country has deteriorated in its governance capabilities. Corruption is endemic. An analysis of data from 175 countries around the world comparing per capita income (World Bank), human development index (UNDP) and corruption index (Transparency International) confirms our intuition. There is a very high degree of correlation between income, corruption and human development. Simply stated: a) No country that does not develop its people is rich; b) No country that is corrupt is rich; c) No country that is corrupt develops its human capital. This should give us a cause for concern. India is at the low end of all these three measures; in per capita income, 117 among 177 countries (in Human Development Report 2007/2008), 128 in human development among 177 countries (in Human Development Report 2007/2008) and ranks 72 among 180 nations in corruption (as per Transparency International‟s report). No major country occupies this undesirable position. We can estimate the cost of corruption to the economy—delays, poor quality, underdeveloped infrastructure, misallocation of resources, low productivity of public services— in the region of purchasing power parity of $10-15 trillion. The country cannot afford to pay this price. Constrained innovation We have to start with the potential of India. India@75 is a perspective on the potential. It denotes a level of economic, social and intellectual vitality that is a quantum jump from where India is today and where the current trajectory will take us. That requires a “quantum jump”—in our ambitions, capabilities, and capacity to innovate. Secondly, this calls for a quiet confidence in the indigenous capacity to “leapfrog” current best practices and create next practices; to turn conventional wisdom on its head. Then we have to focus on the socio-political context within which we have to innovate. I like to think of the constraints outlined above as “non-negotiable”. We cannot ruin the environment, and neither can we tolerate poor governance that slows the country down. Inequalities are unacceptable. We have assumed, implicitly, that if we have to straddle the pyramid, by definition Indian firms must achieve global scale. The same is implied in suggesting that India will be home to 30 of the Fortune 100 firms. We have also assumed that we will primarily use market mechanisms—transparency, the rule of law, and recognition of the true economic costs of all activities. Government‟s primary role is regulating economic activities and providing good governance. We can, therefore, visually capture the opportunity in the form of a sandbox: As

long as our march to India@75 is based on innovations within these constraints, we would have built a fundamentally new model of development on a scale never before witnessed. It would also be an alternative to the much-touted “Chinese model”. Conclusion India stands at an inflection point. The last 15 years have given India the confidence that it can “play in the major league”. India must put its development on a different trajectory. India@75 is an approach to this very desirable end. India can do this if we start with imagination, courage, passion, empathy for fellow Indians across the socio-economic spectrum and humility. Analysis of the past will not get us there. India has the opportunity to build a socially equitable, diverse culture that can be the beacon to the whole world. This is the opportunity. At midnight on August 15, 1947, Jawaharlal Nehru asked the members of the Constituent Assembly to take a pledge: “At this solemn moment when the people of India, through suffering and sacrifice, have secured freedom, I—a member of the Constituent Assembly of India, do dedicate myself in all humility to the service of India and her people to the end that this ancient land attain her rightful place in the world and make her full and willing contribution to the promotion of world peace and the welfare of mankind.” Let us imagine a billion people taking this pledge. India@75 will be a reality. Prof. C.K. Prahalad is the Paul and Ruth McCracken Distinguished University Professor at the Ross School of Business, University of Michigan, and author of several path-breaking books, most recent of which is entitled the New Age of Innovation and is co-authored with colleague M.S. Krishnan

An India that's home to 30 of Fortune 100 companies, the world‟s largest pool of technicallytrained manpower, and Nobel Prize winners in arts, science and literature? That‟s management guru C.K. Prahalad‟s dream for India@75, and he‟s got a plan how to get there. A Business Today exclusive. How to build 30 of the Fortune 100 companies out of India The statistics is disheartening. Of the Fortune 500 companies, just seven are Indian. There isn‟t a single Indian company in the top 100. The highest ranked Indian company is a state-owned enterprise, IndianOil Corporation, which comes in at the 116th position. The highest ranked Indian private entity is Reliance Industries at #206. In comparison, the number of American companies in the top 500 is 153; even China boasts of 29 home-grown entities that made the final cut last year. So, the idea of creating 30 Fortune 100 companies by 2022 is daunting if not out right fantastic. But industry leaders and watchers believe it‟s possible and probable, provided India Inc. does a few things right. “The language for the 21st century is global and India Inc.‟s new leaders will have to master its vocabulary,” Reliance Industries Chairman and Managing Director Mukesh

Ambani told BT earlier this year. “Global ambition needs to be an essential ingredient in a globalised market place,” Sunil Bharti Mittal, Chairman and Managing Director, Bharti Group, told BT recently. But before Indian companies become big globally, they must become big at home. “It‟s a question of getting scale at home and then aiming to replicate that scale globally,” says Russell Parera, CEO, KPMG India. “For that we need to increase the depth of talent and management bandwidth in the country,” he adds. Parera believes that India needs what he calls soft infrastructure, and education is the key to that. So, which are the sectors that could produce India‟s global giants? “The financial services sector has the potential to create such companies. Some of the PSUs with deep pockets also are capable of making it,” contends Parera. Dinesh Thakkar, Chairman and Managing Director, Angel Broking, believes that any industry that harnesses India‟s human resources is capable of producing giants. “R&D-based industries such as pharma and biotech can create such companies.” How to create a trained workforce of 700 million people India @60, growing at over 9 per cent, has missed not just scientists and engineers in the last couple of years. It has equally acutely felt the shortage of trained drivers, masons, carpenters, electricians and the like. Tech entrepreneur Vivek Wadhwa, a Wertheim Fellow at Harvard Law School and executive-in-residence at Duke University who closely tracks the results of the Indian education system, believes that at present it is India‟s unique surrogate education system that is making up for the deficiencies of the public education system. “All of the amazing success India has achieved has been with less than 10 per cent of its population—those that received satisfactory (not great) education. Imagine what could be achieved if India increased this to 30 per cent or 50 per cent or 90 per cent? It would unleash the massive potential of its population,” says Wadhwa. The National Knowledge Commission (NKC), headed by Sam Pitroda, has given out detailed recommendations to fix areas ranging from libraries, vocational education to higher education to banish the talent crunch. For Prahalad‟s vision of 200 million college graduates and 500 million certified and skilled technicians to come true, it is imperative that the education pipeline gets strengthened at the base. Here the NKC very succinctly puts forth the case for school education: “more resources, more decentralisation and more flexibility.” Fixing this end of the pipeline can provide a booster shot to the economy in the long term. At 3.8 per cent of GDP (around $8.6 billion this year), public spend on education is not just inadequate, but also mostly inefficient. Though the government promises to increase this to 6 per cent of GDP by 2012, the private sector will have to invest a lot more aggressively into education and training. A recent report pegged the market for private initiatives at a whopping $40 billion at present, and growing. Unsurprisingly, while school education (kindergarten to class 12) constitutes half of this opportunity, vocational education, too, forms a significant chunk—more than $1 billion already.

Adi Godrej, Chairman, Godrej Group prescribes the solution: “There is a shortage of all kinds of people in India except for the totally uneducated. The education sector should be completely opened up, and there should be an independent regulator for the sector.” How to get a 10% share of global trade A resurgent India is slowly, but surely, making its presence felt in global trade. Since 2004, its share in world trade has gone up significantly. According to World Trade Organisation (WTO) statistics, India‟s share in total world trade (which includes trade in both merchandise and services sector) has gone up from just over 1 per cent in 2004 to 1.5 per cent in 2006. And it‟s estimated that India‟s share may well double from its 2004 level to cross 2 per cent by 2009. Much of this impressive performance has been due to robust growth in exports. In 2004, exports stood at a little over $63 billion. In 2007-08, exports topped $155 billion. India‟s total merchandise trade—exports and imports together—will be almost $400 billion this past year, accounting for 1.2 per cent of world trade. If the trade in services is added to this, India‟s trade with the world would touch $525 billion. Enthused by past performance, Commerce Minister Kamal Nath has set a target of 5 per cent share of the world trade by 2020. Says Nath in his foreword to the “Foreign Trade Policy 200809”: “Considering that world trade is itself increasing, this would translate into an eight-fold increase in absolute terms. Ambitious the target may be, but achieving it is not impossible”. Given this backdrop, Prahalad‟s vision of a 10 per cent share (almost double the government‟s projections) of global trade for India by 2022 is ambitious, but possible. Experts feel we can get there but it would require path-breaking initiative by the government. Says Subir Gokarn, Chief Economist, Standard & Poor‟s Asia Pacific: “There would be a rising tide effect. We are one of the fastest growing economies in the world and that is likely to increase our share of the global trade as well. But if we are to touch 10 per cent then we‟ll need both policy and administrative reforms.” Infrastructure and labour reforms top the agenda. “Labour laws are a huge deterrent to investment in large scale operations by entrepreneurs, and that affects our competitiveness compared to countries like China,” says Gokarn. Poor infrastructure blunts the edge as well. Factories have to grapple with power outages, substandard road networks and congested, primitive ports. Says Ajay Sahai, Director General, Federation of Indian Export Organisations: “Availability of cheap and continuous power is the biggest stumbling block.” The problems are well known. What India needs is imaginative solutions. How to make India a source of global innovations Spread across 50 acres in Whitefield, Bangalore, GE‟s John F. Welch Technology Centre is seen as a beacon of high-end innovation in India. Over 3,500 employees at the centre have filed nearly 700 patents as the centre has evolved into the most publicised success of industrial

innovation in India. “Indian engineers have made many breakthrough innovations for us and this is reflected in our rapid growth,” says Guillermo Wille, Managing Director of JFWTC. At the opposite end of the spectrum, a raft of mostly anonymous innovators across the informal sector has devised as many as 75,000 innovations, 80 per cent of them in the last eight years, according to Anil K. Gupta, Executive Vice Chair of the National Innovation Foundation. Despite this impressive growth, critics argue that India has done little to market its skill in this field. According to statistics from a World Bank report, just over a tenth of all funding received in India is seed or early-stage investment. Experts blame a lopsided education system for this statistic. “There is too much conformity within the education system, and to attempt innovation is considered a crime,” says Gupta. Others such as Rajiv Narang, Managing Director of Erehwon Consulting, a Bangalore-based innovation consultancy, argue that India needs to make the transition from incremental to breakthrough innovation in the market—like Tata Motors appears to have done with its ultra lowcost car, Nano. Also needed is closer interaction between industry and academia. “Half my students who‟ve obtained PhDs have been absorbed by industry,” says Shrinivas Kulkarni, MacArthur Professor of Astronomy and Planetary Science and director of Caltech Optical Observatories, California Institute of Technology. That‟s, of course, in the US, where risk-taking is rewarded and innovation fetches a huge premium. India needs innovation-hungry employers and market, too. How to spawn nobel prize winners Every year in September and early October, innovators around the world go agog with anticipation. That‟s when Sweden-based Nobel Foundation announces the winners of the Nobel Prize in six disciplines, comprising physics, chemistry, peace, economics, medicine and literature. In India, though, not many researchers await the announcement with bated breath. Reason: As always, the prize will bypass India as there are no strong contenders in any field. Ever since the prize was instituted in 1895, only four Indians have won the prize after India‟s independence— Amartya Kumar Sen, Subrahmanyan Chandrasekhar, Mother Teresa and Har Gobind Khorana. That‟s unfortunate for a country that has a billion-plus people. “In India, the amount being spent on R&D is much lower than in any other developed country,” says Samir Brahmachari, Director General, CSIR. “The country also lacks in providing the right kind of environment to foster innovation and application of the discovery for great scientific or social significance, a prerequisite for winning the Nobel Prize.” Despite the constraints, can India produce Nobel Prize winners? Yes, says R.A. Mashelkar, Brahmachari‟s predecessor. “Indians can always argue that we do not win the Nobel because our investment levels are low, but what actually matters is how we can make people think out of the box,” contends Mashelkar. Thought leadership, and not just scientific innovation, will happen when India starts educating its people differently. “Despite its importance, innovation is severely neglected in many educational

systems. We find it astonishing that things like „innovation‟ and „creativity‟ simply do not exist in our schools,” says Brahmachari. Adds Mashelkar: “Indian scientists and institutions are risk averse. We must take risks. We must be more tolerant of failures.” Most importantly, research must get lucrative enough to spur innovation.

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