Businessmen like Rao are faced with immense new opportunities—and familiar obstacles—as India's economy enters a critical period in which it could achieve a China-like breakout or stall once again. India's gross domestic product (GDP) soared 8.4% on an annualized basis in the July-to-September quarter—its best performance in nearly a decade. In the fiscal year ending in March, growth is expected to surpass 7%, making India the second-fastest-growing economy in Asia (after China). The Bombay stock exchange shot up by 73% in 2003, and tens of thousands of Indians joined the middle class, boosted by better-paying jobs in sectors such as India's $2.3 billion outsourcing industry. "There is a new sense of confidence in India about India," exults Jaswant Singh, the country's Finance Minister. "India's economy is fast approaching a point of criticality, and when that criticality takes place, India's growth will be explosive." Already, this feel-good mood has triggered widespread speculation that Prime Minister Atal Bihari Vajpayee's government could call elections as early as April, five months ahead of schedule. The government has even launched an advertising campaign that highlights the economy's strong performance and boasts: "You've never had a better time to shine brighter."
Vajpayee's government—which last month scored a sweeping victory in assembly elections in three states, with the campaign slogan "Bijli, Sadak, Pani" (electricity, roads, water)—is intensifying reform efforts that have been on again, off again since 1991. Last year, India's Supreme Court stunned investors when it derailed the government's attempt to sell stakes in two state-owned oil refineries. Undaunted, the government has set a target of raising $2.9 billion by March 31 by selling state-owned assets, including $2.5 billion through the sale of 10% of Oil and Natural Gas Corp., the country's largest refiner.
Privatization is key to attracting much-needed money from abroad. "There still isn't a level playing field for foreigners," says U.R. Bhat of J.P. Morgan India. Although foreign investors are pouring cash into the stock market, they've stayed away from long-term investments in India's factories, power plants and roads, deterred by the country's history of red tape and corruption, and by restrictions that prevent foreigners from holding controlling stakes in key industries. In 2002, India received $4.7 billion in foreign direct investment—a fraction of the $52.7 billion that foreigners poured into China. "The government is not moving fast enough on reforms—especially on the divestiture front," says Mark Mobius, a mutual-fund manager for American investment company Franklin Templeton.
Although India's great advantage in the global marketplace is its large pool of low-wage, educated, English-speaking university graduates, the nation's creaky infrastructure reduces its competitive edge by raising costs for entrepreneurs. Vikram Talwar, who heads ExlService, a Delhi-based outsourcing company that handles calls and processes forms for American credit-card and insurance companies, says his telecom costs are three times higher than they would be in a country like Thailand. India's backward public-transportation system means he has to hire cars to take his employees home at night, which adds another 3% to 5% to his annual expenses. And India's electrical grid is so unreliable that most manufacturing companies have to produce their own power by purchasing generators and the fuel to run them. The cost of electricity for Indian tech companies is twice as high as it is for their Thai or Indonesian counterparts. "Over a period, we are eroding our competitive advantage," says Raman Roy, managing director of Wipro Spectramind, one of India's leading call-center operators.
Still, signs of progress are everywhere. The once-dysfunctional phone system, for example, has become far more efficient since the telecommunications sector began opening up to private competition in the 1990s. The quality of roads has improved, thanks to an ambitious "golden quadrilateral" highway-building scheme that is connecting India's four largest cities. The government has also been setting up Special Economic Zones, havens that offer speedier regulatory approvals, low taxes, guaranteed power—and shelter from socialist-era labor laws that require a company with more than 100 employees to get government permission to lay off workers.
If some of India's problems are being addressed, others are getting worse. Although politicians have been promising for a decade to rein in the government's free-spending habits, the country's finances continue to deteriorate. Due to high agricultural subsidies, losses incurred by state-owned enterprises and an oversized bureaucracy, India's fiscal deficit has expanded alarmingly; the combined state- and central-government deficits have grown from 7.6% of GDP in 1996 to nearly 10% this year. The Indian government's rising deficits "are not sustainable," warns Takahira Ogawa of Standard & Poor's rating agency. Although interest rates are at a three-decade low, the government's debt is so large that interest payments eat away nearly half of revenues, leaving less money to spend on roads and power generation.
Finance Minister Singh points out that India's Parliament passed a new fiscal-responsibility act that directs the government to trim its expenditure each year so that by 2008 it will spend no more than it receives in revenues. "We're moving in the right direction," he says. Singh is also moving to fix the country's tax system, which suffers from loopholes and evasion. This year, the government plans to introduce a single, uniform value-added tax to replace India's jumble of state and local sales taxes; economists expect the new tax regime will widen the government's revenue base and make life easier for India's businessmen.
With national elections possibly looming in the spring, some international observers worry that surprises at the polls could produce a coalition government without the political will to curb the deficit, fix taxation and continue with the privatization program. Singh, however, asserts that India's reform process is now irreversible—regardless of the elections' outcome. "There are certain ideas which become the dominant themes of the time," he says. "Growth, progress, development, equitable distribution—is today's idea. No political party, no coalition party will be able to go outside the realm of this idea."
India's businessmen are hoping he's right. If the country keeps pushing ahead with reform, the payoff could be enormous. If India's outsourcing industry keeps growing at its current rate, for instance, its revenues are projected to grow to $25 billion by 2008. But if India fails to improve its infrastructure soon, competitors like China could start to steal business from its technology and outsourcing companies. "We still have five years' lead," says Narayana Murthy, chairman of Infosys, a Bangalore-based software giant. "If in five years we've done nothing, there will be an issue." Perhaps the country's biggest hope is the fighting spirit of its new generation of entrepreneurs, who are determined to succeed regardless of the obstacles. "When I'm making my projections for growth or preparing forecasts for investors, I never count on the system," says Dhruva Interactive's Rajesh Rao. "Imagine what it would be like if we could count on the system."