TECH TALK: As India Develops: The Market Within

India is on a roll. Confidence and optimism reign high as every day brings with it news of more jobs and investments coming in. Construction activity is booming with the demand for new offices, homes and malls in urban and semi-urban India. Improving roads are driving demand for cars and weekend vacations. Rarely a week goes by without a significant story in the Western press about India. Indian companies are eyeing acquisitions abroad. Growth rates and foreign reserves are rising to levels which provoke comparisons with China in the 1980s and 1990s. As elections draw near, politicians across the board are realising that the best way to stay in power is to actually do constructive work for the people rather than harp on caste or communal issues. So, India is, finally, Developing.

After years of false starts, stunted growth and belied expectations, India has begun its march on the path of development. For the first time, many of the changes are happening at a fundamental level which is setting in motion a positive feedback loop that is expected to sustain growth at high levels and increase incomes for the next many years to come. For a nation that last experienced real prosperity many centuries ago, this is a different feeling. Attitudes and mindsets are beginning to change as the “feel-good” sector percolates across. It is unlike anything that has been seen in our lifetime.

Yet, this is only the first step in a long journey on the path to development. A lot more has to be done. There is also an India comprised of hundreds of millions of people that still is steeped in illiteracy and poverty, and find life a punishment. Life may be improving for some, but try telling that to those living in the urban slums. Even as employment opportunities abound for some, there are many who are stuck in low-quality jobs. Reliable supply of round-the-clock power is still a challenge in much of India. Peninsula India may be shining, but much of the Hindi heartland and the East of the country is still awaiting its turn.

But, for all its lopsidedness, the development process that has begun promises to transform India. Finally, more than government policies, I believe it is the Indian entrepreneurs who will build the New India – across it length and breadth. One person with vision has the ability to make a difference for hundreds. And what India is seeing today is the creation and rising of the aspirations of this class – who want to not only seek out opportunities to create wealth (and in doing so risk everything they have), but also genuinely believe that it is they who can build out the future.

This series is for these emergent entrepreneurs – that class of people which wants to do good and do well at the same time. Their parents led life in the constraints of the India that was shackled. They want to break free. Their role models are simultaneously Vajpayee and Bill Gates. As they unleash their creative power, these are the entrepreneurs who will take India to levels far greater than what we can imagine. For them, India beckons as a market. Ambala and Jabalpur hold more promise than America and Japan. The opportunities are also within, and not just outside. India is an emerging market.

Tomorrow: What Others Say

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TECH TALK: As India Develops: What Others Say

The Economist writes in its recent survey of India:

The most fundamental long-term reason for optimism is demographic. More than half of all Indians are under 25 years of age. It is the sort of bulge in the numbers of people in productive age groups that produced explosive growth in China and South-East Asia.

The reason India is expected to outperform Brazil, Russia and China as well as the rich world in the Goldman Sachs forecasts is that it is the only country where the population will continue to grow for the next 50 years and where the proportion of working-age people will increase well into the 2020s.

Mr [Mukesh] Ambani [of Reliance Industries] thinks India is undergoing “a silent revolution: our young people want to fend for themselves, and the government is getting out of their way.” What troubles many is that this revolution is changing the lives of only a small urban section of the population. Even Mr Ambani is worried by the widening social disparities. India, as Nehru wrote 60 years ago, is “a bundle of contradictions held together by strong but invisible threads.” Modernisation and globalisation, far from imposing, as some have feared, a bland sameness on India, are sharpening some of those contradictions.

The challenge is both to make India as a whole richer faster, and to find better ways of distributing the benefits of more rapid growth. As India's population expands, that challenge will become ever more urgent, and ever harder.

The next few years should offer the Indian government its best chance yet to tackle it. Rarely has India enjoyed such favourable international prospects: of peace with Pakistan; of enhanced integration in the global economy; and of being accepted as an important world power. At home, this is helping generate a new self-confidence which, rightly managed, could produce a virtuous circle of private-sector investment, rapid economic growth and liberalising reform. That in turn might allow a reshaping of the government's budget, and of its role in the economy: as less of an employer, subsidiser and borrower, and more of a provider of the infrastructure, health care and education its people deserve. That is indeed a shining hope.

From a recent Morgan Stanley report:

The liberalization program pursued in the 1990s in the form of reduced capital and trade controls is enabling India to participate in the global labour arbitrage trend. The increasing integration of the Indian economy with the rest of the world is evident in the significant rise in openness (imports plus exports as a percentage of GDP) to 32% in 2003 from 17% in 1991. Although India was always present in a limited way in manufacturing goods outsourcing, this trend is now increasingly spreading to a wide range of sectors, including IT software, IT-enabled business processing services, pharmaceuticals, engineering, design and research & development. We believe this trend is poised to accelerate significantly, unless there is an increase in protectionist measures by the developed world.

Though the opportunities in IT and Pharma should create employment, this will account for a small share of people entering the workforce. We believe the take-off of manufacturing and major reforms in the agricultural sector is critical to improving India's employment levels. China can be a good example to follow. Over the last 10 years, it has provided a larger section of its work force with higher-quality job opportunities through outsourcing in manufacturing as well agricultural sector reforms. In China, the share of employment in the low income-generating agricultural sector has reduced significantly to 45% in 2001 from 68% in 1981. In comparison, in India the share of agricultural workers has reduced to 58% from 67%. We believe that simultaneous progress in manufacturing will be necessary for balanced economic development ensuring participation of lower-income earners in economic progress and social stability.

In our view, the key measures which the government has to adopt to improve the manufacturing environment are:
(a) Removing infrastructure bottlenecks
(b) Create an environment to attract FDI
(c) Labour reforms
(d) Creating skilled labour by improving education opportunities

In a world with increasingly mobile factors of production, India's rising surplus labour will continue to create opportunities for MNCs and raise of the issue of protection. However, to make full use of this opportunity, India will have to initiate key reform measures, which will enable the manufacturing sector to gear up and provide jobs to the millions likely to join the workforce each year.

Tomorrow: What Others Say (continued)

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TECH TALK: As India Develops:

A much-discussed Goldman Sachs report looks ahead to India in 2050 and sets out what is needed for growth:

India has the potential to show the fastest growth [among the BRICs - Brazil, Russia, India and China] over the next 30 and 50 years. Growth could be higher than 5%over the next 30 years and close to 5% as late as 2050 if development proceeds successfully…India’s GDP outstrips that of Japan by 2032. With the only population out of the BRICS that continues to grow throughout the next 50 years, India has the potential to raise its US dollar income per capita in 2050 to 35 times current levels. Still, India’s income per capita will be significantly lower than any of the countries we look at.

As developing economies grow, they have the potential to post higher growth rates as they catch up with the developed world. This potential comes from two sources. The first is that developing economies have less capital (per worker) than developed economies (in the language of simple growth models they are further from their ‘steady states’). Returns on capital are higher and a given investment rate results in higher growth in the capital stock. The second is that developing countries may be able to use technologies available in more developed countries to ‘catch up’ with developed country techniques. As countries develop, these forces fade and growth rates tend to slow towards developed country levels.

Countries also grow richer on the back of appreciating currencies. Currencies tend to rise as higher productivity leads economies to converge on Purchasing Power Parity (PPP) exchange rates.

A set of core factors—macroeconomic stability, institutional capacity, openness and education—can set the stage for growth. Robert Barro’s influential work on the determinants of growth found that growth is enhanced by higher schooling and life expectancy, lower fertility, lower government consumption, better maintenance of the rule of law, lower inflation and improvements in the terms of trade. These core policies are linked: institutional capacity is required to implement stable macroeconomic policies, macro stability is crucial to trade, and without price stability a country rarely has much success in liberalizing and expanding trade.

Thomas Friedman writes in the New York Times (22 February 2004) on the changing attitudes in urban India:

The Zippies Are Here," declared the Indian weekly magazine Outlook. Zippies are this huge cohort of Indian youth who are the first to come of age since India shifted away from socialism and dived headfirst into global trade, the information revolution and turning itself into the world's service center. Outlook calls India's zippies "Liberalization's Children," and defines one as "a young city or suburban resident, between 15 and 25 years of age, with a zip in the stride. Belongs to generation Z. Can be male or female, studying or working. Oozes attitude, ambition and aspiration. Cool, confident and creative. Seeks challenges, loves risks and shuns fears." Indian zippies carry no guilt about making money or spending it. They are, says one Indian analyst quoted by Outlook, destination driven, not destiny driven; outward, not inward, looking; upwardly mobile, not stuck-in-my-station-in-life.

With 54 percent of India under the age of 25 — that's 555 million people — six out of 10 Indian households have at least one zippie, Outlook says. And a growing slice of them (most Indians are still poor village-dwellers) will be able to do your white-collar job as well as you for a fraction of the pay. Indian zippies are one reason outsourcing is becoming the hot issue in this year's U.S. presidential campaign.

Business World featured a cover story (8 December 2003) by Rama Bijapurkar on “The New Improved Indian Customer” which traced the demographic changes that are driving the local market: income growth, affordability growth, the rise of the self-employed, environmental changes drive aspiration, pragmatism in consumption and preference for 'real value' products and services, comfort with borrowing to fund future consumption, comfort with consumption, comfort with technology. She adds:

Current levels of penetration influence the pace of future penetration. Penetration increases are not linear, instead they accelerate as base penetration increases till a point where saturation sets in. If only one out of 20 households in a given affluence grade have a washing machine or a two-wheeler, adoption will be slow. But when one out of every 10 has it, it becomes something that gets on the radar screen of aspiration for the rest. And when it gets to one in five families, it serves to rapidly penetrate the remaining households because it now becomes a 'must have now' product for them.

For consumer durables, the top (in terms of affluence grades) 40 million households in India - 24 million in urban India and 17 million in rural India - based on their penetration levels would constitute the core consuming class. The magic number of 200 million consumers (assuming five members to a household) has arrived at last!

Within rural India, there are two different grades of overall affluence, which we can call the developed and the developing states. The developed states comprise Punjab, Haryana, Gujarat, Maharashtra, Karnataka and Kerala. They account for about one-third of the rural population and have shown higher penetration in most categories.

The market has enough scale to offer, and enough desire to consume. The consumer is ready and waiting to be served. The new Consumer India will pose a huge challenge to marketers because it offers a difficult revenue model of large but not enormous volumes, modest prices and high benefit expectations. It will reward real innovators and ignore marketing hype. Most of all, it will continue to comprise many markets at different stages of evolution, demanding a complexity of strategy that is far in excess of its worth. And yes, it will continue to throw up unexpected answers to the arithmetic of (medium penetration) x (large size of consumer base) x (low price-willing to pay) x (modest per capita consumption).

So, what does development really mean?

Tomorrow: A Tutorial on Development

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TECH TALK: As India Develops: A Tutorial on Development

The India of today is still largely agriculture-driven, in that a majority of its people are dependent on agriculture. How can India develop? We need to understand the process of development, and in the case of India, also rural India and poverty. These are complex topics – the stuff that economists thrive on. But an understanding of the basics of development and the realities of India are important if we are going to understand the opportunities that will be created as India develops, and the role we can play in India’s development.

I present here a brief tutorial on development. Our guide is Atanu Dey. Besides being the driver for Deeshaa (in which I am also a participant), Atanu has a background in technology and development economics. More importantly, his latticework of mental models makes understanding of even the most complex topics easy. Atanu and I found each other via the Internet, through Reuben. Over the past six months, Atanu has been in India working to put together a venture to help transform rural India.

I have sourced Atanu’s writings from his weblog on Development.

Atanu takes us through the process of development: “Before the Information Age was the Industrial Age. Policy was then focused on ways to make the transition from an agricultural to an industrial economy. Among the various models (such as export-led growth, import-substitution industrialization, and others) there was one that was called 'agricultural demand led industrialization', or ADLI, which was pioneered by Irma Adelman. ADLI recognized that cost-reducing technological change increased agricultural productivity and thus increased rural incomes. Increased rural incomes provided a demand boost for manufactured goods both for consumption as well as for use in agricultural production. The increased demand for domestically manufactured goods raised wages which in turn were spent on the consumption of agricultural output. On the labor side of the market, as agricultural productivity increased, labor shifted from the agricultural sector to the manufacturing sector. Thus the industrialization of the population was achieved at pace with the labor transition and was based on increased agricultural productivity attained through the use of appropriate technology.”

Irma Adelman’s views on development are elaborated in a paper entitled “ Development History and its Implications for Development Theory: An Editorial”, co-authored with Cynthia Taft Morris.

Atanu elaborates on the link between agriculture and development in the Indian context:

What does "moving away from an agricultural economy" mean? If by 'agricultural economy' one means an economy that is mainly agricultural, then clearly India's being an agricultural economy is problematic. The reason is that India is a very large country population wise, compared to a country such as New Zealand. NZ can be an agricultural country and yet be developed because its production and consequent exports are sufficient to earn it a decent national income. India cannot be a developed nation and continue to be agricultural because it can never earn enough from agricultural exports to make a decent living. To illustrate this point, let's do some arithmetic.

Let us assume that for a country to be developed, its per capita income must be $10,000 per year. Currently, India's per capita annual income is about 5% of that, or about a 20th of the income required to be a developed nation. Our agricultural production accounts for about a quarter of our GDP. So for agriculture alone to raise India's GDP to that of a developed country level, Indian agricultural production will have to increase 80 fold at least. Now of this 80 fold increase, we can only consume perhaps twice as much food as we currently produce and consume. So the rest of the humongous output will have to be exported. If one tries to export even a 10th of that amount, the world prices will crash close enough to zero that it will not be worth even picking the produce from the fields.

This is not the case with NZ because a couple of million people have to export only so much to get a decent income. Their exports do not affect their terms of trade so adversely that they become impoverished. A 1000 million people who wish to depend solely on their agricultural incomes to become developed cannot ever hope to do so because there is a limit to how much food humans can consume.

For India to develop, there is no way other than moving away from agriculture. By that I don't mean that we give up agriculture or reduce our production. I only mean that instead of 66 percent of our labor force being in agriculture, we have to steadily reduce that to something like 10 or 20 percent at most in the medium term and to single digit percentages in the long term. When labor does make that transition, then the released labor has to be absorbed in manufacturing and services sectors. This is a natural progression, come to think of it.

Natural because first we need food. Then we need non-food stuff such as clothes and shelter and vehicles and roads and books and computers and shoes and ships and sealing wax etc. All that stuff has to be manufactured. Once we have food and manufactured stuff, we need services such as education and dentistry and dancing and musicals and movies and psychiatry and what nots. This entire edifice is built upon the agricultural sector because without it producing food, no manufacturing nor services would occur. Of course, if we got super good in manufacturing, we could export that and buy food. Or if we got super good in services (BPO or what have you), we could export that and buy food and manufactures. The trouble is that India has a very huge population. And therefore if we ever specialize (that is do only one thing), then we would be forced to produce in such great quantities to export the stuff that the world price of that (food, manufactures, services) will crash and we will not be able to survive.

The bottom line is this: A large economy has to be largely self-sufficient. It has to produce food, manufactures, and services domestically and it has to consume most of what it produces domestically as well. Only small economies can afford to specialize and survive through trade.

Tomorrow: A Tutorial on Development (continued)

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TECH TALK: As India Develops: A Tutorial on Development (Part 2)

Atanu writes that credit constraint is the most important constraint that keeps an economy from developing:

Economics concerns itself with one fundamental problem, that of allocating scarce resources efficiently and optimally. The most succinct definition of the economic problem is therefore a constrained maximization problem. Constraints are all over the place. Physical resources are limited. It is interesting to ask if there is one single physical resource which if not constrained would release all other constraints. There are some basic limited resources such as land, labor, energy, water, etc. Of these, energy is that resource which if it were unconstrained, all the other basic resources constraints will be released.

If you had sufficient energy, you could transform whatever you had into whatever you wanted and recycle old stuff into new stuff. For instance, water. Using energy, clean the water; use the water; and then clean and reuse the water. You can use energy to desalinate sea water (lots of that around) and grow food hydroponically (don't need too much land). You need basic minerals and metals? Use energy to get it by the millions of tons from the sea. Bottom line: if you had unlimited energy, you don't have any real scarcity.

Consider the problem of economic development. There are constraints that bind an economy and keep it from developing. I asked myself if there is one fundamental constraint that if released, will free an underdeveloped economy. The answer I arrive at is yes, it is the credit constraint.

Atanu suggests that to get out of the low-level equilibrium trap of high population growth and low educational attainment, India needs to provide access to credit for its poor people, along with female empowerment, universal literacy at the minimum, and reduced population growth rates. He elaborates on the credit constraint issue: “The single most important and binding constraint in this situation is the credit constraint. Given access to credit, a poor household would be able to invest in factors that systematically reduce the need for having a large number of children and also educate the children that they have adequately. If a household could pay for health care, for instance, childhood mortality rates would be low and hence the need to over-insure against childhood death would be mitigated. Having access to credit would also allow families to invest in education and the returns on education could be higher than the cost of education. Higher educational attainment would imply higher household incomes and thus lower incentives to have more children in the next generation. Higher household incomes would on the aggregate translate to greater availability of social security and thus a lower need for children for old-age insurance.”

Atanu writes that we cannot ignore the rural populace: “India is a two-sector economy: the urban educated sector and the rural uneducated sector. The latter forms the base of the huge pyramid and toils away at a subsistence existence. The urban sector is seeing a boom what with BPO and ITES and all sorts of stuff. Policy makers, politicians, journalists, management gurus, TV reporters, and everyone and his brother are totally wrapped up in this incredible phenomenon. India, they all scream, has arrived. Having convinced themselves of that, they focus entirely on that part of the urban sector that is involved in the boom. This leads to a shocking neglect of the larger rural sector. Then when the boom runs out of steam, the country is worse off than what it would have been without the boom at all.”

On the need for education, Atanu writes: “The urbanization of India is not taking place because the rural population does not have access to education. Thus when forced to move, they migrate to urban India to be employed at menial jobs and live in mega slums. This has got to change if India is to develop. No amount of BPO and ITES is going to cut it: the only hope is to educate the rural population and do so efficiently and with no loss of time. IT has the potential to do just that: bring education to the hundreds of millions in rural India.”

Next Week: As India Develops (continued)

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TECH TALK: As India Develops: A Tutorial on Development (Part 3)

How does one increase incomes of 700 million rural people in India? Writes Atanu:

Yes, India has huge natural resources. Unfortunately, India has huge population as well. So with 2.4 percent of the world's land area and 17 percent of the world's population, the natural resource base does not seem all that rosy. Couple that with the fact that India does not have sufficient fossil fuel resources (we import a lot of that stuff) and one is not all that sanguine about India's natural resources. How about human resources then? The story there is also not that pretty. We do have a thousand million people. But they are mostly illiterate. Literacy is a basic prerequisite for any sort of human capital. Illiterate people can at best be engaged in subsistence farming, not working on rocket science or cardiac surgery or even BPO.

So then, do we have comparative advantage in agriculture. Perhaps we do or perhaps we don't. The problem with comparative advantage (as opposed to absolute advantage) is that it is not always entirely clear whether one has comparative advantage because one is good at something or whether it is due to the fact that one is not good at it but one is worse in everything else one does.

The only way to increase incomes is the old-fashioned way as my grandfather used to say: by producing stuff. Income, just to remind ourselves, is just another word for production. We produce a lot of stuff, so we get to have lots of stuff and that is what it means to have a high income. Therefore for rural incomes to rise, rural production has to rise. Agricultural productivity has to increase (and perhaps some increase in agricultural production as well) of course and then the labor released from agriculture has to produce manufactured stuff and then move on to producing services.

There is very little by way of innovation that is required for rural incomes to increase, looked upon that way. But there may be innovations required for getting the productivity to increase. For instance, for raising human capital (a precondition for raising productivity), we may need innovative solutions to India's literacy and education problems. For educating India's umpteen millions of youth, we may need to use modern technology innovatively. Perhaps we can use the information and communications technologies to impart quality education efficiently.

Atanu discusses the importance of focusing on production over employment:

Production, rather than employment, should engage our policy makers more than it currently does. Why? Because if you don't produce — irrespective of how many people you employ — you cannot distribute. Even if you distribute scanty production very evenly, you are left with a system that fails everyone.

Mechanisation and automation expands the 'production possibilities frontier' and thus we can get more out of less — mostly less labor. Is that good or bad? Let me use a simple example. You can have 10 rickshaw pullers delivering transportation services through back breaking labor 12 hours a day. Or you can use autorickshaws and employ only 2 people who work in relative comfort to provide the same services. Hypothetically you could have every one of those 10 former rickshaw pullers work only one day every 5 days and earn the same as before. On the other four days they could (1) spend time with family, or (2) learn to make pots, or (3) learn arithmetic, or (4) play the santoor, or (5) take care of his aging parents, or (5) contemplate the universe, ...

Now if you are more interested in 'employment', of course the hand pulled rickshaw is a more attractive system for you. To some, those were the good old days when you did not have the 'dark satanic mills', when you had simple country living with horse carriages providing the transportation, and the cooling was done by fans hand-pulled by shapely maidens as one reclined on a diwan eating grapes, I guess. But in those days scanty little was produced and of that, the rich and the powerful got the lion's share and the unwashed masses simply starved.

What has happened since those good old days? The economy has changed structurally. And that structural adjustment has produced more goods and services and having produced more, more people have a shot at living a less brutish, short, nasty and mean life.

However, adjustments don't come for free. There is a cost and that cost mostly falls on those whose services become redundant in the new production system. Typist and shorthand pools have disappeared. Instead we have web designers.

People who are concerned about employment alone would have advocated the banning of research into computers and electronics to save the livelihood of typists and stenographers.

For my money, I would go for a system that is hell bent upon production and having produced, hell bent upon an equitable distribution. Given scarce resources, the most efficient production method is most desirable. If that means more computers in banks, so be it. So you have to lay off bank clerks. But if you look around, humans are somewhat inventive and entrepreneurial. The system adjusts -- not smoothly or costlessly -- but eventually. And if done with sufficient forethought, without too much pain.

We have to get away from this fixation with employment and get more focused on production. We have to use the most efficient and effective tools that modern technology can provide to increase our production. And there will be enough people left over who can use their time to figure out how to distribute most equitably the stuff that is produced.

Tomorrow: A Tutorial on Development (continued)

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TECH TALK: As India Develops: A Tutorial on Development (Part 4)

Atanu on Poverty and making India a Stuff Superpower: “Poverty is lack of income. What is income? Income is that share of stuff produced that you get to take home for yourself. Let's not confuse money with income. Income is often denominated in monetary units but in real terms, income is what you get to keep from what is produced overall. Per capita income is therefore a ratio: a ratio of what is produced (the numerator) to the total number of people (the denominator). You can increase income by either producing more or by reducing the number of people. If the rate of growth of production is lower than the rate of growth of the population, you will have a falling per capita income. In time, you would have deepening of poverty….To repeat that point: we are poor because the amount of stuff we produce is low relative to the number of people we have to distribute the stuff to. IT can help increase the amount of stuff produced but IT can never be a substitute for stuff. So India has to become a STUFF SUPERPOWER because we are a PEOPLE SUPERPOWER. If you divide STUFF INFERIORPOWER with PEOPLE SUPERPOWER, you get poverty-ridden India. On the other hand, if you divide STUFF SUPERPOWER with PEOPLE INFERIOR POWER, you get stuff-rich USA.”

Atanu writes on India’s biggest advantage – its size, and the need to address the domestic market:

The most significant positive factor in India's favor is its size. It is what we economists call a "large economy". Large economies have the luxury of changing parameters which define the market itself. In comparison to that, "small" economies have to take those parameters as given (or 'exogenous') or external to them or outside their control. In a way, you can consider a large economy to be have some sort of 'monopoly power'. Monopolies have the power to change one parameter (price) at will which firms in competitive (or oligopolistic) markets don't have -- the latter are 'price takers' in that they cannot dictate prices and take whatever price they can get.

So India is large enough to be able to change 'world prices'. Suppose you were to create a widget which is suited to Indian conditions. Assume that the cost of production of these widgets exhibit economies of scale -- that is, fixed costs are extremely high and marginal costs are very low, and hence average costs continue to decline as the volume produced increases. In such a case, given India's enormous population, the number of widgets required would be high, and thus the average cost will be appropriately low, and therefore the market clearing price for widgets will be low and quantities will be high.

Now replace 'widgets' in the above with whatever -- "COMPUTING SOLUTION" for instance. Get the hardware that is appropriate for the Indian market developed and get the software developed for the same. Concentrate on the needs of India alone to begin with. Note that hardware and software meet the criteria of high fixed cost and low marginal cost. Marry the hardware and software to create the computing solution, price it just above average cost, and voila! YOU HAVE LIFT-OFF!!

This is at the heart of what the rest of the series will discuss. As India develops, what are the opportunities that are created in the domestic market? And correspondingly, what solutions can we create to help India in the development process? The one thing I strongly believe in is that a handful of Indians with vision and will can make a difference. Once upon a time, we had hoped that our politicians would be this handful. While those hopes have long been belied, they have in the recent past done just about enough to get India rolling (a little) and reduce government involvement in many aspects of life and business. This creates the opportunity for entrepreneurs (and not just inheritors) to thrive.

Tomorrow: The Process

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TECH TALK: As India Develops: The Process

For all-round development of India, it is necessary for agriculture to become more efficient. This will increase rural incomes and free up labour for other kinds of production. The numbers of people involved in agriculture have to come down dramatically. This labour has to shift to production and services.

India is a large country. We cannot develop purely on the basis of services. People in India need to buy food, need homes to live in, and need vehicles for transportation. All of this has to be manufactured. Our population is too large to build an economy purely based on import of manufured goods and export of services. Domestic production needs to grow.

Writing for Bloomberg, Andy Mukherjee puts the challenge in perspective:

India's 700,000 computer software professionals may be hogging the limelight as the biggest beneficiaries of the exodus of U.S. white-collar jobs to developing countries.

Yet, for those who believe India will catapult itself from poverty to prosperity on the strength of its “knowledge'' industries, here's a sobering statistic: three-fourths of Indian workers, or 300 million people, don't have high-school diplomas.

India's educated elite is too small, and its purchasing power too limited, to lift the broader economy. What can really make India prosperous is something that will boost the incomes of workers who are stuck in low-productivity occupations -- farmhands and housemaids -- that pay the national average of $500 a year, or less.

And that something can only be manufacturing.

“The services sector, and in particular the knowledge-based industries, is unlikely to provide opportunities to the poorly educated sections of our society,'' say Sanjay Jain and Uday Bhansali of the consulting firm Accenture India in a study titled “Making Indian Manufacturing Globally Competitive.''

Create more factory jobs, and India's economic growth rate can easily accelerate to 10 percent a year, making it the fastest- growing major economy in the world, the authors argue.

Thanks to the blinkeredness left over from Soviet-style socialism of 1960s and 1970s, the Indian industry treats the local population, a large part of which earns subsistence wages, as the main source of demand for factory-made goods. Manufacturers go on producing large volumes of low-quality, low-margin products to turn a profit. Much of what they make, can't be exported.

Where does one begin to break the vicious cycle? The surefire way is to “force'' Indian manufacturers to tap global demand, so they're able to expand operations, and create more and better-paying factory jobs. As more workers find employment in manufacturing industries, they'll have the spending power to demand better goods and services.

In a chaotic democracy like India, how does one draw out local manufacturers and make them go global? The easiest way is to open more of the domestic consumer-goods market to overseas investors. Competitive pressures, thus unleashed, would ripple through the supply chain and force even small manufacturers to look beyond the local market.

In short, “Made in India” has to go beyond software.

Tomorrow: The Process (continued)

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TECH TALK: As India Develops: The Process (Part 2)

Production is of two types: manufacturing and non-manufacturing. Manufacturing is what is done by the small- and medium-sized enterprises, the large Indian companies and the multinationals. Examples of non-manufacturing production (outside of agriculture) are handicrafts. In both cases, there is a need for greater access to credit and markets, along with the use of appropriate technologies to improve the means of production.

The non-manufacturing sector in India employs artisans who can make custom handicrafts. Their need for capital and infrastructure is low. They use their hands and knowledge, with a limited set of resources, to create items which can have a demand in urban India and potentially, globally. Today, much of the marketing is done through organisations like the Khadi Village and Industries Commission (KVIC). Much more needs to be done to increase incomes of artisans – especially from the point of view of opening up access to global markets, increasing the price realised for the handicrafts, a reduction in the commissions taken by intermediaries in the purchasing network, and the setting up of a proper logistics network to ensure timely delivery of the items to the buyers.

The manufacturing sector has to be one of the big drivers for growth. Over the coming years, this sector needs to absorb the tens of millions of people coming out from rural India. For this, there is a need to increase domestic consumption. This is starting to happen via the spending driven by those engaged in the services sector, especially the knowledge workers catering to the global market. But this number is still very small – there are less than a million people employed by India’s software and business process outsourcing organisations.

What the manufacturing sector in India needs to do is get out of the low-quality, low-price mentality catering only on the domestic market and start exporting in large quantities – akin to what China has been doing. There are some success stories already in India, and these need to be built on across many sectors. As India’s manufacturing sector grows, it will start employing more people. As their incomes rise, they will therefore be able to start consuming goods. This will create the virtuous cycle the manufacturing sector needs for growth, and what India needs for development.

Over time, as the development process continues, there will be an increase in the population engaged in providing services. This is the progression of development – managing the shifting labour force from agriculture to production and manufacturing to services. Given India’s population, there is no way India can leapfrog from an agriculture economy over the production phase straight to services.

So, the road ahead to development needs to cross the following milestones:

Ensure that education (primary, secondary and vocational) is available to the rural poor.

Increase productivity in the agriculture sector – do more with less people.

Foster the creation of co-operatives to get greater scale and information marketplaces to get better value for the producers.

Encourage handicrafts production by artisans, and complement by providing access to credit and markets.

Drive manufacturers to export high-quality goods – this will require them to modernise their operations and seek out business opportunities abroad.

Entrepreneurs can both catalyse and capitalise on India’s development process.

Tomorrow: The Opportunities

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TECH TALK: As India Develops: The Opportunities

India’s development opens up many opportunities. Here, I will focus on seven key areas that entrepreneurs can seek to target in the coming years. While some of these ideas may be specific to the urban or rural context, others can work across both. The two things common to all of them are that they require much less capital than the build-out of core infrastructure, and they need new, innovative ideas. If we can make these ideas work in India, we could also translate them to many of the other emerging markets as they develop.

1. Education: Education is perhaps the most important investment that people can make in their future. Despite all the government efforts, universal availability of quality primary and secondary education is still far from reality. In many areas in rural India, there are schools but no teachers. In addition, there is a need for vocational education for adults along with specific training as they migrate to the production sector from agriculture.

2. Microfinance: Along with education, the lack of finance is one of the biggest inhibitors for getting people out of poverty. One of the ways to address the credit constraint is microfinancing. Grameen Bank of Bangladesh is one of the best examples of a profitable organisation providing credit to rural people.

3. Market Access: There is a need for information marketplaces (or exchanges) to connect buyers and sellers, which can help the producers get the best value for what they make. This is as true for artisans as it is for small- and medium-sized enterprises (SMEs).

4. Information Access: The Internet has effectively bridged the information gap for many of us in urban India. Yet, the same information that we take so much for granted is not available easily to the rural populace. It could be about techniques for better agriculture or about healthcare or near-real-time information about the weather, made available in the local language.

5. ICT: Information and Communication Technologies are the platform on which many of the solutions for providing services can be architected. The key is to create affordable solutions which bring down the price points to levels which today’s non-consumers can pay.

6. Energy: Power is still one of the biggest bugbears as part of the infrastructure in both urban and rural India. Innovations like fuel cells are making possible micropower which bypass the need for the availability of the grid.

7. Distribution Hubs: Products and services need to be made available to both rural India and SMEs. One of the ways to make them affordable is to create hubs for availability and distribution. Two such platforms are RISC (Rural Infrastructure and Services Commons) and the Tech 7-11 in urban and semi-urban India.

Next Week: As India Develops (continued)

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TECH TALK: As India Develops: Education

India has not paid enough attention to educating its people. For India to develop, this needs to be redressed rapidly. Going through life without being able to read and write severely limits what a person can do. Writes Atanu Dey:

Poverty can be considered to be the result of two gaps: one, the ideas gap, and the other, the objects gap. Poor people have less material goods at their disposal as compared to rich people. Hence the objects gap. The ideas gap arises from the inability of poor people to most effectively and efficiently use the limited material resources they have. For any level of objects gap, an ideas gap amplifies the problem. Knowledge goods, efficiently produced and distributed by ICT (information and communications technologies), can bridge the ideas gap.

Education is a way out of the poverty trap. Education plays a paramount role in the process of economic development. Besides being instrumental in development, it is also an end in itself because it helps people lead better lives.

ICT reduce the cost of creating, distributing, and delivering information. Since information is the bedrock upon which education ultimately rests, ICT is uniquely positioned to revolutionize education. ICT is unique appropriate for providing primary and secondary education, increasing literacy and delivering vocational education.

Primary education is a public good. Therefore, the level of primary education provided by the market can be expected to be lower than the socially optimal level. Therefore it is up to the government to step in and either provide primary education itself or subsidize its provision by the private sector.

The higher income groups living in urban areas have the willingness and the ability to pay for primary education. The low income groups in urban areas and most income groups in rural areas do not have the ability to pay for education (primary or otherwise), although their willingness to acquire education is unquestionable. They are not just income constrained, they are credit-constrained as well.

One way of solving the problem would be for the government to provide credit to the poor so that they could pay for primary education. However, given the small size of the budget allocated for primary education and the immense size of the relevant population, it is a challenge that cannot be addressed without resort to technology induced increase in productivity in the education sector.

There are now schools and colleges in India, but in many of them, little teaching takes place. This is where a change is required. Adds Atanu: “Just to provide primary education, India requires seven million teachers if one were to have a 1:50 teacher to student ratio. Not only is that number formidable, the problem is compounded by the fact that these teachers are mainly required in the rural areas where the current number of qualified teachers is extremely low.”

So, what is the solution?

Tomorrow: Education (continued)

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TECH TALK: As India Develops: Education (Part 2)

Atanu Dey has put a set of ideas together for delivering education to rural India:

The availability of ICT tools has major implications for the provision of education. The process of providing education involves the following steps at a minimum:

Content Creation

Distribution of content

Delivery of the content at the "last mile"

Content Creation

A good primary education system has to be built on a solid foundation of content. Content creation involves a high fixed cost. Once created, if the marginal cost of duplicating the content is relatively small, the average cost can be made arbitrarily small depending upon how large the population is that is served by the content. Since the content for primary education is relatively stable, once created the content can be reused year after year. Therefore the use of ICT tools for content duplication is a natural choice. For instance, once produced, the content can be digitized and then duplicated on digital media such as CDs and DVDs.

The major innovation that can be done is in the way the content is presented. Hyperlinked content has the potential to present content in a more holistic way without artificial boundaries normally encountered in linear textbooks. One could navigate through the content in ways that suits individual tastes and inclinations. One could start off learning about the geography of a certain place and learn about the people who live there and understand their society and from there move on to history; or start following the links to the flora and fauna of the place and start learning biology and from there on to studying the ecosystem which supports them, and so on.

The remarkable thing about rich hyperlinked content is that it can be endlessly fascinating to a young mind which can take it all in at a pace that the student herself sets. The important thing to note is that the creation of this type of knowledge object is extremely expensive since it requires the efforts of highly trained teachers. But because of the low cost of duplication, the marginal cost is very low and therefore the average cost can be extremely low.

Consider that we have about 100 million children who require primary school content. Even if we spend Rs 1000 million to create the content (which can be reused for a number of years with minor changes), the cost per student for content creation is still only Rs 10. Massive economies of scale can be obtained because content once created can be distributed so inexpensively.

Distribution of Content

If content is produced centrally and then duplicated so as to reduce the average cost of content, then the next issue that arises is that of content distribution. CDs and DVDs can be mailed relatively inexpensively through the regular postal system. Or the content could delivered to the point of use via cable or wirelessly where internet access is available. This represents high fixed cost but a very low variable cost of distribution of content.

Tomorrow: Education (continued)

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TECH TALK: As India Develops: Education (Part 3)

Continuing with Atanu Dey’s ideas:

Delivery of the Content: The Last Mile

Ultimately, primary education has to be delivered to the hundreds of thousands of schools throughout the land by an impressive number of teachers. Training of these teachers itself is a formidable task. Again ICT tools can come to the rescue both for teacher training and for assisting them in delivering the content to the millions of students.

This component of the educational process involves high fixed costs and high variable costs. The high fixed costs can be reduced by facilitating the ‘last mile delivery’ through ICT tools. ICT tools can reduce the total training that the teachers need by shifting the burden of content creation from them to creation of the content centrally and have the teachers facilitate the delivery of the content. For instance, the actual teaching could be done by a virtual teacher on a CD connected to a TV monitor, while the physical teacher is someone who mediates the delivery and maintains discipline and the schedule.

As we noted earlier, about seven million teachers are required for the primary education of those who are currently illiterate. Training those teachers alone itself is a formidable task. This task can be made tractable through the use of ICT in three distinct ways. First, the training of the teachers themselves can be mediated by ICT tools. And second, the teaching of students by these teachers can be more effectively done by the use of tools such as audio-visual material to supplement books that are currently in use. This not only reduces the load on the teachers but in fact teaches the teachers at the same as the students. Finally, it reduces the variation in the quality of the teaching delivered. This happens because the audio-visual material is professionally produced and the quality of the teaching imparted is not entirely dependent on the skills of individual teachers.

As we shall see later, ICT has a key role to play in the entire process. The commoditisation of hardware and software makes it affordable for use across the education value chain and deliver education to large numbers of Indians more rapidly than any other mechanism.

The challenge lies in the creation of content. At present, there is some content available in some Indian languages. What is needed is an investment to create quality content from the best teachers in the country, and then have it translated for delivery at the schools and colleges. The same ideas can be also used for vocational education.

The likes of NIIT and Aptech have done excellent work in delivering IT education to India’s students in urban and semi-urban India. What is needed is the equivalent of such organizations for the poor India. As Atanu puts it: “The fortunate fact is that education pays for itself many times over. The return on investment in education is estimated to be many multiples. An educated labour force is many times more productive than an uneducated one. The policy prescription is therefore simple: spend whatever is required to provide education because the future earnings will more than pay for the present expenses. Even if a nation has to borrow the funds required, it would assure a future in which repayment of the loan would be easy. Education is too important a subject for it to be neglected merely because the nation is deemed poor at present.”

Tomorrow: Microfinance

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TECH TALK: As India Develops: Microfinance

Small businesses and the poor face a common challenge when it comes to getting out of the vicious cycle of stagnation and poverty: access to credit. While a business can turn to a bank for funding, the poor have very few options. They have little collateral or credit history which can convince a bank to give them a small loan. More over, their needs are fairly small, which makes it uneconomical for a bank to process the transaction. As much, for many, the only option is the local moneylender who exploits the situation by charging usurious interest rates.

Vinod Khosla outlined the problem in a recent interview with the Financial Express: “Finance is still the biggest problem for development of rural economy despite it being innovative. People in the rural areas have no money and often tend to go for high-cost borrowings. No venture capitalists or funders have ever come forward to help those community with social obligations in mind. Who lends the money to those poor people without collateral securities despite having the entrepreneurial capabilities, innovativeness, creativeness and hard working abilities? It is a pity to say that in few districts where I visited, villagers happened to be bonded labourers to big money launderers due to high cost borrowings which has never been a easy task to repay.”

The obvious solution for the credit problem in rural areas is microfinance (also called microcredit). Institutions like Bangladesh’s Grameen Bank have done this successfully and profitably. India too needs its microfinance institutions. While there are many small ones operating at local levels in various Indian states, a concerted effort needs to be made to scale up the offerings and reach. There are indications that this is now beginning to happen.

Wrote Keya Sarkar in Business Standard:

If all goes well, ICICI Bank will close it’s accounts this fiscal with a microfinance book of close to Rs 400 crore. This will be up from last year’s close at Rs 150 crore. A big leap for the bank. But a far bigger one for microfinance. Considering annual disbursement last year to the microfinance sector by the banking sector as a whole totalled about Rs 1000 crore, ICICI Bank’s increased lending to this sector gains significance.

While its size puts ICICI Bank at one end of the spectrum, foreign bank ABN Amro’s efforts in this sector defines the other. The latter is likely to close this fiscal with a disbursement to this sector of close to Rs 6 crore. HDFC Bank, UTI Bank and a few other private sector banks are in the middle. These are a group of banks which have done their numbers and are looking at microfinance as more than what it has always been, merely a priority sector target.

So a combination of investment into child health, elementary education and microfinance (in loans of Rs 5,000 to Rs 20,000) might create a franchise for ICICI Bank in a hitherto untapped constituency. And as yet ICICI Bank is only talking rural microfinance. Urban microfinance can only see the potential balloon.

So at one level, more microfinance companies are being brought into the net for intermediation. But the route which is really likely to change the face of rural microfinance lending is what banks are terming ‘partnerships’. Similar to the concept of direct sales agents through which banks have been dispensing consumer loans and car loans for over a decade now, these ‘partnerships’ will allow banks to lend in the rural areas without the money actually passing on to the books of these intermediaries. They would really be agents to identify borrowers and therefore be extended arms of the banks. ICICI Bank is already talking of over one lakh such agents and ensuring loan quality checks through different levels of loan loss guarantees by these agents.

Tomorrow: Microfinance (continued)

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TECH TALK: As India Develops: Microfinance (Part 2)

Let us take a look at three microfinance institutions to get a sense of the space – two from an India, and one from Bangladesh.

SHARE Microfin Limited (SML), set up by Udaia Kumar, was in the news recently because of the securitisation deal it struck with ICICI Bank. Here is more info on SML:

SML targets its programs at the poorest rural women in Andhra Pradesh. Services are available to the bottom 50% of women living below the poverty line. A housing index and asset holding criteria are used to select clients. In order to be eligible, a woman must have total asset holdings of less than US$500 and per capita family income of less than US$7.50 a month. A study conducted by the International Food Policy Research Institute found that 85% of SML’s clients are in the bottom 20% below the poverty line, reaffirming that the institution effectively targets the poorest of the poor.

SML has an authorized capital of US$3.3 million, of which US$1.2 million was contributed by 26,034 poor women clients. SML’s clients have also contributed 99% of total equity; only 1% is owned by outside sources. Two representatives of the shareholders, or the clients of SML, sit on the Board of Directors. This creates a unique situation: a microfinance institution which is truly owned and managed by poor women.

As of February 2002, SML had 57 branches operating in 13 districts. 105,696 members, all poor rural women formed 21,152 borrower groups. In total, over US$22.5 million has been disbursed since 1993 by SHARE and SML, with a repayment rate of 100%. SML’s operational self-sufficiency stands at 104%, with a financial self-sufficiency of 96%. By March of 2006, SML plans to have served 300,377 women at 150 branches with total loan disbursements of US$64,919,564. The non-quantitative results are impressive as well – a recent UNDP study on the empowerment of women found that SML clients have become much more active in making family decisions, sending their children to school, and practicing proper hygiene.

SML’s loan methodology includes an initial village survey and public orientation meeting, followed by the formation of borrower groups of 5 women. A center consists of 35-40 members, while a branch works with 2,500 women in a 25-kilometer radius. Loans are disbursed on a 2:2:1 staggered schedule to maintain incentives for repayment. Loan products include general, seasonal, sanitary, family, and leasing loans with repayments made over one year. Consumption loans last for three months, while supplementary loans have a duration of six months. Small enterprise loans last two years, while housing loans can extend up to four years.

BASIX, set up by Vijay Mahajan, also operates mainly in southern India.

BASIX is working in 9533 villages spread over 46 districts in 10 states. As on September 30, 2003 BASIX group as a whole was working with 1.36 lakh borrowers and cumulative disbursed Rs 1917 million . The outstandings stood at Rs 603 million with above 90 percent on time repayment rate. Nearly 40 percent of the loans were to women.

A vast majority of the borrowers of BASIX are the rural poor, particularly the landless and women. BASIX lends to them to promote self-employment. However, all the poor do not want to be self-employed. Thus BASIX also lends to rural commercial farmers and non-farm enterprises, which generate much-needed wage employment for the rural poor.

BASIX has adopted an approach to micro finance that serves the needs of different segments of customers through different channels. Its varied lending methodologies are aimed at reaching the poor at reasonable transaction costs. BASIX loans can be classified into (i) direct loans and (ii) indirect loans. Direct loans are extended to rural producers through a network of village/mandal based Customer Service Agents (CSAs), mandal/district based Field Executives and district-town based Unit Offices. Indirect loans are extended through intermediaries such as seed production organisers, who in turn on-lend to rural producers in their network. BASIX also lends to self-help groups (SHGs) of women set up by non-governmental organisations (NGOs).

Next Week: As India Develops (continued)

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TECH TALK: As India Develops: Microcredit (Part 3)

To give an idea of the opportunity in the microfinance sector in India, take a look at Grameen Bank of Bangladesh, started by Muhammad Yunus:

Grameen Bank Project was born in the village of Jobra, Bangladesh, in 1976. In 1983 it was transformed into a formal bank under a special law passed for its creation. It is owned by the poor borrowers of the bank who are mostly women. It works exclusively for them. Borrowers of Grameen Bank at present own 93 per cent of the total equity of the bank. Remaining 7 percent is owned by the government.

Grameen Bank has 1,195 branches. It works in 43,681 villages. Total staff is 11,855. Total number of borrowers is 3.12 million, 95 per cent of them are women. Total amount of loan disbursed by Grameen Bank, since inception, is Tk 191.44 billion (US$ 4.18 billion). Out of this, US$ 3.78 billion has been repaid. Current amount of outstanding loans stands at US$ 274.08 million. During 2003, a total amount of US $ 369.22 million has been disbursed by the bank. Loan recovery rate is 99.06 percent.

The Economist had a review of Muhammad Yunus’s book “Banker to the Poor” (December 10, 1998):

“Can we really create a poverty-free world?” asks Muhammad Yunus at the end of his autobiography. Yes, he says, and he believes that he has the key: credit. According to Mr Yunus, the surest route out of destitution for the world’s poorest people lies not in aid, welfare payments or loans from development banks to governments, but in lending tiny amounts of money directly to the poor. This book, the story of both Mr Yunus’s life and Grameen Bank, the institution he founded, is his account of how he has put his belief into practice.

The poor, he argues, have a much greater incentive than the rich to repay their debts: it is their only way out of destitution. He claims that Grameen Bank has a default rate of less than 1%, far lower than conventional banks can boast. Moreover, most of the world’s poorest people are women. To Grameen, they are more reliable customers than men, and make up 94% of the bank’s borrowers. The bank’s unusual system of making loans, which relies on peer-group pressure, also plays an important part in keeping defaults down. Prospective borrowers form groups of five who learn the bank’s ways together. If one member of a group defaults, the others cannot get a loan.

Microlending, for all its successes, has barely scratched the surface of the world’s poverty. To rid the globe of poverty through credit would require many, many more people with Mr Yunus’s energy and optimism. Are there really enough?

The development of India is intricately linked to creating microfinance options for the poor in both urban and rural India. This is an opportunity that is only now being seen by the bigger players. The last word from Vinod Khosla: “There are NGOs and Grameen representatives, who have powerful micro-financing model with a business principle in mind and market competitiveness. Venture capital funds for BPL (below poverty line) families is a very good idea. If it happens in a more systematic way it will be probably the single largest revolution after the Green Revolution of 1960 in India.”

Tomorrow: Market Access

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TECH TALK: As India Develops: Market Access

A farmer wants to be able to maximise revenues from the agricultural produce grown. An artisan needs to get the best price for the handicraft made. An SME needs to be able to sell the goods made. Whether it is for the agricultural, non-manufacturing or manufacturing sector, access to markets is one of the key requirements for creating a virtuous cycle of increasing production, employment and incomes. In our discussion, we shall consider market access for three constituencies: agricultural products, non-manufactured products and SMEs.

In India, most farmers sell what they produce via Agriculture Produce Market Committees (APMCs), which have been set-up across India by the state governments. An example is the Maharashtra APMC. Its website provides more info: “The APMCs were established by the State Govt. for regulating the marketing of different kinds of agriculture and pisciculture produce for the same market area or any part thereof. Every market shall consist of: agriculturists residing in the market area and being 21 years of age on the date specified from time to time by the Collector in this behalf, traders and commission agents holding licence to operate in the market area, and chairman of the co-operative society doing business of processing and marketing of agriculture produce in the market area.”

The APMCs run the marketplaces, also called mandis. Considering that the infrastructure exists, it is possible that the marketplaces could be made more efficient via the use of technology. For example, by connecting various local markets together, it should be possible to increase the transparency of pricing information.

Co-operatives can also help in increasing rural incomes by aggregating the supply from a number of small providers. The Gujarat Co-operative Milk Marketing Federation (better known as Amul) has done wonders in the area of milk and its derivative products. There is a need for co-operatives in other sectors also.

To complement efficient marketplaces, there is also the need for a complementary set of services – logistics, storage and distribution, and food processing facilities. This is where opportunities exist in rural India. A recent CII-McKinsey report, appropriately entitled FAIDA (Foods and Agriculture Integrated Development Action) offers some suggestions:

Despite being one of the largest agricultural producers, including in fruits and vegetables, the growth in India's food processing sector has been slower than anticipated. The worth of the Indian food industry has gone up from Rs.3.09 trillion in 1993-94 to Rs.3.99 trillion in 2000-01. As a part of the agriculture sector, the value addition segment has recorded a 7.1 percent growth in the last seven years, compared to 3.1 percent for farm and livestock segment. While overall products like as wheat flour, fruit juices, ready-to-eat foods, soft drinks, pickles and savouries have grown at over 10 percent annually, the growth is over 20 percent in the organised sector for products like pickles, savouries and 'papad'.

According to the CII-McKinsey FAIDA report, if India is to achieve the Rs.5 trillion food processing potential by 2005, it will have to create market driven linkages across the entire chain through partnerships and virtual linkages, rather than do-it-alone or build infrastructure. The report suggests that the success of companies in this sector lies in developing innovative products driven by consumer insights and delivery with quality, convenience and the right price in mind. "A distributed, asset-light manufacturing model and an innovative distribution system are essential elements of this system," the report states.

It adds that while the direction and potential were clear, the pace of change towards realising this potential is uncertain. Direct access to agricultural produce, a level playing field through tax reform and a revised food law are among prerequisites sought by the industry for faster growth of the food industry potential. This would "push growth of key enablers such as retail, reduce market interference and proactively facilitate industry initiatives and exports", the report states.

While mass-market basic foods were expected to remain the largest segment, value-added products like 'rotis' and ready-to-cook/eat products and condiments were also growing rapidly. In addition there was a growing niche market for exotic product categories in addition to exports. "Exports of food products can become a valuable growth driver for the industry, leveraging the historic base, new specialty categories and other areas where India can build a distinctive advantage and a strong brand," the report stated. In addition to manufacturing, the report sees significant growth in terms of input providers, logistics suppliers and retail.

For the development of rural India, even as we need to make agriculture more efficient, there is need to grow the non-manufactured sector.

Tomorrow: Market Access (continued)

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TECH TALK: As India Develops: Market Access (Part 2)

Atanu Dey puts the challenge of developing rural India in perspective:

Rural India, like the rest of India, is extremely large. Around 700 million people in 600,000 villages call rural India their home. Agriculture is their main occupation. Foodgrains and cereals add up to about two-thirds of India ’s agriculture output. For India as a whole, agriculture is the most important sector accounting for about a third of the nation’s GDP and two-thirds of all employment. Though the share of agriculture in national income has declined as India develops, it still provides the main source of wage goods for the manufacturing and services sectors of India. Agriculture makes up about 18 percent of India ’s exports.

Rural India is also extremely poor. Of India ’ s over one billion population, about 35 percent live below the poverty line. Fully three quarters of all poor Indians live in rural India. In other words, about 270 million rural Indians – or 40 percent of the rural population – are poor even by Indian standards. The defining characteristic of rural India is therefore both income-and non-income poverty. The challenge facing those concerned with India’s development therefore simply stated is: how to raise rural India’s income. One prerequisite is to increase agricultural productivity, of course. But that would necessarily imply that less labour will be required for agriculture. The labour released from agriculture will have to find alternative sources of income. Manufacturing and services are the obvious sectors which will absorb the additional labour. Given that India is a large economy of over a billion people, the growth of manufacturing and services is natural. However, there are structural impediments to their rapid growth such as poor infrastructure and inadequate financial resources. In the long run, infrastructure improvements must happen. But it will take many years, if not decades, to happen.

Given the constraints, it is important to explore s ort-term and medium-term alternative sources of income for the rural population. Gandhi, the father of India’s independence, once observed that the solution to India’s poverty lay not in mass production but rather in production by the masses. It is in that spirit that we considered the problem of mass poverty. What, we asked, were the masses of rural India most suited to producing outside the traditional agricultural sector? The answer was evident: hand crafted labour-intensive goods which can be produced without requiring massive investments in infrastructure.

Even a cursory examination of the non-agricultural production of rural India leaves one breathless at the scope and the variety of goods produced by artisans. Traditional handicrafts span a range that is nearly impossible to describe without employing superlatives. Tens of thousands of handmade goods in a variety of media are traditionally found across the vast landscape of India. Vast numbers of goods made from a wide range of wood, leather, iron, brass, copper, silver, granite, marble, soft-stones, semi-precious stones, fabrics of various kinds, glass, and so on are traditionally made in rural India. Each region of India has something unique in terms of styling and workmanship. The traditions run deep since the crafts are handed down from generations to generations across the centuries.

It is therefore easy to argue that at least in part, the answer to the problem of rural poverty has to be found in the production of handmade goods by the masses of rural India. Urban India has been so far the major market for these. However, the potential exists for expanding the markets beyond urban India. Globalization and the revolutions in ICT have presented an opportunity for enlarging the market for rural handcrafted goods and thus provide income opportunities to rural artisans like never before.

Indian handicrafts are not entirely unknown outside rural India. There are many institutions, both public and private, that channel handicrafts from rural India to the rest of the world. For example, various Indian state governments have outlets for handicrafts from their states. Most of these are found in major metropolitan cities in India. Some firms export Indian handicrafts also. Exports of handicrafts (including hand-knotted carpets) from India are of the order of $1.5 billion per year. In absolute terms, that is an impressive figure but relative to the size of the rural population, it is clearly far below the potential. One can easily argue that handicrafts should fetch about $50 per capita per year if properly marketed. That means, rural India’s handicraft exports could aggregate around $35 billion. That scale would have been difficult, if not impossible, to achieve a few years ago. Fortunately, it is no longer outside the realm of the possible because of a confluence of a number of factors such as globalization, the Internet and the world wide web and the glut in mass-produced manufactured goods.

The solution proposed by Atanu is “ABC: A Mediated Marketplace”.

Tomorrow: Market Access (continued)

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TECH TALK: As India Develops: Market Access (Part 3)

Continues Atanu Dey on “ABC: A Mediated Marketplace”:

If you were buying a 256 MB of memory from Buy.com from your home in Fremont, CA or Albany, NY, you do not have any insurmountable transactions costs. That type of trade occurs millions of times routinely since the infrastructure and processes are in place already.

Here is a trade that does not occur routinely: an artisan in a village close to Shantiniketan (a town near Kolkata in West Bengal) produces an exquisite 2-foot tall clay horse at a material cost of Rs 40 and four hours of his time. The best price he gets for it is Rs 100 at the market in Shantiniketan. A Swedish businessman thumbing through an in-flight magazine sees a beautiful clay horse in the background of a picture in an article. He would have loved to have one of them and would have been willing to pay $100 for one. He chanced upon the object, does not know where it is made, where he can buy one, how much does it cost, and so on. So also, the artisan in that village does not know that he could sell hundreds of clay horses to customers world wide at price of Rs 1,000 each.

That trade does not occur, leading to losses on both sides: income to the artisan, and an object worth possessing for the Swedish businessman. If the artisan (A) could be connected to the customer (C), a trade would take place. We need to develop the system that makes that trade happen. And we have to create a system that would connect a very large number of small specialized A's to a very large number of scattered small C's for a very large number of handmade unique objects.

ABC – The Mediated Marketing Model

We use a two-step method. In the first step, the artisan interacts with the business portal; in the second step, the business portal interacts with the final customer.

( A2B <=> B2C ) ==> A(B)C

Within B we incorporate all the functions that have scale economies and all functions made necessary because the A's are not technologically enabled and not sufficiently savvy about doing business over the Web. We locate within B all the features that are required for the flow of goods, information, and payments between A and C.

At B, the focus is around a very detailed catalog which has a very large set of low-volume items that are available for sale from a wide variety of small producers. A large number of customers who are www-enabled access the web catalog. The catalog is easy to navigate and search along various dimensions. There a few thousand items and each item is specified in detail including pictures, ethnic origin and history, etc. Beside the price and description of the item, it will also have the lead time for delivery, and other relevant information.

Information Flow from A2C: The artists or producers of the handicrafts are not Web-enabled. Their core competency is producing goods. They interact with Purchasing Agents (PA). These are people who scout the villages and identify local special production. The PAs then select a subset of the local production and create a portfolio of goods that they have access to. The PAs aggregate the information from a number of A's and provides that to Purchasing Masters (PM). The PMs are highly informed individuals who have an understanding of the global market for specialized handicrafts. PMs aggregate the information from the PAs and select those that will eventually get published in the catalog.

Information Flow from C2A: The customers C scan the catalog at B and order items over the www and pay using credit cards. Once the order has been verified, B passes on the order down which eventually reaches the appropriate PA.

Goods and Payment Flow: That PA gets the material from the artisan, does quality check, packages, and ships it directly to the customer C. The goods flow therefore is from A to C using the intermediate PA who does the quality control. Once the goods have been received by C, B releases the funds to the PA and to the artisan A.

Volume of Trade: There must be hundreds of thousands of skilled craftsmen and women in rural India fashioning an equally impressive number of distinct artifacts. One can easily imagine putting online a detailed catalog of thousands of unique items for sale world wide. A few million pieces of high quality goods can easily be sold per month if marketed properly using ICT tools. If each piece were to increase the realised incomes of the artisans by just $10, the cumulative increase in incomes could easily represent a few billion dollars.

ABC addresses the need of an artisan marketplace. The next challenge is to do something similar for the “urban artisans” – the small- and medium-sized enterprises. What is needed is an SME Trade Information Marketplace (STIM).

Tomorrow: Market Access (continued)

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TECH TALK: As India Develops: Market Access (Part 4)

One of the reason why SMEs remain small is because of a marketing trap they find themselves in.

SMEs do not have enough money to spend on marketing (or decide not to). Either way, the smaller marketing spend limits the awareness of the SME’s solutions in the marketplace. This results in lesser business, which in turn results in keeping the SME small. This is the marketing trap. Most SMEs are stuck in this and find it difficult to get out of this.

A big business can be reached by an SME (the knowledge is available of the big buyers) while a big business also has the resources and network to locate SMEs relevant for its business, though this is much harder. On the other hand, it is quite hard for SMEs to sell to other SMEs. The two have no way of connecting with each other. Technology has done very little to change the way SMEs trade with each other, especially in a local marketplace.

Of course, the easy solution to this problem is for SMEs to spend money on marketing and get out of this marketing trap. The problem is that their scale is small to justify effective media campaigns where they have to rise above the din of the big businesses. One-off ads are not very effective, and in fact, have a counter effect because the response is not that great, leading to disillusionment. Other techniques include classifieds, yellow pages, telemarketing, direct marketing and building up a channel. Again, for SMEs, these techniques all have their limitations in generating new business.

Garnering new business is very important for SMEs because that is the passport for growth. Most SMEs typically have very tight cost controls because the owner-managers are in charge and “it’s their own money”. The key for growth lies in leveraging existing capacity to service new customers. Since the base costs are probably already being met by the existing business, the profitability on new business is likely to be higher, giving the SME the necessary additional capital for one or more of the following: business expansion, marketing or technology investments. That is a possible path out of the marketing trap.

It is therefore important therefore to first bridge the “information gap” – knowledge of who the possible SME buyers of the SME’s products and services are. If these buyers can be connected with the SME, it is possible that both will be better off. The problem is that there is no easy way for them to find each other. This is the intervention that is required – an SME Trade Information Marketplace (STIM).

STIM caters to their basic need of SMEs wanting to be better off than where they are. What the STIM does is connect SMEs to other SMEs in a local region. SMEs are both the producers and consumers of information. The information they produce is who they are, and what their needs are (buy) and what they produce (sell). The buy-sell requests need to be mapped and the SMEs need to be connected. So far, there is little new about this – a traditional marketplace solution does that. So, in theory, the classified ads or the yellow pages ads (print or online) are supposed to do this. There are even plenty of Internet bulletin boards and website which provide this facility.

What is different about STIM is the use of innovative technology to make the linkages more effective. SMEs publish the information about themselves, and also subscribe to the information they want. What is different is the way this process is done. By itself, each is perhaps a small advance on current ideas, but taken together, they create a powerful positive feedback cycle.

Next Week: As India Develops (continued)

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TECH TALK: As India Develops: Market Access (Part 5)

Here is how the SME Trade Information Marketplace (STIM) works.

An SME publishes a wiki and a weblog. What is different about both is the ease and immediacy of how they can be updated. Think of the wiki page as providing an outline of the SME’s business – it is like an “About Us” page. It can provide links into the SME’s website.

Why need a separate page from the website? Because it is hard to update most websites! Even after nearly a decade of the Internet, the design elements which make up the website and permissions required make it difficult for an SME to update its website on its own. A wiki does away with traditional design and just focuses on the information. Its simplicity of updation and the addition of new pages makes it easily manageable, without the need for any intervention. Simplicity of design is what Google has pioneered, and what wikis can take further.

The weblog is akin to the “What’s New” page. This is where the SME can post new business developments, product releases, buying needs, links to relevant articles, commentaries on other developments (or blog posts). The weblog is like the SME’s periodic newsletter – the difference is that it not emailed or distributed, only published. A weblog makes publishing very easy. Each post has a permalink and is therefore always accessible and can be linked without suffering from link rot.

Taken together with the wiki, the weblog now offers the SME a way to provide the necessary background as well as the recent updates about the business and perhaps the industry in general. What is disruptive, as we shall soon see, is the RSS feed produced by the blog and a “ping” sent out to a central server whenever the blog is updated.

In addition, an SMBmeta.xml file (as outlined by Dan Bricklin) offers meta information about the SME – contact information, type of industry, and so on. It is a file that is machine readable and can be picked up and searched by special programs. Thus, it becomes possible to build up a searchable distributed directory of SMEs across multiple parameters with the information provided and kept updated by SMEs in their space.

Thus, the wiki, weblog and SMBmeta data provide the SME a self-publishing space. The SME is not required to post information on any central locations or directories. Write in your own space is the message to SMEs. And give them the tools to make the writing easy and instantaneous. And then let magic happen!

The RSS feed published by the SMEs contains the content in the blog posts. What is interesting about RSS is that it can be “subscribed” by anyone using an RSS aggregator. This means that whenever there is an update, the new item is made available to the subscriber without the publisher having to broadcast it. This publish-subscribe mechanism is at the heart of the STIM.

So, now the question is: how does an SME find out which feeds to subscribe to? There are multiple ways to do this: first are the “strong ties” - companies or people known whose feeds (or their company feeds) which can be subscribed to; second are the “weak ties” which emerge from the searches across the blog posts (and notifications based on these searches). For example, if I want to look for a knowledge management solution, then I can set up an alert for all new blog posts which have the phrase, or do a search on the older blog posts for relevant posts. Either way, the control is with the SME on which feeds are subscribed to. An additional way to find new SME feeds is via metablogs which can be created based on certain topics. For example, these blogs can be based on geography (within a certain area) or on a specific topic.

So, the solution is to get SMEs to start interacting via the STIM in an open, transparent way. By catering to their own self-interest, they can ensure that they all will be better off – they have nothing to lose by participating. Over time, as the SMEs make money, they can now invest in technology. Hopefully, this cycle will help SMEs grow.

The interesting thing is that the STIM is not a trading market, it is only an “information marketplace”. There are no commissions payable on the business generated. What the STIM ensures is that SMEs get other SMEs in – the value increases exponentially with every SME joining into the system. So, there is a “viral marketing” element embedded into this idea. The STIM is the intervention, a disruptive innovation, which can transform how SMEs buy and sell, and how they use technology.

Tomorrow: Information Access

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TECH TALK: As India Develops: Information Access

Information abounds around us, but if it is not available at the right time to support decision-making, then its value is limited. The Internet helped bring ease the distribution of information globally. In India, too, we have benefited significantly over the past decade. But a lot more needs to be done to take the benefits of information access to larger numbers across India. The need is to leapfrog from the request-reply (1-way) web to the publish-subscribe (2-way web).

Before we look at how we can build the next-generation information platform and reach out across urban and rural India, let us take a look at how the Internet has had an impact in China, so much so that Chinese will make up the largest user base by 2006. Wrote Business Week in a recent cover story in its Asian edition:

The expanding audience has set off a building spurt in recent months reminiscent of Silicon Valley in the late 1990s. Local businesses such as Kingsoft are moving onto the Net, staking a claim to the rich opportunities ahead. Foreign Web companies, including Yahoo! Inc. and eBay Inc., are making acquisitions to expand their operations in the country. And entrepreneurs from around the world are opening shop on China's Net. They range from Peggy Yu, a 38-year-old MBA from New York University who runs what she hopes will be the Amazon.com Inc. of China, to Li Ka-shing, the Hong Kong billionaire whose Internet portal, Tom Online Inc., expects to raise as much as $200 million in an initial public offering scheduled for this month.

Investors are just as gung ho about the market. Sina Corp., the largest Net portal in China, has seen its shares surge eightfold over the past year, to $45. After the strong IPO of travel site Ctrip.com in December, numerous companies, like Tom Online, are lining up to sell stock to a hungry public. One of the hottest prospects? Shanda Networking Development Co., a Shanghai online gambling outfit that is expected to raise as much as $200 million in an IPO scheduled for later this year. Even venture capitalists are getting bolder. In February, business-to-business auction site Alibaba.com landed $82 million from Fidelity Investments, Softbank, and other venture players -- the largest VC investment in a Chinese dot-com ever.

Yet, China is playing catch-up in many Net markets. E-commerce, for example, has been slow to develop in China because so few people have credit cards and the postal service isn't reliable. But Peggy Yu is starting to make progress with Dangdang.com, a distinctly Chinese version of Amazon. Dangdang began letting would-be buyers pay with money orders and even old-fashioned cash on delivery. To get packages to customers, Dangdang hired a fleet of delivery boys who zip around China's biggest cities on bicycles. Yu says more than 2 million customers have bought books, CDs, and DVDs from Dangdang, with an average order of about $10. "We have figured out the basics," she says.

So have business-to-business Net companies. At Alibaba, CEO Ma had to win over manufacturers worried about fraud when doing business with strangers over the Net. To help customers get up the Internet learning curve, Alibaba sends representatives to the factory floors of each new manufacturer to explain how the site works. Ma says more than 1 million companies have signed up to be listed on Alibaba's import-export site. What attracted the record-breaking VC investment is Alibaba's potential: Companies from around the world can request bids from Chinese manufacturers for thousands of products from cookware to washing machines. Purchasers don't need a representative in China to buy directly from the manufacturers that often have the lowest costs in the world.

Indian Internet portals have stagnated over the years – partly due to a lack of investment in the space, and also because the slow growth is the user base limited the advertising money that the portals could count upon as revenues. The Chinese portals were helped by the boom in mobile phones and online gaming. Neither of this has not yet happened in India. And yet, the need for useful information exists. In the absence of centralised portals creating the information, can we create a distributed, emergent platform to pool together what we all know?

Tomorrow: Information Access (continued)

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TECH TALK: As India Develops: Information Access (Part 2)

The next-generation information platform is the foundation to build vertically specific communities which can exchange information and do ecommerce. This platform will enable users to pool together their individual knowledge and share it with others in the belief that while no one knows everything, together the body of knowledge can be far greater. So far, mass publishing has been rather difficult on the Internet. However, a new set of technologies and tools promise to make this easier, leading to the creation of the two-way web, where every reader is also a potential writer.

This next-generation information platform comprises a series of innovations integrated together into a system which can be easily customised for niche areas. The various elements that make up this platform are:

News: Think of Samachar, Google News and Moreover – value-added aggregation of news.

Search: A search engine focused on the content for the vertical is needed, along with Google’s AdSense-like targeted and relevant advertising.

Blogs: It should be easy for people to write, and blogs offer a framework to do just that. Blogger and Typepad offer. In addition, analytics like what Technorati and BlogStreet provide can glean additional value from what individuals and groups write.

Wikis: A Wiki’s easy editing capability allows anyone with a voice to chip in. Think of Wikipedia, an encyclopedia created by individuals from around the Web.

P2P Community: This should be on the lines of Slashdot, which self-organises and allows the good content to rise to the top.

PubSub Backend: RSS is one of the key enablers of the two-way web. As people publish, they also have subscriptions. News Aggregators with a matching engine like PubSub and Feedster can play a powerful behind-the-scenes in helping generate the two-way flow the platform needs.

Microcontent: The platform needs to take into account that access can happen not just on computers but also a range of wireless devices like PDAs and cellphones. For this, content will need to appropriately formatted to deliver smaller chunks.

eCommerce: Whether it is like an Amazon (product sales) or eBay (auctions), there is need to facilitate transactions for the community. A common payments system would also be a needed feature.

Classifieds: Craig’s List and Alibaba are good examples of classifieds which can focus on geographical or vertical segments. RSS feeds can ease the task of searching for updates.

Personalisation: Like My Yahoo, it should be possible for users to personalise the platform with the content streams that are of interest to them.

Social Networking: Sites like Friendster and Orkut offer the ability to connect people together. This is especially useful in narrower communities of practice. A platform which can enable people to leverage IM and VoIP like Skype to interact is needed.

Local-Language Support: There is a need for content to be able in multiple Indian languages. An auto-translate feature like Babel for Indian languages is needed.

Visualisation: Video games like Everquest create incredibly rich and interactive environments. A similar interface can create 3-D environments for users to interact with others users.

Tomorrow: Information Access (continued)

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TECH TALK: As India Develops: Information Access (Part 3)

Easier access to information can help simplify life and business. And yet, this is where we have to still struggle a lot in India. By using new technologies, it is possible to rethink how content is created and consumed. It is this base of information which will also help propel the use of computers across India, which is a must for building out the digital infrastructure across India.

The next-generation information platform can dramatically cut down the time and complexity for creating portals for various verticals in India. There are three key portals that are needed in the Indian context addressing the key constituencies of the neighbourhood, SME industry clusters and rural India.

LocalNews: Much of our life is centred around what’s happening where we live and work. There are also various small businesses which need a platform to reach out to consumers cost-effectively. Yellow Pages do this job very effectively in the US. In India, the use of yellow pages has still been somewhat limited. By getting people to come together to build “mirrors” of their neighbourhood online, a marketing platform is also created for the local small businesses to reach out to their potential audience.

EnterpriseDigest: Just like Reader’s Digest aggregates the best content for the family, we need the equivalent of an EnterpriseDigest for every industry vertical. This provides a two-way flow of information. In India, while there are many magazines which do cater to verticals, the cost of publishing and distribution can still be a significant barrier. The Internet can cut both costs.

RuralWorld: Rural India has to be one of the engines for growth. And yet, it is one of the most affected by the information gaps. From inputs on farming techniques to the latest prices of goods and commodities to the weather, the RuralWorld portal can bridge these gaps, as also connect farmers with other farmers so they can share best practices and answer each other’s queries, much like users do on community forums in urban areas. As Paul Romer is quoted in the book “Information Markets”: “Information’s capacity for simultaneous use means that we can take all of the poor people in the world right now, let them use all of the knowledge, all of the discoveries that we already take advantage of - and we can raise the standard of living without reducing our own.”

Indian entrepreneurs need to invest in building out the country’s information infrastructure, even as the telecom companies are busy laying the foundation for a “broadband Bharat”. The information highways will not be as useful without the digital worlds as destinations. Be it education or entertainment, food or fashion, business or barters, the Indian portals can serve as the energiser for the Indian Internet business and at the same time fulfill real needs in the daily lives of people and businesses in urban and rural India.

Tomorrow: Information Access (continued)

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TECH TALK: As India Develops: Information Access (Part 4)

One of the key side-effects of the diffusion of information across all sectors of India will be the ability to adopt innovations. Wrote Atanu Dey recently:

As a development economist, I have often asked myself what are the invariants that underlie development. I know for sure that high technology (computers, internet, cell phones) are neither necessary nor sufficient for development. Most of the developed economies of the world developed at a time when all those were not yet invented. I believe that one invariant is the ability to adopt innovations.

People, societies, economies which can successfully adopt innovations tend to do better than those that don't adopt innovations. The operational word is adopt. Innovations happen all over the place and all the time. Who innovates and how is not what I am concerned about although it is a fascinating subject in itself. What I am concerned about is the adoption of innovation rather than the causes innovations.

Innovations are primarily discovered or invented by what I call 'micro-agents'. That is, the suppliers of innovations are individuals or very small groups of people. These are the real smart people who have understood some problem very well and figured out a solution to the problem. This is hard work and it requires truckloads of inventiveness, intelligence, luck, and all sorts of fortuitous circumstances for innovations to arise. Therefore, the number of successful innovators is small relative to the overall population and so is the number of real innovations very small. But what is significant is that any real innovation has a multiplier effect in its implementation when the innovation is adopted by society at large. We all don't have to invent a wheel or a wheel-barrow. Someone somewhere came up with the innovation of a wheel-barrow and for ever not so intelligent people have been using wheel-barrows to cart stuff around with much less effort than would be required without one.

Ever been to a construction site or a farm where they did not use wheel-barrows? The answer is: depends. I have seen hundreds of constructions sites in India and they don't use wheel-barrows. The one right outside my window, where three massive buildings are being built, don't use wheel-barrows. They pile the stuff up on their heads and carry small loads. The lever and the wheel (two innovations that form the basis for a wheel-barrow) have been known for ages. I have seen the use of wheel-barrows all over in developed nations. But not in India. In India, it is stuff on their heads. Go to a railway station and coolies will be lugging stuff on their heads for the majority of the loads. If you insist they will get a huge luggage cart but then you will have to wait for a while for them to track down one and they will have to charge you extra for that.

So as I was saying, micro-agents invent the stuff and macro-agents adopt them. Micro-agents have to be very smart to invent clever things. The society at large, the macro-agents, don't have to be particularly smart: only smart enough to be able to use them. You have to be a veritable genius to invent the wheel-barrow but you have to be a certifiable moron to not use a wheel-barrow after it has been invented.

This, then, is the background and context in which we need to see the necessity for building out the next-generation information platform and ensuring wider access to information.

Next Week: As India Develops (continued)

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TECH TALK: As India Develops: ICT

Information and Communication Technologies (ICT) have been the dominant factor for the productivity growth in the developed markets. The problem with the current ICT is their cost – the dollar-denominated pricing makes it affordable to only a small segment of the business and consumer segment in India. While competition has ensured that talk on cellphones is now among the cheapest in India, the same is not the case in computing given that two virtual monopolies (Intel and Microsoft) control the two most critical components.

For India to develop, there is an increasing emphasis on the need to build out the physical infrastructure – roads, ports, airports, power and the like. But there is the need for a parallel digital infrastructure – high-speed networks, access terminals, software and content. While the telecom carriers are now building out the high-speed networks, not enough attention has been paid in the other areas. This needs to change.

What India needs is an affordable computing and communications platform, one that dramatically brings down the cost without compromising on the performance or utility. Luckily, many of the components are now coming together to make this happen. What is needed is for us to adopt these innovations to build the equivalent of “tech utilities” which make “commputing” (as Om Malik put it) a reality for the next markets.

The connectivity front is an easier problem to address, thanks to competition, the tens of thousands of optical fibre that have been laid across India, and technologies like WLL, DSL and WiFi which can help bridge the last mile. The challenge lies on the computing front.

Consider India and its present installed base of 10 million computers. In the next 12 months, that figure is expected to rise by about 4.5 million. But it is still not good enough. India needs a much faster adoption of computing technology. There is a potential for 100 million computers in the next few years – 3 million SMEs need an average of 10 computers each (30 million), 40 million Indian homes need one each (40 million), 1 million Indian schools need 10 each (10 million), 100,000 colleges need 100 each (10 million), and rural areas and the government need 5 million each. These are the next markets for computing.

While it is tantalising to think of the cellphone as the computer (or perhaps “commputer”), in reality, portability and mobility is a requirement for only a small segment of the markets. The display size and the limited data entry capabilities of the cellphone make it more useful as a “last-mile, always-on bridge” rather than the primary computational device. We still need the desktop computer – but at a fraction of today’s price points. In some segments, we can consider using the TV as a display, but a refurbished monitor costs about the same and gives a much better resolution.

In short, what India needs is a next-generation computing platform for today’s non-consumers, which makes affordability as its primary objective, and at the same time leverages the plethora of software and content that is already available. Think thin clients, server-centric computing and open-source software.

Tomorrow: ICT (Part 2)

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TECH TALK: As India Develops: ICT (Part 2)

What India needs is an affordable computing platform to build out the digital infrastructure across its enterprises, homes, education institutions and government. So far, the high cost of the computers and even higher cost of software (relative to income levels) has hobbled adoption of technology in India. Luckily, the elements to construct solutions at price points which are 70-90% lower without sacrificing performance are now available.

Thin clients are computers with limited local processing and storage, which are both centralised on servers. The client should be able run an OS (Linux ,for example) along with VNC (virtual network computer). VNC is a remote display protocol, much like RDC from Microsoft and ICA from Citrix. Using this approach, thin clients can be, theoretically, assembled for less than Rs 2,250 (USD 50) in component costs, excluding the display. A refurbished 14-inch monitor will cost under Rs 2,000 (while a new one will cost about Rs 3,500). TV can be a possible display option also, though one will have to sacrifice the viewing quality. Thus, it is possible to put together the user desktop for no more than Rs 5,000.

Server-centric computing is just like the mainframe and minicomputers of the past. Terminals managed the local input/output while all the computing and data storage took place on the server. A return to a similar model is essential if one has to dramatically bring down the cost of computing. In today’s world, there are two things working in our favour: networks (local and wide-area) have become fast enough to enable data to be transmitted rapidly across from the server to the client, and Moore’s Law provides for huge server processing capabilities at much lower price points. So, it should be possible to centralise computing at a cost of no more than Rs 2,500 per user (for a minimum of 10 users on the LAN) or a fraction of that if being offered as a hosted service by broadband operators to homes.

Open-source software is the third leg of the affordable computing. For almost every commercial software there is a free, open-source equivalent. For the desktop, Linux compares well with Microsoft Windows, OpenOffice with Microsoft Office, Ximian Evolution with Microsoft Outlook, Mozilla with Internet Explorer. For the server infrastructure, it is possible to put together the complete infrastructure of a mail server, proxy server, firewall, anti-virus software, anti-spam, database server and file/print server software with open-source components. In addition, there are thousands of other open-source applications available for specific needs.

Taken together, thin clients, server-centric computing and open-source software offer an excellent platform on which to build an alternate environment which can dramatically reduce the cost of computing for the next markets. By leveraging a handset-like business model, service operators (think of them as “tech utilities”) can start offering hardware, software, networking, connectivity and support for as little as Rs 500-600 per month, bringing the cost of computing down to that of a cellphone today. This is what is needed for building out India’s digital infrastructure.

Tomorrow: ICT (Part 3)

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TECH TALK: As India Develops: ICT (Part 3)

Much of India’s industry and institutions is still in the Dark Age of technology adoption, even as their competition is now global. Unless Indian industry achieves high levels of productivity and efficiency, it is difficult to see how they will compete with their international competitors. In India, we have also not managed to create a big domestic market for information technology solutions. All this needs to change.

Writing in “The Digital Hand: How Computers Changed the Work of American Manufacturing, Transportation, and Retail Industries”, James Cortada explains the context in which computers became to the part of the fabric of the US economy through the second half of the 20th century:

Businesses came to use computers not because they increasingly became less expensive but because they performed functions (applications) deemed beneficial or necessary for the enterprise. Declines in unit costs did not mean that overall expenditures for computers dipped; in fact, just the exact opposite occurred because as more systems came online, more programmers and other technical staff were needed to maintain and operate them, and more end users had to be trained and supported as well. Yet, overall economies of scale always counted as work shifted to computers and thus away from other sources of expense, or created new capabilities that had economic value. In short, computers made it possible for management to perform tasks less expensively than with earlier information technologies (e.g. adding machines) or manual operations and to do things not practically possible with previous methods (e.g. analyzing millions of customers for trends). Machines were now used to improve efficiency, to lower operating costs, to be seen as “modern” and to be competitive in an economy that increasingly relied on more, faster, and ever more precise technologies.

In India, so far, the cost of labour has been far cheaper than that of capital (in this case, technology). We have preferred to use our labour and stay in the low-cost, low-quality quadrant in many industries. In this equation, if we can now bring in affordable technology, it should be possible for Indian entrepreneurs and managers to automate their businesses, achieve greater scale and be able to better compete on a global level. Only then can we create a positive, virtuous cycle of increasing domestic incomes and increasing consumption.

What the affordable computing platform does is create a foundation for massive adoption of technology in India. Look at how cellphone usage has skyrocketed – India is now adding more than two million users a month, and is expected to cross a user base of 100 million within the next years. As we have demonstrated, it is possible to bring down the price point of computing to that of a handset without any compromise on the versatility, functionality and form factor. By empowering individuals and enterprises with the right technologies at the right price points, India can build out its digital infrastructure in the next five years and create the necessary base for all-round development. The leads needs to be taken by India’s manufacturing sector.

Tomorrow: ICT (Part 4)

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