Monday, June 5, 2017

Indian Economic Turn around - and a humble role by C-DOT

India - Early Years

Till the End of the 1st Millennium, India had a large share of World’s GDP. In the year AD 1, India’s share of World GDP was 32%. By the year AD 1000, it was still 27.8%.

The Indus Valley civilization (3,000 to 1,300 BC) on the fertile plains of the Indus River spreading from North West India to today’s South East Afghanistan was among the top ancient civilizations. It was famous for strong Town planning – gridded, well planned streets, plumbing, public bathes and a great knowledge of metallurgy instead of grand buildings like the Pyramids of Egypt. It was a rich civilization by any standard. By 1,800 BC, the Indus valley civilization went into a decline - suspected to have been caused by desertification and ecological changes. Then the Mauryans took over. Guided by Chanakya, his pupil Chandra Gupta built the Mauryan dynasty which spread from today’s Patna to Afghanistan and Iran. Kautilya’s Arthasastra was a great treatise of public administration. 23 Centuries ago, it advocated – “when it is inefficient to produce things locally, import them” – presenting a case for efficient division of labor and “globalisation”. The book by the Greek ambassador Megasthanis describes India as a very advanced economy of that time. India continued to account for 1/3rd of the World’s GDP – it was 3 times that of western Europe and larger than China’s. India was the economic super power of the times. Soon after, the maritime Trade boomed along the long coastline of India. It left a huge impact of Indian culture in Indonesia, Cambodia, Vietnam, Thailand etc. Voyages to South east Asia were long and dangerous. The waters were infested with ruthless pirates. But the merchant entrepreneurs were ready to take the risk. Towards the west, the trade extended to the Persian and Roman empires. And the economy continued to flourish. Roman historian Pliny wrote – “not a year passed in which India did not take 50 million sestereces away from Rome”. That was when India started accumulating gold. (Indian households today are estimated to hold 20,000 tons of gold valued at $1.3 Trillion - very large for country which has very few gold mines of its own.) India maintained a huge trade surplus with Rome. A thousand years before Galileo, India boasted excellent astronomers like Aryabhatta, eminent mathematicians, metallurgists and surgeons. Plastic Surgery was a routine procedure. Hindu-Buddhist kingdoms in South east Asia and Central Asia looked to India for cultural leadership. Students came to famed universities like Taxila, Nalanda and Ujjaini. All this is not to boast about India’s ancient wealth – but to remind ourselves that we were a risk taking, open-to-the-world, successful society, which for more than a thousand years accounted for 1/3rd of the world’s GDP.

Start of the Decay

From the 11th Century the decline started. By the year 1800, India’s GDP share fell from 28% to 16%. Post colonialization it went down further and reached 4.2% in 1947. It touched the nadir at 2.5% by 1980.

Why the decline?: It is tempting to attribute the decline to the various invaders - Turks, Mangols, Afghans from Central Asia, and later the European colonial powers. Invasions cause disruptions but not long term secular decline. Hindu kings resisted Muslim invaders with vigour when the Muslim religion was at its peak. Despite repeated attempts, Muslim invaders were not able to hold anything more than a tiny part of Sind for a long time. Hindu Shahi kings ruled over most of Afghanistan well into the 10th Century. Even after Muslim conquests, Rajputs of Merwar, and Kingdom of Vijayanagara were able to resist effectively. India either fought back or assimilated the invaders.

Till the 11th century India was a serious mercantile power. Bengal and Odissa were active sea farers and traders. The Chola Emperors extended their kingdom beyond the traditional limits.  Chola navies invaded and conquered Srivijaya (today’s southern Indonesia). Indian mercantile activities extended to both sides of the subcontinent. But, slowly and gradually India ceded grounds to the Arabs and Europeans. Many countries in south East Asia which were under Indian cultural influence, now switched to Muslim culture under the influence of Arab traders – Malaysia and Indonesia especially.

What happened was a civilizational decline. Erosion of the spirit of entrepreneurship and openness to new ideas and enquiry.

Marco Polo wrote how Indian kings kept buying 1000s of horses every year at huge cost from the Arabs. They did not breed horses and did not have enough good veterinarians to take care. Many Horses died and the kings kept buying every year.

In the middle ages, the concept of “Kalapani” came up, which made crossing the seas a Taboo. During the “age of discovery” when the Europeans were crossing many oceans and exploring new worlds, the Portuguese sailors noted that Hindus were reluctant to do maritime trade due to this taboo. In 18th century the Banias of north India considered even crossing of Indus river as a taboo and underwent a purification ceremony. The British had a tough time making Indians cross the sea for them. In 1824, during Indo Burmese war, the fear of being forced to go to Chittacong by sea resulted in the Bararckpore Mutiny by the Bengal Army. Tagore, M.K.Gandhi, Ramanujam etc. had tough time convincing their families when they were to cross the ocean to the west as late as 19th Century. A culture which once celebrated its merchant fleets later forbade crossing the sea.

Backwardness is caused not by lack of intelligence but due to lowering of cultural openness to ideas and risk taking. The same people who invented algebra and calculus in the fourth century, were unwilling to learn the simple technologies of breeding horses. The change in cultural attitude towards innovation became the undoing for India and China while the Europeans moved forward. When Industrial revolution was transforming the west, in India traveling across the seas had become a taboo.

Many great civilisations have fallen in history – It happened to the Chinese, the Roman, the Greek, the Egyptian and others. Civilizations commit suicide from time to time - the last millennium was our turn.

Continued decline post-independence

Nehru was my childhood hero. He was western educated and liberal in his thoughts in many ways and built some great institutions. But on the economy, he chose - what in hind-sense was - the wrong model of the Soviet Union. It was an inward looking economic model with complex controls to distribute resources. Nehru’s thoughts continued to influence the political system for a long time to come. The private sector was “tolerated” but strictly held in check by industrial licensing.  P.C.Mahalanobis, a statistician influenced Nehru big time on this - his model aimed to speed up development through state intervention. It was a statistical model with raw material as inputs and finished goods as outputs. Just collect statistics about demand for goods and control the supply through Government licensing. The most damaging was a model of “Import substitution” which tried to do away with the external world. It was a mechanical model with no place for risk takers. Government controlled everything. Most of the Banks were nationalized, as were Airlines. Communication was always in Government hands. All financial institutions were with the Government - Insurance, Mutual funds, Term lenders (IDBI), you name it. It was argued that private players in financial sector would not meet the development needs of the nation. Doordarshan, the single Government run Television channel showed Krishi Darshan at prime time, oblivious to the fact that at that time only the urban population had TV and they had no connect with the excitement of the new fertilizer. The Chitrahaar program would bring the traffic and the country to a standstill – the only weekly entertainment for most families. Under Mrs. Gandhi, the Peak income tax rate reached 97.5%. This made the limited Indian entrepreneurs focus their innovative efforts on how to hide their income rather than building great companies. The peak import tariff was 85%. If you produced more than the quota that has been licensed to you, you would be punished.

It was not just Nehru. The whole political system had embraced the same mindset. Socialism was the watch word. The first opposition Government that came to power in 1977 is remembered for sending Coca Cola and IBM out of the country for “investment norm violations”. C.Rajagopalachari (Rajaji) and his Swatantra party were the lone champions of economic liberalism. But their voices were hardly heard as they were not fashionable at that time like the Socialists.

In the late 80s, I remember my encounter with a senior Korean Telecom Executive visiting India and C-DOT for the first time. I was given the job of receiving him. We were coming from the airport in the good old Ambassador car. He was politely critical – “why are you so closed, the automobile technology has moved far ahead - you are still driving in this ancient contraption”. I couldn’t accept his argument and offered my feeble defense of the fully “Made in India” car. He pointed out the exhaust leaking inside the car and said I must travel out and see the world. India manufactured the Ambassador and Fiat cars for ever. And we would not allow even thinking of replacing them. The Amby had its roots in the 1950’s Morris Minor. “Other technologies won’t be able to manage the dusty and rickety roads of India”, one would argue.

The Turn Around

By 1991, We were at the nadir. Current account deficit was $ 10 Bn. Inflation was at 13% and rising. The Foreign exchange reserves could pay barely just 2 weeks of imports. We were forced to pawn 20 tons of gold to The Union Bank of Switzerland to borrow $ 200 Million. When the nation’s Gold was pawned, a raw nerve got touched for the Indians. The minority Government led by Narasimha Rao took some bold steps. With Rao’s backing, Manmohan Singh did away with many controls of the past. The feared Industrial licensing policy was dismantled, tax rates were rationalized and the private sector was freed from the dreadful MRTP act. Public sector monopolies were ended for various sectors ranging from Airlines to Banking. The exchange rate was depreciated to more manageable levels in a controlled float. India started “opening up”. But we were still cagey about it. In Manmohan Singh’s Budget speech in 1992, it was necessary for him to say, ”Our nation will remain eternally grateful to Jawaharlal Nehru for his vision . . .’ He knew he was treading in dangerous territory.

But the sky did not fall on our heads. Actually the immediate results were astounding. Foreign exchange reserves rose sharply and growth accelerated. India has taken the first step of freeing itself from a Millennia of isolationism. India now had the courage to face the real world - to compete in global markets, to attract investments, to allow the messy hustle-bustle of free markets. More importantly it opened itself culturally and intellectually to the ideas of the outside world.

The turn-around decade saw the unwinding of a mindset that was irrationally suspicious of the outside world and of innovation, which abhorred entrepreneurship and risk-taking and, above all, was paralyzed by an ancient fear of failure.

Indian entrepreneurs thrived in the new openness. Investments starting pouring in. The GDP growth rate which had dipped to 1.8% in 1991 zoomed to 5% by 1993 and 7% by 1997.

To complete the story of the good old Ambassador car - when eventually the automobile sector opened up, Maruti came first with technology from Suzuki of Japan. Soon it was all over the place – in the dusty and monsoon flooded roads of India and it worked well. Then many others entered one by one. Today, India has a thriving Automobile industry with a strong component eco system. Bharath Forge, Sundaram Clayton and others compete with the best in the world for advanced auto components. We are one of the largest exporters of Automobiles to South America today. in FY 16, we exported 3.6 Millions automobiles of various kinds. We exported more cars than China. There are many Indian designed cars. Mahindras are successful in small tractors around the world including the US. Last August in a US West coast Mall, I saw a Mahindra Scooter on display and many people were trying it out with interest. Tatas owns automobile companies across the world. The Ambassador eventually became a collector’s item and production stopped in 2014.

The chart below shows the turnaround of India in GDP share – in PPP Terms. After a Millennia of decay, India turned around. The decade of 1985 to 1995 was the pivotal period, which happens to be the early and most effective years of C-DOT.

While the Indian Government removed many controls and restrictions, changes in the following three areas were key to help connect India better within the country and with the external world and ended the long period of being relatively closed.

·        Telecom – Digital technology and privatisation - opened up communication
·        Airlines – Privatised airlines opened up physical travel
·        Television – Multiple channels showed the world and the media reached everyone

C-DOT played a key role in the opening up in the communication front which is a key part of the overall change. Communication is the basis of Openness, Accessibility, Networking, Economic development, Decentralisation and Democratisation and as a result fundamental for Social Transformation.

Among others, the following are some key characteristics of the C-DOT project that helped in this transition: 

-       STD PCO: The waiting list for getting a telephone in 1980 was 5 years. The Teledensity was about 0.5 per 100. Increasing the Teledensity would involve huge investment and time. Sam Pitroda championed the idea of STD PCOs, which eased the problem by improving Telephone accessibility for the common man. Every neighbourhood had the ubiquitous STD PCOs with their Yellow Signs. Peppered across the nation, they quickly improved accessibility in communication. They were cheap unlike western Coin box phones. They created 2 million new jobs. This became the fore-runner for the Telecom privatisation which followed later.
-     Technology: In the 80s technology was always imported in India – not just in Telecom. When a new venture gets started, one first looks for a Technology partner from the west. There was hardly any serious belief or willingness to build a complex technology locally except in very few domains like Space. C-DOT successfully challenged and changed this notion.
-   Innovation: The approach of C-DOT had innovation written all around. STD PCO for accessibility, low power CMOS Microprocessors and a non-air-conditioned switch, Distributed microprocessor based architecture of the switch, use of fresh bright engineers – average age of 26, use of private manufacturing eco system, publicly committed goals, the PBX-RAX-MAX approach with many common subsystems, a home grown tools-rich software development environment, a fresh egalitarian work culture and many more.
-     Risk taking: C-DOT was itself a very risky project. Nobody had done anything like that anywhere in the world. Building a family of complex high availability Central Office switches from scratch using mostly fresh engineers was indeed a tall risk. But it worked. 48 manufacturers signed up. They were ready to take the risk too. Some would fail. But it was acceptable. This was new in a Government dominated risk averse environment. Many C-DOT engineers went out to become entrepreneurs and business leaders. They were ready to stick their necks out and thrived on challenges.
-     Build in India: C-DOT built products in challengingly tight time frames for the Indian network using sophisticated technologies. For example, the RAX worked without Air conditioning – unheard of at that time for a central office switch anywhere in the world. This was achieved by using new technologies that consumed least power and generated minimal heat and right packaging practices. It was not just “manufacturing” in India. It was design, manufacture, deploy, maintain and update in India.
-       India Can do it: It was an age when the was common refrain was complex things can’t be done in India. There was disbelief in ourselves. High availability switches involving millions of lines of complex software has been built in very few countries around the world. Many Technology entrepreneurs were inspired by what was achieved by the young engineers of C-DOT and the confidence on building things within India grew. Starting from the scratch, C-DOT proved that Complex Telecom Technologies can be built in the country.
-   Opening up of Telecom sector: In the mid 80s, Sam Pitroda and Rajiv Gandhi had visualised taking Telecom out of Government monopoly, corporatizing the telecom operations (eventually into BSNL and MTNL), and later open up to private operators. The foundations for opening up of Telecom were laid right then and it played out over the next decade. In a couple of decades, Tele density in India grew to 75% (today it is > 82%), an impressive level compared to the level of 0.5 telephone per 100 population in the 1980s.
-       Connecting people: In a modern world, the digital Telecom revolution made people highly interconnected – on which the internet got built. A good telecom network is the first need to opening a country to a globally interconnected society. It started with increasing accessibility, connecting rural villages, cover tier 2 and 3 cities and then urban centres. Once connected to the network people got access to anybody within and outside the country – suddenly breaking a huge barrier. The IT Industry which started growing all over the country in the next few decades would have found it impossible without such an improved connectivity.
-       Creating an Eco system - Ready for the Mobile Revolution: When the mobile technology became affordable and started spreading in India, the platform was ready - corporatized, out of Government, competition, regulation and a large pool of trained man power were all in place.
-   Global work culture: C-DOT set new standards for Egalitarian, non-hierarchical work culture, where everybody was treated with respect. The Elevator was not held up waiting for the big boss when everybody else stood in a queue. Dissent was allowed and encouraged. Non-hierarchical work environment ensured a high level of empowerment. Merit was encouraged. When 1000s of C-DOT engineers spread out to the industry, they carried this work culture with them enriching the industries.
-      Software – IT Industry: The Software design effort in C-DOT is one of the most complex software project in the 80s and 90s. In various ways the C-DOT experiment and Sam Pitroda played a role in the birth of a dynamic IT industry in India connecting GE to Wipro.
-   Global Connect: This is the real thing. Sam came back to India after a successful entrepreneurial carrier in the US, building Telecom Switches. He brought that exposure with him. He guided so many decisions based on that experience and prevented the team from making mistakes and losing time. He also connected scores of Indian experts in the US who had rich experience in Telecom Technologies. My own personal experience showed me that such connections helped a lot. Nobody tells you how to solve your tough problems. But some insight into other’s experiences helps you bridge the gaps in your learning cycle -  especially when you are trying to leapfrog.

The story of C-DOT was not just building telecom technology, improving accessibility, putting rural telecom in place and increasing tele density. It went far beyond that. It furthered the process of the general opening up in a “once in a millennium time window”. C-DOT played a catalytic role in its own way in this turnaround of a nation from a 1000 years of decay. The country became more vibrant, confident, far more open, ready to take risks, increasingly egalitarian in work culture, boasted a new “can-do” spirit, started believing in its youth, became ready to set high bars for achievements, globally connected, outward looking and innovating nation. C-DOT had its own small but unique contribution towards this. This transition has begun and will continue to gather pace.  India still has many problems – poverty, poor infrastructure, inequality, sanitation, a huge population still in agriculture, poor primary education system and other issues. But it is no longer a nation in decay. It is steadily improving, having woken up to its true potential. It is confident of solving its problems. It is ready to seek and get a rightful place of respect in the global table of nations.

But C-DOT’s achievements did not sustain once the political leadership changed. The leadership changed, the vision changed and it has become another R&D organisation. Unlike the Chinese we do not strategically nurture our industry fully. In that way I would consider the experiment around C-DOT had failed in its larger goal of creating a thriving Telecom manufacturing industry in the country.  

In Space technology we have move well ahead. After we started our Nuclear program, we were prevented from most advanced technologies in space. Because there was no foreign technology available, there is no opportunity for corruption by middlemen to undermine local technologies. Whereas in Defence and Telecom there is a lot of foreign competition  ready to sell to India and the corruption in the system puts a lot of spoke on the progress of any Indian technology manufacturing industry. So India imports $ 40 Bn a year of Electronics. It will reach $ 300 Bn soon – much larger than the oil bill, unless we manufacture more in India. It is so doable – but the system does not relent. We missed one large opportunity here.  Hope things change one day. 

“Democracy is the worst form of Government except for all others” – said Churchill. That would hold for Capitalism too. Both are not easy to build. Most developed countries in the world built Capitalism first and Democracy later. This made it easier for them to make hard decisions early in the cycle. Japan, South Korea, Singapore, China and the Asian tigers in general had strong, authoritarian leadership to get things going first and later most of them embraced democracy. The West took many difficult decisions when they were authoritarian or when their democracy was very young. India is one of the very few countries in history that built democracy first and then started building capitalism. It is much harder. It may not achieve rapid reforms and achieve a fast pace of 10-12% GDP growth rate like the Chinese were able to achieve for more than a decade. But the 1000 years of decay is over and India is growing. Thanks to its democracy, the GDP may grow at a steady and modest pace of 5 to 7% for many decades to come. There is also chance that under intelligent leadership, India may achieve a >10% rate of growth for a brief period before coming down to a sustainable 5%. One thing is certain - the new millennia will be growth oriented and there is no stopping of India from regaining its place. The turnaround has been dramatic and caused by multiple forces. The timeframe and multiple facts suggest that C-Dot possibly played some interesting role in its own small way in this turn around phenomenon at an interesting window of time. 

1.    Indian Renaissance – India’s Rise after 1000 years of Decline by Sanjeev Sanyal
2.    The world in 2050 – Will the shift in Economic Power continue? – PWC Report - Feb 2015: World-in-2050-february-2015 by PWC
3.    Economic History of India - Wikipedia: Wikipedia - Economic_history_of_India
4.    World Economy – Wikipedia: Wikipedia - World_economy