Doing Business in India

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Doing Business in India A Guide for Western Managers

Rajesh Kumar and Anand Kumar Sethi

DOING BUSINESS IN INDIA

© Rajesh Kumar and Anand Kumar Sethi, 2005. All rights reserved. No part of this book may be used or reproduced in any manner whatsoever without written permission except in the case of brief quotations embodied in critical articles or reviews. First published in 2005 by PALGRAVE MACMILLAN™ 175 Fifth Avenue, New York, N.Y. 10010 and Houndmills, Basingstoke, Hampshire, England RG21 6XS Companies and representatives throughout the world. PALGRAVE MACMILLAN is the global academic imprint of the Palgrave Macmillan division of St. Martin’s Press, LLC and of Palgrave Macmillan Ltd. Macmillan® is a registered trademark in the United States, United Kingdom and other countries. Palgrave is a registered trademark in the European Union and other countries. ISBN 1–4039–6752–0 Library of Congress Cataloging-in-Publication Data Kumar, Rajesh, 1954– Doing business in India : a guide for western managers / Rajesh Kumar and Anand Sethi. p. cm. Includes index. ISBN 1–4039–6752–0 1. Business etiquette—India. 2. Corporate culture—India. 3. Negotiation in business—India. 4. Industrial management—Social aspects—India. 5. Intercultural communication—India. 6. National characteristics, East Indian. 7. India—Commerce. I. Sethi, Anand. II. Title. HF5389.3.I4K86 2005 395.5⬘2⬘0954—dc22

2005043432

A catalogue record for this book is available from the British Library. Design by Newgen Imaging Systems (P) Ltd., Chennai, India. First edition: October 2005 10 9 8 7 6 5 4 3 2 1 Printed in the United States of America.

C on t e n t s

Preface

viii

India: A Commercial History Perspective

The Rise of India: India and the West—Institutional Contrasts

A Brief History of the Indian Software Industry

Cultural Portrait: Impact of Hinduism on Indian Managerial Behavior

Understanding India

Strategizing Success in India

Communicating with Indians

103

Managing Relationships with the Indian Government: The Critical Challenges for Multinational Firms

115

Negotiating and Resolving Conflicts in India

130

Appendices

140

Notes

142

Index

157

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Dedicated to the bright and dynamic youth of India who stand to inherit a new economic superpower

Preface

The Indian Tourism Board has a series of promotional advertisem*nts with beautiful photographs of places, tigers, elephants, and various aspects of life in India, all with a highlighted expression of “INDIAAHH!.” This sigh pretty much sums up India. An incredible country that can delight, thrill, fascinate, and yet drive people to exasperation. The expression represents the complete bandwidth of the sights, the sounds, the smells, and the colors that typify India, some great and yet some not so pleasant! The British Broadcasting Corporation recently carried a television story about an English Lady who had just sold off her house near London but had missed out on booking her usual Christmas holiday. Seeing an advertisem*nt about the Indian state of Kerala, as a holiday destination, she decided to try it out. Arriving in Cochin after having faced all sorts of travel-related hassles and a hair-raising ride from the airport, at the time of checking in to the hotel, out of sheer exasperation, she requests the travel desk to arrange for her to fly back home the very next day. Unfortunately, no seats were available for a few days. In the meantime, however, with each passing day she began to increasingly like the place and the people. She promptly canceled her return ticket and has now been in India for several years after having bought for herself a dream mansion in Kerala, for a fraction of the cost she would have had to pay in England. Such tales abound. All around India there are former foreign managers and diplomats, who came to India as skeptics and critical of habits, mores, practices, and other things Indian, but in a reasonably short time started to love the country and its culture and got so assimilated that they now call this place home. We also personally know many people who having gone back from India have long pined to return for another stint. There are of course those who, having been sanitized by long years of living and working in very orderly societies and corporations, hate most things about India and cannot wait to leave. It is those who assimilate, drop their “Imperialistic” attitude and become, what may be termed “Indianized,” who like it and are liked. The others want out. This analogy applies equally well to companies setting up operations in India, as we highlight in this book. Indian business history tells us that by the usual definitions, India in the past, with its active trading involvement with countries and peoples from all over the world, was the world’s first globalized economy. India was also where the first confluence of the world’s major religions happened. It therefore has a long history of cross-cultural relationships and an ingrained culture of tolerance, but demands assimilation. The Mughals came, were assimilated and stayed on as rulers.

preface / ix

The British were, however, different and, with notable exceptions, had clear Imperial and Colonial tendencies that generated strong antipathies, resulting in their departure from the subcontinent in 1947. Interestingly, observers also speak of strong evidence, although empirical, which seems to suggest that companies and entities from the old colonial countries are not as successful as those from the non-colonizers. Comparisons are made between the attitudes and performances of U.S. entities and British companies in India, Swedish companies versus those from Denmark (also an ex-colonizer), and German companies versus the Dutch. In this book we attempt to provide Western managers with a background on and an understanding of India, its business culture, methods to deal with its people and its bureaucracy, and in general how to strategize success when operating in the country. We provide some case studies of companies that have done well and it is our hope that readers of this book will draw the relevant lessons from these successes. We have deliberately refrained from covering the usual aspects of how to go about actually establishing local entities, laws, regulations, taxes, and government policies in general. All these are easily and readily available, and in this book we have provided some leads and links to relevant sources of information for the readers. It is nobody’s claim that India is a cakewalk and an easy place to operate in. Yet, it is well known that there are numerous success stories of companies doing very well indeed. In a June 2004 survey of multinationals operating in India, the Federation of Indian Chambers of Commerce and Industry, finds extremely high, and increasing levels of investor confidence, with a staggering 93 percent of respondent companies indicating attractive additional investment opportunities in their sectors of operations. Also India is now rapidly becoming a favored investment destination. A.T. Kearney, the Japanese Bank for International Co-operation and the European Union are just a few of those ranking India among the top three investment destinations in the world. As far as Information Technology, Business Process Outsourcing, and other IT related services are concerned, India has already acquired an outstanding reputation. The past few years have also seen a great surge in outsourced engineering and design services–related projects as well a phenomenal interest in the fields of Biotechnology, Healthcare, and Pharmaceuticals. But, with the recent announcements by the South Korean majors, the Italian company Piaggio, as also the Finnish companies, Elcoteq and Nokia of establishing large production units in India, it is becoming increasingly evident that India could well be the next good story as far as manufacturing is concerned. It is, therefore, our fervent hope that this book will assist companies and managers from Western countries to understand and comprehend this great country, learn how to assimilate and thus, we hope, pave the way toward establishing successful ventures in India, restoring India to the global leadership position and the glory it once had in the past.

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C h ap t e r On e India: A Commercial History Perspective

To know my country, one has to travel to that age, when she realized her soul and thus transcended her physical boundaries, when she revealed her being in a radiant magnanimity which illumined the Eastern horizon making her recognized as their own by those in alien shores who were awakened into a surprise of life. Nobel Laureate, Rabindranath Tagore on India

India: The Pioneer in Globalization If we accept the conventional definition of the term “Globalization” to mean the movement of goods, services, and knowledge across geographical and political boundaries across large parts of the globe, or that goods, services, knowledge, and finance available in one part of the world are also increasingly made available elsewhere, then India would arguably qualify as the very first globalized economy in the history of the world. Indian history records1 that the Indian society of the fourth millennium BC was already dominated by traders who initiated the first Industrial Revolution in India subsequent to which it became a major industrial and exporting country. In the words of Professor H. Frankfort,2 “It has been established beyond a possibility of doubt that India played a part in that early complex culture which shaped the civilized world before the advent of the Greeks.” Recorded history also indicates India’s extensive export and import trade and commerce, right from the days of the Phoenicians (as noted by Herodotus) in the second millennium BC, when Indian natural products, textiles, precious stones, and a range of manufactured items were exported, usually taking the overland route by caravans or through a combination of sea and land routes. Imports were largely gold, silver, copper, and other metals as well as wine. There is also evidence3 to show that King Solomon’s trading ships regularly visited the Port of Cranganore (modern day Kerala) around 950 BC. Tales and stories of India’s fabulous riches carried by traders and merchants spread far and wide. Among those who were attracted by India’s opulence was Alexander the Great of Macedonia who then planned and executed an invasion of India in 327 BC, not for the sake of establishing Greek rule but to monopolize the commerce of India.4

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Alexander left a seminal effect on international trade linking his empire with Egypt, India, Syria, Persia, and the like. He established commercial cities at nodal points in the then Macedonian Greek Empire, some seventy of them called “Alexandria” (including at least four in then India). After the Romans had become the dominating power in Europe, the first Indian ambassador was sent out by Hindu rulers from Madurai in South India who reached Rome in AD 26. A few years later, another ambassador was sent out during the reign of Claudius Caesar by which time the maritime trade between Rome and India had acquired very large dimensions. In AD 45, a very important discovery was made. Admiral Hippalus serving under Claudius discovered the importance of the Indian monsoon winds and did an extensive study on them. This discovery enabled the Romans to send out very large trading fleets linking Alexandria with Indian ports. Every July a fleet of a hundred or so ships would leave from the Red Sea for Indian ports laden with wine, copper, lead, tin, and surprisingly, slaves. This fleet would then use the reversing winds of the retreating monsoon in November to take back cargoes of pepper, pearls, diamonds, and textiles. While Europe, with its trade links with India, was transitioning from under the control of the Greeks to the Romans, a very important development was taking place in India. The great Indian emperor, Ashoka, Chandragupta Maurya’s successor, decided in the year 262 BC to become a Buddhist after seeing the carnage and bloodletting caused by his many battles. During Chandragupta Maurya’s time, India had already begun to propagate Buddhism in many parts of Asia. The process gained momentum with emperor Ashoka becoming an active Buddhist and many countries including China, Cambodia, and Thailand came into the Buddhist fold. Xinru Liu in his excellent book5 writes in considerable detail about the development of trade and commerce between India and China paralleling the spread of Buddhism from India to China and East Asia. The famous Chinese travelers to India, Fa Xian (AD 430–444) and Xuan Zhuang (AD 630–644) have written extensively about the then trade between India and China.6 After the Chinese conquered Canton in 111 BC, China acquired a very convenient port to expand their maritime trade particularly with India. The real breakthrough, however, came after AD 1000 when the Chinese started to develop reasonably accurate compasses for use on board their ships. During the reign of Yongle (AD 1403–1424), the third emperor of the Ming Dynasty, the use of these compasses on board Chinese ships became widespread and the Chinese were able to mount increasingly larger merchant fleets. At least seven major expeditions were sent to India from AD 1405 to AD 1433, most of them under the command of the famous eunuch Admiral Zheng He.7 But it was not all trade and commerce. Long before the dawn of Buddhism, India was already beginning to be a major center for learning. Writing in India goes back to the most ancient times. India’s first prime minister, Jawaharlal Nehru, in his masterly book Discovery of India8 writes that in ancient India, “The study of astronomy was especially pursued and it often merged into astrology. Medicine had its textbooks and there were many large hospitals.” However, it was in Mathematics that India made some really major contributions, which is discussed in chapter three, “A Brief History of the Indian Software Industry.”

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The development of Mathematics in India was not a result of basic philosophical meanderings but that which arose out of the existing demand of complex problems of trade and society such as taxation, debt, interest, exchange rates, calculation of the fineness of gold, and the like. The study of Chemistry and Metallurgy were also quite advanced in India. Because of India’s very large textile export market, special fast dyes termed “Indigo” were developed. The tempering of steel was a well-developed technology, and Indian metallurgical products were in great demand internationally, especially for weaponry. Testament to this is the iron pillar near Delhi, which was built before the fourth century, and has withstood the ravages of elements with no sign of any rust formation. It has been discovered only now by metallurgists that a thin layer of “misawite,” a compound of iron, oxygen, and hydrogen, has protected the pillar from getting corroded. The protective film, formed catalytically by the presence of high amounts of phosphorous in the iron—as much as 1 percent as against less than 0.05 percent in modern day iron, started forming three years after the pillar was built. Northern India, however, began to go into a decline toward the latter part of the fifth century AD, even though the Gupta Empire (fourth through sixth century AD), the so-called Golden Age of India, still existed. There were repeated invasions by the Huns from the northwest, who, for a period of 50 years actually ruled most of North India. This along with a rapidly fossilizing social and commercial structure, possibly because of the growing influence and rigors of the caste system, affected productivity as well as contacts and trade with the rest of the world. Basically, there was a largescale decline in all the spheres. The southern part of India under the domination of the progressive Chola kings, however, remained by and large steady and prosperous and continued to maintain commercial relations with the outside world. With North India going into decline, the way was open to all kind of invasions from Afghanistan, Central Asia and beyond. The Arabs and Islam were beginning to make their mark. Around AD 1000 Sultan Mahmud of Ghazni (Afghanistan) began his ruthless raids and occupied a large part of North India. While India for long had trade, commerce as well as knowledge interaction with the more moderate Islam of the Middle East, the barbarism of Mahmud and his harsh propagation of Islam brought a new dimension into India’s knowledge of Islam and its culture. A succession of Islamic invasions saw the power base move to Delhi, the capital of their Sultanate. The great Khans (Chengiz and Kubla) did not come to India; however, Timur the Turk and his armies ravaged and ransacked the North and pretty much denuded any remaining wealth and destroyed all commerce from the northern part of India. It was only in AD 1526 that the North came under the control of a somewhat better lot of invaders like Babar, from near present day Uzbekistan. Thus the Great Mughal Dynasty of India was born, which went on to rule a major part of India for over two centuries. With the rise of Arab power (Caliphs of Baghdad), the Ottomans, and then the ascendancy of Genghiz Khan the overland trade between Europe and India came to a low ebb. European merchants did not like the stranglehold of other powers in the trade with India. It was in such a scenario that Marco Polo on his return from China by sea in AD 1292 stopped by in the much more prosperous South India. Marco Polo

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went back to Europe with great tales of India’s fabulous wealth and trade potential and more importantly, about the “Spices” Europe had found in India. Europeans Arrive in India: Confluence of the World’s Major Religions It was however not until the birth of the European renaissance after the Crusades and the defeat of the Arabs by Isabella and Ferdinand that the next chapter of India’s globalization began. The technology of the maritime compass by then had spread to Europe and there were a few intrepid mariners who defied the church and believed that the Earth was round and circumnavigable. One such mariner was the Portuguese Bartolomeu Dias who in AD 1488 sailed the Cape of Good Hope and sailed some distance up to the East Coast of Africa but inexplicably did not go on to India. Christopher Columbus was another such intrepid mariner and did manage to convince Queen Isabella in AD 1492 to proceed westward in search of India. The rest, as they say, is history. Although Columbus made landfall in San Salvador while searching for the prize that was India, he did kick off the great modernization of the world and globalized trade, as we now know it. A few years after Columbus’s historic voyage, another great sailor from Portugal, Vasco da Gama, sailed the Cape of Good Hope with his fleet of ships and with great navigational skills arrived at Calicut in India on May 20, 1498. Europe had finally found the invaluable sea route to India and its fabled wealth, safe from any interdiction by hostile Islamic elements that controlled the overland routes. Significantly, although Christianity had been introduced into India in AD 52 by the arrival of St. Thomas in Madras (Chennai), it was only with the Portuguese that real Christian culture was introduced to India. Precolonial India thus had become a repository of the world’s four greatest religions and cultures namely Hinduism, Buddhism, Islam, and Christianity. Little wonder then that, Indians are possibly the most adept in the world, in cross-cultural relationships. The Portuguese in India: In Quest of Spices The timing of the opening out of the two great all water trading routes, one to India and beyond and the other to the Americas turned out to be extremely fortuitous. As it later turned out, the Portuguese had more practical matters on their mind than pure plunder of India’s fabled wealth! In the early days, food in Europe was neither good nor palatable. There was no cattle fodder that could be stored so animals were killed for beef in the autumn and salted. There were no potatoes or corn or sugar or tea or coffee or lemons. A bit of pepper, ginger, cloves, cinnamon, and other spices could not only make the meat taste better but helped in its preservation with some health and medical related benefits thrown in for good measure. Medicines of those days used particularly large quantities of spices as reported by Hippocrates. For centuries the Arabs controlled the spice trade into Europe with all its contingent profits. The Prophet Mohammed was married to a rich spice trading widow and when the Islamic missionaries traveled they also promoted spices. They kept their

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sources of supply—the Indian as well as the Chinese and Javanese traders who called into Indian ports—a complete secret. It was only after Marco Polo’s travels that the secret was revealed. With the availability of the safe, all water passage to India, the precious spices could now be obtained at much lower prices without the Arab middlemen. With increasingly larger ships, the cost of transportation to Europe also became considerably lower. Fortunately, with the simultaneous opening up of the Americas’ trade, the tremendous expansion of European silver stock by the working of the Spanish American silver mines could easily pay for the Indian trading operations. The Portuguese rulers of the fifteenth century looked with great envy at the riches of the nobility and traders of Venice and Genoa who controlled the distribution and sales of spices in Europe from being supplied by the Arabs. The arrival of Vasco da Gama in Calicut on an all-sea route was to change these equations irrevocably. The Portuguese were then well on their way to becoming the masters of trade with India, the Orient, and the New World with the consequent diminishing importance of Venice and Genoa as trading centers and the virtual destruction of the Arabian Empire of that time. The Portuguese dominated trade with India for pretty much the whole of the sixteenth century. The control of India related operations was directly in the hands of the Royal trading firm “Casa da India” with the Indian side being handled by “Estado da India” headquartered in Goa. Under Governor Afonso de Albuquerque, a capital was set up in Goa in 1510, the very first piece of Indian territory directly governed by Europeans since the time of Alexander the Great. From here the Portuguese sent out ships to control all the strategic ports in the Indian Ocean and at the entrance to the Red Sea, effectively cutting off all the erstwhile spice and other trade including textiles, piece goods, horses, gold, and ivory, of the Arabs and their Gujarati partners. The Portuguese, after the capture of Malacca went on to establish the first ever commercial sea route by running the “Great Ship” from Goa to Nagasaki via Malacca and Macau. The Portuguese, because of the priorities being accorded to their colony in Brazil, were unable to put together a genuine commercial and corporate infrastructure. Thus, when the Dutch and the English, two nations with greater resources, came to India, the Portuguese, having been weakened by their campaigns in Europe, Brazil, and Africa, were not only beaten and dispossessed of much of their settlements, but also had their commercial base in India ruined. In September 1632 the Mughal Emperor of India evicted the Portuguese from their possessions in Bengal, and in January 1663, the Dutch under Ryckloff Van Goens defeated the Portuguese and captured Cochin. By 1665, Bombay went under English control, and the Portuguese were left with the small colony of Goa along with the small enclaves of Daman and Diu, north of Bombay, from where they were finally, and somewhat unceremoniously, evicted by the Indian Army at the end of 1961. The Dutch and the English in India: The Birth of Modern Capitalism, the Establishment of the World’s First Incorporated Company and Its First Multinational Corporation By the middle of the sixteenth century, word of the exploits of the Portuguese had spread to England. Several business people in the city of London contemplated the

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possibility of business with India. It was however an explorer, Sir Richard Willoughby, who in 1553 formed what records indicate is possibly the world’s first ever incorporated company. Willoughby set up, along with a set of merchants as other shareholders, a company with a really romantic name, “The Mysterie and Compagnie of the Merchant Adventurers for the Discoverie of Regions, Dominions, Islands and Places Unknown,” later to be called the “Muscovy Company,” to find and exploit an overland trade route to India. Yet, while it was for trade with India that the Muscovy Company was set up, the company made huge profits, but from trading with Russia, as their expeditions could not find an easy overland trade route to India. The great English naval victory of Francis Drake over the Spanish Armada in 1588 kindled their desire for major maritime enterprise and particularly for a share in the sea-based trade with India and the Far East. At the end of 1600, Queen Elizabeth I granted a Charter with rights of exclusive trading to “the Governor and Company of Merchants of London trading into the East Indies.” Thus was born the “Joint Stock” East India Company (EIC ) constituted by a grouping of 218 knights, London merchants, ordinary city tradesmen, and Aldermen.

The Dutch About the same time the Dutch with their strong mercantile tradition, especially in the spice trade, developed their own plans for trading with India and the Far East by the sea route. In 1602, a group of Burghers and traders from the Dutch towns of Amsterdam, Rotterdam, and Middleburg established the Verenigde Oost Indische Compagnie (VOC), the United Netherlands East India Company. The Board of Directors of the VOC was a set of 17 gentlemen (the Heeren XVII) who controlled the operations of the company, which at its peak included its huge network of factories and settlements in India, Sri Lanka, Indonesia, the Spice Islands, South East Asia, Africa, the Middle East, China, and Japan. Between 1602 and 1796, the VOC sent out almost a million Europeans to work on the Asia trade on nearly 5,000 ships, a number significantly larger than its nearest rival EIC, truly making the VOC the world’ s first multinational. Although the EIC was established a couple of years before the VOC, the Dutch beat their English rivals in reaching India. The first Dutch ships arrived in India at the Malabar Coast in 1604 under the command of Admiral Juris Van Spilbergen before going on to then Ceylon. By 1606, a trading station had been established at Surat in Gujarat, two years before the English were to arrive there. By 1610 the VOC had established possessions in Pulicat (north of Madras) and Masulipatnam and expanded their trade considerably. The Dutch upgraded their presence by appointing Pieter Both as the first governor of their possessions in Ceylon and India. It was however the next governor, Jan Coen who not only consolidated the Dutch presence in India and Ceylon but also led the Dutch expansion into Indonesia. By 1619, Coen had captured Jakarta, and renamed it Batavia, which then went on to become for many decades the Dutch capital of the Indies and much like Goa for the Portuguese, the pivot of the Dutch trade of spices, sugar, textiles, timber, gems, and the like in the Asian region. With the VOC getting increasingly involved with Indonesia and Malacca their activities in Malabar were largely confined to their factories at Kayamkulam and

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Cannanore, and in Bengal to the factories at Chinsurah (Fort Gustavius) and Baranagore, until 1658 when with the weakening of the Portuguese in India, the Dutch under Ryckloff van Goens decided to strike. In 1658 they captured Tuticorin and in 1661 Quilon, Cranganore and Cochin in 1663 and subsequently all of Malabar. The Dutch established their capital in Cochin from where they controlled Malabar for the next 130 years, with the contingent advantage of the monopoly of the pepper and cinnamon trade of the region. Surprisingly, neighboring Travancore did not come under Dutch control except very briefly. And it was here, off a small coastal town called Colachel on the route (the present day National Highway 47) from Trivandrum (modern Thiruvananthapuram) to then Cape Comorin (Kanyakumari) at the southern most tip of India, that a most remarkable event took place in 1741. In a major naval encounter, a squadron of the ruler of Travancore’s navy defeated the invading Dutch fleet under the Command of Delannoy. For the first time ever an Asian navy had defeated a European power at sea. A feat not to be repeated until 1905 when Admiral Tojo defeated the Russians in the battle of the Yellow Sea. The defeated Delannoy was so impressed that he switched to the service of Marthanda Varma, the ruler of Travancore and trained his forces for almost 30 years thereafter. Delannoy died in India and lies buried at the inland fort of Udaygiri, a name now proudly borne by a warship of the modern Indian Navy. The Dutch and the VOC never fully recovered from their defeat in this encounter. From 1750 onward the VOC was in a state of decline particularly in India. The English by then had started to get stronger and more assertive. Industry and commerce in Holland had considerably diminished. On October 20, 1795, the Dutch lost control of their Indian capital, Cochin and on December 31, 1799 the VOC was finally wound up. The Dutch however kept control of Chinsurah in Bengal until 1825 when it was finally ceded to the English as part of the exchange deal for Sumatra. Interestingly, the VOC was not the only Dutch effort in India. Merchants from Ostend, which had come under the control of Austria, with the support of some Dutch and Belgian merchants, set up their own enterprise for trade with India. They started the Ostend East India Company in 1722 (although some trading had begun as early as 1715) and established trade links with Mocha (Yemen), India, and China. The Ostend Company, to avoid conflict with the VOC, stayed away from South India and concentrated on operations in Bengal. In 1723, a trading station and factory was set up in Banki Bazar (now a suburb of Kolkata). However, in March 1727 the Charter of the company was suspended and finally in March 1731, after the Second Treaty of Vienna, the company itself was wound down and all its possessions were taken over by the Austrian Crown. The Austrians then ran the Indian colonies until they closed them down completely in 1744, except for a brief take over of the Nicobar Islands from the Danes between 1778 and 1784. The English in India The East India Company (EIC) in the start-up phase organized ship expeditions primarily to the Spice Islands. These were called “Separate Voyages” because each

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expedition was financed by a group of merchants within the EIC, who wound up the expedition on the return of the ships and divided the profits among themselves. The third such separate voyage called in at Surat in 1608 but was driven away by the then powerful Portuguese. In 1610, the English did manage to establish a trading station in Masulipatnam in Andhra Pradesh. Meanwhile, a highly colorful character called Capt. William Hawkins had in 1609, arrived as an envoy of King James I to the court of the Mughal emperor Jehangir in Delhi. Capt. Hawkins rapidly became Emperor Jehangir’s drinking partner and also an advisor to the Mughal army and commander of its cavalry. In 1612, a group of English ships under the command of Capt. Best successfully beat off Portuguese counter attacks and established their first trading station at Surat. In 1613, the English received a formal approval from the Mughal emperor for full trading rights in the area around Gujarat and Surat became the first Presidency of the EIC in India, which with the efflux of time, developed into the Presidency of Bombay, and a major commercial center for the English in India. In 1615, King James I sent out Sir Thomas Roe as the first official ambassador to the court of the Mughal emperor, who managed to obtain major concessions for establishing trading stations and factories around many parts of India. In 1625, Francis Day the English Commander in the southern part of the Bay of Bengal, managed to obtain from a local chief the grant of a strip of land north of the Portuguese settlement of San Thome with permission to erect a fortification. England had thus acquired her first property rights in India and the Presidency of Madras was thus established, with the fort being named Fort St. George. As Nick Robins describes in his article “In Search of East India Company,”9 “Asia played a great role in civilizing Europe. From the middle of the seventeenth century on, the growing influx of cottons radically improved hygiene and comfort, while tea transformed the customs and daily calendar of the people (in Europe). And it was in the huge five acre warehouse complex at Cutler’s Gardens (London) that these goods were stored prior to auction at ‘East India House’ (Leadenhall Street, London). Here, over 4,000 workers sorted and guarded the EIC’s stocks of wondrous Indian textiles, calicos, muslins and dungarees, ginghams, chintzes and seersuckers, taffetas, ‘alliballies’, and hum hums. Today, the company’s past at Cutler’s Gardens is marked with ceramic tiles that bear a ring of words: ‘silks, skins, tea, ivory, carpets, spices, feathers, cottons.’ ” By 1624, the English had figured out a great Dutch secret. It turned out that the Dutch used saltpeter from India as ballast for their ships returning home instead of plain rocks. Apparently Indian saltpeter was very rich in potassium nitrates and other alkaline salts essential for gunpowder in those days. The Crown put pressure on the EIC for their ships to bring back this high quality saltpeter from India for their guns. Failure to do so would result in the application of an export duty on all silver, the then trading currency, carried to India by the company’s ships. Hundreds of thousands of tons of saltpeter was taken to England from all parts of India thus contributing enormously to the rise in the domination of English guns and weaponry of that time. The EIC rapidly consolidated and expanded its Indian operations. Incredibly, except for a minor battle at Biderra (Chinsurah, Bengal) in 1759, there is very little evidence of large scale hostilities between the English and the Dutch. This enabled

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the EIC to gradually expand their trading portfolio. By the middle of the seventeenth century the EIC was shipping goods as diverse as cloth from Southern India to Sumatra and coffee from Arabia to India. Profits thus generated were put back into buying the spices required in the home country and hence were able to circumvent the Dutch stranglehold on the Spice Trade. In 1661, the English in India got the equivalent of a “windfall.” King Charles II of England married the Portuguese Princess, Catherine of Braganza, and Bombay (“Bom Baja”) was gifted to him as part of her dowry mainly in order to secure English support to the Portuguese against the Dutch. The cash-strapped king leased Bombay to the EIC for a huge loan but with an annual rent of only ten pounds sterling per annum. One of the earlier governors of Bombay, Gerald Aungier (1669–1677) went on to develop this city and the Presidency into India’s commercial powerhouse. Indian Exports Lead to the World’s First Protectionist Barriers. Nick Robins10 further writes, “The lifestyle evolution (in England) was not without opposition. For hundreds of years, India had been renowned as the workshop of the world, combining great skill with phenomenally low labor costs in textile production. As EIC’s imports grew, so local manufacturers in England panicked. In 1699, things came to a head and London’s silk weavers rioted, storming ‘East India House’ in protest at cheap imports from India.” Horace Walpole was famously known to have stated, “What is England now? A sink of Indian wealth, filled by Nabobs.” Shortly thereafter Parliament prohibited the import of all dyed and printed cloth from India, to be followed a few years later by a complete ban on the use or wearing of all printed calicoes in England. Such unique protectionist barriers were later to contribute enormously to the rapid progress of England’s textile factories and the demise of India’s handloom textiles business for years to come. Meanwhile, the wealth being generated by the EIC led to considerable envy. Toward the end of the seventeenth century a rival company called The English Company Trading to the East Indies was set up and the future of the EIC was now seriously threatened. The directors of the EIC protested pleading that “two East India Companies in England could no more subsist without destroying one or the other, than two Kings, at the same time regnant in one Kingdom.” After much quarreling an agreement was reached. Under the award of Lord Godolphin, who had the task of resolving the issue, the two companies were merged into one entity called The United Company of Merchants of England trading to the East Indies. This was then the company and not the old EIC, as is widely believed, which went on to control trade with India and ended up taking control of the sovereignty of India from 1757 to 1858. However, the moniker of the EIC has stuck in conventional history books and, for ease of recognition, is used in this chapter. The English in India: Imperialism Replaces Capitalism. In 1743, a young man from an aristocratic family from Shropshire, England, by the name of Robert Clive, came out to India as a clerk for the company and ended up enrolling for military service with them. Clive was soon to distinguish himself in battle in 1751 and 1752 against the French (under Dupleix), who by then had also come to India, and were on the verge

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of achieving near hegemony, in the southern part of India. Shortly thereafter Clive was made the Governor of Fort St. George at Madras. From then on the history of India and the history of India’ s business and trade were to be changed irrevocably. Because of the continuing trade barriers in the textile trade, the EIC had to change tack. With increasing manufacturing activities in Europe, raw materials needed to be procured at very cheap prices. Also, there was great consternation in England about the huge outflow to India of precious metals, particularly silver, which was the principal “currency” acceptable to Indian traders. The EIC had to find other sources of financing their operations. The easiest way out was to diversify. And diversify the company did, and started a massive though dishonorable trade in opium that made huge profits but was to later lead to the infamous Opium Wars. The other way of increasing finances was the military option of annexing territories and then taxing the local people. Gerald Aungier, the Governor in Bombay, wrote to the Directors in London advocating, “The time now requires you to manage your general commerce with the sword in your hands.” Accordingly, Robert Clive, in 1757 on a not very convincing charge relating to the questionable “Black Hole of Calcutta” incident, attacked and defeated the Nawab of Bengal, Siraj-uddaula, at the battle of Plassey and installed a compliant “puppet” Mir Jafar as the Nawab. This was then the defining moment and the turning point in Indian history. Imperialism had now replaced Capitalism. The Loot of India’s Wealth Finances the “Industrial Revolution.” Within five years, revenues from tax at the rate of 67 percent on income went up by 300 percent, driving the people of Bengal to near penury. By 1769 such extortion, together with a period of drought, kicked off the great famine of Bengal. Over ten million people died and yet the company made no relief arrangements. Tax revenues were further increased and the EIC’s monopoly textile trade was protected by some brutal measures such as the cutting off the thumbs of weavers who dared to sell to other traders. According to Nehru11 “The English historians of India, Edward Thompson and G.T. Garrett, tell us that a gold lust unequaled since the hysteria that took hold of the Spaniards of Cortes’ and Pizarro’s age filled the English mind. Bengal in particular was not to know peace again until she had been bled white.” But Bengal and India can nevertheless take credit for the fact that its looted wealth paved the way for the Industrial Revolution. In the words of the American, Brooke Adams,12 “very soon after Plassey, the Bengal plunder began to arrive in London, and the effect appears to have been instantaneous, for all authorities agree that the ‘Industrial Revolution’ began with the year 1770 . . . Plassey was fought in 1757, and probably nothing has ever equaled the rapidity of the change that followed. In 1760 the ‘flying shuttle’ for textile manufacturing appeared, and coal began to replace wood in smelting. In 1764, Hargreaves invented the Spinning Jenny and, in 1768, Watt matured the steam engine. Before the influx of the Indian treasure, and the expansion of credit, which followed, no force sufficient for this purpose existed. Possibly since the world began, no investment has ever yielded the profit reaped from the Indian plunder, because for nearly 50 years Great Britain stood without a competitor.” Needless to say, India’s industry was devastated and its agriculture decayed. The economic development of India was completely arrested for the rest of the eighteenth

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century as well as for all of the nineteenth century. With Indian manufacturing and exports severely curtailed, the British started to flood India with their own products. According to Nehru,13 “The Classic type of modern colonial economy was built up, India becoming an agricultural colony of industrial England, supplying raw materials and providing markets for Industrial goods.” India was not to recover until late into the twentieth century. Interestingly, among the increasing exports to India from Britain were such unique items as “India Pale Ale,” a highly hopped beer to withstand the long and hot journey with large blocks of ice obtained from North America. Also at this time large quantities of gin and tonic (quinine water) used to be shipped out to India, “the Gin to keep the boredom (of the British expatriates) away and the Tonic Water to keep off malaria!” The English in India: Imperialism gives way to Colonialism. All of these events, together with the constant envy at the wealth generated by those connected with the EIC led to great political pressure in England to carry out reforms, despite the interest to the contrary shown by King George III. In 1773, Lord North introduced “The India Bill” in Parliament providing for greater parliamentary control and placing India under the rule of a governor general. In 1784, Prime Minister William Pitt pushed through Parliament the “India Act” that effectively transferred the full management of the company to a board answerable directly to Parliament and thus according to Nick Robins,14 “in the final 70 years of its life, the company would become less of an independent commercial venture and more a sub-contracted administrator for the English (later on the British) State, a Georgian example of a public–private partnership.” Warren Hastings came out to India as the first governor general and he vigorously pursued the expansion of British rule in India. The aggressive territorial policies of the subsequent Governors General led to the defeat or expulsion of the other European entities in India, as well as the defeat and annexation of any individual state that defied the British. By 1856, the British had total occupation of all of India. Imperialism had given way to Colonialism. Unfortunately for the EIC though, its racial and administrative arrogance of the rule in India led to the Mutiny of India in 1857. This brutal war lasted two years and the victorious British sent the last Mughal emperor to prison and killed his two sons. While that was the end of the Mughal empire in India, the EIC itself, by a proclamation on November 1, 1858, was abolished and the direct rule of India by the Monarch and Parliament in London was established. This situation was to last until August 15, 1947 when India finally won its independence from British rule. The Danes in India According to Peter Ravn Rasmussen,15 in 1615 two Dutch merchants, Jan de Willem and Herman Rosenkrantz, brought a proposal to King Christian IV, monarch of Denmark and Norway, a proposal for the establishment of a Danish trading company, that would compete with the VOC and EIC. On March 17, 1616, the King issued a charter giving The Dansk Ost Indisk Kompagni (DOIK—The Danish East

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India Company), a monopoly on trade between Denmark and Asia for a period of 12 years. The DOIK was structured very much like the VOC and further, according to Rasmussen,16 several of the Articles of Association were lifted in their entirety from those of the VOC. However, it was only by 1618 that adequate finances could be raised to mount the first expedition. This voyage was originally to sail to the Coromandel Coast of India on the advice of Roelant Crappe, who was earlier in the service of the VOC. However, another Dutchman, Marselis de Boschouwer, claiming to be the emissary of the “Emperor of Ceylon,” met King Christian IV and persuaded him to sign in March 1618 a “Treaty of Aid and Trade” between Denmark and the so-called Emperor of Ceylon (in fact just the Rajah of Kandy). The destination of the expedition was now changed to Ceylon. On August 18, 1618 the Danish Ship “Oresund” under the command of Roelant Crappe sailed to the Indies from Copenhagen, followed shortly thereafter on November 29, 1618 by the main fleet of four ships under the command of Ove Gjedde. However, during the long voyage from Denmark, Boschouwer died, and shortly after arriving in Ceylon, the “Oresund” was sunk by the Portuguese, and Roelant Crappe captured and handed over to Raghunatha, the local ruler (Nayak) of Tanjore province in India. Thus, on arrival in Ceylon, Ove Gjedde did not find any satisfactory arrangements in place and decided to move on to India’s Coromandel Coast. In October 1620, Gjedde, accompanied by Reverend Lutken, the Chaplain to King Frederik IV, arrived at the Court of the Nayak of Tanjore, and by November that year a treaty was concluded by him on behalf of the King of Denmark with the Nayak, and permission obtained for establishing a fort (“Dansborg”) at the village of Tarangambadi, later to be called “Tranquebar.” By 1621, with “Dansborg” well established, the ship “Kobenhavn” (Copenhagen) sailed out from Tranquebar to Tenasserim (Mergui) on the western coast of Thailand and returned with a large cargo of pepper. In 1622, Gjedde sailed back to Denmark leaving the now freed Crappe in charge of Tranquebar. In 1624, the Danes expanded their trade by sending expeditions to Macassar in present day Indonesia to bring back cargo loads of cloves. With these initial successes, the Danes felt emboldened to expand their Indian operations and in 1625, a Danish possession was established in Masulipatnam on the Andhra coast and subsequently similar operations were set up in Pipely and Balasore in Orissa. However, it appears that the finances of the Indian operations of the DOIK were poorly managed and by 1627, the Danes were reduced to running their ships on third party neutral charters for the Portuguese and the Dutch. Worse, Roelant Crappe was unable to pay the agreed upon royalties to the Nayak of Tanjore and was promptly put on notice. Crappe tried to negotiate with the VOC for them to take over Tranquebar but the Dutch were not interested. Crappe decided to return to Denmark to seek financial assistance and left the operations in India to another Dutchman, Pessart, who made the financial situation worse by mismanagement, and by 1638 he along with his family were finally held hostage in lieu of outstanding Danish payments. The major shareholders of the DOIK petitioned King Christian IV to wind up the company in view of its deteriorating finances but the king clearly had other ideas.

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In 1639 two more ships, the “Solen” and the “Christianshavn,” were sent out to Tranquebar along with William Leyel, the designated new governor of Danish possessions in India. On arrival in India the “Solen” managed to seize a ship belonging to a wealthy local businessman and Pessart and his family were released in exchange for this ship. Unfortunately, serious differences arose between Leyel and Pessart. Pessart finally ran off on a Portuguese ship taking with him all the remaining money, gold and silver and some of the best guns, and to top it all, the books of account. With no money left the Danes in India had to abandon conventional commerce and unfortunately resorted to privateering and piracy in the south of India as well as off Pipely and Bengal. Worse was to follow. In 1648, a number of the Danish officers led by Poul Hansen Korsor, successfully rebelled and Leyel was sent back to Denmark and the privateering activities further intensified with the DOIK now virtually bankrupt. DOIK—The First of the European East India Companies to Wind Up. In 1648, King Christian IV died and Frederik III became the new king of Denmark. However, with the ongoing wars with Sweden at that time, Frederik III was not particularly interested in DOIK’s Indian operations. In 1650, the king, at the request of its majority shareholders finally dissolved the DOIK, the first of the European East India Companies to wind up. Attempts were made to sell Tranquebar to the Dutch as well as to the Elector of Brandenburg17 but nothing came of these efforts. Poul Hansen Korsor died in 1655. By then the Danish population in the Indian possessions had substantially dwindled and operational control was passed on to a chief gunner called Eskild Andersen Kongsbakke. The Nayak of Tanjore, disgusted by the Danes who had settled their dues, decided to attack Dansborg in Tranquebar but Kongsbakke and his small force of two remaining Danes and a few Portuguese mercenaries beat off the attacks with the help of the local population. Kongsbakke, obviously a loyal Dane, then went on to fortify all of Tranquebar with revenues from increased privateering and set about improving the finances of his territories. By 1660, it is reported, he was the only Dane left in India but continued to send regular reports to Copenhagen where they were received with considerable disbelief. Finally in 1668 he managed to send to Copenhagen a personal representative, Geert van Hagen, a Sergeant from a nearby Dutch enclave. The Danish government promptly despatched a warship, the “Faroe,” to Tranquebar and in May 1669 the long isolation of the Colony was lifted. Kongsbakke married a local Indian girl, received a Royal accolade, and stayed on to help develop and govern Danish possessions in India. He finally died and was buried in Tranquebar in 1674. On November 20, 1670 a second DOIK received a Danish Royal Charter from the then king, Christian V, for exclusive trade with the East Indies for 40 years. The new company18 consolidated the Indian operations and expanded its trade connections (reportedly including slavery) to Malaysia, Malacca, Sumatra, and China. Tranquebar enjoyed great prosperity from 1687 to 1714 through export of sugar, spices, saltpeter, and textiles. In 1698, Danmarksnagore was founded at Gondalpara in Bengal and an additional trading station was established on the Malabar Coast for trading in pepper. In 1699, a colony called “Frederiksnagore” was set up in Serampore, Bengal.

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However, the same year the then Nayak of Tanjore besieged and ransacked Tranquebar and left it in ruins. As a result of this attack, and with the growing recession in trade, the second DOIK was also wound up in April 1729 after the then King, Frederik IV, refused further aid to the company. A new company, the Dansk Asiatisk Kompagni (DAK ), was established in 1732 with a 40-year-monopoly on Asian trade. In 1752, DAK established a major pepper trading center at Calicut. In the same year two Danish warships arrived at Tranquebar to reestablish the colony, and to protect it from the impact of the Anglo-French wars. It was also decided to reopen the Bengal trade by resettling Frederiksnagore in Serampore. The principal items of trade were textiles, saltpeter, salt, pepper, soft brown sugar, rattan, indigo, and tea, amounting to several million “Rigsdalers.” The traded “tea” was largely smuggled from Denmark into Britain, an aspect that caused great concern to the directors of the EIC. In 1756, a Danish expedition was sent from Tranquebar to the Nicobar Islands, which were then occupied in the name of the Danish king and named “Frederiksoerne” (The Islands of Frederik). A trading station called “Ny Danmark” was established on Greater Nicobar Island. The commercial activities out of Nicobar, however, never really took off as a result of large-scale deaths of the expatriate Danish community due to tropical diseases and also because of the several battles with the Austrians, who actually managed to colonize the Nicobar Islands briefly between 1778 and 1784. Upon the outbreak of hostilities between Britain and Denmark in 1801, Tranquebar and Serampore were captured by the British but were restored to the Danes under the Treaty of Amiens. Six years later, when war resumed, both places were again taken possession of and were occupied by the British from 1808 to 1815, and subsequently returned to the Danes in a somewhat miserable condition. Finally in 1845, all Danish territories on mainland India were sold to the EIC for 1.25 million rupees (1.1 million Rigsdaler). The Nicobar Islands remained under Danish control and Frederikshoj was built on Nancowrie Island and another outpost on Polo Milo Island north of Little Nicobar. With further outbreaks of tropical diseases decimating the Danish population in Nicobar, the islands were finally handed over, free of charge, to the British in 1868 ending 250 years of Danish commercial and colonial activity in India. The French in India: The World’s First Corporate “Wars” The French, who competed with the English on many grounds, also took to exploring trade with India and the East. In 1611, Emperor Louis XII granted a monopoly to a French company to pursue their quest of trading with India. Nothing much, however, came of this venture. In 1664, the then Emperor, Louis XIV, granted another permission to a company established by Jean Baptiste Colbert and chartered by the emperor to begin trade with India. Colbert’s Compagnie des Indes (CDI—French East India Company) first managed to establish trading stations on the islands of Bourbon (Reunion) and Ile de France (Mauritius) off the East Coast of Africa. The French landed at Pondicherry, south of

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Madras, and established their first colony in India. By 1719, they had established themselves in the southern part of India and established additional factories and settlements (Etablissem*nts Francaises dans L`inde) in Masulipatnam, Karaikal, Mahe, and even one in Chandernagore in Bengal. Like the DOIK, the French operations in India were not successful initially and remained so until 1741. At this time, the French colonies in India received a new and ambitious governor called Joseph Francois Dupleix. He pursued a very aggressive policy both toward the Indians as well as with the British. Dupleix’s efforts at undercutting the EIC trade and commerce, and political machinations involving local Indian rulers, brought him into direct confrontation with the British. This led to the clash of the two multinational companies. It was the first of the world’s greatest “corporate battles,” except in this case, unlike the modern age, the battle was fought with real guns, cavalry, and infantry. Three wars were fought in India between the French and the English during the period 1746 to 1763, the last of which was to result in the rout of the French by the English under Clive and the loss of most of the French trade and many of their possessions in India. Dupleix was recalled to France but a few of the French possessions, including their capital of Pondicherry, remained in their control until 1949 when they were ceded back to Independent India. The CDI, never really financially successful, went bankrupt and was finally dissolved in 1769. The Other Europeans in India The Portuguese, Dutch, British, and the French were not the only ones coveting a piece of Indian trade and commerce. By the end of the seventeenth century and the beginning of the eighteenth century, almost all the West European maritime nations with the exception of Spain (who were preoccupied with the Philippines), large and small, were in one way or the other involved in trade with India. The Swedes, for example, established in Gothenburg the Svenska Ostindiska Companierna (SOC) in 1731 at the initiative of an enterprising Scotsman, Colin Campbell, who had his own axe to grind against the English. He and a few other partners, including the British—Charles Graham, Charles Morford, and Charles Irvine—wanted to take advantage of the trading space left after the closure of the Ostend East India Company in March 1731 after the Second Treaty of Vienna. The SOC had also learnt its lessons from the activities and problems of the other East India Companies and decided to concentrate purely on trade without recourse to any colonization. This policy was to bring the SOC huge profits without the liability of supporting any colonies in the East. It has been stated that the relative success of Swedish companies in modern India may have something to do with the noncolonial policies of the SOC in the past and certainly a bearing on traditional Swedish neutrality. The initial Swedish activities are chronicled in Colin Campbell’s “A Passage to China”—a diary of the first Swedish East India Company Expedition (1732–1733). The good ship “Friedericus Rex Suecia” built at the Terra Nova shipyard in Stockholm set sail in 1732 for India and China, under the command of Captain Georg Herman Trolle. It docked at Surat in Gujarat before going on to Bengal and

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Canton in China. Between 1731 and 1813 the SOC sent out 38 ships (“EastIndiamen”) to the East with a large majority of the later expeditions more focused on China and its ceramics. Interestingly, the SOC has recently been revived recently, more as an historical project to reconstruct a new “EastIndiaman” called the “Gothenburg” at the new site of the Terra Nova Shipyard at Eriksberg, and to sail the ship to Canton later in 2002. In 1647, the Compagnia Genovese delle Indi Orientali (The Genoese East India company) was set up. Not much is known about the activities of this company except for a few references relating to trade in Bengal. In 1754, the Prussians established the “Prussian Bengal Company” at Emden and again very little is recorded of their activities. In 1779, Haider Ali, the ruler of Mysore, during the period of his problems with the British, invited as a counterpoint, the Germans to establish an East India Company and establish operations in Nandangade in present-day Karnataka. This German company was wound up in 1789. In 1780, the “Philippines-Spanish East India Company” was set up but this carried out only some minor trade between the Philippines and Bengal. The Austrian interest in India came through the Ostend East India Company established in 1722 in Austria controlled Ostend. As earlier, this company was wound up in 1731 after the Second Treaty of Vienna and its possessions in India taken over by the king of Austria. Although the Austrian colonies in Bengal were formally closed in 1744, the Austrians still made their presence felt by capturing the Nicobar Islands from the Danes in 1778 before they were finally defeated and driven out by the Danes in 1784. The (North) Americans and India As we know, Christopher Columbus set out from Spain in 1492 to find the western sea route to India and fortuitously hit America. It was, however, only after the British were well entrenched in India that the first contacts between North America and India were established. The Portuguese by then had already established commerce between South America (Brazil) and India (Goa). The EIC had established significant trading links between the two large British colonies by 1625. Directors and officers of the EIC as well as administrators of the British Government were actively involved in this activity. Prominent among them were Lord Baltimore (founder of Maryland and a Director of EIC in the 1620s) and Elihu Yale (founder of Yale University and a former governor of Madras for the EIC from 1687 to 1692). It was also common for senior functionaries of the EIC “to invest in a few servants or slaves, which they resold at a profit. The slaves were subsequently taken to the colonies in the New World.”19 Francis Assisi, in his extensively researched work,20 identifies a “Peter Fisher” (name obviously changed from his original Indian name) as possibly the very first such Indian slave brought into America by Lord Baltimore. He subsequently married a white Irish servant girl, Mary Molloyd, and their first child, Mary Fisher, born in 1680, is recorded in history as the very first Indian American. In fact there is evidence to suggest that the first real slaves in the United States were from India. The first direct American contact with India was however established in 1784 by the sailing of the ship “United States,” from the Port of Philadelphia and arriving in

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the Indian city Pondicherry in December 1784 with a cargo of “Madeira, Tobacco, Copper, Lead and Iron.”21 This and few subsequent voyages were financed by Thomas Willing of Philadelphia, who entertained visions of establishing an “American East India Company” but was unable to do so because of subsequent events in history. According to Bhagat,22 because of the war between France and England, American merchants who were neutral made enormous profits from trade with India at that time. Elias Hasket Derby of Salem (Mass.) became America’s first millionaire. Between 1795 and 1805, American trade with India exceeded that of all the European nations put together. However with the escalation of hostilities in Europe, attacks on American ships by both, the British and the French increased so much that President Jefferson’s administration imposed an embargo on all foreign trade that had a significant negative impact on the economies of the prosperous coastal towns. Although the embargo was repealed in 1809, the declaration of war by the United States against Britain in 1812 brought further restrictions on international trade especially against British-controlled India. These restrictions led to the unforeseen benefit of a rapid industrialization of America, which got further impetus when in 1816, the U.S. Congress introduced a prohibitive tariff against the import of inexpensive products from India, especially textiles, thus more or less putting an end to Indian imports into America for several years to come. More interesting, however, was the effort by an enterprising American from Boston, Frederic Tudor, to export ice from the United States to the British in Calcutta in the year 1833. The ice, cut from fresh water ponds in New England, was sent out by ship to Calcutta, insulated with thick layers of sawdust from Maine. Nearly twothirds of the ice survived the long journey without the use of refrigeration. The grateful British built an “ice house” in Calcutta to store the imported ice. Tudor made about $ 200,000 profit from the Calcutta trade alone. This enterprise is well chronicled in “The Frozen Water Trade.”23 So far as I am able to judge, nothing has been left undone, either by man or nature, to make India the most extraordinary Country that the Sun visits on his rounds. Nothing seems to have been forgotten, nothing overlooked. (Mark Twain)

Indian Business—Coming of Age Indian Enterprise and Industry in the Days of the “Raj” The Governments of an exclusive company of merchants is perhaps the worst of all Governments for any country whatsoever. Adam Smith in The Wealth of Nations, referring to the East India Company

For centuries prior to the arrival of the Europeans, Indian business was largely in the hands of a few business communities (e.g., Marwaris, Parsis, and Gujaratis, etc.) endowed with traditional business skills. However, the establishment of the domination of British business interests with the East India Company enjoying a trade monopoly guaranteed by the British Monarch, worked to the enormous detriment of

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local Indian enterprise, particularly in the period starting from the later half of the eighteenth century. As noted earlier, this British domination was a result, not of market forces, but of non-economic, legal, punitive taxation and other coercive factors. Fortunately, while the Indian business communities were made totally subordinate, they were not completely decimated, primarily because Indian merchants and moneylenders proved useful to the British. In Bengal, for instance, Indian merchants were essential as middlemen for the procurement of items such as silk, fine cotton cloth, and indigo. With the substantial increase in industrial output in Britain after the Industrial Revolution, middlemen all over India were also increasingly used for marketing and trading of imported products manufactured in Britain. The local moneylenders, on the other hand, extended short-term credit to producers of commodities and also supplied cash with which land revenues could be paid to the British Indian government.24 A few of these middlemen and land holding (Zamindars) financiers particularly in and around Calcutta, won the confidence of the British and were encouraged to form interracial trading and agency houses in partnership with the British. The first agency was formed by Dwarkanath Tagore, Nobel Laureate Rabindranath Tagore’s grandfather. He formed the Agency House “Carr, Tagore & Co.” in 1834 and went on to become a pioneer in the mining, banking, insurance, shipping, plantation, and export–import trading businesses. British policies during the “Raj” in India clearly promoted the export of agricultural products, minerals and raw materials from India for factories in Britain with a substantial percentage of the finished goods exported back for sale and consumption in India. Industrialization of India was certainly not on the agenda. Even the noted economist, John Maynard Keynes25 wrote in 1911, “specialization among nations was a good thing and, though the Indian educated class seem to desire, with patriotic fervor, industrialization of their country, such industrialization was neither desirable nor likely.” Sabyasachi Bhattacharya writing in “A Pictorial History of India”26 notes that “British capital investment in India did not play a significant role in nineteenthcentury industrial development with the exception of jute mills, coal mines and tea plantations, followed by some investment in tobacco, hydrogenated oils, electrical machinery, pharmaceuticals, and petrol.” Thus India’s industrial and commercial development was left primarily to the fervor of patriotic educated Indians belonging to the traditional business communities. Because of the very substantial quantum of import and export trade, predominantly controlled by the British, amongst the first corporate enterprises established during the “Raj” were banks and insurance companies starting with the “General Bank” that opened for business in Calcutta in 1773, during the time of Governor General Warren Hastings. In 1793, the “Calcutta Laudable Mutual Insurance Society” opened for business and the “Bank of Calcutta” was established in 1806. The “Bank of Calcutta,” in 1809 changed its name to “Bank of Bengal” and in 1921 merged with the “Imperial Bank of India” which, after India’s independence in 1947 morphed into the “State Bank of India,” currently India’s premier bank. The first Indian Companies Act was instituted in 1850 (subsequently amended in 1856 to include limited liability companies) and the very first Indian company, “The New Oriental Life Insurance Co. Ltd.” was registered under the act in 1851.

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It was however the Parsi business community in the western part of India that pioneered the establishment of Indian-owned manufacturing companies, with the first textile mills being established in the middle of the nineteenth century, after the removal in 1843 of all restrictions on the export of textile machinery from Britain. On July 7, 1854, Cawasji Nanabhai Davar set up the “Bombay Spinning and Weaving Co.” followed a month later by the establishment of “Oriental Spinning & Weaving Co.” by Manekji Nasarvanji Petit. Jamshedji Nasarvanji Tata, the founder of India’s highly acclaimed conglomerate, the Tata Group, established the “Empress Mills” in Nagpur in 1887 and followed up shortly thereafter with the “Swadeshi Mills” in Bombay. The Indian business community in other parts of India was somewhat slower to start their own enterprises. The east, with the colonial capital in Calcutta was under close British political and administrative control. Also, business in the east as well as the south, was under the near total domination of British owned or controlled “Agency Houses.” The north, on the other hand, until the first Indian war of Independence (referred to as the “Indian Mutiny” by the British) in 1857, was still largely under Mughal rule. In eastern India the breakthrough came with the jute industry. In 1855, Bysumber Sen, a Bengali entrepreneur, joined hands with George Acland to set up the country’s first organized jute mill. After the Crimean War in the 1860s, hemp which was then the packing material of choice, was in short supply giving a big boost to Indian jute exports. A few years after Bysumber Sen’s effort, G.D. Birla (who was subsequently to become a doyen of Indian business and industry) set up an even larger unit, the “Birla Jute Mills,” in the face of the strongest possible opposition and obstructionism from British Agency Houses and the Government. It was however during World War I, when a large numbers of British businessmen from Bengal were called out for military and other duties, that several of the British jute interests were bought over by Indians who then proceeded to establish additional capacity. Indian owned jute mills made enormous profits during World War I with dividends of over 100 percent annually and this is what largely helped create the wealth of the Marwaris (the traditional business community from Rajasthan) who had migrated in large numbers to Calcutta. Because of the extreme conservatism of the south Indian business community and the relative lack of adequate infrastructure in the south, compounded by the overwhelming influence of the British Agency houses (Parry’s, Binnys, Arbuthnots, Best & Co. etc.), in that region, Indian commercial enterprise in South India was also a late starter. Even the initiative for the establishment of the first textile mills in Madras also came from Bombay-based industrialists. The engineering business in India started in 1823 when the “East India Company Ordnance Company” was set up in Bombay, but the first recorded private initiative was the establishment in 1830 of the “Porto Novo Steel & Iron Co.” near Cuddalore by Josiah Marshall Heath.27 This company, later to become the “East India Iron Co.,” Madras, was inexplicably closed down in 1866. Because of the availability of iron ore and coal in the region, The “Bengal Iron Works” was set up near Asansol in 1874. But these were British-owned enterprises. It was the genius in Jamshedji Tata and his vision that really set India on the path to industrialization with the establishment of the “Tata Iron & Steel Co. (TISCO).”

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As Dwijendra Tripathi writes in “A Pictorial History of Indian Business”28 “His (Jamshedji Tata’s) dream of launching steel production in India must have seemed impossible to anyone familiar with past attempts in this direction, and the prevailing situation in India. But Jamshedji persevered in the face of ludicrous prospecting regulations, an unhelpful government, financial stringency and paucity of technical hands. Regrettably, he did not live to see the consummation of his dream project, but if TISCO finally became a reality in 1907, it was due to his vision and dogged determination. From the far off United States where he had gone in search of technicians, he continued to send elaborate instructions to his son Dorabji back home, about every aspect of the project in Bihar.” It is said that when Jamshedji Tata approached Lord George Hamilton, the then secretary of state for India in the government in London, he was told that Lord Hamilton was prepared to eat every ounce of steel that Tata could produce. Within a few years TISCO began to produce tons of the finest quality steel. The London financial markets rebuffed Jamshedji Tata when he tried to raise 1.6 million pounds sterling. Not willing to take this lying down, Jamshedji Tata appealed to the patriotism of Indians and within a few weeks raised this amount from 8,000 Indian shareholders. The British, to paraphrase Queen Victoria, “we are not amused.” TISCO was “ironically” (pun intended) to become the only dependable source of supply of high quality steel, rails, and other products to the British rulers of India during the period of World War II. In 1909, Laxmanrao Kirloskar, a teacher of “Engineering Drawing,” at the Victoria Jubilee Technical Institute in Bombay, resigned his job in protest as he was passed over for a promotion, ostensibly on racial grounds, and went on to set up a unit to manufacture plows and other agricultural implements in Belgaum (in present-day Karnataka), the first such industry in the country. After a few years29 the unit moved to Kirloskarwadi (Kohlapur) and additional products such as diesel engines and centrifugal pumps were added. Subsequently, the Kirloskar empire grew substantially with additional units set up to manufacture machine tools, electric motors, transformers, compressors, industrial combustion engines, and the like. In 1945, the Kirloskars were to enter into the first ever recorded Indian joint venture with a British company, the “Associated British Oil Engines Export Ltd.” Today, apart from a host of items, they also manufacture passenger cars in a joint venture with Toyota of Japan. Meanwhile, the Tata group went on a major expansion program, especially during and shortly after World War I when transportation and supplies from Britain were severely disrupted and British enterprises in India were deprived of financial and manpower resources. The Tata Hydroelectric Power Supply Co. was set up in 1910. The origins of this company are interesting. In 1902, the state of Mysore established the “Kolar Goldfields Power Company”30 at Sivasundaram Island near the Cauvery falls (providing the city of Bangalore with modern electricity), in association with General Electric of the United States. This is the first officially recorded active U.S. corporate activity in India (although as early as 1882, Thomas Edison had incorporated in England a company called “Edison’s Indian and Colonial Electric Light Co.” to promote power projects in India and other British colonies). Harry Parker Gibbs, was

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sent out to India by General Electric of the United States, as the Chief Engineer of this project. Gibbs was subsequently employed by the Tata group to establish their power companies including the “Andhra Valley Power Supply Co.” in 1916 and the “Tata Power Co. Ltd.” in 1919. The Tatas had also, early in the 1900s, started the world famous and celebrated, “Taj Mahal Hotel” in Bombay, and in 1912 set up the first cement company with another one added immediately after World War I. To put up these large projects the Tatas had established another entity called the “Tata Construction Company.” In 1920, the Tatas invited a young entrepreneur, Walchand Hirachand, to become a partner in this company and to manage it. In 1923, Walchand31 purchased large tracts of land near Nasik to grow cash crops and which was to later become the supply base for the establishment of “Ravalgaon” a large sugar, candy, and confectionery complex, and subsequently for the manufacture of cardboard, paper, edible oils, and alcohol. Meanwhile as in the other sectors, patriotic fervor had begun to stimulate Indian businessmen and industrialists to challenge the monopoly of British shipping interests. Mafatlal Gaganbhai, a textile manufacturer from Ahmedabad, after making serious inroads into British jute interests in Bengal, had set up a small coastal shipping operation called the “Ratnakar Steam Navigation Co.” But, it was Walchand Hirachand who was determined to really challenge the British monopoly. He, along with three partners, established in 1919, the “Scindia Steamship Navigation Co.” and also merged the “Ratnakar Steam Navigation Co.” into it, much to the chagrin of the British. The story is told of Walchand angrily telling Lord Inchcape, the then head of “British India Navigation Co.” that “Indians had the right to run our own steamers on the coast of our own motherland.” In December 1940, Walchand went on to establish on a site in Bangalore gifted by the Maharaja of Mysore, the “Hindustan Aircraft Company” in collaboration with the “Intercontinental Aircraft Company” of the United States to assemble the Harlow trainer, the Curtiss Hawk fighter, and the Vultee attack bomber aircraft. He also set up in 1941, “Hindustan Shipyard” in Vishakapatnam, the first Indian-owned modern shipyard. Both these companies were, after independence, taken over by the Government of India and today are at the very heart of India’s Defence production. Not only did the luminaries of Indian business and industry resolutely challenge British monopoly interests, several of them actively participated in the Indian freedom struggle either by direct financial assistance or by taking active part in protests and other programs, such as the Quit India and the Non Cooperation Movements initiated by Mahatma Gandhi, which, in some cases, led to their incarceration. This spirit of patriotism and nationalism soon spread from leading industrialists to professionals, merchants, traders, and small businessmen. Efforts to challenge British interests were soon being made in diverse areas such as paper, tea, coal mines, and the like. In Calcutta, P.C. Ray armed with a Doctorate from the University of Edinburgh, and with a worldwide reputation of pioneering work on the synthesis of mercurous compounds, decided that the people of India should have access to cheaper medicines and be free of British pharmaceutical domination. In 1899, he established India’s first pharmaceutical manufacturing company, the “Bengal Chemicals & Pharmaceuticals Works.” It is little wonder then that by the

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time of India’s independence, local enterprise had captured over 70 percent of the domestic market and controlled over 80 percent of bank deposits and was close to self-sufficiency. British Companies in Pre-Independence India As mentioned, British commercial interests in India were predominantly based on trading. The typical capital investment in these ventures was small and usually made by individuals and directed by managing agency firms such as Andrew Yule, Bird-Heilgers, Jardine Skinner, Rallis, Killick Nixon, Brady & Co., British India Corporation, and so on. Though they controlled some manufacturing units like jute and cotton mills, basic engineering units, mining companies, and tea plantations, the agency houses were primarily exporters of jute, jute goods, tea, raw cotton, shellac, and the like, and importers of manufactured goods such as cotton textiles and yarn, paper, various other consumer goods, and production equipment. With Calcutta as the then capital of British India, it became important to provide the city with electricity. The city had its first demonstration of electrical lighting on July 24, 1879, courtesy P.W. Fleury and Co. It however took almost 20 years before the company, “Calcutta Electric Supply Company Corporation,” with its head quarters in London, secured the license for lighting the city in 1897. In 1899, when the city was electrified it was merely 12 years behind New York and 11 years behind London, a testimony to the importance of India and Calcutta. This nature of British investment in India however began to change in the period after World War I. This war stimulated policies to enhance India’s industrialization to make it less dependent on imports, and the great depression of 1929–1933 again boosted incentives for industrial growth by reducing prices of agricultural commodities compared to manufactured goods. As a result, industrial output in British-ruled India grew steadily from 1913 to 1938. The years between the two World Wars also saw the rise of the British transnationals based on the momentum generated by the Industrial Revolution and postwar growth of demand. Thus were born such world famous companies as Imperial Chemical Industries, Unilever, General Electric Company (United Kingdom), Guest Keen Nettlefolds—partially owned and managed by Joseph Chamberlain, father of Neville Chamberlain, prime minister to be, of Great Britain—and the like. With the protection provided to industries in India, especially those of British parentage, many of these transnationals began to set up operations in India. Although Edward Dwyer had established Dwyer Breweries (later to be called Dwyer Meakin) in Solan in 1855 and Lever Brothers had set up a basic import and sales operation for their “Sunlight” brand of soap as early as 1888 in Calcutta, the first real industrial corporate to be set up was that of GEC for electrical machinery and fans at their unit in Calcutta in 1911. In 1911, a British company called Brunner Mond set up sales operations in Calcutta for dyes and alkalis. This company was one of the four that were to later, in 1926, merge to form the Imperial Chemical Industries. In 1929, the Indian entity was renamed Imperial Chemical Industries India Ltd. and full-scale manufacturing started in 1939 in Rishra, West Bengal, under the name of the subsidiary, “Alkali and Chemical Corporation of India.”

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Other major British transnationals followed into Calcutta shortly thereafter. These included, Britannia Biscuit (Subsidiary of Peak Frean & Co.) in 1918, Dunlop (1926), Metal Box (1933), Guest Keen Nettlefold (in 1931 as Henry Williams India Ltd., later to be renamed Guest Keen Williams), and British Oxygen (in 1935 as Indian Oxygen & Acetylene Co.). By the time India achieved independence in 1947, about half of British private capital holdings in India was Foreign Direct Investment in the subsidiaries of British Companies.32 However, as a prelude to the fight for Independence in 1947, Indian businesses had already begun to challenge British business interests in India and had made great inroads into their market shares. Postindependence, many of the British companies sold out their companies and their managing agencies to big Indian business interests. Along with the “Union Jack,” British businesses in India were in decline and it was not until the 1980s, would there be any significant revival. U.S. and European Companies in Pre–Independence India The earliest known mention of modern U.S. business in India, outside of the “Frozen Water Trade,” relates to the power sector. As noted earlier, the maharaja of Mysore roped in General Electric to establish a modern power station in the state. In the same year, an American financial institution, “International Banking Corporation,” established a banking operation in Calcutta and provided finance for the trade and export of jute, silk, and cotton textiles. On December 15, 2002, this institution celebrated its centenary in India under its current name, “Citibank.” In 1910, the “Singer Sewing Machine Company” set up a company in India to assemble and sell basic sewing machines and in 1912, became the first real multinational manufacturing operation in India. Singer is still a known brand entity long after control passed into Indian hands. History records that the first automobile was introduced into India in the year 1900, but it was only in 1928 that “General Motors” established an assembly operation in the city of Bombay (now Mumbai) for 11,000 cars and trucks annually under the Buick and Chevrolet marquees. This operation would be followed by the Dodge DeSoto and Plymouth brands in 1946 in collaboration with Walchand’s Premier Automobiles. Walchand, as already noted, was also to go on to establish an aircraft assembly operation, “Hindustan Aeronautics” in Bangalore, in collaboration with “Intercontinental Aircraft Company” of the United States. The very first of the European continentals in India was the Swiss company, “Volkart Brothers,” who in 1851, established a large trading operation with headquarters in Bombay (now Mumbai), and traded in coffee, cotton, and industrial goods. They opened their first coffee venture “Volcafe” in 1857 and went on to set up a facility in Tellicherry, near India’s coffee growing district. The Danish company, “Dumex” established a baby food venture in 1920 and followed it up with a pharmaceutical operation in 1928. Others were to follow. Swedish Match AB (as Western India Match Company) set up operations in 1923, the Czech/Canadian venture “Bata Shoe Company” came to India in 1931 and set up their first modern shoe factory in Batanagar, Calcutta in 1936. Sweden’s “Vulcan” (Alfa Laval) set up shop in Poona in 1937, while Philips established India’s first electric lamp factory in 1939.

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Business in Post-Independence India: Advent of Socialism Business in India underwent a sea change after attaining independence on August 15, 1947. Even before independence, the doyens of Indian business, including luminaries such as J.R.D. Tata, Walchand Hirachand, Padampat Singhania, and the like had in the 1940s formulated “The Bombay Plan,” which was a “blueprint adopted by the leaders of the Indian capitalist class who, in their nationalistic fervor, had decided to ‘eclipse’ their individual interests and favored a largely state led revival of India’s industry.”33 The Federation of Indian Chambers of Commerce and Industry (FICCI), the chamber favored by Mahatma Gandhi, comprising of India’s prominent capitalists, strongly endorsed the policies of the ruling political party, the Indian National Congress, “in its strategy to make India a strong and self-reliant economic power.”34 It is said that when economic policy for development is being formulated for the governments of newly independent nations, policy making gets heavily influenced by their experience under the previous colonial rule and the inequities and deprivations suffered through colonial history. As Abid Hussain, a famous Indian diplomat, writes eloquently35 that “at the time of independence after a long period of subjugation, its land and people were a picture of distress, removed from great events of its past glory and splendor. A whole creative side of Indian civilization had shrunk under foreign rule. The common man, burdened by poverty, hunger and ignorance, had lost the will to exercise its productive might. Out of the dust, they had to be raised by men of great vision like Gandhi and Nehru.” Abid Hussain goes on to say that, “India was a stagnant economy at the time of independence. The economy was predominantly agrarian with little industrial development. Most people lived in villages, in hunger and despair. Bullock carts, wooden plows, spinning wheels and thatched huts—life made of small things, unimaginatively hard, dull and cruel. Agricultural growth was around 0.3% per annum in the first half of this (20th) century. The colonial government took little interest in the improvement of the cultivation practices, except in the case of export crops like cotton, jute and tea.” As far as industry was concerned, the British were not interested in increasing the industrial base of the country as their policies were primarily targeted toward taking out raw materials and intermediates from India for their own large factories for processing and exports to the rest of the world. So jobs were created in Liverpool and Manchester based on Indian raw material while Indian manufacturing and job creation was substantively ignored. It was in such a scenario that Nehru assumed office as India’s first prime minister. Nehru, already influenced by the socialistic ideals of William Morris and George Bernard Shaw while at Cambridge University, and equally impressed by the Fabian socialism of Britain’s Labor government in 1945, looked upon the then Soviet system of centralized planning, as the ideal way forward in governing the newly independent country. Such centralized control, as noted, also had the support of India’s leading industrialists and businessmen. Consequently, in 1948, shortly after independence, India’s “Industrial Policy Resolution” was formulated, giving prominence to heavy industries and the public sector. Under its dispensation, governmental monopolies were created in most of the

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important industrial segments including, for example, iron and steel, telecommunications, and mineral oils. Eighteen other industries were brought under central government and control. Other controls on the economy namely, Imports and Exports, Foreign Exchange, Industrial Licensing, and Capital Issues were, unfortunately, already in place, being a legacy of the wartime controls introduced by the colonial government. These controls then just got incorporated into the industrial policy of the new government. Soviet style “Five Year Plans” were to be formulated and oversight given to a “Planning Commission.” Things were to get worse. In 1955, at its annual meet, the ruling Congress party passed a resolution stating that, “planning should take place with a view to the establishment of a socialistic pattern of society, where the principal means of production are under social ownership or control” and further that steps should be taken to, “check and prevent evils of anarchic industrial development by the maintenance of strategic controls, prevention of private trusts and cartels.” These sentiments were incorporated into a new “Industrial Policy Resolution” in 1956 and additional draconian measures introduced in 1961 and 1969, including the controversial “Monopolies and Restrictive Trade Practices Act.” The Indian private sector, which had initially supported centralized controls, were now in a real “pickle.” All their enterprise and activities were now under strict political and bureaucratic control. Private sector “profit making” was seen as a social sin. Survival was possible only by satisfying the greed of rent-seeking politicians and bureaucrats, and by cornering hard-to-come by industrial and import licenses, in what came to be termed the “License-Permit Raj.” In the words of Amit Mitra, current secretary general of FICCI, “Private sector manoeuvered and meandered to simply remain functional at the cost of low economies of scale, over employment, low productivity, poor quality, obsolete technologies, inevitable rent seeking practices and global isolation in a regime of import substitution.”36 This state of affairs continued during the period 1977–1979, when the first non Congress government led by the Janata Party came to power. This period is, more regretably, noted for the expulsion from India of the multinationals, such as IBM, ICL, Coca Cola, and others. India’s Economic Liberalization However, by the time the Congress party led by Mrs. Indira Gandhi, returned to office in 1980, it was abundantly clear that Indian business and industry could no longer continue under rigid socialism influenced controls. Policy changes were introduced in 1980 but as Amit Mitra writes,37 they were “measured and introspective, focusing primarily on delicensing of two major groups of industries, access to imports for manufacturers of exports, and a change in mindset towards acquiring higher order technologies. The result of, even these halting steps, towards decontrol were almost spectacular. The growth rate of the economy wrenched out of the 3 percent record to an average of 5.5 percent in the 1980s and there is strong evidence that productivity too improved significantly. India was at the door of a new vision of political economy driven by markets and private enterprise. The days of the

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‘License-Permit Raj’ were now numbered, the period of atrophy over, and India was entering a brave new world”. With the easing of restrictions and the gradual removal of licensing, subsidies and other political and bureaucratic roadblocks, many of the old established industrial houses that had survived by playing “the game” within the rules and rent seeking of the old order were now in serious trouble and within a few years the more inefficient of them had started to crumble and close down. The public sector, especially in the states, with their inherent inefficiencies was in serious trouble. First generation entrepreneurs such as Dhirubhai Ambani of Reliance Industries and others, with new concepts, modern management, economies of scale, and a more international approach had now arrived on the scene. The high technology sector, particularly IT, biotechnology, and telecommunications, had been provided a boost by the modern thinking prime minister, Rajiv Gandhi, and his extraordinarily talented advisor, Sam Pitroda, and had spawned the likes of Infosys, HCL, Biocon, and Bharati Telecom, Dr. Reddy’s, Ranbaxy, among others. It seemed to be the beginning of a new dawn. The wealth creators had arrived. However, some of the inefficiencies and controls of the old order continued especially in terms of foreign exchange controls. The economy, by the late 1980s, was struggling to globalize and there was a growing dependence on imports. The economy was also affected by the pressures and vicissitudes of the international financial system. This led to a more significant vulnerability of India’s balance of payments and reliance on debt. Surely enough, in 1991, India found itself in situation of a “debt trap” leaving India with no alternative but to go in for full-scale reforms. Thus, in 1991, under the stewardship of Mr. Manmohan Singh, the then finance minister and, at the time of writing, the prime minister of India, a massive economic reform process was initiated. Licensing was abolished, the Monopolies and Restrictive Trade Practices Commission was disbanded, imports and exports were almost freed of restrictions and most importantly, foreign exchange rates rationalized and important fiscal house cleaning put in place. The rest, as they say, is history. India was now set on the path to becoming an economic super power with the target of becoming the world’s fourth largest economy by 2020.

Chapter Two The Rise of India: India and the West—Institutional Contrasts

India is now emerging as a major player in the world economy that is increasingly dominated by the ascendance of knowledge-based activities. It is the second fastest growing economy in the world, with an expected GDP growth of 8 percent during 2005–2006. The rapid growth of the information technology sector alongwith globalization, and deregulation, created new opportunities as well as new challenges for firms in an environment that is ever changing at an accelerating rate. In the changed scenario, India is becoming an active participant in the global economy, while at the same time drawing increasing interest among foreign investors as well as national governments in Europe, North America, and Asia. A number of factors indicate the growing integration of India in the world economy and is reflected by a number of different indicators. To begin with, there has been a significant increase in the flow of foreign direct investment to India. It is estimated that foreign direct investment increased by 66 percent in 2001.1 More broadly during the decade 1990–1991 to 2001–2002 foreign direct investment inflows increased from US$103 million in 1990–1991 to US$5.9 billion in 2001–2002.2 During the period 1991–2002 India is estimated to have received a total amount of US$24 billion in foreign direct investment. This figure, of course, does not include that of Foreign institutional investment that is considerably larger. There are other indications that an economic transformation may well be underway in India. A study by Goldman Sachs suggests that India is expected to be the world’s third largest economy in 2035, after United States and Japan.3 A ranking by Forbes of the world’s best corporations included nine Indian companies such as Indian Oil, HLL, Infosys, Reliance, and WIPRO.4 By 1999, India had become the third largest car market in Asia.5 The intense competition in the Indian market due to the entrance of foreign competitors, has led domestic firms to upgrade the quality of their products, and these firms often give the multinationals a run for their money. India has become a haven for foreign companies seeking to outsource their business operations. General Electric is reported to have garnered cost savings of US$350 million a year by outsourcing to India.6 The decision by IBM to buy Daksh (see chapter three), India’s third largest back office services firm, in an acquisition that is valued between

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US$150–200 million is a good example of India’s increasing attractiveness as an investment destination.7 Overall, it is estimated that there are several hundred call centers in India with a turnover of US$2 billion and employing about 150,000 people in India for companies such as Citibank, Deutsche Bank, HSBC, Dell Computer, SAS, and Compaq.8 India’s resurgence as a major economic player is not without historical precedence. It is estimated that in the early nineteenth century, India accounted for about 16 percent of the world’s GDP.9 As noted in chapter one of this book, as early as the second century BC, India was a major trading nation and it was perhaps the reputation earned as a commercially oriented country that led Alexander the Great to invade India in 327 BC,10 Indians exported products to the Roman Empire, and after its fall had developed ties with their successors both in that part of the world as well as South Asia. The active involvement of the Indians in trading suggests a strong entrepreneurial spirit among Indians, a spirit that was curtailed (although not eliminated) initially by overseas invasions, as well as the advent of colonial rule, and post independence, by a regulatory regime that created impediments to innovative ideas. That this entrepreneurial spirit still exists can be seen not simply by the rapid growth of the information technology industry in India (see chapter three), but also by the fact that the Indians who have migrated overseas, have utilized their entrepreneurial spirit for considerable gain for themselves as well as the larger community. It has been suggested, for example, that a third of the engineers in the Silicon Valley are of Indian origin while 7 percent of the high tech firms are led by Indian CEOs.11 Similarly about one third of Microsoft employees, a quarter of IBM, and a sixth of the scientists of Intel are said to be of Indian origin. There are other examples as well. Consider the case of the Jain community, who have carved out a dominant position in the lucrative international diamond trade. It is estimated that they control about 50 percent of the market for gem quality diamonds.12 The Tatas and the Birlas, two of the leading business groups in India developed under British occupation and fortified their position in the post-1947 regulatory regime. The global Indian diaspora is estimated to be about 25 million people and their importance seems to be on the rise. What are the implications of the potential emergence of India as an economic superpower for foreign investors seeking to do business in this country? This is the central theme that we attempt to address here. Although the resurgence of India as an economic power is a view that is now widely held by scholars and business people, India is still a country in the process of economic transition. It is our belief that while the Indian market does offer huge opportunities, the opportunities have to be utilized in the right way. A prerequisite for such an endeavor and a deep understanding of the Indian business environment. This calls for a keen knowledge of the Indian political, cultural, and economic realities that govern economic transactions in this country. Although each business opportunity is unique, tailoring that opportunity for creating a win–win solution for all, requires a sophisticated understanding of environmental realities. We begin this chapter by providing a broad overview of the differences that exist in the institutional environment between India and the North American and European

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environments and the implications that they may have for the practice of business in these countries. A more detailed analysis of the political and the cultural environments follows in the subsequent chapters of this book. The institutional environment comprises the economic dimension, the political dimension, and the sociocultural dimension. These dimensions are not entirely independent of each other but for expositional purposes we will be dealing with them as separate entities. We also recognize that not all European countries are the same, and are equally cognizant of the fact that the European business environment is different from the North American one. Therefore, the institutional gap is likely to be far greater between India and the Western world than is the case between Western European countries and North America. The Institutional Contrast between India and the Western World “The nineteenth century belonged to Europe, the twentieth went to America, and many believe that the twenty-first century is likely to be Asia’s.”13 This comment highlights the great optimism that is felt by some experts about developments taking place in this region. Some experts are even suggesting that within Asia, it is India that may have the edge over China, given the strong tradition of entrepreneurship in the country.14 Indeed, the Global Entrepreneurship Monitor of the London Business School has rated India second in entrepreneurship globally.15 It is evident that there is considerable potential in this country, and indeed, one of the implications suggests that the institutional gap between India and the West may diminish over time, and that there is a possibility of a two-way knowledge flow, as opposed to a one-way flow, that traditionally existed between the West and India. (a) Political Dimension “India is a modern state, but an ancient civilization,” writes Stephen Cohen in his 2001 book Emerging Power: India.16 As a modern state, India came into existence in 1947 when it attained independence from the British. As an ancient civilization, contemporary India had its origins in the Indus Valley civilization. This civilization was at its peak around the third millennium BC. This was an extraordinarily sophisticated civilization in which commerce played an important role. The geographical extent of this civilization was huge, spreading as it did from the eastern border of Iran till eastern India. The decline of the Indus Valley civilization was followed by the rise of the Indo-Aryan civilization, which provided the spiritual foundation of India as a civilized entity. It was during this period that some of the most sacred Indian texts (e.g., Vedas) were written. A unique feature of the early Indian political order was its chronic instability. The idea of a state as an agency that could exert power to change society was notably lacking in this period.17 The stability of a society rested less on the political order than on the social order that was shaped by the cultural ideology of Brahmanism. The Brahmins exchanged political power for social power by creating a set of cultural rules that everyone in the society had to follow. A notable example of this is the caste

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system, which drew a distinction among different segments of the society, and provided a hierarchical ordering of the society. The Hindu ruler was constrained by caste obligations and his duty was to preserve the integrity of the Hindu social system.18 It is the disjunction between political power and social power that was the hallmark of the earlier Indian civilization. The greater emphasis laid by Brahmanism on social conduct rather than on issues of governance was also to have a number of significant implications. This was in contrast to the developments in Europe where the onset of reformation and the birth of renaissance during the period 1450–1670 created a situation where the political rulers started to extend their control over territories, carving out their own spheres of influence. The impetus for this was both economic as well as political.19 This was the immediate precursor for the emergence of the nation-state in Europe in the mid-nineteenth century. British colonialism undoubtedly left a deep imprint on the Indian society and commentators still remain sharply divided as to its impact on Indian development. Whatever be the merits or the demerits of the different arguments in this domain, it was the British who introduced India to the notion of a state as a sovereign entity with definable territorial boundaries.20 However, a vast cultural gap between the British and the Indians, with the British relying on the local Indian elite to maintain control remained. Although pragmatically expedient, this policy continued to maintain the cultural gap between the parties, and generated its own counterreaction in the form of a nationalist reaction. This manifested itself in the formation of the Indian National Congress, a political party that was founded in 1885, and was the precursor of the post-independence Congress party. The impact of colonialism on the Indian mind-set should not be underestimated. It has shaped India’s attitude toward foreign investment, played a role in stressing the importance of self-reliance and autonomy in the country’s developmental strategy, and more broadly, it has traditionally made the country more cautious when engaging with the outside world. After the liberalization of 1991, this mind-set has begun to change, and there is less now less suspicion of foreign capital than at any other time in India’s history, but remnants of this fear probably still exist, and it may take a little more time before the ghosts are finally laid to rest. This is only understandable given that nationalist feelings are not entirely absent even in the industrialized world. Consider the case of Norway where foreign investors such as Danske Bank, of Denmark, Fortum of Finland, Elf Aquitane of France, and Telia of Sweden have been thwarted by nationalistic pressures in acquiring local companies. With India gaining independence in 1947, Jawaharlal Nehru became India’s first prime minister. A charismatic politician who was deeply involved in India’s struggle for independence, Nehru embarked on a process of rapid modernization of the country. Although the economic policies pursued by his government, proved to be counterproductive in the end, the early years of his government were crucial in both extending and enhancing state capability as well as firmly embedding the principles of democracy in India. Indeed, one of the most remarkable things about India is that democracy has taken firm root, even though some of the preconditions for the establishment of a democratic state in Western Europe and the United States such as the preexistence of a nation-state, high literacy rate, a vibrant middle class, high levels of industrialization were absent in 1950.21 Perhaps it is also worth mentioning that

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while in the West democracy arose as a result of a contest between aristocrats and commoners, in India democracy was the by-product of the Indian fight against colonialism. A further point of contrast is, while in the West the growth of democracy limited state authority, in India, it led to an increase in the power of the state. India is now the world’s largest democracy with a voter turn out that is often higher than in many industrialized countries. The most recently concluded election in the summer of 2004, in which the voters decided to vote against the Bharatiya Janata Party (BJP) led coalition, against all expectations, is clearly indicative of a thriving democratic culture. During the first 50 years of independence, India was primarily governed by the Congress Party, with a brief interlude, during which, a coalition the comprising of the Janata Party, the BJP, and other opposition parties, was in power in the late 1970s. If there was opposition, it existed within the party, rather than from other competing parties. All of this began to change in the late 1980s with the rise of BJP, a party that focused its appeal on reviving Hindu nationalism or “Hindutva.” This ideology had many dimensions to it. One was rediscovering and/or recreating, the greatness of India, which had been crushed during the era of colonialism. The other point was that the state should seek to favor the interests of the Hindus as they constitute the majority of the population. The nuclear tests conducted by the BJP in 1998 were a dramatic illustration of recreating India’s past glory and making its mark as a major power. The BJP was quick to capitalize on the weaknesses of the previous governments, and in conjunction with a moribund economy, extended its electoral base from the trading community to the middle and the upper middle class. In 1996 the BJP emerged as the single largest party although it was not able to retain power for any significant period of time. Although BJP has undoubtedly, of late, been a major player in the Indian politics, its ability to fully realize its nationalistic aspirations are constrained by its necessity to rely on coalition partners who do not necessarily subscribe to its “Hindutva” plank. The BJP’s first extended run of power came in 1999, when it formed a coalition government. When it called for elections six months before its term in 2004, it was expected it would return to power in conjunction with its coalition partners. This did not happen and it has surprised both the ordinary public as well as political commentators. The emergence of coalition politics in recent years is another theme that is gaining prominence in the Indian political context. The new Congress-led government is also a coalition government. Some have voiced concern that because the government is dependent on communist support it may not be able to vigorously pursue reforms to the extent desired, as the communists are not keen on liberalization. The current prime minister of India, Dr. Manmohan Singh dismisses these concerns and suggests that his government will have no difficulty in implementing the reform measures.22 Although the ultimate proof lies in the actions taken by the government it needs to be noted that even the communists have been promoting reform and liberalization in the state of West Bengal where they are in power. In recent years there has been an increase in the number of regional political parties, and they are now likely, in the foreseeable future, to decisively shape the pattern of Indian political development. The increase in the number of regional parties, and

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in particular, the growing mobilization of the lower castes in the electoral process, has imparted a new dynamic to Indian political development. The new groups are trying to maximize the benefits more for their own particular group. At the same time they are opposed to the narrow nationalistic vision inspired by BJP, which is primarily an upper caste based, predominantly Hindu party. The emergence of coalition politics does impart a certain degree of unpredictability to the political dynamics, but this unpredictability is not unique to India. Many European countries such as Denmark, Italy, or Germany have had coalitions. The fact that coalition governments may not necessarily be detrimental to sustaining growth is also illustrated by the fact that in the 1990s the Indian GDP grew at an annual rate of 6.3 percent, but this was also the period characterized by political instability. As stated earlier, a core constituency in support of economic reform has now emerged in India with the resulting implication that while the pace of economic reform may not consistently accelerate, it is at the same time, unlikely to be reversed altogether. (b) Economic Dimension Without question, there is still a vast gap between the GNP per capita in India and that in Europe and North America. World Bank 2002 statistics suggest that GNP/capita in India is US$480, US$35,060 in United States, US$26,220 in France, US$26,180 in Germany, and US$25,870 in UK.23 Nearly a third of the country’s population is below the poverty line. In the IMD’ s annual ranking of world competitiveness in 2004, India was ranked 34 whereas in 2003 the country had been ranked 50. Although this represents a considerable improvement over previous years, the study also suggests that Indian growth and development is constrained by the poor quality of infrastructure and ineffective management of public finances. There are numerous infrastructure bottlenecks in power, transportation, ports, and telecommunications sectors. An infrastructure survey by the World Economic Forum in 1999, ranked India 55 out of 59 in terms of the adequacy of the infrastructure. Inadequate infrastructure has without question hampered the growth of the Indian economy, with some estimates suggesting the cost is about 3 percent of the annual GDP.24 One gets additional perspective on the nature of the problem by looking at more micro level data. For example, it is pointed out that the cost of industrial power in India is 8 cents per Kwh, which compares unfavorably with other countries where the cost is estimated to be only between 4–6 cents per Kwh.25 It has also been pointed out that given the unreliability of the power supply more than 70 percent of the Indian firms possess their own generating sets. The Indians were cognizant of the problem and in 1991 opened the doors to foreign investors in power generation, but the results have been disappointing. The Indian government expected to add new generating capacity of 10,000 MW during the period 1991–2000 but in actual fact the net increase was only 2000 MW.26 A number of foreign firms decided to pull out of potential projects that they were seeking to develop. Although there are a number of reasons for their exit, the common problem centered was the lack of certainty of payment by the State Electricity

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Boards, who were to buy the power generated by these projects. It is widely acknowledged that the State Electricity Boards are in poor financial health either due to excessive subsidization of electricity and/or due to theft. The first example of privatization of distribution of electricity took place in Delhi in 2002. In Delhi theft of power accounted for a staggering 50 percent of transmission and distribution losses. The inland transportation costs are also said to be high thus adversely affecting the competitiveness of Indian industry. For example, the freight costs from Gujarat to Chennai are said to be around US$40 per MT whereas the comparable costs from China to Chennai are around US$20 per MT. The Indian ports are also not noted for their efficiency. It is estimated that in 1999 in India it took about 4.7 days to turnaround a ship whereas in Singapore it was 6–8 hours.27 This adversely affects the competitiveness of Indian exports and has a cascading effect on inefficiency throughout the system. Although a new policy designed to encourage private investment in ports has been announced, the conditions surrounding the investment have not made such an investment a very attractive one for the foreign investor, at least not yet. The reforms in the telecommunications sector have progressed more smoothly vis-à-vis the power sector. Although much has been accomplished compared with the situation in the early 1990s the pace of movement needs further acceleration. It is estimated, for example that in 1997 India had 18.6 telephone lines per 1,000 people compared with 444 in Korea, 107 in Brazil, and 96 in Mexico. Ten years ago the information technology structure in India was on par with China. However, in 2000, the “teledensity” in China was 112 telephone main lines per 1,000, whereas in India the figure was 32. Likewise China had 15.9 personal computers per 1,000 Chinese whereas India had 4.5 per 1,000.28 However, it may be noted that at the time of writing, the mobile phone user base in India was already nearing the 45 million mark, crossing the number of fixed line subscribers, usually seen, particularly from the experience of China, as a critical inflexion point in the growth and modernization of a country. Although there is clearly much that remains to be done, India has made considerable progress in recent years and there is an underlying dynamism that is now increasingly being exhibited by the Indian economy. It would also be fair to say that India is now at a stage where the logic of the economic reforms has gained widespread consensus within the country. This means, there is no going backward, the only choice is to move forward. To understand the full magnitude of the transformation that has occurred and is happening in India, one must examine the current pattern of Indian industrial growth and development in the context of the period after independence in 1947. In 1950, the Indian per capita income was estimated to be around US$95.29 The country was primarily agricultural with over 70 percent of the population being engaged in agriculture and with just less than 50 percent of the GDP from agriculture.30 Scholars remain divided as to the impact of the colonial rule on the Indian economy. While the British created the institutional foundations for a functioning market economy, India still remained largely non-industrialized at the onset of independence (see chapter one). As seen in chapter one, the then prime minister, Jawaharlal Nehru decided to embark on a policy of import substitution led industrialization. This policy had acquired ideological respectability at that time in history and many countries sought

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to follow this model. The underlying rationale to pursue this policy in the Indian case was a deep sense of pessimism about increasing the country’s exports, a desire to industrialize rapidly, and a romantic attachment to the fundamental tenets of Fabian Socialism, so deeply ingrained into some of the new India’s ruling class under the influence of, amongst others, The London School of Economics. In practical terms this policy meant that some industrial sectors were to be the sole monopoly of the state, others could be jointly developed between state and the industry, while the other sectors were reserved for the private sector, and all this in a regime of licenses and exchange controls. In practice, this “well-intentioned” policy, led to a cumbersome system of controls in which the bureaucrats and the politicians reigned supreme. Many commentators described this period as “license raj,” during which business firms were subject to extreme forms of micro management by the bureaucracy. Naturally many of them, sought to evade these controls, and in doing so, furthered the practice of corruption (see chapter five, “Understanding India”). Internal constraints on entrepreneurial activity were also reflected in India’s declining share of world trade. In the period 1947–1990, India’s share of world trade declined from 2.4 percent in 1947 to 0.4 percent in 1990.31 What is interesting is that in 1948 India’s share of world merchandising exports was 2.2 percent, a figure that exceeded China’s 0.9 percent, and Japan’s 0.4 percent.32 The consequences of this introspection were profound. During the period 1950–1980, India’s GDP growth rate was around 3.75 percent per year, a rate that often came to be pejoratively called the “Hindu rate of growth.” By the late 1970s or the early 1980s it had become reasonably clear that the existing growth strategy was producing suboptimal outcomes. Analysts classified India as a “low income, slow growing economy.”33 When Rajiv Gandhi came to power in the early 1980s, the first attempts to liberalize the economy were made but the reform agenda was never implemented wholeheartedly for a variety of reasons including the debilitating effects of a weapons purchase scandal involving Bofors of Sweden. It took the balance of payments crisis in 1991 to refocus the government’s attention on removing the shackles on the Indian economy. While the economic imperatives for reforming the economy were clear, it was the collapse of the Soviet Union, and the emergence of China as a major actor on the world stage, that impelled the Indian government to initiate bold and decisive action. The reform process of 1991, was spearheaded by Dr. Manmohan Singh, the then Finance Minister and the current Prime Minister. He initiated a series of first generation reforms, that is, reforms covering industrial policy, trade and exchange rate policy, and financial markets. The government for all practical purposes abolished industrial licensing, allowed automatic approval for foreign investors to gain 51 percent equity in their ventures in India, and lowered tariffs and quantitative restrictions on imports. Prior to the liberalization the average tariff rate in India was 125 percent.34 The impact of the first generation reforms has been, without question, positive. Analysts estimate that the poverty levels in both the rural and the urban areas have declined by a third.35 It has also been pointed out that in absolute terms, the number of poor people has declined by 60 million with the poverty rate declining from 55 percent in 1973/1974 to 26 percent in 1999.36 This has also been accompanied by an increase in the literacy rate, which rose from 52 percent in 1991 to 65 percent in 2001.37

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This is in large part a consequence of the higher growth rates experienced by the economy in the post-reform period. The reforms have also helped to alter the sectoral shares of agriculture, industry, and manufacturing, in the GDP. The share of agriculture as a percentage of GDP has declined from 40 percent in the 1971–1980 period, to 28.3 percent in the 1991–2000 period. At the same time the share of the services sector in the GDP has increased from 34.4 percent in 1971–1980 to 44.4 percent in 1991–2000.38 Furthermore, the opening up of the Indian economy has also helped to create new opportunities for the Indian exporters. Finally, the growing opening up and integration of India in the world economy has also strengthened the impression among foreign investors that India may be a good place to do business. This intangible benefit is of vital importance because investor sentiments are crucial in attracting foreign direct investment. In India’s case this is doubly important as prior to 1991, the Indian trade and investment regime was very restrictive. Although much has been accomplished, there is clearly more to be done. Policy makers need to focus their attention on second generation reforms like reforming labor laws, which would make it easier to lay off workers. However the focus on privatizing inefficient public sector enterprises that are a drain on the national treasury remains a controversial issue, and the newly elected coalition government may have to fight some battles in moving this process along. They have already disbanded the Ministry of Privatization, but that by itself may not necessarily be a negative omen. Mr. P.C. Chidambaram’s appointment as the Minister of Finance is an encouraging sign as he is considered to be an ardent supporter of reform. There is an urgent need to deal with the overall government deficit (central and state combined), which is estimated at about 10 percent of GDP. This deficit is a consequence of excessive subsidies given by the central and the state governments, as well as a low tax yield, stemming from the fact that only few people pay taxes. The free distribution of power to farmers, as well as transmission and distribution losses due to theft, are additional contributing factors. As we have pointed out earlier, an emphasis on the improvement of infrastructure is an absolute must if higher rates of growth are to be sustained. An improvement in government finances will provide an opportunity for the government to undertake substantial investments in this area. In our view, there is now an increasing recognition in European countries as well as in the United States that India is fundamentally committed to the process of economic reform, although there is a clear understanding that in a democratic framework, the reform process may not necessarily proceed smoothly. But this greater interest in India that is now being demonstrated by the United States and the European countries is likely to further strengthen the Indian enthusiasm for engaging with the outside world. The visit of the then U.S. President Bill Clinton to India in 2000 generated a very positive response. This openness means that the reform process is unlikely to alter its fundamental direction, even though its pace may accelerate or decrease, depending on circ*mstances. What are the implications of this economic contrast for the European and the North American investors who seek to do business with India? The first point to be noted is that there is a new spirit of openness in India with the Indian populace recognizing that integration with the world economy can produce significant benefits. This spirit of openness has been reinforced by the dramatic growth of the information

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technology industry in India (see chapter three). This industry has become one of India’s major exports and also a major advertiser of India’s strengths. Consider the fact that India’s software exports increased from US$128 million in 1990–1991 to US$8.3 billion in 2001.39 The industry has been experiencing 50 percent annual growth since 1991 and constitutes about 8 percent of total Indian exports. Most Western companies now consider India as their first option in outsourcing software development.40 This is particularly true of American companies. In the year 1997–1998 total software exports from India totaled US$1.8 billion, and of this figure 58 percent went to the United States, 21 percent to Europe, and 8 percent to South East Asia. The industry has gradually moved up the value chain with Indian companies now engaged in high value-added work. A study by McKinsey and Company suggests that the output of the Indian software and services industry is expected to increase to US$87 billion by 2008, of which US$50 billion may be exported. NASSCOM, the industry association, predicts a turnover of over US$20 billion for the current fiscal year with US$16 billion to be exported. In addition to the success of the Indian software firms in the global market, foreign firms are also taking advantage of the local talent that is available here. Intel has reportedly invested about US$25 million in software development in Bangalore, India. This investment appears to be paying off handsomely. In 2003, the Indian subsidiary of the U.S.-based company Intel filed 63 patents. Intel is not alone in reaping the benefits of operating in India. More than 100 multinational firms have established research and development centers in India including companies like General Electric, Bell Labs, Du Pont, Caterpillar, Microsoft and IBM. One of the largest R&D centers has been established by GE in Bangalore. This is a US$100 million center that was set up in 2000 and has already applied for 17 patents. Texas Instruments, which was one of the first companies to set up operations in Bangalore has realized 225 patents while Cisco systems has 120. There are many other companies that have attained comparable level of success. The development of this industry has undoubtedly been greatly aided by the presence of a large and skilled manpower that is fluent in English. India annually produces about 75,000–80,000 software professionals, and perhaps more interestingly, there are about 140,000 professionals who work in Bangalore, a number that is 20,000 more than in Silicon Valley. Analysts predict that foreign firms are likely to use India as a base for R&D even in industries such as biotechnology and pharmaceuticals. The demographic profile of the Indian population is also becoming younger and this has implications for the marketing strategy of firms as well as for a country’s rate of growth and development. Estimates suggest that more than 500 million Indians are below the age of 21 and the median age of the Indian population is 24.41 This is in sharp contrast to the median age of 36 in the United States and 30 in China. The implications of this demographic transition are many. A more youthful population that has grown up in the Internet age and in era of globalization may have higher levels of aspiration, and may also seek to realize their higher aspiration levels in different ways. It is now widely believed that well over 600 shopping malls in the American style, may now be created in India. Malls have already been established in Gurgaon, a town on the outskirts of Delhi. These malls contain outlets of the likes of international brands such as Nike, Benetton, and Pizza Hut, among others.

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The growing number of young consumers is also forcing multinational firms to tailor their marketing strategy to a new market segment. Motorola has developed cheap phones primarily for the younger consumer market segment. Citibank has observed that the average age of a mortgage holder has declined in India from 41 to 28. The company is developing new programs to attract an increasingly younger crowd. The youth are part of an emerging middle class in India. Estimates of the middle class vary but a study by the U.S. Department of Commerce suggests that India has 20 million people with annual incomes in excess of US$13,000, 80 million people with annual incomes in excess of US$3,500, and 100 million people with incomes in excess of US$2,800.42 A shift in the age distribution of the population also has implications for the rate of growth that a country can hope to realize and sustain. Scholars note that when the percentage of people who are working in a given country increases, the saving rate increases correspondingly. Increased savings, in turn, will enhance the growth rate. The heightened interdependence between India and European and North America also implies that there are many more foreign investors active in India and likewise there are Indian companies that are increasing the scale and scope of their international operations. Foreign companies are operating in India in a wide range of industries such as the automotive, consumer electronics, food processing, telecommunications, financial services, infrastructure, engineering, information technology, biotechnology, entertainment, retail, and healthcare sectors. Ford has made an investment of more than US$350 million in India. The company currently exports cars from India. At the other end of the spectrum, Marks & Spencer, a well-known U.K.-based retail chain has set up franchisee outlets in Delhi and Mumbai. In the era of control it would have been unthinkable for Indian companies to operate overseas. As Indian firms venture overseas, they are likely to absorb the capitalist ethos to a heightened degree, and may seek to reshape their corporate culture to conform to the demands of the international environment. This can only but strengthen the Indian integration in the global capitalistic environment. There are several indications to suggest that this process is already underway. India has already become the eighth largest investor in the United Kingdom. At the same time Indian companies are reported to have acquired about 120 foreign firms during the period 2001–2003 with a combined value of US$1.6 billion.43 Indian pharmaceutical companies, for example, have sought to acquire overseas firms. Dr. Reddy’s laboratories acquired Trigenesis, a U.S.-based company, for US$11 million to enter the speciality drugs market. Ranbaxy acquired the French generic drugs maker, RPG Aventis for about US$70 million. Hindalco has acquired an Australian company, Straits (Nifty) Pty., for a value of AD$79.80 million. Seven Indian companies are reportedly listed in the New York Stock Exchange while three are listed on NASDAQ. India is a country comprising 29 states and 6 union territories. There is considerable interstate variation in economic performance. In 1998/1999 the Gross State Domestic Product per capita was highest in the state of Maharashtra (US$657) and lowest in the state of Orissa (US$238).44 Since the start of reforms, highest growth has been recorded in the states of Karnataka, Maharashtra, Tamil Nadu, and Gujarat, and lowest in the states of Uttar Pradesh and Bihar. Andhra Pradesh, Karnataka, Maharashtra, Tamil Nadu, and Gujarat have also been the most pro-reform

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states, whereas Bihar and Uttar Pradesh, with very large populations, can at best be described as reluctant reformers. The implications of this state of affairs are fairly clear. The five pro-reform states have accounted for two-thirds of private investment inflows, even as these states constitute only a third of the country’s population. To put it in more concrete terms, Tamil Nadu has become a major hub for companies in the automotive sectors with firms such as Mitsubishi, Ford, and Hyundai having a presence in the state. Karnataka and Andhra Pradesh have staked out their claim in the information technology sector by attracting companies such as Microsoft and Sun Microsystems while Maharashtra has been a home to Mercedes Benz and Siemens amongst others. Differences in the regional performance of states has a number of different implications. First, it clearly suggests that some states are much more attractive destinations for foreign investors than others. The differential economic performance of the states may be attributable to the differences in the quality of governance and that of the infrastructure, as well as differences in their motivation and ability to create an investment climate that is attractive to foreign investors. The area around Delhi, the southern states in India and the western region of the country are by far much more attractive destinations for foreign investors than states such as Uttar Pradesh, Bihar, or Orissa. As foreign investment gets localized in the more promising states, the differences between the high growth and the low growth states are likely to widen. Regional inequality is likely to increase and this may create some interstate tensions as the less well-performing states demand greater allocation of resources from the center. Although these tensions may cause some hiccups they are highly unlikely to fundamentally threaten the integrity of India as a nation-state. We are also seeing the emergence of regional centers of excellence within India. Thus the southern states, and in particular, the city of Bangalore in Karnataka, has become the hub of the Indian information technology and biotechnology industries. These centers, if we can call them as such, are often much more integrated with the global economy and the operating routines within these segments conform to global norms. Finally, the clustering of foreign investment within certain regions may also have the additional potential of creating synergies among the foreign investors. (c) Cultural Dimension Many scholars have often debated as to whether India belongs to the East or to the West, but a consensus seems to be emerging that the Indians are closer to Europeans/ Americans than they are to the Asians. A renowned German scholar of India, Max Mueller, once noted “India for the future belongs to Europe, it has its place in the Indo European world, it has its place in our own history, and in what is the very life of history, the history of the human mind.”45 A good example of this observation is the close linkage that exists between Sanskrit, the language of the Aryans of India, and Greek, Latin, and Anglo-Saxon. Scholars have shown that all of these languages have a high degree of commonality about them with this commonality being indicative of a shared Aryan culture. The Aryans who are supposed to have migrated to India around 1500 BC spoke Sanskrit and this provides the foundation for languages currently spoken in India.

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Even if we move from the realm of shared knowledge to the realm of action there are similarities. The Indian, for example, is aggressive, argumentative, emotional, and analytical. These are traits that set the Indian far apart from the model of the “Confucian gentleman” that is so revered in Asia. A Japanese anthropologist, Chie Nakane, described the Indians as being very logical and noted that their thinking was much more similar to the Westerners than it was to the East Asians.46 An ABB manager who has done business in India for more than 20 years once indicated to one of the author/s that it was extremely difficult to win an argument with the Indians. Similarities aside, there are without question, some differences between the Indian and the European/American cultural realities. Cultural differences are rooted in ideas/practices that originated in ancient times, but it needs to be noted that all societies evolve and adapt continuously. Culture is, therefore, both stable as well as malleable, and for this reason its potential impact cannot be overlooked. At this point we would like to draw attention to some aspects of the Indian culture that have exerted a significant impact on practices from ancient times till the present. The aspects that we will focus on are the caste system and the family. (i) Caste System. No aspect of the Indian social system has probably attracted greater attention than the caste system. Although both Indian and foreign observers have been, and continue, to be critical of it, it is still very much a part of contemporary life in modern India. The caste system represents a hierarchical ordering of the society and stands in opposition to the norm of social equality, so characteristic of Western societies in general and of Scandinavia in particular. Although hierarchy is a universal feature of all societies, the hierarchical ordering implied by the caste system had extreme rigidity, and it was this rigidity, that has most fundamentally attracted the opprobrium of many commentators past and present. The term caste is derived from the Portuguese word “casta,” which refers to family strain, breed, or race and was first employed by Portuguese traders in their interactions with the Indians in the sixteenth century. The Sanskrit word for caste is “jati.” The jati was broken down into four varnas, which in a hierarchical order were Brahmins (priests), Ksatriyas (warriors), Vaishyas (merchants), and Shudras (workers). Each group in this hierarchical order had an important role to play in promoting the well-being of the society. The Brahmins at the apex of this order were the intellectual guardians of the society; the Ksatriyas defended the society from external or internal threats; Vaishyas provided the commercial lubricant for the society, while Shudras performed the menial tasks in the society. Each caste has its own dharma or a set of behavioral norms defining what is acceptable and unacceptable behavior. The Brahmins are expected to be vegetarians, teetotalers, and spiritual; the Ksatriyas must be strong and brave and it is acceptable for them to drink alcohol and be nonvegetarian; Vaishyas are your conventional businessman; while the Shudras were considered to be seen as behaving in a less than desirable manner. The caste system in India originated more than 3,000 years ago when the IndoAryans migrated to India. Deepak Lal has made the interesting argument that the caste system developed in India as a response to problems of political stability that was endemic in the early Aryan civilization.47 There was an urgent need to ensure a

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stable supply of labor for the labor-intensive agriculture that was practiced by the Aryans in the Indo-Gangetic plain. Given the lack of an effective centralized state, which could maintain control over labor through coercive means, only a decentralized control mechanism could ensure this option. Within the rubrics of the caste system, it was not possible for any individual or group to flee, because they would lack the complementary skills necessary to function autonomously. Although the origins of the caste system may have been benign, and while the caste system may not have been very rigid in the early Vedic period, it is a system which continues to exist, notwithstanding governmental laws and regulations which explicitly forbid caste discrimination. It is believed that there are around 2,000–3,000 subcastes today as a consequence of the subdivision of the original fourcastes. It is also worth noting that there is some, although not a perfect correlation between status and income, implying people of higher status are overall more prosperous. It is interesting to note that the Indian information technology industry, in which India excels, has been primarily dominated by Brahmins. One commentator made the observation that “There have never in Indian history been so many entrepreneurial Brahmins as seen in the software industry now.”48 This is a remarkable development, but in some ways not surprising because the Brahmanical emphasis on knowledge goes well with the development of the information technology industry, in that the latter is also knowledge intensive. The political elite has also, for the most part been dominated by people, who belong to the upper castes and the unstated goal of the now-ousted BJP was to strengthen the position of the upper caste groups. What is the role of caste in modern India, and especially in the business sphere? Undoubtedly, caste has less relevance in the urban domain than it has in the rural domain. In the urban domain, business transactions are anonymous and professional identities may be more salient. However, it is worth noting that while caste barriers may not negatively shape interaction, caste similarity may certainly induce the actors to be more motivated to cooperate with each other. In this context caste is not intrinsically important, but it is important only because it helps to draw a distinction as to whether a person is a member of an in-group or a member of the out-group. Most often members of in-group are trusted more than those of the out-groups making it easier to enter into transactions with the former than the latter. (ii) Family. The family represents the fundamental building block of the Indian social system. It has been the “joint family,” that is, a family in which two, three, or four generations all live together, that has been the normative ideal in India. The Indian system, by and large, is a patriarchal one, which brings together many generations under one common roof. Although the joint family may be undergoing some changes, and especially so in the urban areas, it would be fair to say that the family is revered by most Indians, even today. The basis for this strong identification lies in the strong mother–son relationship as well as a deeply internalized set of obligations that are inculcated in early childhood. Parents are willing to make sacrifices for their children and vice versa, a norm far different from that of contemporary Western industrialized societies. The family structure is hierarchical with key decisions being made by the head of the family. Such hierarchy is usually accepted by the younger members of the family, as it is accompanied by benevolent paternalism.

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The strong sense of interdependence that exists among the members of a family does not imply that there are no conflicts. Often, there is an attempt to paper over or avoid these conflicts, but should either of these prove unsuccessful, conflicts can certainly escalate in an unrestrained manner. Most importantly, it is hard to overestimate the impact that family has on social life and on business practices in India. In other words, without a sufficient grasp of the role played by the family in an Indian’s life and world, it is often difficult to explain the Indian employee’s commitment to the organization, or to the strategic decisions made by Indian organizations. For an Indian, the primary loyalty and commitment lies with the family rather than to the work or organization. Scholars have maintained that it has been the narrow loyalty to the family or to the caste grouping that has historically prevented the development of a broader loyalty toward the nation. This does not imply that Indians cannot transfer their loyalty to the larger organization; only that such a transference requires a communal corporate culture and a nurturing leadership style.49 The strategic significance of family in a business context can best be gauged by recognizing that much of Indian business is still family owned. It has been estimated that 71 percent of India’s market capitalization can be attributed to the Indian family business. The Indian family businesses are said to employ 75 percent of Indian citizens.50 In the post-independence period the Indian business firm grew in a protected and a closed environment. The key to success was good relationships with the bureaucrats and the politicians. Analysts have noted that Indian family business has often suffered from a lack of clear focus, short-term thinking, weak marketing skills, and often an inability to separate the interest of the family from that of business.51 It has also been pointed out that very few (3 percent) of Indian family businesses are able to survive in their present form beyond the third generation. One of India’s largest family owned businesses, the Reliance Group, witnessed a major power play between two brothers who inherited the business after the demise of their father. Post-1991, the Indian family business firm is facing new challenges as a number of multinationals have entered the Indian markets and tariffs/quantitative restrictions have been eased, thus permitting foreign firms to export directly to India, after a long time. How are the Indian family businesses doing in the changed scenario? By all accounts, it has not been an easy ride for them and there is often still a reluctance to thoroughly professionalize management by bringing in “non family” members in positions of control. A recent study on family businesses conducted by Grant Thornton found that 46 percent of Indian business people felt that their successor should come from their family whereas only 24 pecent of Europeans and 22 percent of North Americans subscribed to this view.52 Indeed, even in the Indian pharmaceutical company as dynamic as Ranbaxy, it appears there are pressures to re-exert managerial control from within the company. The sudden departure of their professional CEO raised concerns within the larger financial community in India. There are Indian family business firms that have made a mark in the Indian business environment. The three largest owned family businesses in India are Reliance Industries with an estimated value of US$9.63 billion; the Tata Group with an estimated value of US$7.9 billion; and the Aditya Birla Group Industries that has

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an estimated value of US$6 billion. These are companies that have been bold and innovative in coping with the changing environment, although as we have noted above, the Reliance Group is now confronted by sibling disputes. We began this section by making the argument that culturally speaking India is closer to Europe and North America than it is to Confucian Asia. Although in subsequent paragraphs we have identified some key differences between the Indians and the European/Americans, these differences have to be viewed within the context of an overriding similarity. The Indians and the European/Americans have an analytical bent of mind and an abiding desire to know more about the world, although there may well be differences in how they have made, and make use their knowledge about the world. Commonality in language (English), the annual exodus of many Indians to study in the United States and Europe, and external events, most notably the end of the Cold War, and more recently the terrorist attacks of September 11, 2001 have only heightened this natural affinity. This shared sense of unity is, of course, also accompanied by differences, and it is this bridge that Western expatriates will have to build to succeed in the Indian environment. As pointed out in the earlier part of this chapter, the Indian environment is now becoming an increasingly attractive one for Western firms. The next few chapters will discuss the best methods to operate in such a challenging environment.

Chapter Three A Brief History of the Indian Software Industry

“I.T.”—“India’s Tomorrow” A.B. Vajpayee; Former Indian Prime Minister The West created wealth through the Industrial Revolution and then West Asia through Oil. Now, it is India’s turn. They created it by using wealth that nature offered to man, but we (Indians) will create it by using what’s within ourselves—in the human mind. In the 21st Century, which will go down in history as the “Century of the mind,” India has the rare opportunity to earn back its pride of place among the nations of the world. Rajendra Pawar, Managing Director of the leading Indian IT Company, NIIT, quoted in The New Nirvana, India Today’s Special Issue (2000)

India’s software history perhaps can trace its origins from within the ancient Indian texts, the “Vedas” (derived from the root “vid,” meaning “to know”). These texts, which lay stress on abstract, logical, and rational thinking, form the basis of all Indian learning and education. Vedic mathematics is based on sixteen “sutras” or word formulae that describe the way the human mind naturally works, and direct one to the appropriate analysis and solution, often with only mental calculations. The Vedas have an adage that states “knowledge is wealth.” This concept is viewed as fundamental in most Indian families who perceive learning and education as the most important investment of all. Thus, steeped as they are in vedic values with an extraordinary facility for lateral thinking and mental abstract hypothesizing, and with ancient Indian history replete with extraordinary contributions to mathematics, the software exploits of Indian “humanware” or “wetware” should come as no surprise. The late Jawaharlal Nehru, India’s first prime minister, writes in his book, Discovery of India,1 that ancient India laid the foundations of modern arithmetic, geometry, and algebra and that the so-called Arabic numerals originated in India. Further, arguably India’s greatest contributions to the world have been the concept of “zero” as well as the decimal place-value system that are integral concepts in modern software and in all calculations. Mathematical contributions from India also came in the form of fractions and their multiplication and division; the rule of three; squares and square roots and their respective signs; cube and cube roots; the minus sign; calculation of the value of “pi” as well as the origins of trigonometry.

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According to T.R.N. Rao and S. Kak of the University of South West Louisiana, in their fascinating book Computing Science in Ancient India,2 traditional thinking has it that the first software programs, if defined as logical statements for complicated problem solving, were written by the great Indian mathematicians and astronomers, Aryabhata (in AD 476) and Bhaskara (in AD 628). The modern Indian Information Technology industry came into existence when the government of India invested in Defense, Nuclear and Space, Research and Development, and invested heavily in the various public sector undertakings during the many years of socialistic, centralized, planned “command economy.” The first digital computer was introduced into India as early as 1956, at the Government’s, Indian Statistical Research Institute, in Calcutta (now Kolkata). The early history of the so-called software development in India was closely interlinked with the growth of the computer hardware sector. Until the mid-1960s, computer hardware as well as supporting software was largely provided by two multinational companies with operations in India namely IBM and ICL (United Kingdom). All the software to run the systems as well as the basic programs had been developed overseas and more often than not, was provided as a thrown in item at little or no cost, as an adjunct to the sale of the main hardware. This of course was the prevalent international practice. However, the needs of India’s strategic R&D establishments, the defense services, and some of the leading public sector undertakings, required more than plain vanilla software. Since it became increasingly difficult for the multinational computer hardware companies to respond to these demands and also in a few cases where national security considerations required confidentiality, local engineers were required to write out such special software. Such software development was mainly carried out by inhouse developers, writing programs for their own organizations. From the mid-1960s onward, partly due to dwindling foreign exchange resources, and largely due to restrictions imposed on India by the developed countries after India had conducted its first underground nuclear test explosion, the Government of India at that time embarked on a major indigenization program in the strategic electronics sector. Accordingly a policy of locally assembling computers at an Indian public sector company, Electronics Corporation of India Ltd. (ECIL), was initiated, based largely on technology cloned from IBM systems, and sourced from the then soft currency trading partners from the erstwhile USSR and other COMECON countries. Further, some of the larger hardware systems were imported as completely built units from these countries, using an Indian public sector electronics trading entity as an intermediary. Unfortunately, for obvious reasons, all such technology and hardware procurement came with only the very rudimentary software and it was left to local Indian software engineers to make up the deficiency. Thus by the 1970s, government and academic computer users relied very marginally on imported software bundled with the hardware, and increasingly Indian software engineers were called on to develop IBM compatible software for the IBM-360 series computer clones sourced from USSR and the COMECON countries. At about this time, the French came forward to offer their own IRIS range of computers and technology, developed at their company CII (later to become a part

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of Honeywell-Bull). A cooperation agreement was signed with ECIL, and initial systems and technology was transferred. Unfortunately, the IRIS machines were not quite IBM technology compatible and hence some special software tweaking was needed, again, to be carried out by Indian software engineers. With the increase in domestic hardware production, either of Indian design, or under license from France, USSR, Poland, and Bulgaria, an increasing number of Indian commercial organizations as well as research and educational institutions, started using computers for which development had to be contracted out because of the lack of in-house expertise. A fledgling software industry had been created in India.3 The continuing difficulties in obtaining computers and the very high cost of hardware, led some entrepreneurial companies and computer professionals to set themselves up as computer bureaus, to provide services to private companies. In some cases, the computers in these bureaus, were imported and the principal method of acquiring the precious foreign exchange to pay for them was to provide an undertaking to the Government of India to earn substantial sums of money through exports. The first such firm to set up operations was Tata Consultancy Services (TCS) in Bombay (now Mumbai) in 1974, thus initiating the Indian software exports industry. At the time of writing, TCS is a “billion dollar” plus turnover IT Company, India’s largest software entity, and one of the world’s premier software companies. In the late 1970s, the data processing departments of some of the larger companies and the software groups of some of the hardware companies began trying to sell the software developed in-house. As they came to recognize the revenue generating potential of software, several of these firms made their software units as profit centers while a few others hived their software groups into separate companies within the same business group. An interesting aspect of the history of the Indian software sector, is highlighted by Professor Howard Rubin of the City University of New York in an article entitled, “The US, IT workforce shortage” (Dr. Dobbs Journal ). Professor Rubin states that “Due to the import restrictions and foreign currency shortages during the 1970s and 1980s, Indian engineers had to make do by connecting low cost PCs and work stations into a “network” which though at that time was a make shift solution, turned out to be India’s major contribution to international computing. The world now had “Computer Networking,” an unintended consequence of Indian expertise and propensity for practical and adaptive solutions, locally described as “Jugaad” (see chapter five, “Understanding India”). In 1977, the first non-Congress Government formed by the Janata Party was in power. The minister of industries decided that all the large multinationals operating in India were not really required and in an extraordinary development, the government of the day decided to “expel” multinationals such as IBM and ICL, and Coca Cola, among others, from the country. Unwittingly, and unintentionally, this action, a quirk of history, became the trigger for the rapid growth of the Indian software industry. Most of the 1,200 plus ex IBM India employees and many others from ICL were now out of work. A few managed to get jobs overseas and some of the hardware specialists were recruited into a new public sector company grandiosely called the “Computer Maintenance Corporation Ltd.” All the software engineers who could

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not readily get jobs overseas were left to fend for themselves. Several of them teamed up together and set up their own software operations, often beginning as computer services bureaus but then graduating into software development for local clients. Thus, by 1980, India had the kernel of an IT industry, albeit small. Two very significant developments, however, took place. A young man, Azim Premji, all of 21 years old was studying at Stanford in 1966, when his father, who headed a vegetable products (Cooking Oil and Soaps) company, called “Western India Vegetable Products Co.” (WIPRO), passed away. Azim left Stanford without completing his degree to come back to India to take charge of the 20-year-old family business and promptly started a program of modernization and diversification, first moving into the manufacture of electrical bulbs. With the exit of IBM and ICL from India, Azim Premji sensed an opportunity in the IT hardware business and so in 1980 obtained a license for WIPRO, from the Sentinel Computer Corporation of the United States, to make and sell Minicomputers in India. Shortly thereafter, in 1982, WIPRO entered into a tie-up with Sun Microsystems and several other international companies to address the Indian hardware market. At one stage WIPRO had become India’s leading computer printer manufacturer. With the decline in the IT hardware business and the rise of software in the late 1980s, WIPRO’s focus also shifted toward software and designing. By 1992, WIPRO’s software activities had grown to such a level that they established their Global IT Services Division. The company has now grown to be a “Billion Dollar” IT entity with worldwide offices and working with world leaders including Nokia. And, because of the market capitalization of his shareholding, Azim Premji, at least on paper, is now the richest Indian. Meanwhile, in 1975, another young man, N.R. Narayana Murthy (NRNM), with a postgraduate degree from the Indian Institute of Technology, Kanpur, one of the world famous Indian Institute of Technology, returned to India after working for three years with SESA in Paris on projects such as designing a real time operating system for air cargo handling at Charles de Gaulle airport, and took up a lowly research assistant’s post with a small institution in Pune. NRNM was, even at that time a bit of an idealist and at the very first meeting with his father-in-law to be, confessed that he “wanted to become a politician in the communist party and wanted to open an orphanage.”4 The venerable “In-Law-to-be” promptly declined to let his daughter, a qualified engineer with a good job with the Tata Group, marry this young man unless he got himself a proper job so as to be able to support a family. At that time NRNM was already financially indebted to his wife-to-be. So, at the end of 1977, NRNM took up the assignment of general manager in a small IT start-up company in Mumbai, Patni Computers, which had just been appointed as the Indian representative of the U.S. Minicomputer company, “Data General.” Shortly before being sent out to the United States for training, the young couple finally got permission to get married. In 1981, Narayana Murthy, at the age of 32, “being passionate about creating good quality software,”5 together with six colleagues, all software professionals, and with the equivalent of US$250 borrowed from his wife as initial capital, set up “Infosys Technologies.” The fledgling company started operations out of a tiny two-room residential flat in Pune, acquired after the Murthys sold off all their jewelry to raise the margin money for obtaining a housing loan.

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For Infosys, business was initially slow and there were also the then prevailing formidable Indian bureaucratic hurdles to be overcome. The Times of India of April 28, 2002, carried a story that, to obtain permission (only available from Delhi in 1982) to import a computer costing $15,000, NRNM had to make 25 visits to the capital, spread over a period of 18 months, involving costs exceeding that of the computer. It was only in 1983 that Infosys got its first client, MICO (a Bosch associate) in Bangalore. The little flat in Pune was sold and the Murthys and the Infosys headquarters moved to Bangalore into a rented house. Within a short span of nine years, Infosys had already begun to acquire the reputation as a competent Software company within India and overseas. Yet, when the company came out with a public issue in 1992 for a listing on the Bombay Stock Exchange, it barely managed to get fully subscribed. NRNM and his colleagues however kept up a relentless pace of growth and began to pick up clients like Reebok, Nortel Networks, Nestle, Cisco, and Nordstrom. Infosys, like its peers such as TCS, WIPRO, and Satyam, had come of age. In March 1999, Infosys became the first company with an Indian registration to get listed on the American Stock Exchange and during the stock market mania of 1999–2000, the share value of the company reached unheard of highs. Today, Infosys is a “billion dollar” company, but more than that, the company as well as NRNM, have now become Indian icons and a great inspiration to many youngsters who for the first time can visualize the “Indian Dream” of first generation entrepreneurs from modest family backgrounds, becoming millionaires by sheer talent and hard work. Although the growth of the software industry in the 1980s was slow and erratic, exports of software began to grow after 1981 because of increasing export awareness, largely arising out of the need to earn foreign exchange for meeting the commitments given to the authorities in lieu of being able to import computer systems. Further, at this time, in the international market, the cost of hardware had dramatically dropped and software, especially application software, as a cost factor had started to gain prominence. This increasingly required low-cost, highly skilled, software expertise, which by then was available in India in reasonable measure. With the advent of modern and “forward looking” policies introduced during Prime Minister Rajiv Gandhi’s tenure, the IT scenario in India underwent a quantum change. The government now actively promoted software exports for the first time, by providing concessional financing, export incentives, improved infrastructure, legal regulation, and export marketing assistance. Furthermore, in 1984, import of computer hardware was liberalized for the first time and large quantities were imported, principally small mainframes, PCs and minicomputers, as that was pretty much what could be afforded at the time. A large number of software companies then set up operations to meet the large market created by the companies who had imported these computers. Many of the then software exporting entities thus had their origins in the domestic market, either as data processing centers of large companies or as software developers for domestic hardware installations. However, under the new dispensation, with the active encouragement of the government and with the provision of incentives, the focus rapidly shifted to exports. Also, as noted later in this chapter, by this time, Indian engineers and managers, who had gone overseas to study,

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particularly to the United States, and stayed on in jobs there, had now started to reach positions of considerable influence in their companies and some had also ventured out as successful entrepreneurs. Thus, in the 1980s, multinational companies also began, for the first time, to take a serious interest in India as a source of software development and also as a potential market for software “products.” Companies like Unisys and Burroughs even entered into Indian joint ventures with equity participation. Some of the world’s leading airlines including British Airways and Swiss Air outsourced IT, ticketing, and fare reconciliation activities into dedicated “virtual” software operations set up in Indian entities. In 1985, Citibank established a 100 percent foreign-owned, export-oriented offshore software company in the Santa Cruz Electronics Export Processing Zone (SEEPZ) in Bombay (now Mumbai). Indians working at Citibank’s Indian operations were particularly keen on creating this subsidiary, which initially undertook software development work for the parent company and later diversified into other activities. This activity spawned the Indian company I-Flex, which developed, Flexcube the world’s leading banking software product and other products such as Microbanker and Reveleus a business information tool for financial institutions. “I-Flex” is now a world leader. Soon thereafter, the U.S. companies, Texas Instruments and Hewlett Packard established subsidiaries in Bangalore, in 1986 and 1989 respectively. With these significant initial multinational software commitments in India, worldwide attention was drawn to the possibilities for offshore software development in India. This increased awareness coincided with the severe shortage in the supply of programmers and software developers in the international software industry, particularly in the United States.6 In 1991, the Government of India, as part of the overall economic liberalization regime, established “Software Technology Parks” (STPs) in the major cities of the country. The STPs provided the software export industry with international quality, satellite-based telecommunications infrastructure as also the possibility of importing hardware and software products free of import duties. Further, profits from exports of software were entitled to claim zero income tax. The STP scheme became enormously successful and was the real facilitator for India’s software export boom. Now, STPs have also been established in the smaller towns of India with the same facilities as in the larger cities. The reforms of 1991 also brought about some other very significant policy changes, which were to really benefit the Indian software sector. First, with the introduction of currency convertibility on the current account, it was now possible for companies to hire the services of international consultants to assist in global branding. Second, foreign companies were now freely allowed to set up 100 percent owned software companies in India providing appropriate competition and “benchmarking” for the healthy growth of Indian IT companies. Third, with the abolition of controls on Capital issues, companies were now free to enlist shares both on Indian as well as overseas stock exchanges and also offer stock options to their employees. But the greatest benefit came from the abolition of wealth tax, which for the very first time brought about the possibility of attractive wealth creation for entrepreneurs and shareholders alike.

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The 1990s also saw two very interesting situations, which went a very long way in establishing India’s software prowess on the international scene. First, and possibly the more significant event happened in Switzerland. The Swiss Railways, famed for their precision and demanding performance, wanted to completely revamp and modernize their software and integrate all their disparate systems. Despite international competition, the Indian company TCS was awarded the contract. They not only delivered excellent service to a very demanding customer, but also finished their assignment well in advance. This shattered two long held negative beliefs. First, that, Indian software professionals were just “techno coolies” fit only for low-grade software work at “sweat shop” wages. Second, that Indians, given their casual attitude to time, could never finish or deliver an international project in the time allocated, and to the desired quality standards. The more knowledgeable U.S. companies, particularly those in California, with link to India through engineers and managers of Indian origin as also through work done for them by Indian entities, were aware of the skills of the Indian software professionals. It was a revelation and eye opener for the rest of the world. And it came at just the right time! The world was heading toward a change of the century. The long awaited and dreaded “Y2K” was soon going to be upon us, and companies and users had not reacted fast enough. Worse, there was not enough local talent to fix this potential nightmare. So, the word was now out. Call in the Indians and let them fix it. Thus, in the second significant event, Indian software engineers, passing out in thousands from excellent universities and colleges and professional software training institutions, were filling the aircraft of the world’s leading airlines, traveling to the corners of the developed world fixing the “Y2K” problem. The Indian companies did themselves proud by responding appropriately to the challenge and delivering. Shortly after the “Y2K” situation, another peculiar situation arose. A large part of the European Union was going to convert to their new, unified currency, the “Euro.” This again needed massive software inputs not readily available within Europe. So once again the Indians were called in. Countries such as the United Kingdom and Germany even relaxed their visa regimes. The Indian software companies, aided and abetted by their highly professional and effective association, the “National Association for Software and Services Companies” (NASSCOM), were now on a roll. There was to be no looking back from here. IT and the Indian Diaspora in the United States The great Indian poet and Nobel laureate, Rabindranath Tagore, eloquently said: To study a Banyan Tree, you not only must know its main stem in its own soil, but also must trace the growth of its greatness in the further soil, for then you can know the true nature of its vitality.

This extraordinarily philosophical statement is appropriate for an understanding of the international growth of India’s software business. It also leads us to study and analyze the extraordinary contributions to global IT made by the phenomenally

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successful Indian diaspora in the United States, particularly those from the so-called Silicon Valley in California. According to Professor Anna Lee Saxenian7 of the University of California, Berkeley, “the origins of the high skilled immigrant presence in the U.S. date back to the mid 1960s,” when an amendment was made to the U.S. Immigration and Nationality Act repealing the national origins quota system allowing for graduating overseas students to extend their residency in the United States. At about this time some of the graduates of the initial batches of the then recently established and now famous, Indian Institutes of Technology (IITs), had just started to finish postgraduate studies in the United States. This was also the time when the Silicon Integrated Circuit had just been developed in the San Francisco Bay area, and Stanford University, the Xerox Palo Alto Research Center, Hewlett Packard, and others were anchoring a massive development of the electronics industry in the geographical area now called the “Silicon Valley.” The skills of the enormously talented, English-speaking, Indian engineers with fresh postgraduate degrees from leading U.S. universities such as Stanford, University of California—Berkeley, MIT, Carnegie Mellon, and so on could now be used by the high technology companies in Silicon Valley. The success of these pioneers led to a clamor by both universities as well as high technology companies for more Indians, and they came in increasing numbers. In December 1998, the prestigious U.S. publication, Business Week in a report said that, “a full 30% of the graduating classes (from the Indian Institutes of Technology) headed to the U.S. for graduate programs and better job opportunities in 1998. In the more popular computer science programs, nearly 80% leave for Silicon Valley. So routine is the exodus that at the IIT— Madras, the local campus postman and bank clerk provide unsolicited advice on the best U.S. schools to attend.”8 Over the years, U.S. companies derived great benefits from the skills and talents of this great diaspora, but for the Indian engineers the path up the technical management ladder was slow and limited. It was only in the years following the Vietnam War, with California rapidly becoming a multicultural society, that the “glass ceiling” of senior management was finally broken and several Indians such as Vinod Dham, the “father” of the Pentium chip at Intel, almost reached the top rung. A June 1999 study by Professor Anne Lee Saxenian,9 indicated that at that time, India and Taiwanese Chinese constituted over 35 percent of the Silicon Valley region’s scientific and engineering workforce. Further, Saxenian notes that by 1998, these Indian and Taiwanese had become senior executives at about one quarter of Silicon Valley’s new technology businesses. However, by the 1980s, with cuts in the defense and space budgets, several U.S. companies started downsizing. By then the entrepreneurial bug had bitten the Indian diaspora in the U.S. and several of them in senior positions decide to strike out on their own. Among the first few was Kanwal Rekhi, an alumnus of IIT—Bombay and a postgraduate from Michigan, who in 1981, along with two other Indians, set up “Excelan,” the first Internet company. Shortly, in 1982, Vinod Khosla (IIT—Delhi) established Sun Microsystems and in 1984, Suhas Patil (IIT—Kharagpur) set up “Cirrus Logic.” These organizations became highly successful multi-million dollar businesses and inspired other Indian professionals to follow suit.10

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The start up of the Internet was now to provide great entrepreneurial opportunities. Technology leaders such as “Exodus Communications,” “i2 Technologies,” “Sycamore,” “Juniper,” “Junglee,” and so on, all set up by Indians later grew to become great wealth creators. The Internet technology domain was now rapidly dominated by people of Indian origin. Michael Lewis in his book The New Thing quotes Jim Clark of Silicon Graphics and Netscape fame as saying “The Internet had acquired a predominant flavor of curry!” But the “big one” was yet to arrive. Smitten by the Internet bug, the then 28-yearold, Sabeer Bhatia, quit his job after just nine months at Apple Computers to join a start up company, “Firepower Systems” which in a few months, went under. Along with an ex-colleague from Apple, Jack Smith, Sabeer sat up one night and wrote a business plan for a software company that would enable the users to send e-mails from any computer, anywhere in the world. This concept was named as “Hotmail” derived from “html” the programming language used to make web pages. But venture capital was required to start up the company. Following 19 rejections, Sabeer reached the offices of Draper Fisher Jurvetson who, in 1997, impressed by the concept, put up $3 million as venture capital. By the end of the year Hotmail had a million customers and in a year’s time, when Microsoft paid $400 million to buy out Hotmail, they had over 10 million customers.11 With the great success of the Indian diaspora in Silicon Valley, as far as India was concerned, many possibilities now opened up for outsourcing work, establishment of delivery centers in India, and the setting up of new high technology ventures in India by Indians who returned from the United States (described as “brain circulation” by Professor Saxenian) for all kinds of IT work from IC chip designing to animation of Hollywood blockbusters. What was needed was an institution that would somehow bring all this together along with advisory functions, venture capital facilitation, networking, political and bureaucratic contacts and most important of all, nurturing of the entrepreneurial spirit. The more experienced among the diaspora, led by Kanwal Rekhi, formed just such a non-profit institution, “The Indus Entrepreneurs” (TIE), 1992 with its headquarters in Silicon Valley, with chapters in several U.S. cities as well as in India and other countries of the world. With an active membership and with a wealth of experience being made available by the driving forces at TIE, the two streams of Indian IT, the home-grown one and that of the diaspora are now rapidly converging to make India the great information technology powerhouse, in the process completely transforming cities such as Bangalore, Hyderabad, Gurgaon, and Chennai. IC Chip Designing/Electronic Design Automation (EDA) Services While the story of India’s software exports prowess was being written about and highlighted in the world’s media, some other IT-related activities were beginning to gather momentum in India. Although these were technical enough, they required different skill sets and were really not mainstream software activity. In 1985, Texas Instruments (TI) established a small export oriented IC design facility in the city of Bangalore to leverage the local engineering and design talent.

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At that time there were no guidelines or regulations (particularly related to customs) in place, regarding design exports over satellite telecommunication channels. Technocrats from the Indian Government’s Department of Electronics had to be positioned in the TI facilities in Bangalore to be the virtual customs authorities. Over the past few years, the TI facility grew from strength to strength in their IC chip designing capabilities. Today they are engaged in several full product development including, for example, a world class Digital Signal Processor (DSP) as well as DSP Systems on a Chip (SOC) for Controllers and Audio and Video functionality for broadband communications and 3G telecommunications. Their success was a pathbreaking endeavor that induced others to follow suit. Today, India is considered the IC chip design capital of the world.12 There are at least 70 companies of a significant size engaged in chip designing in India. Over 50 of these are located in Bangalore. Many world leaders such as ST Microelectronics (see Case Study on ST Microelectronics in this book), National Semiconductor, Sage, Motorola, Sanyo-LSI, Lucent, Analog Devices, Alliance Semiconductor, Cypress, Cadence, Cirrus Logic, AMD, Zilog/Qualcore, Intel, to name a few, now have large chip design and “System on a Chip” (SOC) design capabilities in India. Integrated Circuit design export billing now exceeds US$300 million and employs almost 10,000 VLSI engineers, software engineers, system and complexity engineers, to design chips for products ranging from i-PODs, to DVD players and advanced telecommunications systems. IT Enabled Services (ITES) and Business Processing Outsourcing While the Indian IT and EDA sectors were making their mark in the international sphere, an interesting sector that is the subject of a raging international controversy which has even been brought into focus in the U.S. presidential race, with India facing some backlash. This sector covers the whole gamut of IT enabled services (ITES) and Business Processing Outsourcing (BPO), ranging from simple Back Office Operations, Medical Transcriptions (for the U.S. medical sector), financial services, engineering design services, architectural services, Geographical Information Services, technical support centers, through to plain vanilla Call Center Services. From a near nonexistent presence as recently as the 1990s, the ITES/BPO services today are a $4 billion revenue earner for India, employing over 200,000 Indians, with skill sets ranging from raw young graduates to highly qualified engineers and scientists, some with Ph.D. degrees. And more are being added every day, to the consternation of many countries, who see this development as a massive transfer of jobs from the developed world to India and even became a major issue in the 2004 U.S. presidential race. But how did it all start? The Indian ITES/BPO story starts in 1984 when Raman Roy, described as the “Father of the Indian BPO Industry,” joined American Express in India to help set up its automation services and accounting operations. From a small beginning, Raman Roy went on to establish a global, centralized, accounting facility in India,

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providing services to American Express customers in Europe, United States, Japan, and Australia. Today this center has grown to about a thousand employees and provides all aspects of accounting and other services to the global offices of American Express. In 1992, Swiss Air established a joint venture company, ATS, in India, with the Tata group to work on airline back office assignments. In 1997, British Airways, as also American Express also started to outsource some routine back office and reconciliation work of India. By the mid-1990s some entrepreneurial Indians had also managed to get medical transcription work from the U.S. medical sector. Not much IT or technology was however involved in such work. The real fillip however came in 1998 when the Indian subsidiary of GE Capital, GE’s finance arm, set up a small eight-person team to do elementary address changes for the group companies. This experiment was so successful, that it was not too long before this group had mushroomed into a major operation “General Electric International Services” (GECIS), based in Gurgaon near Delhi, handling basic voicebased call center operations, claims processing, e-business, accounting, actuarial services and so on. Raman Roy was brought in as the chief executive of GECIS. From an employee base of eight at the beginning, they grew to 600 in 1998 and almost 12,000 in 2003. (See the case study on GECIS in chapter five of this book.) India and the world took note of this extraordinary development. Some of the senior managers left GECIS to establish their own companies and work independently. Most notably of them all, Raman Roy, established his own company, “Spectramind,” which he later sold. It is now a wholly owned unit of the software giant, WIPRO. The concept of subcontracting out ITES and BPO operations to an independent entity based in India, rapidly caught on, and an increasing amount of work was transferred to India. In July 1999, four young Indians working with U.S. multinationals sensed an opportunity when apparently they read a report somewhere which seemed to show that well over 65 percent of all online transactions are abandoned due to a lack of any customer support. At the beginning of 2000, the four entrepreneurs established a company, Daksh, also in Gurgaon. One of the founders was related to Ashish Gupta who had set up Junglee in the United States, which was later acquired by Amazon. Ashish Gupta became the angel investor in Daksh and brought in Amazon as one of its first customers. In a short time, Daksh became a huge success story with many leading international organizations as customers and a turnover rising from zero to $60 million in four years. In early 2004, IBM bought out Daksh for $160 million. Now all the world’ s majors were scrambling to India to get a piece of the action. GECIS was followed quickly by Citigroup, HSBC, Accenture, Dell, Hewlett Packard, and many others streamed in. Today, India provides ITES and BPO services to nearly all the Fortune 500 companies and many others, covering every conceivable sector that can be outsourced. Exports of ITES from India have risen from US$565 million in 1999–2000 to US$2.4 billion in 2002–2003. Analysts predict that by 2006 export revenues from ITES will rise to a staggering US$6 billion. But this will still be only a small portion of the global ITES/BPO business expected to be US$1.6 trillion by 2006.

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India has the human resource, now being defined as “wetware.” The infrastructure is now in place. The larger IT companies are getting into or expanding their ITES activities as also going in for high-end designing work. It, therefore, is entirely conceivable that by 2010, India could earn export revenues of US$100 billion. That, at least is the target the industry sector has set for itself.

Chapter Four Cultural Portrait: Impact of Hinduism on Indian Managerial Behavior

The born traveler—the man who is without prejudices, who sets out wanting to learn rather than to criticize, who is stimulated by oddity, who recognizes that every man is his brother, however strange and ludicrous he may be in dress and appearance—has always been comparatively rare. Hugh and Pauline Massingham, “The Englishman Abroad.” Cited in Craig Storti, The Art of Crossing Cultures

Introduction Many, perhaps most, people who go abroad to live and work genuinely want to adapt to the local culture. And most of them do not. It’s not that they don’t appreciate the reasons for adapting to the culture or know that it is all but essential to being successful in their work and at ease in their society, but rather that true cross cultural adjustment and effective cross cultural interaction are more elusive than we might imagine.”1

Managers engaged in cross-border transactions are often faced with the need to bridge the cultural gap that exists between their cultural background and that of their foreign counterparts who possess a different cultural background. This is by no means an easy task. Although globalization has increased the interdependence among different societies, the growing interdependence has not necessarily brought about a convergence in managerial values, although without doubt, pockets of global hom*ogenization may be found in all societies.2 “Culture is to a human collectivity what personality is to an individual.”3 Culture has a profound impact on the ethos of society. It influences the way in which it engages with the outside world as well as the way in which it deals with its own internal problems. Culture sets the parameters for what are considered acceptable as well as unacceptable forms of behavior in a society. It affects the way in which people think and resolve conflicts in their everyday life. As Adler points out “Our ways of thinking, feeling, and behaving, as human beings are neither fully random nor haphazard, but are profoundly influenced by our cultural heritage.”4 The essence of culture is neatly captured in the definition by Hofstede who defines culture as “the collective programming of the mind that distinguishes the

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members of one group or category of people from another.”5 In this definition “culture” is likened to a software program that governs the manner in which people think, behave, and/or respond to any situation facing them. This does not imply by any means that every individual in a given culture will think and behave in the same fashion; all that it suggests is that every culture has its own unique way of relating with the world with different individuals differentially exhibiting the impact of culture, personality, and the situation in any concrete situation. The “collective programming” encapsulates the “core assumptions,” that govern the functioning of society. These core assumptions manifest themselves as values, which determine what a society considers valuable or desirable.6 It is important to note that members of a society are generally not aware of their own cultural values and it is this unawareness that often causes unpleasant surprises/shocks when they interact with members of another cultural group. The human mind is comfortable with order and predictability, both of which are called into question in an alien cultural environment. It is the disconfirmation of one’s unconsciously held expectations that often gives rise to what has commonly been described as culture shock.7 What aspects of the Indian value system are going to be troublesome for the Western expatriate manager? What are the origins of the dominant values in the Indian society? How do these values shape Indian managerial behavior? These are the issues that we address in this chapter. At the outset it is perhaps useful to state that the Indian culture exhibits a level of “complexity” that makes facile generalizations often difficult. The complexity of the Indian culture stems from the fact that the Indian social system as embodied in the basic tenets of Hinduism has over the years been subject to a myriad of influences stemming from Islamic rule, British colonialism, and more recently, the advent of globalization. The fundamental underpinning of Indian culture is still provided by the fundamental principles of Hinduism that continue to shape Indian thought and behavior. We will make an attempt in this chapter to distill the basic elements of Hinduism, and to sketch out their impact on the conduct of business practice in India. The Nature of Hinduism The term “Hinduism,” was first used by the British in the nineteenth century to describe the beliefs/values of individuals who were neither Christian nor Muslims.8 Scholars note that even the word Hindu was first used by the Persians to refer to the individuals who were living near the river Indus, around sixth century BC.9 A unique feature of Hinduism has been its ability to incorporate a wide variety of different beliefs. As Wendy Doniger notes “It is axiomatic that no religious idea in India ever dies or is superseded—it is merely combined with the new ideas that arise in response to it.”10 This has a number of implications. First, given the “all encompassing” nature of the Indian thought, scholars note that it is often hard to define Hinduism precisely.11 Second, the primary focus of Hindu thought has been on incorporating new developments instead of trying to refute them.12 This logic of assimilation was predicated on the worldview that the world is only one, although it may be called differently by different people. An emphasis on assimilation also reflected a spirit of tolerance in this way of thinking. As scholars note

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“Hinduism’s openness to new ideas, teachers, and practices, and its desire for universality rather than exclusivity, set it apart from religions that distinguish their followers by their belief in particular historical events, people, or revelations.”13 In the process of assimilation, Hinduism developed the capability of offering something to everyone, notwithstanding the fact that there is a vast gap between the culture of the priestly classes (the Brahmins) and that of the masses.14 The Vedas are a body of religious literature that provide the foundation for Hinduism. Although many Hindus may not be familiar with its contents, they have an unparalleled status in Hindu thought. Scholars have observed that “In the traditional Hindu understanding, Vedas are said to be non personal and without beginning or end. This means that the truths embodied in the Vedas are eternal and they are not creations of the human mind.”15 Some parts of the Vedas have furnished the basis for Indian rituals and continue to influence Hindu thought.16 The philosophical basis of Indian thinking is expounded, above all, in the Upanishads, which constitute the last of the Vedas. The Vedas were transmitted verbally and not written down for many centuries after their composition.17 Oral transmission reinforced the monopolistic status of the Brahmins in the Hindu society and as Lannoy points out “it was not numbers which became the key to both power and wisdom, as in Europe, but the Word.”18 What are some of the key beliefs in Hinduism that have shaped, and continue, to shape Indian thinking and behavior? While there is a wide corpus of beliefs associated with Hinduism, just as there with any other social thought, we will focus on, what are widely considered to be, the key aspects of this philosophy. The key beliefs revolve around (a) the nature of the ultimate reality (Brahman); (b) the doctrine of karma; (c) the principle of ahimsa (non injury); and (d) the four stages of life (ashramas); (e) the concept of dharma; and (f ) the principle of hierarchy.19 The Nature of Ultimate Reality This, in many respects, is the core foundational principle of Hinduism that has attracted widespread attention both in India as well as throughout the world. Hindus believe in an ultimate transcendental reality that is called the Brahman. The transcendental reality is beyond reason and may be hard to even describe in words.20 The ultimate reality stands in marked contrast to the illusion (maya) of the phenomenal world, which we have to navigate everyday. The dominant school of thought in Indian philosophy (i.e., the Vedantic school) makes the argument that Brahman is both the creator as well as the preserver of the Universe and this vital life energy (atman) is present in all things, animate or otherwise.21 The normative implication of this principle is that individuals should strive to unite their inner self with the ultimate reality. The attempt to realize this unity constitutes the heart of spiritualism in the Indian subcontinent. The Doctrine of Karma This is a core doctrine in the Hindu philosophical system. Simply put, the doctrine asserts that individuals will be rewarded for good deeds in a future life and penalized for actions that are morally inappropriate. Coupled with the doctrine of transmigration,

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the implication is that individuals with good karma will gain rebirth in a social setting that represents an improvement over their current situation. Over time, they are also more likely to attain moksha, that is, get united with the Brahman and in doing so will escape from the clutches of the illusory world. Likewise, individuals with a bad karma, may be reborn in a social setting that represents a decline in their social status. It also makes it that much more difficult for them to attain liberation. Some have argued that this doctrine engenders pessimism and fatalism, but if present actions influence future outcomes, there is an active role for human agency, and there is less reason to be pessimistic. Doctrine of Ahimsa The ideal of ahimsa is another characteristic of Indian thought. Most fundamentally, the Hindu thought went against the inclination to inflict harm upon others. As Wendy Doniger points out, the concept of ahimsa was not related to vegetarianism, although over time the two did mutually influence each other.22 This principle gained its most prominent exponent in Mohandas Gandhi, the Indian leader, who steadfastly employed the principle of “non violence” in exerting pressure on the British to leave India. The Four Stages of Life Many scholars have characterized the Hindu philosophical thought as being “other worldly in orientation.”23 Although elements of this are clearly present in Indian thought, it is not the only orientation that is dominant in Indian thinking. There is much in Indian thought that also values an individual leading a fulfilling life within the phenomenal or the illusory world. The idea of fulfillment is developed within the context of the life stages that an individual has to go through. Indian philosophers conceived of four different stages, namely, that of a student, a married person, withdrawal from the world of the “maya,” and the ultimate stage that involved renouncing the world. Indeed, when an individual was raising a family, issues of wealth were obviously of importance. Within this life cycle, individuals had specific responsibilities associated with each of these phases, and it was their duty to fulfill them. The Concept of Dharma “Dharma,” refers to behavior that is considered to be morally appropriate. Scholars have pointed out that in Hinduism, there is not one Dharma but that there are many Dharmas. There is the Universal Dharma, which refers to behavior that is appropriate under all circ*mstances. This is complemented by dharmas that focus on (a) how women should behave; (b) how individuals should perform their vocational duties; (c) how individuals should act during their life cycle; and (d) how elders should act toward those who are younger to them.24 The existence of different dharmas, has the implication that the different dharmas may compel individuals facing conflicts with the unenviable task of making difficult choices. As Dhand points out “At all times, one has several possible duties to perform, given one’s location on numerous interlocking matrices of relationships. One must

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determine which duty is the most pressing at any one time and act accordingly.”25 When deciding on the appropriate course of action in a given situation, the individual, as Dhand, points out perceptively “relies upon relational metaphors rather than an ideology of individualism.”26 The importance of relational metaphors is also stressed by White who notes “For the real order and harmony in society rests as much, if not more, upon the obligations within a social group as upon the shared virtues of all people in society.”27 The crucial implication of this being, that individual actions are governed by relational logic and for that reason may be particularistic even though they may be justified by universal ideals. The Principle of Hierarchy Although the hierarchical order is not unique to Hindu India, it is without question, a key aspect of this civilization. As Sinha writes “Hierarchical order signifies that the whole cosmos and everything within it—animate as well as inanimate—are arranged in a hierarchical order of being superior to some and inferior to others.”28 As argued earlier the social order of the society is hierarchical, resting as it does on the caste system. At the apex of this hierarchical order are the Brahmins, the knowledge/priestly class who maintain a monopoly of wisdom. The Indian hierarchical system has often been characterized as a closed stratification system in which upward mobility is difficult, if not impossible. Although this has clearly been the dominant view more recent scholarship seems to suggest the caste system is not as monolithic as it has often assumed to be. As Dipankar Gupta points out “different and conflicting hierarchies exist at subjective levels. . . . Very often in practice we find more than one hierarchical order in effect.”29 The crucial implication of this line of reasoning is that while the Hindus may be preoccupied with the hierarchical order, there may well be dissent about the nature of the hierarchical ranking. Cultural Implications of the Hindu Belief System What are the key cultural implications of the Hindu belief system? In this section we outline some of the major cultural implications of the Hindu worldview. Scholars note that religion is often closely intertwined with culture in that it is likely to critically shape the beliefs and values that shape individual behavior.30 A direct impact of this is evident in the goals that individuals seek to pursue. Emmons and Paloutzian note that religion shapes an individual’s ultimate concerns.31 Ultimate concerns refer to the goals that are likely to be the most meaningful for them in their lives and which they should seek to pursue. Religious beliefs are also likely to influence the inner psychological states of the individuals while also simultaneously shaping the way in which members of a given society interact with each other.32 In our view, the Hindu belief system (a) shapes the individual’s orientation to the world; (b) embraces rationality and emotionality that play a simultaneous role in the thinking process; (c) induces individuals to behave both individualistically as well as “collectivistically” at the same time; (d) tolerates the paradox of spiritualism and this worldly orientation; and (e) induces context sensitive patterns of behavior.33 While this categorization by no means captures all aspects of Indian behavior, it does, in our

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view highlight dominant tendencies, the origins and implications of which we will discuss in the next few paragraphs. Orientation to the World An important cultural belief deals with the way in which individuals conceive of their relationship with the external world. Scholars have drawn a distinction between cultures that seek to attain mastery over nature, those that wish to live in harmony with it, and still others that expect to be subjugated by nature.34 Cultures in which attaining mastery is the dominant cultural imperative will leave no stone unturned in attaining their goals. Individual accomplishments, as also societal accomplishments, are valued highly with an emphasis on attaining success both at the individual and the societal level institutionalized with huge rewards for success and large penalties for failure. The most suitable example undoubtedly is that of the United States of America, where the search for success begins at a very early age. By contrast, cultures where mastery over nature is not the preferred cultural imperative may display passivity and helplessness in dealing with the external world. Scholars maintain that in the Indian tradition the dominant cultural orientation is one of subjugation to nature.35 This orientation stems from the Hindu belief that the phenomenal world is illusory. If, the world of day-to-day living is indeed an illusion then why should one make any effort to transform it? This cultural value orientation may, without question, lower achievement motivation, may lessen the centrality of work in one’s lives, and may also lower the motivation of the individuals to display initiative and creativity. There is evidence to suggest that this is still the case in India, although the impetus for enhancing competitiveness in light of the liberalization of the economy is causing some organizations to change directions.36 In their study of Indian managers Jones and Jackson found that the managers were “comparatively less motivated by autonomy, personal development, achievement, and managing uncertainty.”37 Similarly as Professor Srinivasan observes “The Indian approach of conservatism and conformism, of adjusting and satisfying, is a major drawback when it comes to making world leaders.”38 These observations have also been demonstrated in experimental simulations involving Indian students.39 In a study of problem solving that involved comparing Indian and German students, Stroschneider and Gusch found that the Indian students were not proactive enough in dealing with the problems that they were faced with. Referring to the Indians the author/s note “they are more likely to ignore key aspects of a scenario, rely on a purely feedback controlled strategy, make decisions without having the necessary information available, fail to adapt their interventions to changing circ*mstances, and forget about effect control.”40 But by contrast, Sinha points out that Tata Steel was very effective in responding to the challenges of a more demanding environment. As he notes “The managing director impressed upon the employees that the company was facing a crisis, it was not in a position to hold that many employees, some had to go, the company must invest money in upgrading technology, modernize plants and systems, and so on.

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The employees accepted the reality. Over 35,000 accepted attractive separation packages and left without making any loud noise, and the remaining ones fell in line, although some of the older and senior ones did not change their minds.”41 The implication of this fact is that while there may well be cultural beliefs that may stand in opposition to proactive behavior, the impact of these beliefs may be mitigated by effective leadership that is able to create incentives for radical change. Rationality and Emotionality as Complementary Modes of Thought Intellect is a highly valued attribute in India and its importance was valued both in the past as well as the present. As Lannoy points out “Indians became great mathematicians, inventing the zero, the decimal system, and the sine function . . .”42 In modern times, the growth of the software industry, and the large number of engineers and scientists that graduate annually from Indian higher education institutions provide an eloquent testimony to the computational and the mathematical ingenuity demonstrated by the Indians. These skills are reflective of a strong tendency to rely on logical principles in decision-making. It may also be a form of hyper rationality, in which the individuals seek to find the best possible solution to a given problem. Scholars have often described this as an “idealistic mode of thinking” in that it is a “thinking” process whose only restraint is the human imagination.43 It is due to this rationality that Indians often have high aspirations that are the outcome of pursuing perfection to its logical conclusion. Although high aspirations are an essential precondition for attaining high outcomes, high aspirations may not necessarily lead to high outcomes. Swami Bodhananda Sarasvati, a spiritual management guru in India suggests that an orientation toward perfection leads to inaction in the Indian managerial context.44 One can deduce this mode of Indian thinking from the basics of Indian philosophy, which emphasizes the search for the eternal universal (Brahman). The Brahman is the ultimate reality that we need to discover if we are to attain the ultimate state of bliss. The highly developed capacity to reason has a number of different implications. It suggests, first of all, that Indians are great debaters and that it may be difficult to win an argument with them. There are few arguments that are completely infallible, and the clever Indian, can easily find weak spots in them. If logic is the normative ideal that all of us should follow in making decisions, then it only stands to reason to make the related assertion that the logical argument is also the most morally defensible one. The key implication of this line of reasoning is that a logical argument is ipso facto superior to a pragmatically expedient one, and for that reason may not easily brook any compromise with an alternative mode of thinking. It may also be argued that this strong analytical capability may become an end itself, with the very process superseding the goal that it is supposed to achieve.45 Illustrating this is a study of Indo-German joint ventures conducted by the IndoGerman Chamber of Commerce. Commenting upon the German perceptions of Indian managers, the authors note, “Because they are convinced of their own being right, they fail to see their weaknesses, are not ready to cooperate, and appear mentally inflexible.”46 A further implication of this is that spontaneous decision-making

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may be somewhat infrequent given the need to subject everything to a logical scrutiny. While rationality characterizes the Indian decision maker at one end of the spectrum, emotionality captures the other end of the spectrum. By emotionality we mean the ability and the willingness of the manager to express emotions in social situations. Unlike East Asians, where emotionality is taboo no matter what the circ*mstances, there are few such restrictions in the Indian social context. As Langauni points out “In such a society, feelings and emotions are not easily repressed, and their expression in general is not frowned upon. Crying, dependence on others, excessive emotionality, volatility, and verbal hostility, both in men and women, are not in any way considered as signs of weakness or ill breeding.”47 This is not to imply that the Indian managers will always display emotionality; the argument is only that there are no such taboos as in East Asia. The high degree of emotionality exhibited by the Indian decision maker is a product of several factors. First, the Indian decision makers take a moral approach to problem solving, and this in itself, is likely to make the decision maker exhibit emotionality.48 Second, the Indian does possess a core individualistic self, and this certainly guarantees that the Indian decision maker will be comfortable in experiencing and expressing emotions.49 Third, the Indians do possess a very high degree of pride based both on the past achievements of the Indian society as also on what India has accomplished most notably in the post liberalization era. It therefore, stands to reason, that the Indians may react to situations emotionally. However, the emotionality that is displayed by the Indian decision maker is not necessarily in opposition to rational aims (although it could be), and in that sense is quite compatible with rationality. However, it is quite conceivable that the expression of it as such, may be misconstrued by the Western expatriate manager. The fact that the Indian decision maker so closely intertwines rationality with emotionality in decision-making may have a number of alternative implications. The process of making decisions may not be that linear or that straightforward. Periods of progress may be followed by that of re-evaluation or re-adjustment, as the decision maker seeks to reconcile the imperatives of reason with that of emotion. While the need for attaining this balance/adjustment is probably universal, the time path is likely to be culturally variable. Given that time is

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References