Keeping faith with India
Sadanand Dhume reviews "Conquering the Chaos" by Ravi Venkatesan.

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  • Given the well-known pitfalls of doing business in India, should multinational companies bother to invest there at all? @dhume01

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  • Indian business needs to spend more time convincing domestic policy makers to improve business conditions.

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U.S. Vice President Joe Biden meets with Indian business leaders in Mumbai this week against a backdrop of sinking investor confidence in Asia's third largest economy. Economic growth has plummeted to its lowest level in a decade, about half of India's 2007 peak of 9.7%. Foreign direct investment last year totaled $25.3 billion, down from $43.4 billion five years ago. With elections less than a year away—meaning India's populist politicians are focused on handouts rather than reforms—nobody expects a turnaround any time soon.

Given the well-known pitfalls of doing business in India, should multinational companies bother to invest there at all? Is the promise of a toehold in a potential market of 1.2 billion people worth the price of dealing with an obstreperous bureaucracy, grasping politicians and regulatory systems that sometimes appear designed more to enhance opportunities for graft than to encourage productive long-term investments?

For Ravi Venkatesan, the former CEO of both Cummins and Microsoft in India, the answer to these questions is a resounding "yes." Never mind that for most multinationals India accounts for a trivial 1% or less of global revenues and profits, and a paltry 5% or so of global growth. For Mr. Venkatesan, it's the size of the opportunity that matters, not the size of the market.

At its heart, this book is a call for companies to view India with less skepticism and more hope. Growth and development in India are irreversible, Mr. Venkatesan believes. Moreover, with China and Brazil already fairly developed, India "may be the last giant market where [a multinational company] can still aspire to build a dominant position."

With its low costs, capacity for innovation and talented CEOs, India offers much more than just a market. And since many Indian problems such as poor infrastructure and shoddy governance are familiar elsewhere as well, success in India "is actually shorthand for succeeding in emerging markets."

To pull this off, however, a multinational must overcome the temptation to simply sell existing products or services off the shelf to the richest Indians, the 16 million or so people who, according to Microsoft's Steve Ballmer, constitute "the Australia at the top of India." The real challenge, as well as the most potential, lies in reaching the country's 160 million strong middle class and 350 million "aspirers."

To call these consumers demanding would be an understatement. Mr. Venkatesan reckons that they typically want a product 70% as good as what a multinational sells in an advanced market, but at just 30% of the price. Think of $100 smartphones or X-ray machines for $400.

The most successful foreign companies in India find a way to crack this puzzle, often by aggressively localizing to cut costs and appeal to Indian tastes. For instance, the only items on the menu a McDonald's in Bangalore shares with its counterpart in Boston are fries, beverages, the McChicken sandwich and Filet-O-Fish. The rest of the Indian menu is an exercise in brutal cost-cutting built from the ground up.

To his credit, Mr. Venkatesan does not gloss over the difficulties of doing business in India. There aren't too many other places where you may find deliveries delayed by a Maoist insurgency, a brand new taxation policy that arrives without warning, a powerful builder-cum-politician who refuses to refund your company's rent deposit, or a mob that randomly shatters your windows in grief on the death of a beloved movie star.

Moreover, despite the high number of MBAs and engineers turned out on paper, talent in India remains scarce. There's usually a steep drop in leadership capacity between the CEO and the next level, says Mr. Venkatesan, and an even steeper drop a level below that. Managers who can close a $200,000 deal or run a $20 million business as a profit center without handholding simply "don't exist."

Meanwhile, corruption has become all-pervasive enough to merit a taxonomy of its own. Mr. Venkatesan distinguishes between bribes, speed money, extortion, senior management fraud, vendor kickbacks and procurement frauds. A bribe is "a payment to a government officer for doing something he should not do." Speed money: "a payment for doing something he should."

In India, it may be possible to avoid paying bribes, but only by staying out of sectors such as infrastructure, mining and natural resources where the heavy hand of government is impossible to escape. But in most places speed money, usually disguised as a "facilitation fee," is simply a fact of life when it comes to such routine affairs as clearing a shipment or registering a land deal.

Typically it costs 1,500-2,000 rupees ($25-34) for an electricity connection, and 5,000 rupees to ensure that a truck clears a check point. Mr. Venkatesan suggests hiring a "reputable" clearing agent to handle such grubby business, and ensuring that the multinational's global headquarters is kept in the loop.

In some ways, this is a valuable book. Few corporate chieftains in India bother to step back and think analytically about the business landscape, and Mr. Venkatesan's account brims with interesting anecdotes and useful insights.

But in a larger sense, the author misses the proverbial forest for the trees. Simply put, Indian business needs to spend less time convincing the world of the country's specialness, and more convincing domestic policy makers to improve business conditions.

The World Bank ranks India 132nd globally in terms of ease of doing business, below Nigeria and Bangladesh. On Transparency International's Corruption Perceptions Index, India ranks 94th of 174 countries surveyed, below such paragons of good governance as Colombia and Greece.

When India's economy was clocking double digit growth, it was much easier to make the case that companies had no choice but to stay in the game. With growth closer to 5% India has become a much harder sell.

Had Mr. Venkatesan written his book five years ago, few would have quibbled with his contention that India's chaos was conquerable. These days, though, a responsible CEO scouring the globe for opportunities must factor in the possibility that the chaos might just win.

Mr. Dhume is a resident fellow at the American Enterprise Institute and a columnist for Follow him on Twitter @dhume01

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