It's a Topsy, Topsy, Turvy, Turvy World!

M. Vidyasagar
Tata Consultancy Services
Hyderabad, India
December 26, 2002

The Axioms

For as long as I can remember, some things have been accepted as axiomatic by all of us: the `original' NRI's (Non-Resident Indians), the `other' NRI's (Not Really Indians, also known as RNI's -- Resident Non-Indians), RRI's (Resident Real Indians), R2I's (Returned to Indians), and the rest. If I may paraphrase Thomas Jefferson, I would say: We the people hold the following truths to be self-evident:

That the Rupee will always depreciate against the dollar (US dollar naturally -- is there any other kind?).
That the inflation rate will always be higher in India than in the US.
That the job market will always be better in the US than in India.
That the standard of living will always be higher in the US than in India.

So accustomed are we to accepting these premises without question that we have thoroughly internalized them -- we no longer consider these as overt externally introduced assumptions, but treat them as immutable laws of life, like Newton's three laws and Maxwell's four equations.

The Reality

But now things have gone topsy turvy in this land of India that is Bharat. As Marc Antony said ``Oh what a fall was there my countrymen!'' Just consider the following facts:

The Rupee

After depreciating steadily against the US dollar (from 31.37 to the dollar in 1991 to 49.07 to the dollar in 2001), the Rupee has now appreciated against the dollar, and is now at 48 to the dollar. In fact, but for active intervention by the Reserve Bank of India, the Rupee would appreciate by another 2.5% against major currencies, including the US dollar. India's foreign exchange reserves, which hit rock bottom at less than $ 1 BB (that's billion) back in 1991, are now at $ 68.5 BB and climbing steeply. Too steeply as a matter of fact. If the RBI did not `sterilize' these massive dollar inflows, the Rupee would appreciate even faster than it is at present. The `merchandise' trade of India shows a deficit only because the Indian government perversely insists on counting India's massive software exports of $ 8.2 billion under a strange head called `invisibles.' Its outdated rationale is that, since no material changes hands, software exports cannot be counted as `merchandise.' But for this and other such accounting quirks, India would show a merchandise trade surplus. Similarly, our strange way of counting Foreign Direct Investment (FDI) substantially understates the amount of money that the Indian economy is able to attract. A recent issue of Businessworld points out that, if we were to use the norms published by the International Monetary Fund, India's FDI last year would be $ 8 BB, not $ 2.2 BB which is government's official figure. (As an aside, using the same IMF norms, China's FDI falls from $ 40 BB to $ 22 BB.) In any case, India is now showing a current account surplus. In contrast, for many years the US economy managed to get away with a huge trade deficit, since the other countries of the world turned right around and invested their trade surpluses in the US. This gave the US a huge surplus on the current account, even if it had a trade deficit. But now the trading partners of the US are no longer automatically willing to reinvest their surpluses in the US. This is one of the reasons why the current economic slump in the US has been so prolonged.

The Indian Inflation Rate

The inflation rate in India has been hovering at between 2% and 4% per year for the past several years. With salaries increasing at a much faster rate (especially, but not exclusively, in the software sector), the real incomes have been increasing at a very healthy rate. Coupled with the rapid drop in real estate values (possibly because most of the black money has already been invested in this sector), this implies that the disposable income, especially in inexpensive metros like Hyderabad, has just been going through the roof. This is why there is such an increase in the number of restaurants, entertainment outlets, etc.

The Indian Job Market

And how about the job market? Until the dot-com bubble burst in 2000, everyone assumed that the part of one's career spent in India was just a prelude to one's `real' career, i.e., a job in the USA. Anyone who had the option of going to the USA was considered mad if he did not exercise that option. Fresh Master's graduates in computer science from very ordinary American universities were able to command starting salaries of $ 60 K per year. So it was not unusual for kids from middle-class families to take huge loans to go the USA to do a Master's degree even without any financial support, since they were sure that (a) they would get financial aid after one semester, and (b) they could recoup the loan amount and much more as soon as they finished their degrees. But now the situation has turned around completely. With the job market being so bad, many persons in the US are either delaying their graduation or returning to graduate school. As a result, Indian students who have gone to the US without financial aid are being forced to complete their Master's degree entirely on their own money. If at all a fresh Master's degree holder in computer science is able to get a job, he will be lucky to get $ 36 K per year -- a drop of 40% from earlier highs. I know of many Indian students who have gone to the US taking loans and still spinning out their degree programs, since they have no hope of getting a job of any kind. Some persons I know are compounding their earlier mistake by taking further loans to do a second Master's degree, all because they don't want to contemplate returning to India.

Ever since the downturn in the US economy, H1B visa holders in the US have become an endangered species. The downturn in the US software industry has not spared even GCH's (that's `Green Card Holders,' for those of you who don't regularly read the matrimonial columns). The bursting of the dot-com bubble was quickly followed by a seemingly never-ending series of accounting scandals, which makes one wonder how much of the `growth' of the US economy during the 1990's was real, and how much was simply a stage-managed mirage. In fact, many of my US-based friends have told me that, not only has the software job market disaster claimed literally tens of thousands of jobs, but there is also no end in sight.

But how about the situation in India? After growing at the dizzying pace of 50%-plus between 1998 and 2002, last year the Indian software industry grew by `only' 30%. Being an ethical company, in Summer 2001 Tata Consultancy Services (TCS) honoured all the campus recruitment offers it made during the preceding year and inducted everyone at the originally indicated time. Other leading software companies did not honour their campus placement job offers, preferring instead to hide behind the euphemism of putting these offers `on hold.' But even these companies did not resort to massive layoffs as their American counterparts did. Now, in the Fall of 2002, it is business as usual. Every large company is hiring by the thousands. TCS itself is hiring 4,000 persons this year, and others are hiring similar numbers. In terms of undergraduate calculus, one could say that so far as the Indian software industry was concerned, the first derivative has always been positive. The second derivative temporarily became negative, but now it too has turned positive. Anyone who even thinks about quitting a steady software job in India and going to the US can only be considered a fool.

The Standard of Living in India

The last point is about the standard of living. As little as three years ago, I felt that in my lifetime I will not see a day when a person living in India would opt not to move to the US because he would not have the same standard of living. There are plenty of reasons why a person living in India might opt to stay here, family responsbilities being the most common. But I never imagined that the inability to maintain one's standard of living would be a consideration. Of course, in the software industry, it was not unusual to see a person who had ten or more years of experience opting to stay on in India, because he felt that his experience would not be `counted' in the USA and that he would therefore not command a comparable position abroad. But it was taken for granted that a person holding a particular level of position in the USA would always have a better standard of living than his counterpart in India. Even I felt the same way. Again it took the slump in the US software industry to turn things topsy turvy.

In comparing living standards in India and the USA, it is desirable (in my opinion) to use the so-called `purchasing power parity (PPP)' exchange rate, and not the official exchange rate. The PPP was a concept that has been around for many years, and is intended to measure the different cost of goods and services in different societies. To illustrate, one dollar equals 48 Rupees. But one cannot get a good cup of coffee for eight cents (four Rupees) in the USA, nor a cup of coffee in an air-conditioned restaurant for thirty cents (fifteen Rupees). One cannot eat out for one dollar (fifty Rupees), and so on. Services are also cheaper in a developing society. One cannot get a flat tire repaired in a roadside shop for eighty cents (forty Rupees) -- in fact, one is lucky to get it repaired for forty dollars! The United Nations formalized this concept in the early 1990's, and started ranking international economies on the basis of the PPP-weighted GDP (Gross Domestic Product). Of course, the GDP itself is a flawed notion and is stacked against developing countries, because a housewife producing lunch for her husband is deemed to make no contribution to the GDP, while a restaurant worker is believed to do so. But let us not go off at a tangent. The point is that, when the first PPP-weighted GDP figures came out in 1993, it was determined that the PPP factor for India was about 4.5. This factor has remained pretty much constant over time. This means that in reality the Indian GDP is undervalued by a factor of 4.5. To put it another way, in reality one dollar should be taken as 10.5 Rupees (which I will round downwards to 10 Rupees for convenience), and not 48 Rupees.

If we apply the PPP weighting, it follows that a person earning X dollars per year will have a comparable living standard if he is able to earn 10X Rupees per year in India. The question therefore becomes: Is such an expectation realistic? Even as little as five or six years ago, the answer was in the negative, even in sunrise sectors such as software. But thanks to the rapid increase in software salaries in India, coupled with a deflation in US salaries, the situation has now turned around. In recent months, I have seen a flood of applications from persons either living abroad or having recently returned from abroad. When they apply to TCS, they are naturally obliged to mention their last salary abroad. With this data, I can definitely state that TCS is able to offer 10X Rupees per year to a person earning X dollars per year abroad. Of course, if a person earns X dollars in, say, Tennessee and 10X Rupees in Mumbai, his standard living would be much better abroad. But conversely, a person earning X dollars in Silicon valley would be much worse off than a person earning 10X Rupees in Hyderabad. As the Chief Minister of Andhra Pradesh never tires of telling his audience, one out of four software professionals from overseas is from AP!

I can add one more data point to the discussion. When I decided to leave the Ministry of Defence after eleven years back in 2000, I explored just two job options. One was in the US, in a company that belongs to the thirty companies that make up the Dow Jones Industrial Average, and the other was my present job in Tata Consultancy Services. Both jobs were comparable in scope. The overseas job was as a `Research Fellow' to do what I felt like -- I would have been just the fourth Research Fellow in that company's R&D set-up. Similarly, in TCS I became the fifth EVP (Executive Vice President). At that time, the US salary was numerically just about 10% of my TCS salary. So in terms of PPP-weighted income, my TCS salary two years ago was just about equal to the US offer. Just two years down the road, my income in TCS has increased by more than 50%, while I imagine that my US salary would not have increased by anything like this amount. Clearly I am now better off in PPP terms in my Indian job than I would have been in the US.

To summarize, at least in PPP-weighted terms, it is now definitely realistic to expect an Indian salary that is comparable if not superior to the US salary.

Other Sectors

I have argued that, at least in the software industry, India is able to offer world-class salaries, at least to persons with about ten or more years of experience. Will this idyllic state of affairs spread out from the software sector to other segments of Indian society? I am not sure, but I would not rule out the possibility either. Many in India are convinced that our next success story will be in biotechnology. `BT will follow IT' is a fairly commonly-heard slogan. I myself have launched my company's activities in bioinformatics, an essential part of biotechnology, so I have studied this market a little bit. In principle, I don't see any reason why we cannot repeat our IT success in BT. We have some advantages that apply to both domains, such as a large pool of reasonably well-trained manpower, attention to detail, and of course, knowledge of the English language. India is slowly but surely emerging as the `back office' to the world.

The main worry that people like me have is the apparent inability of India to compete in the arena of `pure' manufacturing. Our antiquated labour laws, outdated procedures for customs clearance, cumbersome rules governing import and export, our (in-)famous bureaucracy, etc. are all factors that are working against India becoming a major player in manufacturing. But apparently all is not doom and gloom. I see many hopeful signs, all based of course on what I read and hear, not on personal experience. Various business magazines have pointed out that, whenever a multinational company has set up a plant in India, the cost of manufacturing in India has not been significantly higher than elsewhere, and in some cases it is the lowest in the world (even lower than in China). Examples of this are St. Gobain's of France, one of the leading manufacturers of glass in the world. Of course, Tata Iron and Steel Company, better known as TISCO, is now the cheapest producer of steel in the world, notwithstanding our high cost of electricity, high cost of capital, high cost of rail transport, etc., etc. So if we decide to make manufacturing a priority, we can make a mark there too.

The Indian economy grew at an `official' rate of about 6% during the last ten years. Even at this official rate, the Indian economy has been the second fastest growing economy in the world during this period, China being the fastest. But what I see all around me seems to point to much more robust growth than this figure would indicate. I have talked to many economics experts about this apparent disparity. I should emphasize that I have been talking to `real' economists who need to work and survive in the marketplace, and not the closet Marxists who pass themselves off as economists and infest Indian academia and newspaper editorial pages. What I hear the professional economicsts saying is that, while Chinese growth figures are based on somewhat generous interpretations of their performance, the Indian figures always understate the actual growth. Over the years we have apparently perfected a system of officially shooting ourselves in the foot, and repeatedly doing it. For instance, the services sector, which has been growing at a tremendous clip in India, is given a very low weight in our official statistics, whereas static sectors such as agriculture are given a huge weight. The late (and great) jurist Nani Palkhivala said ``It takes a superhuman effort to keep India poor.'' Earlier we could count on our netas and babus to supply this superhuman effort. Now that the Indian economy has been unshackled a little bit, they are apparently content to present a picture of poverty and degradation through the clever use of statistics. If our babus and netas had a little more imagination, they would reinterpret our growth figures to present the Indian economy in the best possible light. Instead they seem to be doing just the opposite.

The Future

Does this mean that India is poised to take over the US as the largest economy in the world? Of course not. The US society has several advantages that have been carefully built up over time. There is no way in which India can even close the gap in these advantages, let alone dream of overtaking the US. To cite just one example, the US has the best universities in the world, by a huge margin. Forget about India -- even the best European universities are nowhere near the best American universities. A mediocre American university is miles ahead of a mediocre university anywhere else. So far as India goes, our universities are in an abysmal state, and I do not see any signs of improvement. Everyone speaks of the politicization of the universities, especially in terms of the appointment of Vice Chancellors. But I consider the system of reservations, both in student admissions and in faculty appointments, to be a far bigger evil. So I am not at all hopeful that we will have a good university education system at any time in the near future.

Another advantage enjoyed by the US is its vibrant and dynamic economy. The US offers a challenging atmosphere in which new technological ideas can be conceptualized, tried out, perfected (and also rejected), and exploited commercially. In contrast with the situation regarding university education, in this respect I think India is beginning to get its act together. The Indian economy now demonstrates a surprising amount of dynamism, with mergers and acquisitions, branding exercises, competition for customers, and all the other positive aspects that one associates with the consumer-oriented US economy. To cite just one instance of this, the charges for cell phones started off at Rs. 16.80 per minute, and are now down to about Rs. 1.20 per minute (a reduction by a factor of fourteen) in just about five years. The recent introduction of WLL/CDMA technology promises to bring down the prices even further. Unlike many other economies, our economy is mostly driven by internal consumption, especially the huge unfilled demands for everything, ranging from soaps to soap operas. This is not at all a bad thing. With our huge internal economy, I believe Indian society is now beginning to offer an opportunity to aspiring innovators and technology creators to come up with ``Indian solutions for Indian problems.'' Also, our technological scene is now beginning to mirror the world scene in areas such as IT, pharmaceuticals etc. Hence, after a technological solution has been proven in the Indian context, it can be exported abroad. This is quite a contrast to the old days, when Indian innovators had no exposure to the overseas marketplace, and thus had to try and dream up products and technologies in a vacuum.

One criticism I hear about the Indian technology scene is the absence of so-called venture capitalists. I for one have never believed in the `venture capital culture' that supposedly exists in the USA. If one studies the years of the dot-com boom carefully, one realizes that the role of most venture capitalists has been to start new companies and take them public, not to take them to profitability. Now that the US stock market is no longer willing to pay astronomical sums to own shares in loss-making companies, the venture capital culture has pretty much died out in the US as well.

Another criticism with which I don't agree is the so-called absence of the `entrepreneurial spirit' amongst Indians living in India. I think the popular media (both in the US and India) has played a very undesirable role in defining what an `entrepreneur' is. According to the media, an `entrepreneur' is someone who starts his own company. `I am running a start-up' is the kind of glamorous phrase one is supposed to toss out at parties, to draw the admiration of all and sundry. But I must say that I disagree with this viewpoint. To my mind, an entrepreneur is someone who starts a new venture and creates jobs. It does not matter whether `he is his own boss' or not. In practice, this rather romantic business of being one's own boss often forces one to take expedient short-term decisions, instead of concentrating on creating long-term lasting value. In contrast, when I started the bioinformatics activity in TCS, I had the luxury of hiring 35 persons without worrying about generating an immediate positive cash flow. Because of this, we are able to concentrate on building up our intellectual assets, which is the only way to become a global player. What I am saying is that I see plenty of creatity and entrepreneurship amongst RRI's, even if they don't all rush off and try to `be their own boss.'


The last two years have been truly amazing in terms of demonstrating what India can expect in coming years. Thus far only a few tiny cracks have been introduced into the solid wall of Nehruvian state control that has prevented India from reaching its true economic potential. But even with these tiny cracks providing equally tiny openings in our bureaucratic control mechanisms, Indians have delivered the world's second fastest growing economy for over a decade now. The future can only be better, not worse.


My thanks to Dr. P. J. Narayanan of the International Institute of Information Technology (IIIT), Hyderabad, for suggesting that I turn my rantings and ravings into something a little more coherent.