Why freedom is the key to India’s economic success

Republished with permission from Knowledge@Wharton, the online research and business analysis journal of the Wharton School of the University of Pennsylvania. 

India’s British rulers left the country in 1947. Nearly 70 years later, why is India not yet a wealthier country? According to entrepreneur Rajesh Jain and economist Atanu Dey, the reasons are manifold, but they have to do with a simple reality – that Indians are not yet economically free. “Under British rule, Indians suffered the ill effects of extractive and exploitative policies,” they note. “These policies did not change even after independence. What is worse is that socialist policies were added to an already toxic system. These need to be replaced with new, pro-growth, pro-economic freedom policies.”

Jain describes himself as a serial tech and political entrepreneur. He is founder and managing director of Mumbai-based Netcore Solutions, India’s leading provider of digital communications and marketing solutions via email and mobile. He also founded Niti (New Initiatives for Transforming India) Digital, which worked actively on the 2014 election campaign of Indian prime minister Narendra Modi.

Dey, who lives in the San Francisco Bay area, is the author of Transforming India, a book in which he explores the causes of India’s poverty and discusses what steps India would need to take in order to become a prosperous country by 2040.

Jain and Dey visited Wharton last month to discuss their new initiative named “Free a Billion,” which refers to gaining economic freedom for a large part of India’s population. Among other steps, they believe India needs a new Constitution, which can empower people rather than the government.

Edited excerpts from their interview with the K@W radio show on Sirius XM (channel 111) appear below.

Knowledge@Wharton: Is India a free country?

Rajesh Jain: India is not really a completely free country. Atanu will explain why.

Atanu Dey: The potential has always been there. India is quite rich in terms of resources, both human and non-human. But, unfortunately, there are barriers to India’s growth at this point.

Knowledge@Wharton: What was the role of the British colonial legacy and the fact that India, even after independence in 1947, was such a highly regulated economy? What role have those factors played in keeping India poor?

Dey: It’s a very important question. The British legacy has been instrumental in preventing India from growing, because the British were a colonial government and a colonial government is in the business of colonizing so that it can reap economic benefits. So its regulation and rules, the whole structure, is such that it can exploit and extract from the economy.  Twitter At the time of India’s independence from the British, the country became politically independent, but Indians never got economic independence from the British.

Knowledge@Wharton: If you’re talking about just India on the global spectrum right now, where does the country stand in terms of being competitive with others?

Dey: India is not very competitive for some reasons. I think Rajesh will be able to address this point because he’s a businessman in India.

Jain: If you look at some of the numbers, in 1980, India, believe it or not, had a higher per capita income than China. Both were very small, sub-$300. Today, China’s per capita income is almost five times that of India. On various other parameters, whether it’s transparency, human development, the happiness index, the ease of doing business and, most important, the index of economic freedom, India comes out very poorly. And part of the reason is that it’s very hard to be an entrepreneur. It’s hard to do business. There are a lot of challenges. And once you constrain entrepreneurship you are not going to be very good at wealth creation and prosperity.

Knowledge@Wharton: What are some of the constraints that entrepreneurs face? And how can they play an active role in wealth creation?

Dey: Let me add before Rajesh addresses that question: India is a control-permit-quota kind of place. The government has to have control over the economy. And entrepreneurs actually bring in disruptive innovation, which creates wealth. It’s the job of an entrepreneur. It doesn’t fit well under a control-and-command economy. Therefore entrepreneurship is being suppressed actively in India. But Rajesh will tell you more about it.

Jain: Let me give some simple examples. The time it takes for an entrepreneur to register the name of a company can run into weeks rather than being an instant process. And many times we’ve seen that you’ve actually got to pay bribes to get the name that you want cleared, even though that’s not been taken up by anyone else. Or getting income-tax refunds can take many years. In my own company, we’ve not got the money due for almost five years because people are in charge of giving the money back: it’s not automated. There is some discretion. Because they have control, they can ask for money to give our own money back.

Knowledge@Wharton: How much money are you talking about?

Jain: These are small amounts, but they all add up. For entrepreneurs it’s the cash-flow that is important. Hurdles are there at every stage. When you also run manufacturing units, the labor laws are a big challenge. It constrains businesses from growing. Even when you look at education, India is underinvested. India has too much control on education, with the result that it’s very hard to get high-quality talent and skill. And the corresponding part of it is that there is significant unemployment and underemployment. There was a story in the newspapers recently about 300 vacancies for a peon’s [office helper’s] job – a government job – and it attracted 2.3 million applications.

Dey: Including applications from some people who had college degrees. And there were some 250 people with Ph.D.s who said, “I’d rather be a peon than do nothing.”

Jain: Peon in a government organization

Dey: It’s really very disturbing if you think about it.

Knowledge@Wharton: Let us pause and take a different course in our conversation. Could you tell me a little about your own backgrounds and how that brought you to the ideas that you’re talking about?

Dey: I’m an engineer by training and moved to study computer science at the graduate level. I went to Rutgers University and got a job in Silicon Valley. While in the Valley I saw that California was rich and I didn’t understand why India was poor, because all people are the same. Then I came to the realization that it has something to do with the structure, the rules that we are governed by. It was India’s structural problem. So I studied economics at UC Berkeley, I got my Ph.D. from there. After that I started working with Rajesh. And we came to realize that we have to make structural changes. He’s an entrepreneur and can make things happen.

Jain: My background is in engineering. I started in the U.S., got my masters from Columbia University and then went back to be an entrepreneur in India. I set up India’s first internet portals in 1995, just around the time Yahoo and eBay had started. And I sold that business in November 1999 for about $100 million. It was at that time one of Asia’s largest internet deals.

I’ve continued since then as a serial entrepreneur. Over the past few years, I’ve become increasingly interested in seeing how we can create prosperity in India. It all started with a question that Atanu had asked me a few years ago — “Rajesh, when your son (who was three years old at that time) grows up and asks you: ‘Dad, you saw what was happening around you. You had the money; you had the time. Why didn’t you do something about it?’” From there started a different journey.

In 2009, I worked in the campaign of the Bharatiya Janata Party (BJP) which is the current party in power. But they lost in the 2009 elections. From 2010 onwards I started working for current Prime Minister Narendra Modi. In 2011, I wrote a blog which articulated a strategy saying that the BJP should focus on getting a majority on its own. No political party had achieved this in India for 30 years. That’s really a different way to think. And then a year later I set up a separate team to help with the elections which were coming up in 2014. With my own money we hired 100 people to work on media, data analytics and build a volunteering platform.

Over the past year I’ve been thinking more deeply about the problem of the structural changes that India needs to get onto an irreversible path of freedom and prosperity. If you look at Indians in the U.S., they have 40-50 times per capita income than Indians living in India. They are the richest group in the U.S. So there’s nothing intrinsically wrong with Indians.

Dey: Yes. I don’t see any reason to believe that people in India are any stupider or more ignorant. It is that the government doesn’t allow them to do things. That’s the problem; Indians need economic freedom to prosper, for India to prosper.

Knowledge@Wharton: Do you think politicians understand markets?

Dey: Actually they do — because they are also in the business of trading, give and take and all of that. They understand markets very well. They also would understand that markets have the power to transform and it creates wealth. But if you let the market do its stuff, then you have to be out of the business of command and control. So you can have competition in the market or competition for the market. And they prefer the competition for the market because they then extract dividends from it.

Jain: In fact, this is sort of structurally encoded in the Constitution of India. When you look at the Constitution, it’s essentially a derivative of the Government of India Act of 1935, which was set up by the British to control India. Out of 395 articles, 250 are taken from there. And India has the longest Constitution in the world.

Dey: Incidentally, nobody has read the Indian Constitution. Nobody. I challenge you to find a person who has read the Constitution. And I would say “That’s amazing. We have to stuff the guy and put him on display.”

Knowledge@Wharton: What role would constitutional change play if you were trying to establish economic freedom?

Dey: You can’t take a car and change it into a boat. I believe the Constitution needs to be replaced entirely with something that actually makes economic freedom — personal freedom — a fundamental right. We do not have the right to property in India. We do not have the right to free speech. You can say what you want to say, provided the government agrees with you. That’s it.

Jain: In fact just to add to that point, one of the states in India has passed a sedition act recently. This is not 1860 that we are talking about. This is 2015. People in India just don’t realize what’s happening. There was very limited protest.

Dey: If you speak against the government or any of its representatives, it is sedition. That’s the way it’s defined.

Knowledge@Wharton: Are the people there so used to this pattern going on for decades that it has become the norm for them?

Dey: That’s precisely right. They just don’t know that they’re not free.

Jain: I keep saying government is like air in India, it’s all around you.

Knowledge@Wharton: Do you think prime minister Modi will be the person to make these changes, to try and evolve India into the country that it needs to be and take a huge step to become a global economic power?

Jain: Absolutely. He has taken the right first steps. We have 65 years of a total mess that need to be cleaned up. I think a lot more has to be done. India needs structural change. And for that I think you have to persuade, not the political class, but the people of India, because the politicians essentially react to what people want. You have to create a demand for freedom in India. That’s what’s missing. People should want property rights, freedom of speech, economic freedom to do what they want, get the government out of a lot of areas. And the prime minister has spoken about this — that the government has no business being in business. Minimum government which ensures maximum governance. We need to take care that there’s no discrimination.

Dey: Actually, before he became prime minister, Rajesh and I had met Modi many times. My book Transforming India lists a number of major changes that need to be made. It’s in the book. He has evidently read it because during his election campaign he mentioned some of these points.

Knowledge@Wharton: When Narendra Modi became India’s prime minister in May 2014, there was tremendous expectation, especially among business people, that this would result in a major change for entrepreneurship and business growth. Based on the past several months, to what extent have these expectations been fulfilled? Do entrepreneurs feel that there has been a fundamental change, or are there still frustrations?

Jain: People don’t see things moving as fast as they would like. There’s a lot of energy we see in the startup space, in e-commerce and linked with the internet and mobile. But that’s one sector. There are many other sectors that need this same energy. I think people have realized that there’s a systemic problem. There’s a structure that needs to be changed. For that, we first need to modernize the Constitution, because that’s where the fundamental rules are.

Knowledge@Wharton: You have a new initiative called Free a Billion. How you see that contributing to what we have been discussing, especially in the creation of demand for economic freedom in India?

Dey: The goal is to free a billion people. We want to make about a billion people free economically. Rajesh is going to lead that initiative.

Jain: We need to persuade people in India that they are not free. We use technologies, smartphones, we build a volunteering community, organizers across the country. We persuade people that this is something that needs to be fought for…if you are young and you want to become rich, you don’t have to go to the U.S. We need to create an India where we can create prosperity and wealth in a single generation.

Publication does not imply endorsement of views by the World Economic Forum.

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Author: Rajesh Jain is founder and managing director of Mumbai-based Netcore Solutions. Atanu Dey is an economist and author. 

Image: An employee counts Indian rupee currency notes. REUTERS/Adnan Abidi.