India’s High-Tech City Becomes Political Icon

As the final day of India’s national elections approaches, the entrepreneurs who transformed this subtropical city into a rival of Silicon Valley are flashing a knowing smile.

On the campaign trail, Bangalore’s economic miracle is touted to hundreds of millions of voters as a vision of India’s future. For the first time since the country opened its economy eight years ago, both major political parties are promising to speed up the pace of reform. Politicians who once threatened to block liberalization now talk up the low-tax, highflying capitalism that flourishes here.

“Bangalore is a model for the nation,” said Ananth Kumar, aviation minister in the national government and up for reelection to Parliament this year. “If we can duplicate what has happened here, India could become an economic superpower.”

Kumar’s Bharatiya Janata Party, or BJP, which is favored to retain its hold on the national government, has downplayed its policy of swadeshi--favoring local over foreign industries--in its 18 months in power.

With both the BJP and the opposition Congress Party backing pro-market reforms, entrepreneurs here are hoping that the elections will jump-start a process that has stalled over the past three years under a series of weak governments. Their hope is that a new wave of reform will allow India to match the strides of its neighbors in China and East Asia.

“We have posed a challenge to the rest of India,” said Narayana Murthy, whose software company, Infosys, boasts annual revenue of $120 million. “There is no reason why the country cannot follow our example.”

It won’t be easy. Many economists doubt that Bangalore’s high-tech example has much to offer a country with more than 300 million people who are illiterate, poor or both. A legacy of Soviet-inspired economics has left behind some of the world’s highest tariffs, inefficient state-owned industries and volumes of pointless regulations. Having a telephone installed can take months. Securing approval for a major project, like an electricity plant, can take years.

What’s more, the enthusiasm that Indian politicians show for economic reform often evaporates once they take office. An economic crisis in the early 1990s forcedthe government to abandon 45 years of socialism. Now that the crisis has passed, the campaign has stalled--with much of the old order remaining.

In the past 18 months, several important reform measures bogged down, including the opening of the government-dominated insurance and telecommunications industries to foreign and domestic competition.

“The pace of reforms has slowed considerably,” said Charan Wadhva, professor of economics at the Center for Policy Research in New Delhi. “It boils down to a lack of political courage.”

The leaders of the two main parties say they would do more if their parties had more seats in Parliament and thus were better able to take on the powerful interests--such as trade unions--that are resisting reform. Polls suggest that when the staggered voting is finished Sunday, the BJP and its allies could end up with a majority.

If the BJP gets the votes, many predict that the party will launch a big reform drive. That would represent a big change from the past, when the BJP promised to shield Indian companies from foreign competition.

“Things will start moving very fast,” said Rahul Bajaj, chairman of Bajaj Auto, one of India’s largest companies.

In Bangalore, businesspeople say they have created proof that liberalization can work in India. In less than a decade, Bangalore has emerged as a global center for software, the home to 200 high-tech companies employing 20,000 people.

This year, the industry will send abroad an estimated $4 billion worth of goods and services, about 12% of India’s exports. In a country where farmland is still often plowed by oxen, Bangalore boasts cyber cafes, high-tech parks and a freewheeling entrepreneurial culture.

“We live on an island here,” said Aparna Jain with Gray Cell Inc., which also has offices in Silicon Valley. “We are all on U.S. time. None of us know what is going on in the rest of the country.”

Like a growing number of industries in India and the rest of the developing world, Bangalore’s software companies gain an edge by offering First World services at Third World prices. Instant global communication obliterates the distance between Bangalore’s engineers and their markets in the West.

But business leaders say that Bangalore succeeded because they persuaded the Indian government to create a free-market framework around their industry--if not for the rest of the country. The government agreed to waive the usual 125% duty on imported computer equipment. It wrote off corporate income taxes for companies exporting software and allowed 100% foreign ownership of local firms.

“The government has done a lot for us, but we have to keep it out,” said Dewang Mehta, president of the National Assn. of Software and Service Companies. “If the government began interfering, that would be the end of us.”

Mehta believes that the government’s most significant move was lifting the duties on imported computers. Not only did that allow India’s software companies to buy the latest equipment quickly--importing a computer into India used to take about a year--but it also forced India’s high-tech companies to be more competitive in their own market.

“We realized that if we couldn’t compete against the multinationals on our own turf, we would not be able to compete against them anywhere,” Mehta said.

Bangalore’s enthusiasts say the city has created an entrepreneurial culture that is replacing the old one of relying on government, which has long dominated India’s economy.

“It used to be that if you were bright, you became a government servant,” said Subroto Bagchi, vice chairman of MindTree Consulting. “Now kids are going to business school. We are witnessing a complete change in Indian culture.”

Many economists say Bangalore offers only limited lessons for the rest of India. Software is an industry that requires little of the expensive infrastructure--ports, roads and power plants--needed by many other enterprises. Power blackouts are common throughout India, and half its roads are unpaved. Economists say India needs billions of dollars’ worth of such infrastructure to sustain its economic growth.

By contrast, many of Bangalore’s computer firms generate their own electricity rather than rely on the government’s. A satellite station takes care of much of their communications.

And the software industry offers little hope for India’s millions of illiterates. Although its universities turn out thousands of engineers each year, India still fails to educate a large proportion of its population. Until that happens, economists say, Indian prosperity will probably remain confined to pockets like Bangalore.

“The things that inhibit growth in this country--illiteracy, over-regulation, government corruption--run very deep,” said Jean Dreze, a professor at Delhi University. “Neither of the parties seems interested in tackling the underlying problems.”

On the campaign trail, many people have said the prosperity of Bangalore’s software industry has failed to touch them. The most common complaint is the state of India’s public schools--and the price of a private education.

“Everyone knows the government schools are terrible,” said Amir Pasha, a shop owner and father of five in the nearby city of Mysore. Like many parents in India, Pasha spends a huge chunk of his earnings sending his children to a private school.

“Elections never change things for the common man,” he said.

Bagchi, the software executive, said his firm has decided to donate a portion of its profits to primary education. Even with both parties committed to economic reform--even with the obvious success of the city where he lives--Bagchi says he doubts that a country as old and overpopulated as India can overcome all of its problems any time soon.

“As soon as you step out the door here, it’s a different world,” Bagchi said. “It’s not going to be easy to change this country.”