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Widespread Poverty

The scourge of poverty is one of India's biggest challenges. According to The World Bank, India has the highest concentration of poverty of any country, with more than a third of its one billion population living below the official poverty line. The gross national product per capita was US $ 440 in 1999. India also leads the world in population growth at 16 million people each year. Bias against women and girls is reflected in the demographic ratio of 929 females for every 1,000 males. Female infanticide is partly to blame. Diseases such as leprosy, tuberculosis, cataract blindness and malaria continue to plague India. Two-thirds of polio cases reported worldwide in 1998 were there. It is estimated that 4 million to 5 million Indians are infected with HIV, and the number of new infections doubles every 14 months. Pollution is also a serious problem. India's cities are beset by environmental hazards, contaminated water, sanitation problems and population growth rates double that of the country as a whole.

India Lags Behind

Pyramid Research forecasts that four countries - Australia, Japan, South Korea and Taiwan - will account for nearly 80 percent of Asia's e-commerce in the next year. India, hobbled by its infrastructure, will account for just 4.3 percent of the total. Low credit card penetration and potential delivery problems are among the obstacles to e-commerce development. Only 46 percent of India's roadways are paved; the railways, ports and airports all require upgrades to meet international standards.

In early September, Mumbaiites are in the midst of the annual 10-day celebration of Lord Ganesh, a half-human, elephant-headed Hindu deity, reputedly the harbinger of wisdom and success, a sort of national lucky charm.

The streets of Mumbai - or Bombay, as many English-speaking Indians still prefer to call the financial capital - are decked out with bright lights. Every stall hawks small Ganesh statues, which are considered auspicious gifts. A shopkeeper throws in the cheaper variety with the silver bracelet I buy. " It will bring you good fortune," he says.

Not necessarily so. In the early morning of Sept. 5, an earthquake hits, registering 5.5 on the Richter scale, jolting me out of a restless sleep on the 21st floor of the luxurious Oberoi Hotel. I resolve to stay in low-rises for the rest of my stay in India. More alarming, the monsoon has brought the heaviest rains in a century and caused hundreds of deaths. The newspapers describe bloated corpses and poisonous snakes; flood survivors wade through chest-high water in eastern India searching for lost relatives and valuables. The season also brought a new kind of suffering - a bitter dotcom shakeout and a battering of India's IT stocks riding Nasdaq's choppy wake.

But there's good news as well, especially for India's high-flying IT industry. In September, Goldman Sachs revised its projections for India upward, saying the country's IT industry will grow almost six times in the next five years. In addition, Internet use will grow four times faster than was earlier projected. Based on growth during the past year, previous estimates of 17 million Internet connections in India by 2003 have been jacked up to 70 million connections in the same period. The report also says India may corner 5 percent of an expected US $ 585 billion in the global IT services market by 2004. That's up from 1.6 percent (or US $ 5.7 billion). In 1998 fewer than half a dozen venture capital (VC) companies were in India; today there are more than 50. VC investments in India are expected to jump to US $ 3 billion in the next 18 months, almost 10 times the US $ 320 million that flowed into the country in 1999, according to the Indian Venture Capital Association.

Both local and foreign investors are inspired by the Silicon Valley successes of Indians such as Sabeer Bhatia, 41, who three years ago sold Hotmail.com to Microsoft for more than US $ 400 million; Gururaj "Desh" Deshpande, 49, cofounder of Sycamore Networks (Forbes listed him as being worth US $ 3.9 billion); and Rajendra Singh, 46, cofounder of Teligent. Indeed, India's far-flung IT billionaires are among the most aggressive investors eyeing Indian startups.

"[Nonresident Indians] are now showing a lot of interest in India because they think there's a lot of money to be made,'' says Azim Premji, chairman of Wipro, the homegrown computer services and software giant. "They're suddenly finding that the quality of investment and the return on investment in India are better than the return on investments in Silicon Valley."

The numbers look good. India's software industry earned US $ 5.7 billion last year, up from US $ 50 million in 1991. Market capitalization, US $ 4 billion in March 1999, rose to US $ 104 billion in March 2000. With market fluctuations, it has dropped to around US $ 65 billion. "But from US $ 4 billion to US $ 65 billion is not a joke," says Dewang Mehta, president of the National Association of Software and Service Companies, an industry lobbying group that represents some 700 Indian companies. Three Indian software companies are now listed on the Nasdaq exchange, and five are on the New York Stock Exchange. The IT industry employs 340,000 workers. India is producing 122,000 software engineering graduates every year with plans to double that figure to meet worldwide demand.

Traveling through India, I hear one phrase repeated many times - from writers, software engineers, movie producers, investment bankers, members of parliament, shopkeepers and even one crisply tailored hotel driver, who, steering his taxi through streams of mopeds, auto rickshaws, wobbly trucks, cars, cows and panting dogs in downtown Bangalore, glances in the rearview mirror and announces with pride, "It is our time, madam."

Rocky Path to the New Economy

The paradox is that while Indians rejoice over glowing projections of IT growth, India is one of the world's least-connected countries. Seventy-five percent of the population live in rural areas. Most Indians have no access to telephones or the Internet. Although telephone lines in India are expected to increase by 4 million to 6 million lines annually, as of March 2000, there were only 26 million fixed phone lines for India's 1 billion population. Of India's 600,000 villages, only 370,000 have phone lines. Cell phones, introduced in 1995, now have some 2.2 million subscribers. India has around 1 million Internet subscribers with an estimated 3.5 million users. By comparison, China has four times as many telephone lines and Internet users and 18 times as many mobile.

And for all its prowess in software, Indians have few computers. India has only 4.3 million PCs, half the number of PCs in New York City.

But Indians do own 80 million TVs. With 37 million cable TV installations, India ranks No. 2 in the world for cable connections. "We believe that in the next two or three years that if the Internet will penetrate more in this country, it will be more likely through cable TV than through PCs," Mehta says.

The problem, of course, is infrastructure. No Indian industry - old or new economy - is unaffected by India's crumbling infrastructure, its long legacy of poverty, corruption and a plodding socialist economy only recently dismantled.

Even Bangalore, a high-tech boomtown, endures frequent and annoying power outages. Most shops on the city's main drag - Mahatma Gandhi Road - rely on noisy, polluting backup generators that sound like outboard motor engines to keep the lights on.

"We also suffer from a severe lack of telecom infrastructure,'' says Mehta. "The next big project is to increase bandwidth." Deregulation is expected to improve the infrastructure picture. Earlier this year the IT-minded government of Prime Minister Atal Behari Vajpayee opened up the domestic long-distance market to private operators and announced that Videsh Sanchar Nigam (VSNL), the state-run monopoly largely blamed for India's high international phone rates and bandwidth shortage, will be privatized two years ahead of schedule, in 2002. Private businesses were recently allowed to operate gateways but will rely on VSNL for bandwidth until new stations are in place.

India's frustrations and contradictions are nowhere more plain than in Mumbai, a city of great cosmopolitan charm, with ritzy hotels, modern office towers and miles upon miles of squalid shanties. Privacy seems of no concern. Slum dwellers let it all hang out, with lean-tos lining the roads in every direction, cobbled together with bamboo, cardboard and heavy plastic sheets with bricks, stones, old wheels - whatever is handy - holding down the roofs. Ragged dogs, some with deep gaping sores, slumber inches from traffic. Women scrub laundry on cement; barbers squat on their haunches before customers, dipping razors into cups of soapy dark water. There is a wondrous sociability about the whole enterprise. But the pollution burns my eyes; an acrid taste settles in my mouth. I look at the slums and think I would lose my mind living like this. Nonetheless, the women who live on the streets exude an elegant insouciance, brushing and plaiting each other's hair, sipping cardamom tea from rusted cups, chatting as if unaware of the petrol-belching traffic and gawkers like me on their doorsteps.

Traveling through Mumbai's traffic-clogged streets - it takes two hours to cover a few miles - I see this headline in the newspaper: "Earthquake Could Destroy Mumbai in 10 Seconds." The taxi driver points out with some apparent awe at life's surprises: a pile of rubble where a commercial building collapsed during the monsoon a few years ago. Many Indians were killed, though one resourceful woman buried in mud used her mobile phone to summon help.

This is a country where rail-thin barefoot men wearing only loin cloths construct modern office towers, where Indian women haul debris from a construction site in trays balanced on their heads. This is a country where land and caste continue to plot the fate of most Indians, where most regulations and building codes are fluid. When people talk about the benefits the Internet can bring to India, some see a way to beat corruption, allowing citizens to obtain certificates (a caste certificate, for example, that entitles the holder to apply for low-cost loans) and file applications for basic services like land transfer registration without having to bribe a clerk.

World's Richest Indian

Over the years, Wipro Chairman Azim Premji has waged what at times must have seemed a lonely battle against corruption. His company has withstood power outages and confiscation of import consignments for its refusal to bribe.

Everybody in Bangalore, all of India, it seems, takes pride in the success and humility of Premji, the world's richest Indian. He is described as a regular guy with simple tastes, a man who has been observed at the airport patiently waiting for a driver. (Imperious airs are not uncommon to Indians of high position.) With an estimated personal wealth of US $ 6.9 billion, 54-year-old Premji tops Forbes' list of Indian billionaires, a distinction he finds mildly embarrassing: "It makes me feel like a zoo animal."

He attributes his reputation for integrity to his father's legacy. His father founded the vegetable oil company that Premji grew into a US $ 47 million home-care and computer services conglomerate. Though he manages to stay above the near hysteria that surrounds hopes for the Internet and e-commerce, he is closely watching the burgeoning VC market in India. "The VCs are very aggressive, very hungry, going around like vultures," Premji says. " They make two calls a week to one person in the same company all the time - a tremendous source of distraction for people who are working on jobs. But I suppose they are generating opportunities for people."

VC in India is targeted at software development, services, companies that can sell to the West. But according to Merrill Lynch, local and foreign VCs have also invested more than US $ 100 million in 800 Indian-based Internet companies in 2000. The current favorite is 3-year-old Rediff.com, which in June was the first portal site to go public on Nasdaq, raising over US $ 60 million. Headed by a former advertising executive, 52-year-old Ajit Balakrishnan, Rediff's backers include General Electric, Citicorp and Intel, among others. Its model is Yahoo. Rediff offers online shopping, language editions, a search engine, news links, its own columnists, e-mail, chat, instant messaging and homepages.

Among the more aggressive newcomers is Indiainfo.com, which provides content in six local languages and is the first general portal to offer personalization. In the past year it acquired eight companies, and the staff grew to 350. Its founders are B.G. Mahesh, 33, a computer scientist with a master's degree from the University of Alabama, who put up one of the first Indian websites (Mahesh.com) in 1994; and Madhu Kodali, 36, who once ran an ISP in Flint, Mich. Last April, in Bangalore, they launched Indiainfo.com, backed by US $ 16 million from 30-year-old U.S.-based Indian entrepreneur Raj Koneru, who built the US $ 180 million IT services company Intelligroup. JM Morgan Stanley has bought a 7.5 percent stake in the company for US $ 11.5 million. A third partner is V.S. Mani, 35, whose dial-in information service was acquired. A blitz of negative publicity followed the departure of some high-paid executives at odds with the founders. Rumors of a cash crunch were denied. Meanwhile, an IPO was put on hold. When I ask Kodali, recently named CEO, what he'd learned from the dotcom frenzy in the United States, he says, "The basic lesson for us is that you cannot go and acquire a customer at any cost. You need to be conservative. It's tough, but it's going to happen."

New websites in India are appearing at the rate of three per day, with the total estimated at around 23,000. Competition is almost impossibly fierce. "People will give a rosy picture of dotcoms in India, but success in this sector is way down the line," says E. Raghavan, editor of the Bangalore edition of The Economic Times of India. "If we find a way to do business on the Internet and eliminate processes in the middle, that will be great, but I'm not so sure about e-tailing. Indians are very touchy-feely; they like to shop and see what they're buying."

The brave remain undeterred. Last year McKinsey & Co. offered a mentoring program in which top VC and IT professionals would help budding entrepreneurs sharpen their business plans. Expecting 300 applicants, they were deluged with 4,000.

"Everyone senses this is a once-in-a-lifetime opportunity," says Ashok Soota, chairman and CEO of Bangalore-based MindTree Consulting. " What we are seeing is a revolution - and it's just the beginning. Hype? It's not hype at all, because there are past business comparisons to draw on and learn from. We know that in the long run it won't be cost that drives companies to India. It will be quality. Indian IT companies learned early on that strong processes and high quality would keep the world interested and provide repeat business. Cost is a big factor but not the deciding factor.

"A good analogy is the Japanese auto manufacturers' entrance into the U.S. market," Soota says. "At first, in the 1970s, the attraction was low cost and good gas mileage, but Toyota, Honda, Nissan and the others would not be the major players they are today without quality. They also knew that in the long run, quality would outlast cost, and they started building reliable, affordable cars. The biggest winners were the ones that realized that the combination of high quality and reasonable cost creates profitable growth and market dominance. The IT industry in India is being built exactly this way."

Given the talent, the assurance of quality and the sheer determination of the Indians - all at low cost - it's no wonder that India is suddenly everybody's new best friend.

The World Comes to India

Japanese Prime Minister Yoshiro Mori visited India in August (stopping in Bangalore before he visited New Delhi, the Indian capital), stressing his admiration for India's IT success and soft-peddling Japan's concerns about India's nuclear technology. In September, while Indian Prime Minister Atal Behari Vajpayee and his entourage wined and dined at the White House, Bill Gates, Jack Welch and Michael Dell packed off to India to push product and make deals. In October, Russian President Vladimir Putin was in New Delhi, hoping, perhaps, to rekindle some of the warmth and amity that marked the countries' relations in the Soviet era.

The corporate titans received the fanfare normally accorded heads of state. In Bangalore, the road to Premji's house was given a special cleaning, as GE's Welch would be coming to dinner. Beggars and hooligans were rounded up. Hopes were high.

GE's business investment in India is more than US $ 1 billion since India began to wean itself from socialism and loosened up its economy in 1991. GE's businesses in India include avionics, medical systems, call centers and investment banking. GE Capital, the world's largest nonbank finance company, set up its first India-based call center in 1997 with two employees and has since grown to a US $ 30 million business, employing some 2,500 Indians who examine medical claims and car loan applications, and track down credit card defaulters several continents away.

Meeting businesspeople in New Delhi, Welch praised India's "intellectual capital" and "the sheer raw talent of Indians." He announced that GE would invest about US $ 100 million during the next three years to build its largest research center in the world in Bangalore. The center will employ 2,600 scientists and engineers and focus on advanced chemistry, polymer science, mechanical engineering, ceramics, metallurgy and e-business. The company may also expand its financial services business and is examining the recent opening of India's insurance sector.

"This is the most fertile place for research...and you get quality," Welch told a business group. "The fact that it is a low-cost country is all the more appealing."

But Welch warned that without a drastic upgrade in infrastructure, including a massive increase in electrical generating capacity "to realize its dreams," India will "miss the next revolution without the power to drive it."

India's power capacity is estimated at about 20 percent below its needs, with another third lost in transmission and through theft. The government needs a US $ 250 billion investment over the next 10 years to double capacity, with at least two-thirds of that from the private sector. That will mean further cutbacks in popular subsidies and higher electric bills for consumers. Last summer, electricity cost hikes in the reform-minded southern state of Andhra Pradesh resulted in riots and four deaths.

A Work in Progress

Before India truly establishes a new economy, much work remains to be done to stamp out endemic corruption, update the banking sector and establish a legal framework for Internet transactions. (B2B is in a nascent state, while B2C is still negligible.) In its most recent corruption perceptions index, Transparency International listed India as tied with the Philippines for 69th among the worst out of 100 listed countries. In New Delhi, Central Vigilance Commissioner (CVC) N. Vittal has turned to IT to fight corruption. Posted on the CVC website ( www.cvc.nic.in) are the names of more than 100 civil servants against whom the commission has sought criminal departmental proceedings for major penalties. The roll of dishonor was, as one magazine called it, "a psychological assault that left civil servants dazed."

In this climate of change and uncertainty, the foreign banks - with the exception of Citibank - are holding back, waiting to see if promised reforms take root. Citibank, with some 10,000 account holders, has spent nearly US $ 10 million on 28 ATMs, debit card terminals and other setups for Internet and phone banking in Bangalore, with plans to expand to other cities. But work is currently underway to upgrade the country's Counting on the Future central banking system to put it in line with global standards (see "Counting on the Future," right).

Thanks partly to IT, India's gross domestic product is predicted to grow at least 6 percent per year, nearly double the average annual growth of the European Union and far ahead of many Asian nations. In Bangalore and Hyderabad, a Western-style middle class is growing, and this new class (including a growing number of millionaires) is moving into luxury-gated complexes and building large villas on the outskirts of a once sleepy pensioners' paradise.

But what of India's poor, who lack not only phones, credit cards, computers and Internet connections, but also safe drinking water and, quite often, enough to eat? Is the IT revolution passing them by? Not entirely. Increasingly, villagers are finding ways to improve their lives with the Internet. Indian farmers use the Internet through low-cost public kiosks to check market prices and make decisions on where to haul and sell their produce. Farmers in some 20 villages in Madya Pradesh use e-mail to order fertilizer, contact officials and make arrangements with milk distributors. Through the Internet, schools in remote areas gain access to the world's great libraries.

Indian villagers are also using the Internet to register complaints. A trip to the village cyberkiosk and a payment of a few rupees is all it takes to report a broken water pump. Last year schoolteachers in Anandkhedi and Umrela, obscure hamlets, were not paid for five months. An e-mail complaint uncovered an accounting error, and the funds were dispatched.

This, then, might be the real potential of India's new economy and the role of IT: empowerment to the people. "IT is one sector where the entire country has somehow united in desiring progress," says Sudheendra Kulkarni, the prime minister's coordinator for IT and government. "There are no divisive positions in IT. In Hyderabad you saw riots over the power reforms. But in IT there has been no resistance because everyone feels this is the future for India. We're noticing that the people succeeding in IT are first-generation entrepreneurs, making it on talent and hard work. Today the son or daughter of a small clerk in an office or even a farmer who is minimally exposed to what is happening around the world would like to have computer education, would like to be part of this revolution. A nation moves when all the people desire movement. It has become a part of our aspiration."

Where will India be in another nine years? Share your thoughts with Senior Editors Tom Field (tfield@cio.com) and Cheryl Bentsen (cbentsen@cio.com)