The Rise of India: Getting to the Top of the Pyramid

Speech | 18 March 2011

Speech by Rajat M. Nag, ADB Managing Director General, at the C. K. Prahalad Memorial Annual Lecture - Indian Institute of Management, Kozhikode, India

Introduction

Thank you very much for your warm welcome. I am truly honored and grateful to be invited to deliver the inaugural C.K. Prahalad Memorial Annual Lecture. I am particularly excited to speak to an audience that includes some of the brightest and the best minds of India: the current and future leaders of India's vibrant private sector.

It is fitting that this lecture series was created in the name of the late C.K. Prahalad. Professor Prahalad stood shoulder to shoulder with the top global thinkers on innovative management. But what most distinguished Prahalad was his deep commitment to bring the best management practices and innovations to bear on the difficult challenge of eradicating poverty.

Prahalad was a socially committed, conscientious intellectual who, in the midst of high-octane market oriented management practices, did not forget those excluded from progress. By word and deed, he kindled new interest among the top private sector practitioners in developing markets at the so-called "bottom of the pyramid," and championed the cause of sustainable prosperity for all. Professor Prahalad's leadership and contributions will be relevant for many decades to come.

Given that India today stands at a critical threshold of opportunity, Prahalad's legacy should certainly be given the consideration it deserves. India's rapid development has positioned the country for a leadership role in the global economic landscape: the signs of an "Asian century" are now more a reality than simply wishful thinking. And it is you, the young leaders of the private sector, who will be in the driver's seat during this highly charged transition. It is you who will have to bring innovative thinking and create productive partnerships with government and the public sector to ensure that all of India – and not just its elite – are part of this "Asian century".

The Rise of India to the Top of the Pyramid

India's bright future... but

India today is at a critical juncture. With proper management of its economy, India has the potential to become an affluent society within one generation. A recent ADB-commissioned study found that, by 2039, India's per capita income could reach $22,000 – a dramatic increase from $940 per capita in 2007. In the same time period, India is likely to become the 2nd largest economy in the world, representing more than 17% of the world's economy.

There are a number of reasons to be optimistic about India's growth story:

Fixed investments have increased from about 22% of GDP in 1980s to as high as 35% in recent years;
India is set to reap a demographic dividend as its labor force is likely to increase annually by 1.7% for next 30 years; and
India's middle class (income more than $10 to $100 per day per capita)—a strong force for sustained growth—is likely to increase from a current 10% of the population to 90% of population by 2039.

Despite these strong fundamentals, the high growth rates that underpin India's promise are by no means pre-ordained. India needs to overcome a number of challenges in order to realize its immense promise.

Poverty and inequality

First and foremost among these is persistent, debilitating poverty. India's rise to the "top of the pyramid" is not achievable without attention to the millions of poor households still mired in poverty. According to the revised official poverty line, 37.2% of the population (about 410 million people) remains poor, making India home to one third of the world's poor people.

Significant numbers of children under age 5 are underweight and/or stunted, and the majority of Indian children are anemic. What does this really mean? To answer that, make the child come alive. Give her a name. I call mine "Asha." It means that little Asha has probably gone to bed hungry for each or most of the 1825 nights that she has lived so far. Across Asia, there are 107 million Ashas and a high proportion of them live in India. Furthermore, although the enrollment and retention of children in India's schools have increased, and the gender differentials in school enrollment have been reduced, there are still serious questions being raised about the quality of education being imparted in our public schools.

It is not only poverty in its absolute terms, but also India's deep inequalities that should concern us. To fulfill its potential, India has to ensure that growth is inclusive – to ensure that the poorest households and the backward regions of the country are integrated into India's growth story.

Some degree of inequality in a vibrant and growing economy is natural. In fact, the desire to increase one's income and well being are key motivators for innovation, hard work, enterprise, and risk-taking—which transformed humans from cave men to smart phone and linked-in global netizens. However, to level the playing field so that all citizens can participate and compete, some minimum standard of equality must exist – particularly in health and education.

Here in India, the life expectancy gap between the richest and the poorest is significant. Child survival and child nutritional status differentials between the richest and the poorest households are also wide. Poor health and nutritional status reduce a child's ability to successfully participate in school. For many of the children from the poorest households, the battle for better living standards is lost even before it has begun.

Human capital

Ensuring that children from poor households have good health, good nutrition, and adequate schooling to prepare them to participate in the growth story of India is not simply a moral obligation. It has real consequences for India's future growth.

For a country to progress, its workforce must have, at a minimum, the basics of reading, writing and mathematics. The major divide that we are witnessing in India will have serious ramifications if not corrected soon. Students from the elite private schools are by and large well endowed with these skills by the time they leave school, giving them opportunities to pursue college education in institutions like IIT and IIM, among others. However, the majority of poor students have no option but to pursue public schools, where the quality of education is generally poor. These students start with a huge disadvantage when they enter the job market, even if they complete full schooling. For millions more poor students who either drop out or do not enroll, moving up the pyramid will remain a dream. Access to good quality education is, therefore, key for households at the bottom of the pyramid to unlock India's full growth potential.

Role of the private sector

The private sector has done a commendable job in imparting good quality education. But unfortunately, the scale is still limited. Moreover, to reach children from poor households, it needs to be affordable. Greater innovation is required to use information technology and better human resource management to expand education for the poor. As the future leaders of India, I hope you will keep this in mind as you chart your careers. To increase the productivity of our labor force, we need to strengthen our vocational education systems to provide workers with marketable skills, and set up systems that are agile to respond to the changing demands of the market. This is essential for any dynamic economy in a world that seems to undergo creative destruction and reinvention in increasingly shorter cycles.

The private sector can also play an important role in raising health standards for the poor. The rich are able to overcome unpredictable health shocks with their deep pockets. The real challenge is providing social safety systems for the poor. In a resource scare environment, we need to increase the reach of micro-health insurance through innovation and better risk management and pooling to drive the costs down for the poor. The private sector can do this by developing efficient and cost effective health management protocols, and equally efficient health insurance and risk pooling mechanisms.

For the private sector, a huge market awaits at the bottom of the pyramid. But to access that market, the purchasing power of this important demographic has to be significantly improved. Poor households need access to capital if they are to improve their productivity and expand their asset base. An innovative private sector can help by investing more research and venture capital in finding new ways to make the poor more employable and more productive, and by expanding innovations that have helped the poor increase consumption – such as smaller and more affordable sizes of consumer products – to address issues such as micronutrients and improve water quality at the household level.

What is required is a concerted focus, game changing ideas, innovation, risk taking, and venture capital to address this major challenge. For the private sector, high risk also means high rewards through increased productivity, increased access to capital, new markets, and higher purchasing power and consumption among the poor. This is what Professor Prahalad urged the private sector to do.

Good governance, institutions, and middle income traps

Underlying education, health, inclusiveness and economic competitiveness is the issue of governance. The positive association between governance and institutional quality, on the one hand, and growth and level of income on the other, is strong and incontrovertible, both conceptually and empirically. A two-way casual link between the two is well recognized in the literature.

Corruption remains a major challenge. Transparency International estimates that in developing countries and countries in transition, bribes on the order of US $20 billion and US $40 billion, respectively, are received annually by public servants and politicians. As a result, project costs are increased by 10% to 25%. It has been estimated that corruption amounts to 5% of the world economy, or over $1.5 trillion. The vast majority of the 180 countries included in Transparency International's 2009 Corruption Perception Index are perceived to be corrupt.

Reforming governance and institutions can also help countries avoid the "middle income trap" – the phenomenon where, after brief period of high growth, there is flattening or stagnation of growth. Simply put, countries that fail to reform their governance and institutional structures, to foster strong property rights and effective legal systems, to forge strong institutions to ensure intellectual property rights and enable governments to work closely with private sector, to encourage innovation and entrepreneurship – these countries are destined to stagnate.

India needs to do much more on governance and institutional structures. The impact of weak governance has a disproportionately higher impact on the vulnerable and the poor. For example, poor households end up paying much higher prices for drinking water compared to richer households due to poor institutional structures and basic urban services delivery.

Although governance is largely seen as the responsibility and mandate of the public sector, in a vibrant democracy like India, government is responsive to the voices of the various stakeholders. As the private sector grows, it has the added responsibility to demand changes in governance and institutional structures to ensure sustainable and inclusive growth and discourage "oligarchic" tendencies in the private sector. As the future leaders of the private sector, it also falls to you to promote the message of "fairness" and "justice" in the pursuit of India's high growth objectives of India.

From the corporate perspective, inequalities in opportunities can be a dangerous trend. In a market economy, the winners are selected based on innovation, efficiency, customer focus, execution, among others. However, if winners are selected because of patronage, connections, or ability to bribe the system, growth is fundamentally challenged. Corporations that build on political connections only increase their influence with growth based on poor governance. This deepens the nexus further. Moreover, patronage based growth leads to overall sub-optimal performance as innovation, efficiencies, execution are not rewarded adequately. Good governance is therefore fundamental for sustainable economic growth.

Concept of Justice

Here, I would like to dwell briefly on the concept of justice. An acceptable society must include a strong element of social justice. Professor Amartya Sen, who has done seminal work on this, distinguishes between two visions of social justice: one which he calls an "arrangement-focused" view of justice, and the second, a "realization-focused" understanding of justice.

The "arrangement-focused" version argues that justice needs to be conceptualized in terms of certain organizational arrangements. You get the right institutions, you get the right laws, you set the right rules and regulations, you set some behavioral rules, and justice follows. In the "realization-focused" version, Professor Sen argues that in the real world, justice does not follow just institutions – that we need to examine what actually happens in society, including the circumstances and conditions of poverty and deprivation that people actually live in. With this thinking, justice cannot be divorced from the realities on the ground. Of course, institutions, laws and regulations matter, but they are not sufficient to ensure justice as people feel and experience it.

I have found it very useful to draw on two words from Sanskrit which Professor Sen talks about extensively. The first is "niti", and the second is "nyaya".  Both mean justice in a sense in classical Sanskrit, but the nuanced difference between the two is critical. "Niti" refers to organizational propriety, behavioral correctness and rules – how we ought to behave. "Nyaya" on the other hand refers to realized justice. "Nyaya" of course recognizes the role of "niti" — the rules and the organizations, the importance of institutions — but considers the world as is. The context in "nyaya" is the world we live in — not some idealized state of society, the perfectly just society which is what Hobbes' social contract was all about.

In this context, there is another very interesting Sanskrit word:  "matsyanyaya", which is really justice in the world of the fish. And this justice in the world of the fish, even with all the rules and regulations, basically allows a big fish to devour the small fish at will. Such a situation is obviously a fundamental violation of human justice, no matter how well laid out the rules, regulations, and institutional structures are.

As Professor Sen articulates in Development as Freedom: "The greatest relevance of ideas of justice lies in the identification of patent injustice, on which reasoned agreement is possible, rather than in the derivation of some extant formula for how the world should be precisely run".

Obviously, it is the reduction of the patent injustices that we are after. And that is very powerful because it talks about the girl child – Asha – who cannot go to school even if there is a basic primary education act. That injustice is what we in the development world are concerned about – and what we as a society must be concerned about. We are not worried about the fact that there is this perfect law, or that there is a central school board which is supposed to implement it. We are talking about trying to reduce the patent injustice of this girl child not being able to go to school because she goes to fetch water for seven hours a day. So our effort is obviously at preventing such severe apparent injustices. While we, as citizens, might aspire to perfect justice, we are also capable of making partial order rankings.

We can therefore recognize that not providing basic education; not providing basic health facilities, access to water and sanitation; women being denied access to education, employment, property rights; brides being burned, etc. are not acceptable, even in a less than perfect society. So taking the world as given, what can we do to make the world a bit less unjust, not necessarily more just or more perfect? Until we as a society – not just government, not just development institutions, but society as a whole, and together – can deal with these issues, India will be held back in its rise to the top of the pyramid.

Conclusion

Let me close today with this final thought. As young graduates from this prestigious Indian Institute of Management, you will be much sought after by the legions of private sector corporations vying for the best young managers.

You have a choice to ignore the poor at the bottom, and take the more assured traditional course. However, persistent inequalities are issues that no reasonable person can ignore, and they are issues that will hamper India's progress.

There will be many who say "what difference can one person make?" I say: ignore them. They have not seen the gleam in the eyes of the child who walks into her first school. They have not felt the joy of the father whose child has just recovered from a bout of illness. They have not felt the sheer relief of the young girl who does not have to walk for hours to fetch water.

I urge you therefore to embrace the vision and wisdom of the late Professor Prahalad; to bring the energy and genius of the private sector to bear on helping those at the bottom also rise to build a sustainable prosperity for all. To make a difference to the millions of Ashas who need your help to be part of India's growth story. Much has been given to you; much is expected of you. I know you will rise to the challenge.

Thank you.