"Something tremendous is happening in India, and Das, with his keen eye and often elegant prose, has his finger firmly on the pulse of the transformation."--The New York Times Book Review

"One of the most readable and insightful book s to appear on India's tortuous economic path in its 54 years since shaking off British rule."--Business Week

"Head and shoulders above the customary bunch. This elegant essay has something for everyone."--St. Louis Post-Dispatch

"For American readers accustomed to view India as a land of tigers rather than high-tech and maharajahs rather than microchips, this book will come as a welcome surprise."--The Washington Post Book World

... the causes of wealth and poverty of nations -- the grand object of all enquiries in Political Economy.

-- MALTHUS TO RICARDO,
LETTER DATED 26 JANUARY 1817

The ascent of a country from poverty to prosperity, from tradition to modernity, is a great and fascinating enterprise. India has recently emerged as a vibrant free-market democracy after the economic reforms in 1991, and it has begun to flex its muscles in the global information economy. The old centralized bureaucratic state, which killed our industrial revolution at birth, has begun a subtle but definite decline. With the rule of democracy the lower castes have gradually risen. This economic and social transformation is one of the themes of this book. The struggle of one-sixth of humanity for dignity and prosperity seems to me a drama of the highest order and of great consequence for the future of the world. It has meaning for all of humanity and sheds new light on the future of liberalism in the world.

The story I will be telling is soft drama. It is taking place quietly and profoundly in the heart of Indian society. It unfolds every day, in small increments barely visible to the naked eye, and is more difficult to grasp than hard drama, which is more dramatic and captures the headlines. Most people instinctively grasp the spirituality and poverty of India. But the significance of this quiet social and economic revolution eludes them. The change is partially based on the rise of social democracy, but more importantly on the sustained 5 to 7 percent annual economic growth that India has experienced for the past two decades, which has tripled the size of the middle class. Although the middle class is still only 18 percent of India's one billion population, it is expected to become 50 percent within a generation. In the end, this "silent revolution" is more significant historically than the constantly changing fortunes of political leaders and parties which so absorb Indians.

I have followed, I find, the method of Defoe's Memoirs of a Cavalier, in which the author hangs the chronicle of great political and social events upon the thread of an individual's personal experience. However, this is not autobiography. I have decided to tell the story in the first person because I believe that one person's experience, honestly captured, even on the sidelines, not only is unique but is the only certain data of history that we possess as human beings. I did not, besides, wish this account of national competitiveness to be dry and didactic; I wished to breathe life into the clash of economic and social ideas.

When I was young, we passionately believed in Jawaharlal Nehru's dream of a modern and just India. But as the years went by we discovered that Nehru's economic path was taking us to a dead end, and the dream soured. Having set out to create socialism, we found that we had instead created statism. As a practicing manager in the 1960s I found myself caught in the thick jungle of Kafkaesque bureaucratic controls. Our sense of disillusionment reached its peak during Mrs. Gandhi's autocratic rule in the seventies. There was a glimmer of hope when Rajiv Gandhi became Prime Minister, but it quickly died when we discovered that he did not have what it takes. It was not until July 1991 that our mood of despair finally lifted, with the announcement of sweeping liberalization by the minority government of P. V. Narasimha Rao. It opened the economy to foreign investment and trade; it dismantled import controls, lowered customs duties, and devalued the currency; it virtually abolished licensing controls on private investment, dropped tax rates, and broke public sector monopolies. As a result, growth picked up to 7.5 percent a year in the mid-nineties, inflation came down from 13 percent to 6 percent by 1993, exchange reserves shot up from $1 billion to $20 billion. As India joined the world economy we felt as though our second independence had arrived: we were going to be free from a rapacious and domineering state.

Although the reforms after 1991 have been slow, hesitant, and incomplete, they have set in motion a process of profound change in Indian society. It is as important a turning point as Deng's revolution in China in December 1978. A half century of the ballot box has also empowered the lower castes, and this means that the fruits of the reforms are likely to be better distributed. The world has, meanwhile, changed from an industrial to an information economy, and it speaks to India's advantage -- our initial success in software is the first evidence. The irony is that most Indians, especially in the political class, have not yet realized it. If they had, they would invest more in education and implement the reforms much faster.

One of the intriguing questions of history is why we failed to create an industrial revolution in India. Marx predicted that the railways would transform India and usher in an industrial revolution. Indeed, by the First World War, some thought that we were ready to take off. By 1914, India had the third-largest railway network, the world's largest jute manufacturing industry, the fourth-largest cotton textile industry, the largest canal system, and 2.5 percent of world trade. It also had a merchant class hungry to become industrialists. After the war, industrialization did, in fact, pick up. G. D. Birla, Kasturbhai Lalbhai, and other businessmen made huge trading profits during the First World War and reinvested them in setting up industries. Between 1913 and 1938, our manufacturing output grew 5.6 percent a year, well ahead of the world average of 3.3. By 1947, industry's share doubled to 7.5 percent of national output from 3.4 percent. But it was not enough to broadly transform our agricultural society. Modern industry employed only 2.5 million people out of a population of 350 million. The chief problem was our agriculture, which remained stagnant, and you cannot have an industrial revolution without an agricultural surplus or the means to feed a rapidly growing urban population.

After we won freedom, Jawaharlal Nehru and his planners attempted an industrial revolution through the agency of the state. They did not trust private entrepreneurs, so they made the state the entrepreneur. Not surprisingly, they failed, and India is still paying a huge price for their follies. Instead, we experienced an agricultural revolution. Ironically, we now had an important precondition in place -- an agricultural surplus -- but the industrial revolution continues to elude us.

When I was in college, we talked about India as though it were an airplane and we wondered when it would take off into self-generating growth. No one asked "if" it would take off -- the only question was "when." During the takeoff, economists told us, the nation's investment rate would climb to 10 to 12 percent. Well, our investment rate in India has been well over 20 percent for two decades, and yet we have not transformed our society. Why? There were at least six things wrong with India's mantra. One, it adopted an inward-looking, import-substituting path, rather than an outward-looking, export-promoting route, thus denying itself a share in world trade and the prosperity that trade brought in the postwar era. Two, it set up a massive, inefficient, and monopolistic public sector to which it denied autonomy of working; hence our investments were not productive and we had a poor capital-output ratio. Three, it overregulated private enterprise with the worst controls in the world, and this diminished competition in the market; besides, our merchant-businessmen were not "tinkerers" and they were slow to innovate. Four, it discouraged foreign capital and denied itself the benefits of technology and world-class competition. Five, it pampered organized labor to the point where we have extremely low productivity. Six, and perhaps most important, it ignored the education of half its children, especially of girls.

In part, this is a story of the betrayal of the last two generations by India's rulers. In stubbornly persisting with the wrong model of development (especially after 1970, when there was clear evidence that this path was doomed), they suppressed growth and jobs and denied their people an opportunity to rise above poverty. It is ironic that men and women of goodwill created this order and were widely admired. After all, they did succeed in institutionalizing democracy. The second irony is that in the name of the poor they refused to change course. The worst indictment of Indian socialism is that in the end it did very little for the poor. All the countries of East Asia did far better. Even China, with all its convulsions over the past fifty years, has done a better job at improving the lives of its people. Our failure came less from ideology and more from poor management.

Hence, India's per capita income is $450, which places it 162nd out of 206 countries in the World Development Report for 2000-2001. In 1960, it was higher than China's, but today it is half. Although by purchasing power parity India's income rises to $2,149, that lifts its global rank only marginally, to 153rd. Half the Indian people are poor by the international poverty line of one dollar per person per day, and a third of the world's poor are in India. An Indian's life expectancy is sixty-three years, lower than that in many poor countries. As many as sixty-five out of a thousand infants die, and that is too high; two-thirds of the children suffer from malnutrition and are underweight. Seventy-one percent cannot access sanitation. Four out of ten Indians are illiterate. Therefore, India is ranked 134th out of 174 countries on the United Nations Development Program's Human Development Index. India's performance is not good enough. Other similarly placed countries have done better.

To top this tale of India's lost decades, members of the Indian ruling elite -- the politicians, the MPs, the senior bureaucrats, and the economic planners -- are not contrite. They complacently proclaim, "After all, we have done rather well compared to the 3.5 percent Hindu rate of growth." There is no more defeatist expression in the dictionary than this fatalistic phrase. They feel no humiliation that India has lagged behind in a Third Worldish twilight while its neighbors in East and Southeast Asia have gone ahead. There is no feeling of shame that countries with a fraction of India's natural and human resource potential have created some of the most prosperous societies in the world. They have used the recent troubles of East Asia to justify our incomplete and frustratingly slow reforms. When individuals blunder, it is unfortunate and their families go down. When rulers fail, it is a national tragedy.

Indians have not traditionally accorded a high place to the making of money. The Vaishya or bania (merchant) is placed third in the four-caste hierarchy, behind the Brahmin and the Kshatriya (warrior, landowner), and only a step ahead of the laboring Shudra. Since the economic reforms, making money has become increasingly respectable and the sons of Brahmins and Kshatriyas are getting M.B.A.'s and want to become entrepreneurs. India is in the midst of a social revolution rivaled perhaps only by the ascent of Japan's merchant class during the 1868 Meiji Restoration, which helped transform Japan from an underdeveloped group of islands into a thriving modern society and economy. The commercial spirit is not limited to the cities. The smallest village has found it. On a visit to Pondicherry from Madras a few years ago, I stopped at a roadside village cafe where fourteen-year-old Raju was hustling between the tables. He served us good south Indian coffee and vadas. Raju told us that this was his summer job and it paid $11.50 a month -- enough to pay for computer lessons in the evenings in the neighboring village. For the next summer, his aunt in Madras had arranged a job for him in a computer company.

"What will you do when you grow up?" I asked. "I am going to run a computer company," said Raju. He had decided this when "I saw it in TV, where this man Bilgay [sic] has a software company and he is the richest man in the world."

In Bartoli, a sleepy village of six hundred families in the heart of feudal Uttar Pradesh, a government schoolteacher lamented: "Everyone has become money-minded. Even the leather workers, low down on the social scale, are removing their children from my school and putting them into this newfangled private 'English' school which opened six months ago. Can you believe it -- they are willing to spend $1.05 a month when it costs three cents a month in my school!" They were leaving his school "because they watch TV; they want to learn English; they want to get rich. This is what happens when the 'low' castes get uppity. No one wants to work on the land."

"There is no loyalty left, sir," added Fateh Singh, who stood shyly outside the door and would not sit with us because he is from a low caste. He complained that his grown-up nephew, Vikas, wanted to set up a factory to make steel trunks in nearby Khurja rather than become a conductor in the state-run bus company like his father. Indians are slowly realizing that economic reforms are not only about tariff levels, deregulation, and structural adjustment. They are about a revolution in ideas which is changing the mind-set of the people and leading to the commercialization of Indian society.

Rich countries were supposed to specialize in the knowledge industries of tomorrow and poor countries in low-wage, low-skill industries of yesterday. This was the theory, but someone forgot to tell Bangalore (and Hyderabad, Chennai, Gurgaon, and Pune). Every day these days we read about a new success in the new "knowledge economy," and we wonder if, at last, we may have arrived. There are 325 software companies in Bangalore. Most of them have customers in America, who e-mail their needs before they leave their offices. While they sleep, Indian engineers work on their problems. By the next morning, as they bring their coffee mugs to their desks, Americans have their answers as they log on.

One of these companies is Infosys, which started out with a $500 capital; in February 2000, it was worth $15.4 billion and more than a hundred of its managers were each worth over a million dollars. Another is the National Institute of Information Technology (NIIT), which has franchised (like McDonald's hamburgers) 1,750 computer schools in Indian bazaars and in thirty-one countries. It plans to become the world leader in computer education. Over the last decade, it has created 1,750 entrepreneurs and fifteen thousand jobs. On 22 February 2000, Azim Premji had become the third-richest man in the world on Forbes rankings based on the market capitalization of his software company, which crossed $46 billion, or 11.3 percent of India's GDP. With his wealth, Premji could pay for India's fiscal deficit and still have change left over.

The spirit of the age is reflected in hundreds of entrepreneurial successes in the knowledge economy. Subhash Chandra used to be a rice trader in the 1980s and he has built a worldwide media empire that was worth $14 billion in February 2000; he is called the Murdoch of Asia. A tiny two-year-old company in Bangalore called Armedia achieved a breakthrough in designing a chip for digital TV in 1999; America's Broadcom bought it for $67 million and made its forty-three employees rich beyond their wildest dreams. Ranbaxy, Dr. Reddy's Laboratories, Cipla, and Wockhardt are building successful global businesses in generic drugs. Crest Communications in Bombay is one of only two studios outside North America with the expertise to make 3D animation films and it has recently won a contract from one of the Hollywood studios to make an animated feature film. Rajesh Jain's Internet sites were so attractive that Satyam Infoways bought them for $116 million -- a nice return on the $57,000 that he invested five years ago. Around forty thousand Indians are employed in online "remote services" --transcribing medical records, editing books, making digital maps, doing payroll accounts for customers around the world; and McKinsey projects that this could grow to a million jobs earning $50 billion in revenues by 2010.

These entrepreneurial miracles are part of a new social contract for postreform India. The new millionaires did not inherit wealth. They have risen on the back of their talent, hard work, and professional skills. The old business houses, on the other hand, are struggling in the competitive economy created by the reforms. The dilemma of Rahul Bajaj is typical of the old companies. Bajaj is the clear leader in the world's second-largest scooter and two-wheeler market. Yet he is unable to take the next step, which is to become a global player. He has the world's lowest costs; he has successfully withstood the challenge of Japanese competitors on his home ground; he is cash rich -- making more profit than all his competitors put together. But he exports only 3 percent of his output. Despite his awesome advantages, Bajaj does not have the confidence to take on the Hondas and Yamahas in the world market.

A decade ago, no one would have even thought of criticizing Rahul Bajaj for not thinking globally. Government rules did not permit him to have a foreign operation, or buy equity of a foreign company, or import components at a reasonable tariff, or expand capacity at will, or buy new technology without a lengthy approval process. Rahul Bajaj had a purely "local" mind-set of a shortage economy. He sold everything he produced, because demand was always ahead of supply -- for a decade, there was a ten-year waiting period for his scooter. Thus, he never developed marketing or product development skills. Rahul Bajaj is a creature of Nehruvian socialism. The legacy of forty years of a closed economy has caught up with him. He is the symbol of the "old" India, hobbled by poor infrastructure, obstructionist bureaucrats, high tariffs and interest costs, and a "factory mind-set."

As with Bajaj, the older Indian groups are creatures of a system they did not create. They do not have the skills to succeed in the global economy. Eight years into the reforms, they are still floundering. Success in the global economy needs three things: massive investment in human resources, a passion for product improvement, and a deeply caring attitude for customers. These companies are smart and they understand this. Then why haven't they acquired these skills? The answer is that it takes time to change from doing what you have been doing successfully. But time is precisely what they do not have.

The beginning of the twenty-first century is a time of ferment. Two global trends have converged -- both of which work to India's advantage and raise the hope that it may finally take off. One is the liberal revolution that has swept the globe in the past decade, opening economies that were isolated for fifty years and integrating them spectacularly into one global economy. India's economic reforms are part of this trend. They are dismantling controls and releasing the long-suppressed energies of Indian entrepreneurs. They are changing the national mind-set, especially among the young. Because we are endowed with commercial communities, we may be in a better position to take advantage of this global tendency. Merchants understand from birth the power of compound interest; they know how to accumulate capital. The Internet has also leveled the playing field, so that it seems sometimes that any mad, passionate Indian entrepreneur can write his own future.

Meanwhile, the information economy is transforming the world -- this is the second global trend. We may not be tinkerers, but we are a conceptual people. We have traditionally had a Brahminical contempt for manual labor, which was relegated to the lowest caste, Shudras, who were also denied knowledge. A tinkerer combines knowledge with manual labor, and this produces innovation. Our entrepreneurs, who come mainly from the higher merchant caste, have also shied away from manual labor and technology. This may be another reason why we did not produce innovation and failed to create an industrial revolution. But this is all changed now, for the industrial age is gone and the knowledge age potentially plays to our advantage. Our success in software and the Internet is the first emerging evidence. We have wrestled with the abstract concepts of the Upanishads for three thousand years. We invented the zero. Just as spiritual space is invisible, so is cyberspace. Hence, our core competence is invisible. In information technology we may have finally found the engine that can drive India's takeoff and transform our country.

There is an old idea in economics, as old as Adam Smith, that if a rich and a poor country are linked by trade, their standard of living should converge in the long run. It makes intuitive sense, because standard of living depends on productivity, and productivity, in turn, depends on technology. When a poor nation is connected, it merely adopts the technological innovations of the rich one without having to reinvent the wheel. Thereby, it grows faster and eventually catches up. Why then has the world not converged in the past fifty years? Very simply, because the rich and poor were not joined. Two Harvard scholars, Jeffrey Sachs and Andrew Warner, studied this dilemma and concluded that only thirteen out of eighty-seven Third World countries were "open" to world trade, and they grew six times faster. Between 1970 and 1990, the thirteen open countries grew at an average 4.5 percent per capita per year compared to the 0.7 percent growth rate of the seventy-four closed countries. India was in the latter group, and not surprisingly many East Asians were in the former. Thus, convergence did take place among the virtuous few economies, and they did substantially conquer poverty.

Now the world has changed. Whereas only 20 percent of the world's people lived in open economies in 1970, today more than 90 percent do, and that is why we call it a globalized world. China and India, with more than a third of the world's population, have accelerated their growth rates in the past two decades: China 8 to 10 percent, and India 5 to 7 percent. If this is sustained and literacy keeps rising, there is a very real prospect that people below the poverty line, who live on less than a dollar a day, will decline to a more manageable 15 to 20 percent of the population from 50 percent today. This is the experience of the East Asian countries. India's poverty is a symbol of poverty on our planet, and if India can hope to make a significant dent, so can most of the Third World. China will get there probably ten to fifteen years earlier. Just ten years ago, this would have been unthinkable. Today, astonishing as it may seem, we can dare to contemplate this proposition.

The Indian state's biggest failure has been in building human capabilities. As a result, 40 percent of Indians remain illiterate. We have now realized that primary education and primary health care are the two most powerful ways to eradicate poverty. Simultaneously, there is a growing, impatient demand for these social goods from below. Indian literacy has already risen by ten percentage points in the past six and a half years, from 52 to 62 percent. It is primarily because of grassroots pressures from below as social democracy has created upward mobility among the lower castes. The push for liberal economic reforms combined with investment in human capabilities will ensure that millions of Indians lift themselves from poverty within a generation.

India embraced democracy first and capitalism afterwards, and this has made all the difference. India became a full-fledged democracy in 1950, with universal suffrage and extensive human rights, but it was not until recently that it opened up to the free play of market forces. This curious historical inversion means that India's future will not be a creation of unbridled capitalism but will evolve through a daily dialogue between the conservative forces of caste, religion, and the village, the leftist and Nehruvian socialist forces which dominated the intellectual life of the country for so long, and the new forces of global capitalism. These "million negotiations of democracy," the plurality of interests, the contentious nature of the people, and the lack of discipline and teamwork imply that the pace of economic reforms will be slow and incremental. It means that India will not grow as rapidly as the Asian tigers, nor wipe out poverty and ignorance as quickly.

The Economist has been trying, with some frustration, to paint stripes on India since 1991. It doesn't realize that India will never be a tiger. It is an elephant that has begun to lumber and move ahead. It will never have speed, but it will always have stamina. A Buddhist text says, "The elephant is the wisest of all animals/the only one who remembers his former lives/and he remains motionless for long periods of time/meditating thereon." The inversion between capitalism and democracy suggests that India might have a more stable, peaceful, and negotiated transition into the future than, say, China. It will also avoid some of the harmful side effects of an unprepared capitalist society, such as Russia. Although slower, India is more likely to preserve its way of life and its civilization of diversity, tolerance, and spirituality against the onslaught of the global culture. If it does, then it is perhaps a wise elephant.