Financial Express, March 21, 2013

A view from Silicon Valley

 Silicon Valley, a short distance from where I teach, is aptly viewed as one of the most important symbols of India’s success. This is paradoxical, of course, because the success of Indians in the Valley (as it is often known locally, with an implicit sense of uniqueness) has come at a cost to India—the talent that thrives here has been lost, in some sense, to India. On the other hand, the success of Indians here in the Valley has served as a powerful signal to those who did not migrate, of what knowledge, talent and hard work can achieve. Just as importantly, it has signaled to non-Indians what might be possible in India, in the right circumstances. 

Every year, for several years now, I have participated in a panel in the Valley that discusses India’s Budget in the context of the country’s economic prospects. My fellow panelists and the entire audience are representative of the area’s ecosystem—smart, well-educated, experienced entrepreneurs and financiers, with global perspectives. Their views on India are worth noting. Here is what I took away from their remarks earlier this month. 

It was unsurprising that the businesspeople expressed dissatisfaction with the current state of the laws governing the use of land and of labour. These are well-known, long-standing issues that successive Indian governments have not managed to come to grips with. What struck me, though, was a sentiment that, even worse than inefficient or overbearing regulation, uncertainty about policy has been a major recent problem. The prime example of this, of course, is the General Anti-Avoidance Rule (GAAR), proposed in last year’s Budget to general consternation. The postponement of GAAR, and a promise to rethink provisions that have been criticised as poorly drafted, have created a period of prolonged uncertainty, which can act as a major deterrent to investment. There was appreciation of the current finance minister’s outreach to foreign investors, but a clear sense that ultimately, it is the certainty of the rules in place that matter, not just wooing through words. 

A closely-related concern that I heard expressed was that India’s rules for business also lack clarity. This, too, is an old problem, but one that has been growing worse in a more complex economic world. Transfer pricing was raised as a major issue in this context. There is a connection to GAAR here too, and national government concerns about tax avoidance through transfer price manipulation are common across many countries. The point here, though, was that poorly written rules unnecessarily increase litigation and other administrative costs: businesses have to pre-emptively spend on trying to get clarification in advance, or they have to bear risks of lawsuits, or both. 

On the positive side, panelists and audience members emphasised that Indian-Americans in senior positions in high tech companies have made a difference in those companies’ strategies towards India. The importance of personal knowledge and networks has been recognised of course, and the Indian Consul General in San Francisco plays an important and visible role in nurturing some dimensions of these, but my outsider (and possibly not fully informed) view is that India’s government could do more to deepen and systematise these networks of Indian-born leaders of high tech companies, to benefit India’s economy. 

As it is, I got the sense from other remarks that India’s political leaders often still do not understand how business at its best can work, and the importance of innovation in its many dimensions, including technology transfer and adaptation, as well as indigenous research and development. One venture capitalist in the discussion remarked that greenfield foreign direct investment (FDI) remains relatively low. Another noted the lack of coordination across ministries. Another observation was on the arbitrariness of some kinds of FDI restrictions, such as those governing e-commerce. One senior investor and entrepreneur suggested that the push for a semi-conductor manufacturing plant did not make sense, either in generating employment or being a fruitful avenue for spurring innovation. 

One can debate these kinds of specific issues, which have to do with the innovation and employment potential of various technologies or combinations of technologies. What is perhaps missing for India is a systematic dialogue with Silicon Valley. The US-India Business Council, which co-sponsored the panel at which I spoke, is certainly systematic in its efforts to build business ties across the two nations. But it represents the interests of its members. There are other institutional linkages as well, such as a sister city initiative between San Francisco and Bangalore. But my sense is that there is room to create a richer interaction that is more balanced in representing various interests, and does more to integrate academic and business knowledge, to further investment and innovation in India by leveraging the tremendous human capital of Silicon Valley. What institutional form that interaction takes would have to be thought through, but the need and potential are both present.