NOVEMBER 2013

Reimagining India: A conversation with Yasheng Huang

MIT Sloan School of Management professor Yasheng Huang warns of the dangers of Indias reliance on the IT sector for economic growth, calling for regulatory reforms and greater investment in basic services.

India is known globally for the rise of its information-technology and software industry. Yet in

this video interview, Yasheng Huang, a professor of global economics and management at MITs Sloan School of Management and essayist from Reimagining India: Unlocking the Potential of Asias Next Superpower (Simon & Schuster, November 2013), warns the country against becoming too dependent on those sectors. He argues Indias potential will only be realized if the country develops its manufacturing and services sectors, which requires labor-market reforms and significant investments in both education and social services. Without those, India will not only face growing social inequality but could also jeopardize its pipeline of college-ready students critical to the hightech industry. What follows is an edited transcript of his remarks.

Needed reforms
The key for India to move forward is: how do you maintain a healthy growth ratewhich, I believe, is 5 percent, 6 percentin this kind of adverse environment? I see labor reforms as the key. For a country with 1.2 billion people, you cannot grow just on the basis of software engineers and business-process operations. You have to include the workers, the women, villagers, and the rural Indians into the growth machine. Were talking about simple manufacturing. Were talking about simple service-sector jobs that require basic reading, a little bit of math, functional capabilities. And labor regulations in India are killing those potentials. They dont kill the IT, they dont kill the high tech, but they do kill the blue-collar manufacturing jobs, which India needs the most. The other area that would require more government intervention is in the social sectorhealth and education. If the government doesnt provide health and education, nobody can come close to matching the government. And this is where you actually want more government intervention. You

want more tax money to go in those sectors. And the Indian government is not able to collect enough taxes to spend on health and education; it is also constrained administratively and politically in terms of scaling up education. If India doesnt fix the problem of educationprimary-education, first-tier educationthey are going to undermine their success in the high-tech sector. The reason is very simple. The tertiary education requires a long pipeline of college-ready students. If you dont fix your primary education, if you dont fix your high school, primary school, youre going to have a very narrow pipeline.

Leapfrogging wisely
There are many analysts and scholars and observers who believe that India can skip this sort of normal, sequential economic-development model and leapfrog directly into the information age, the IT age. I think there are two kinds of leapfrogging, and one is more plausible than the other. The leapfrogging in education, I do believe that there is a lot of potential therethe Khan Academy model of delivering educational content to villages and children in remote places, for example. You probably can leapfrog the brick-and-mortar education-provision model. The leapfrogging view that is laid out by some observers, which is that you dont need manufacturing, you just go directly into ITtheres absolutely no evidence in support of that. The current struggles that India has now are actually related to the lack of manufacturing. The only way for a country of that size to have broad-based economic growth, to have sustained income growth, is to do those things that the majority of your population can do. Its manufacturing; its not writing software codes. My worry about India is that if you just have IT, if you just have software, business-process operations, youre going to have an economy in which one part of the country, a very narrow slice of the country, does extremely well, leaving the vast majority behind in economic development and economic growth. Politically, I dont think thats a sustainable proposition. Economically, I think its very unhealthy to have the growth be so concentrated in just one or two areas and leaving the vast majority of the population behind.

Yasheng Huang is the International Program Professor in Chinese Economy and Business and a professor of global economics and management at the Massachusetts Institute of Technologys Sloan School of Management. He founded and heads the schools China Lab and India Lab, which assist entrepreneurs in areas of management. Copyright 2013 McKinsey & Company. All rights reserved.