India is a stable democracy, but an undercurrent of religious and ethnic tension remains. Cities such as Bangalore and Hyderabad are bustling high-tech centres; but Mumbai, the financial and media centre, is a confusion of gridlock and slums. Foreign investment is desperately needed, especially to build the manufacturing sector, but India has been painfully slow in opening up many of its markets.
Over the past year alone, McKinsey has talked with leaders of more than 100 multinational corporations that are operating in India, preparing to do so, or wondering if they should. The following questions and answers, based on McKinsey's experience with government officials and businesses across the country, address some of the more common issues they raise.
Will economic reform continue?
The momentum behind reform is irreversible, for it is driven by a collective belief that India must have a strong economy to improve its standard of living to be taken seriously by the world, and to keep pace with neighbouring China. Both major political parties - Congress and the Bharatiya Janata Party (BJP) - are committed to the economic reforms begun in 1991, when Manmohan Singh, now the prime minister, was the finance minister. Despite the change of leaders in 1996 and again in 2004, India has moved unwaveringly in the direction of reform. As the benefits of strong growth are felt across the country, this political support will be sustained.
Still, India's political cacophony perplexes many multinational executives. The country is a stable but noisy democracy. All manner of political parties have their own media organs, and headlines magnifying the objections to reform scream from every newsstand. The acrimonious debate obscures an underlying consensus on the benefits of continued change.
Coalition politics has affected the pace of reform. After one year in power, the prime minister himself gave the government low marks for implementing the Common Minimum Program, a blueprint for change agreed upon by the coalition partners. Little has been done to cut the budget deficit (a burdensome 8 to 9 percent of GDP), to relieve the problems of India's poorest people, or to embark on new reform programs.
The Communist Party, whose support sustains the governing coalition, has blocked privatisation and efforts to relieve the special economic zones from the burden of restrictive labor laws. Much work remains if the government is to accelerate economic growth to 8 to 10 percent - the level needed to stave off increasing unemployment - from the current 7 percent, in three to five years.
The government should nonetheless receive credit for refusing to back away from the reform programmes already in motion, as some observers thought it would after the 2004 election. And some progress has been made, over the past year, in promoting foreign investment and establishing a value-added tax, among other things.
But the state governments, which hold considerable power in India's decentralised democracy, sometimes slow the pace of reform. Much of the country's mineral wealth, for example, remains undeveloped because of certain recalcitrant states. Meanwhile, those run by more progressive parties are free to undertake reforms and to solicit foreign investment more actively than their neighbours do. Karnataka, Maharashtra and West Bengal, for example, are blazing a trail for others to follow.
Next: Are the multinationals really welcome?
Adil S Zainulbhai is a director in McKinsey's Mumbai office. This commentary first appeared in India Abroad, the newspaper owned by rediff.com, courtesy McKinsey Quarterly.
