These Tech Oases Aren't Transforming India

World-class software companies are walled off from the rest of the country, and the government seems to like it that way

By Robert J. Dowling

We're in the business center of the Taj West End hotel in Bangalore, the Silicon Valley of India. Across the lobby, fund managers representing some $40 billion gather to get the latest on Indian information technology plays, courtesy of Goldman, Sachs & Co., which is hosting back-to-back conferences with America's Asia Society on India's bright high-tech future.

It's a beautiful day in mid-March. But all is not well in the IT capital. The phones aren't working, the laptops aren't connecting, and tempers are rising. Suddenly, the guy next to me starts flapping his arms like a wounded eagle. "No, no, no...arrah!" he shouts as his connection crashes. "You're better off going through Pakistan," he says. I think it's a joke until Madhu Kannan, who represents the New York Stock Exchange in Asia, pulls out his number for an Islamabad Internet exchange.


  Pakistan works, and India doesn't? What's going on here? Bangalore, along with emerging tech centers in Hyderabad and Pune, are India's star business attractions. The software talent and the best schools are there, and foreign money managers, even now, are beating the bushes for promising startups. The New Delhi government would like to make IT a mantra for national renewal. "IT isn't just about technology, it's a mass movement for making a new India," declares the government's Information Technology Minister, Pramod Mahajan, a rising political star who was previously the country's Information & Broadcasting Minister.

He talks about doubling the number of software engineers and using technology to modernize everything from manufacturing to agriculture. It's a sweeping vision. But truth is, it's mostly wrong. As with most things concerning tech today, the hype greatly outstrips the reality. India's tech business isn't really about benefiting India.

It's an export business that amounts to only about 1.5% of its economy. Reaching the government's goal of 10% or higher, where ordinary Indians could reap a real payoff, would take a political revolution that would require levels of foreign investment akin to what China has experienced. So far, that seems remote.


  India does have some world-class software companies that aspire to become powers in their own right. But to prosper, they've walled themselves up in gated campuses that could just as easily be in the Arizona desert as in the lush southern state of Karnataka. A hot, dusty cab ride to Bangalore's suburbs tells you why. There, software houses like Infosys and Wipro exist like lunar modules with their own power and communications, security, water, gyms, and wading pools. Infosys even sports a nine-hole golf course.

Here, high-tech India provides around-the-clock software services for many of America's largest companies, including Sun Microsystems, Oracle, Motorola, General Electric, and Nortel Networks. Their self-sufficiency and intense security --- they are, after all, working with information from archrivals -- mean the only thing they really depend on from the city are the eager graduates they can hire from the top technical universities, who until better housing is built nearby, shuttle back and forth to work in company-owned vans.

Oh, it's not a bad deal if you're a techie, and it's a very good deal for the companies, who pay for a software engineer in Bangalore about one-fifth what they might in California. But in terms of driving improvements for the region, outside of salaries and taxes, there's little payoff for the local economy.

That's because as proud as the government is of its tech stars, it has been woefully slow to improve the climate in which they live. Phone lines are owned by the state carrier, VSNL, an encrusted monopoly with no interest in improving service, and the electric power grid is a much worse version of California's failed system. Bankrupt state companies distribute electricity from plants that aren't up to current power needs, much less anything close to what the country would need if it drew in the level of foreign investment it aspires to. Worse, about 40% of what's already distributed is stolen by rural users, who simply strip electricity from main transmission lines.


  It doesn't have to be this way. Deregulating the phone monopoly fast might bring in any number of outside investors. But both state and national politicians would give up a lot of power. Freeing up electric rates would lure entrants to the industry, too. But that would mean cracking down on farmers, who get their electricity gratis and kick in healthy contributions to their local politicians, who protect them from a crackdown. "I don't mind if we move a little bit slowly, even if it takes two years," says S.M. Krishna, who, as chief executive of Karnataka, is the virtual mayor of India's Silicon Valley. He's nationally regarded as one of the nation's most progressive leaders. Besides IT, he now wants to make Bangalore a center for biotechnology as well. With an ample supply of smart graduates and a little venture capital, it could happen -- but probably not because of anything he does.

More likely, if India does move more boldly up the tech ladder, it may be only through islands of IT. So the next time you think of Bangalore, don't think of it as India's high-tech city. Instead, think of a bunch of floating private oases ringing a declining metropolis. It shouldn't have to be that way, but under the rules of Indian politics, a distant second best, even if you have star-quality attractions, seems to be not only acceptable -- but preferred.

Dowling is managing editor in charge of international coverage for BusinessWeek

Edited by Douglas Harbrecht

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