India rising: Can a giant democracy become an economic colossus?

The sleek blue-glass building of the Infosys corporation sits like an intruding spaceship amid the unpaved side streets and half-completed residential structures that surround it. Its giant porthole windows offer a peek into a Jetsons-esque world of workers gliding between floors on elevated moving sidewalks.

For now, 19-year-old Nishank Nachappaa toils in the shadows of Infosys and the other high-tech companies that, like him, call the Electronic City section of Bangalore home. The high school graduate helps out at two dormitories for tech workers – one for young men, the other for young women – that his parents manage. His father maintains the buildings and his mother prepares meals for the 120 male and 30 female residents.

Walk a block or two from the dorms and other corporate structures loom with multinational names such as Emerson and Yokogawa, Altametrics and Hewlett Packard.

The company logos offer a hint as to why Bangalore is known as India’s answer to Silicon Valley. Yet despite the high-tech cornucopia, it is still Infosys that Mr. Nachappaa aspires to work for in the future. Perhaps that’s because it is the building the entering college freshman, who will major in computer applications, sees every day as he completes his mundane summer chores cleaning and fetching water. Or maybe it’s those big round windows that offer a glimpse into another world.

“I dream of maybe working for Infosys someday,” says Mr. Nachappaa, shooing away the stray dogs that also call his street home. “It just seems like the future in there, from what I can see. It looks like a good future for me. I think it’s the kind of future many Indians want for our country.”

The dreams that Mr. Nachappaa lays out mirror in many ways the aspirations of a country that senses it is ready to vault forward in the world economy. Fueled in part by the global aspirations of the nation’s charismatic prime minister, Narendra Modi, and by an increasingly educated and middle-class population of youth, India stands on the threshold of a breakout.

The country has addressed much of the abject destitution that vast numbers of Indians lived in 25 years ago. As a result, it appears ready to join not just China but also South Korea, Indonesia, Vietnam, and other Asian neighbors that have either made the leap to middle-income prosperity or are well on their way. Along with its world-class space program, assertive foreign policy, and global cultural presence, India is trying to leverage its economic clout and privileged relationship with the United States into a more prominent role among world powers.

And yet, the country that will soon be the planet’s most populous – India is on track to surpass China in 2027– and is perhaps the world’s most culturally and linguistically diverse, also faces a number of key challenges that could yet stifle its rise. Among them: a huge, underproductive rural population and economically inactive female population; a heavy state footprint in the economy that discourages private enterprise and foreign investment; rising political divides and religious tensions; and a lingering post-independence mindset of reliance on the state.

It’s a daunting list – one that echoes the period, more than a decade ago, when a first wave of “India’s time has come” declarations coursed through the country.

“Countries that have all kinds of potential and show great promise sometimes get stuck,” says Suyash Rai, a fellow at Carnegie India, a branch of the Carnegie Endowment for International Peace, in New Delhi. “India has a lot of advantages, but it also has some deep structural reforms and basic shifts in thinking to make.” 

Unless the challenges are addressed, analysts say, they could stymie the aspirations of one-seventh of the world’s population. “We face some crucial decisions that our leadership and Indians in general are going to have to make,” says Nitin Pai, director and co-founder of the Takshashila Institution, a Bangalore think tank. “We could continue on our current trajectory of about 6% annual growth and modest job gains, and that would allow us to continue moving some people out of poverty and would be a respectable performance. But it won’t be adequate for fulfilling India’s dreams of national prosperity and international prominence.”

India hopes to capitalize on tensions between other nations. Most notable is the continuing fallout from the U.S.-China trade war, which experts here see stretching over the coming decade, no matter who occupies the White House. They envision the repercussions of U.S.-China tensions resulting in a further shift of China’s low-wage and high-tech manufacturing jobs to other countries.

The diesel engine-maker Cummins is just one example of a U.S. company that this year has shifted some manufacturing from China to India to avoid President Donald Trump’s tariffs on Chinese goods. In Bangalore, people also point to a new Apple plant assembling iPhones for the Indian market, reportedly replacing work previously done in China. India could benefit, too, from the desire of other Asian countries, such as Japan and South Korea, to diversify their trade and investment portfolios away from Beijing.

India largely missed out on the first wave of jobs that left China over the past decade. Countries such as Vietnam and Bangladesh captured most of those low-wage positions. Now, if the nation wants to create anything like a new Indian century, it will have to embrace fundamental economic reforms – and far-reaching cultural changes. 

Rural-to-urban shift

In many ways, Mr. Nachappaa and his family embody the kind of social and economic transitions the country will have to make to achieve global prosperity. 

Until a few years ago Ranama Mandanna, Mr. Nachappaa’s father, grew spices and peppers on the family’s three-acre farm in Coorg, a lush, tropical region of Karnataka state. Despite the appeal of rural life, however, Mr. Mandanna realized he could never get ahead working the small family plot, and he wanted a better future for his two sons. So he took a job managing the dormitories in Bangalore – a move that allowed his wife, Asha, to enter the workforce as his partner. 

“I miss the work in the fields; it’s a very nice place,” Mr. Mandanna says with a whiff of nostalgia for the family farm. “But we have a nice life here,” he says, gesturing around the tidy apartment his family occupies on the ground floor of the young women’s dormitory they manage. 

Over a lunch of aromatic rice and a masala omelet, Mr. Nachappaa reminds his father of the employment crisis gripping rural India and the difficulty of making money there. It brings a nod of acknowledgment. “It’s true our sons can now work for a better future than if we’d stayed on the farm,” says Mr. Mandanna, smiling proudly at his college-bound son.

The rural-to-urban shift the family has undertaken is something India will have to do on a massive scale. Of the country’s 1.3 billion people, more than 700 million are farmers or family members dependent on one farmer’s income. And with most of those farmers producing very little, rural incomes remain meager. 

Many farmers already have to leave home part of the year to survive and keep their children in school: Cities such as New Delhi, Mumbai, Chennai, and Bangalore are full of day laborers who come in from rural India to augment modest incomes. 

Experts note that China moved about 400 million people out of agriculture to urban jobs in its march to prosperity, and they say India will have to do something similar. That will mean difficult land-use reforms and changes to a system of agricultural subsidies that has allowed millions of farmers to cling to low-earning, low-productivity farms.

But even that won’t be enough. India will also have to build a modern agricultural sector. Currently it takes about 400 Indian farmers to produce the equivalent of what one American farmer does. 

“No country has grown its way from poverty to prosperity without growth and productivity in the agricultural sector first,” says Avinash Kishore, a research fellow at the International Food Policy Research Institute in New Delhi. Mr. Kishore points out that China followed the same pattern – “Deng [Xiaoping] de-collectivized China’s agriculture” beginning in 1978, “and the boom followed from there.”

Not far behind in importance is boosting female participation in India’s workforce. With fewer than one-fifth of working-age women in jobs, India stands near the bottom in rankings of female employment – with only Muslim countries faring worse. And despite growing awareness of the role women play in economic development, female participation in India’s economy has continued to decline in recent years.  

As Asha Mandanna, Mr. Nachappaa’s mother, chops big bowls of cabbage for her household’s dinner – enough for her family and her 150 tech-work boarders – the idea that she is in the vanguard of a leap in female workforce participation may not be uppermost in her mind. But her shift from a stay-at-home mother on a farm to full contributor to the family income is emblematic of the kind of transition millions of Indian women will have to undergo.

Surrounded as she is by high-tech workers, Ms. Mandanna is certainly well aware of the importance of technology to the future of India and her family. She is the one who nudged her son to study electronics in college. “It’s true, nowadays computers do everything,” Ms. Mandanna calls out from the kitchen. Moving closer to the doorway to the tile-floored dining area, she adds with a smile, “That’s why I chose it for him.” 

To make its leap, India will have to create 20 million jobs a year, Mr. Pai estimates. And to even approach that goal, it needs to embark on a series of reforms to modernize labor laws, privatize moribund state enterprises, and revamp a defective judicial system. “If you commit a crime at 40, chances are good you’ll die before your case is adjudicated,” says Carnegie’s Mr. Rai, lamenting India’s famously inefficient courts. The same goes for the legal system overseeing business transactions, which hinders investment and stunts job growth.

Then there are the lingering pieces of a postcolonial socialist economic system that have kept the government deeply involved in various industrial sectors and propping up inefficient state-run enterprises.

“The government makes soap. Soap!” notes Mr. Pai, rolling his eyes skyward and shaking his head. “We’re in a situation where many Indians live in the 21st, even the 22nd century, while the government is back in the Middle Ages. That has to change.” 

Mr. Modi, reconfirmed at the helm of the world’s most populous democracy in national elections in May, has talked of emulating the Asian Tigers. In 2014, he instituted a Make in India program – with a lion as its emblem – that had the goal of creating 100 million new manufacturing jobs by 2022. But the program has gone almost nowhere, experts say, hobbled by an unreformed state and a lack of boldness in execution.

Enter the entrepreneurs

Yet, for all its problems, India does have a rising entrepreneurial class. This is evident inside an incubator in a sleek multistory building in Bangalore’s Diamond District.

Part of a program called Nasscom 10,000 Startups, it is one of 10 state-funded incubators started across India in 2013 with the goal of creating 10,000 companies by 2023. The initiative here is a hive of activity focused on software innovation. 

At rows of desks stretching out over a large open floor, young people huddle in teams around computer screens. They’re fine-tuning business plans, adapting ideas to new clients, and perhaps dreaming of breaking out as India’s latest unicorn (a privately held company valued at more than $1 billion). India is currently third on the global list of unicorns, behind the U.S. and China. 

“Our aim is to give Indians more of a profile across the globe, so that India is no longer the back office” – that is, focused on call centers and other lower-level administrative services – “but moves up to the front,” says Saravanan Sundramurthy, who heads up the Nasscom incubator here in Karnataka state. “We’re very much about creating new companies, but at another level we want to help provide all the building blocks to get the country to the next level.”

That entails everything from creating educational curricula that respond to employer needs to easing obstacles to foreign investment. Driving many of the entrepreneurs on Nasscom’s vast floor is a sense that India’s time as a global player has come.

“India is where it’s happening,” says Rohit Sen, chief executive officer and co-founder of Nira, a digital lending startup. The company offers a mobile app that provides small cash loans – as little as $90 – for everything from emergency home repairs to school costs to the all-important Indian wedding. Nira is aimed at the 90% of urban Indians whose working-class wages leave them without access to conventional banking services.

“This is the Asian century,” Mr. Sen says, “and India is going to be part of that.”

Nearby, two women are also contributing to what they hope will be a “new India.” They’ve developed an artificial intelligence program, Headway.ai, that helps companies match employees’ skills with new or evolving jobs. It also helps workers who want to transition to new careers. “I might be a techie today, but maybe my talents match my dream of becoming a chef tomorrow,” says Sujata Mukhopadhyay, co-founder of the company, which has clients in India, Asia, the Middle East, and the U.S.

A few tables away sits the team behind Flutura, an artificial intelligence application that helps oil and gas firms automate operations. Another group has created Opentalk, a WhatsApp-modeled platform for live audio conversations among people around the world. A kind of techy ham radio, it had 1 million users in 100 countries last year. Many of those discussions were between people in India and rival Pakistan, which in recent months have been ominously feuding again over the disputed territory of Kashmir.

“Our idea is that if the world is open to talk between people from different countries and cultures, it will be a much better place to live in,” says Sumit Jain, the company’s co-founder and chief executive officer.

Still, despite the unbridled enthusiasm in the building here, India’s raft of innovative startups is not likely to contribute in a major way to transforming the economy over the next decade.

“Information technology looks like a big story and it tends to suck up all the attention. But IT is not what’s going to give good jobs and better lives to the tens of millions of not-so-well-educated Indians currently in the unorganized sectors of the rural economy,” says Carnegie India’s Mr. Rai. Noting that agriculture still employs almost half of the country’s workforce while producing only 14% of gross domestic product, he adds, “the [rural-to-urban] transition is very necessary – but it’s not going to be easy.”

“No national model to follow”

India could be called the Ginger Rogers of Asia. Just as Rogers was famously described as doing everything her dancing partner Fred Astaire did – only in high heels and backward – India is seeking to follow the lead of the Asian Tigers that have emerged from poverty to prosperity, only while being the world’s largest and arguably most linguistically, culturally, and religiously diverse democracy.

As Indians debate the steps their country must take to make the leap to success, the question often arises: Can the world’s most complex democracy do what other Asian countries did under authoritarian regimes?

“People often compare a democratic, diverse India to the United States, but it is really more like the European Union, when you look at the cultural and linguistic and religious diversity. So there really is no national model to follow,” says Milan Vaishnav, director of the South Asia program at the Carnegie Endowment for International Peace in Washington.

Coping with all that diversity means India’s transition to becoming a major economic power will probably be slower than some of its neighbors. It also means that India’s prosperity will likely have to be achieved with greater buy-in from its people.

“In a democracy like India, it’s difficult to do the big-bang reforms that are going to be necessary without the impetus of an economic crisis; it takes more time than under a system where a central authority can order things done,” says Dhruva Jaishankar, foreign policy fellow at the Brookings Institution’s India center in New Delhi. “The upside is that when big decisions are made it tends to be with broad consensus, and that means more stability over time. It’s a strength of democracy.”

Mr. Rai puts it a different way. “It would be very difficult to do a Three Gorges Dam in India,” he says, referring to China’s controversial hydroelectric dam completed on the Yangtze River in 2008 that displaced more than 1.2 million people. “In a democracy you need some level of consensus and you might have to take the slow path, but you also slow down stupidity.”

The Indian preference for economic growth under democracy does not mean people have glossed over the country’s glaring inequalities. If anything, some say, a democratic system encourages greater exposure of the challenges that need to be overcome. Indeed, some worry that India’s tilt toward one-party rule by Mr. Modi’s Hindu nationalist Bharatiya Janata Party will mean less attention to India’s post-independence values of pluralism and respect for minority rights.

Ultimately, while India’s path to prosperity may not be swift or perfect, many believe that it will reflect greater innovative thinking and will be more inclusive because of democracy. 

“Without democracy, we would be yet another China, maybe richer at this point but without the freedom to celebrate our diversity and to claim equal status in ways that make this India,” says Ms. Mukhopadhyay of Headway. “If you look around,” she adds, sweeping a hand over the buzzing incubator warehouse she shares with a hundred other entrepreneurs, “what you see is the result of the freedom of thought and inquiry that democracy inculcates.”  

Back on the construction-filled side streets of Bangalore’s Electronic City, Mr. Nachappaa is not prone to quite so lofty musings about India. But as he climbs a mound of dirt in a vacant lot to get a better look at his giant neighbor Infosys, the aspiring computer engineer nevertheless makes a case for his and his country’s advancement. 

“People used to do whatever they were born into, like working your family farm in a place like Coorg,” he says. “But young Indians are more ambitious; they want to make their own way.

“My goal is to one day start my own company. If I can build something new and create a lot of jobs,” he adds, “I think it would be fulfilling for me – and it would be a good thing for my country.”