Monday, 11 May 1998. A quarter to four in the afternoon, in the Rajasthan desert.
The air is 43 degrees, and the wind is the deciding factor in when the devices can be fired. Ten days ago, around three in the morning on 1 May, four Army trucks carried the devices out of the Bhabha Atomic Research Centre. A coalition led by the BJP has been in office for under two months; it won its confidence vote on 28 March. At about 3.45 p.m. three devices go off at Pokhran. Two more will follow on Wednesday.
On the 13th the United States will impose sanctions: no American government credit guarantees, no American bank loans to the Government of India except for food, and opposition to loans from international lenders for anything but humanitarian purposes. Japan will freeze new grants and yen loans. The BBC will note that India owes about $44 billion, that it had budgeted about $6 billion of IMF and World Bank loans for the year, and that Moody’s says reform has stalled.
This chapter is about what India had by then, seven years into the long grind that followed 1991, and what it had not. It had a new set of rules, a new kind of company, and a bottle. It did not yet have a factory floor.
1993New DelhiOn 27 February 1993 the finance minister, Manmohan Singh, rose in the Lok Sabha to report that two years of repair were working. Inflation had come down from a peak of 17 percent to below 7. The fiscal deficit had fallen from 8.4 to about 5 percent of GDP. Growth had been 1.2 percent in 1991–92 and was heading for about 4.
The budget abolished the dual exchange rate. It taxed foreign institutional investors at 20 percent on income and 10 on long-term gains. And it extended the five-year tax holiday of the free trade zones to Software Technology Parks and Electronic Hardware Technology Parks. It also gave the existing 100 percent deduction on software export income one more year.
That last item did not make headlines. Singh also reported that foreign-equity approvals since August 1991 totalled $2.3 billion, and noted that approvals were not arrivals. The arrivals were small. Net foreign direct investment into India was $0.28 billion in 1992 and $0.55 billion in 1993; into China it was $11.2 billion and $27.5 billion. A country that foreign factory-builders were not yet entering had written a tax holiday for something that needed no factory.
Two weeks later the reform had a different test. On Friday 12 March 1993, between 1.30 and 3.40 in the afternoon, thirteen bombs went off across Bombay, the first at the Bombay Stock Exchange. 257 people died and 1,400 were hurt. The BBC’s account calls them revenge for the riots that followed the demolition of the Babri mosque at Ayodhya, and says Dawood Ibrahim’s network, grown from the gold-smuggling trade long dominant in Bombay, was widely seen as behind them.
The Software Technology Parks were a late step on a road that began with one decision in the first weeks of Rajiv Gandhi’s government. On 19 November 1984 he announced a New Computer Policy. Import duties on computer peripherals came down, foreign equity in information-technology companies was allowed, restrictions on importing computers were loosened, and software companies were recognised as a separate industry. William Aspray, the historian of the industry, puts the cuts at 135 to 60 percent on hardware and 100 to 60 on software.
The first passenger of the lift was already in place. Infosys was incorporated in Pune on 2 July 1981 by seven engineers, among them N. R. Narayana Murthy and Nandan Nilekani, and moved to Bangalore in 1983.
In 1985 Texas Instruments began operating in Bangalore. It describes itself as the first multinational to set up a software design centre in India and the first to install and use a satellite dish to export software. Aspray puts the first operational satellite link in 1986, a year later than TI’s own date. The book gives both. A page of Wikipedia, which cites no source for this, adds that TI first approached Maharashtra and Tamil Nadu, that both refused, and that Karnataka then offered land near the HAL airport.
The policy was not a one-way street. By the late 1980s, with foreign currency short, duties on software went back up to 110 percent. And a private firm could not simply build its own dish. Private links were not allowed at first, so the government supplied links to firms inside official software parks; private links came only after 1991.
That is the point of the parks. In 1985 a dish on a roof in Bangalore was a favour from the state before it was a technology, and by 1993 the state had put a tax holiday on top of it. A firm that sold code abroad needed neither a factory licence nor an exemption from the reserved list. A factory owner needed both, and the 1991 policy that freed industry from most licences had left the small-scale reservations in place.
None of it began from nothing. The prologue tells how IBM, in India since 1951, shut its Indian operations in June 1978 rather than dilute its core arm. The lines that matter here are two. On 26 December 1975 the state incorporated its own Computer Maintenance Corporation. And when IBM left, that corporation took over maintenance of IBM installations at more than 800 locations. IBM came back in February 1992, as Tata Information Systems, and the state company was its first customer on return.
The prologue leaves open whether the exit helped Indian computing or cost it a generation of access, and so does this chapter.
On Sunday 24 October 1993 Coca-Cola came back to India. It chose Agra, beside the Taj Mahal, for the relaunch, almost sixteen years after leaving. It paid $40 million for the soft-drink brands and bottling plants of the Parle company, Thums Up among them.
The government had approved the return in June, and a monopolies inquiry followed complaints about the deal. Pepsi held about 25 percent of the market and Parle about 60. The launch came three days after the company told the world it expected China to be one of its fastest-growing new markets.
Chain X221977 → 1993The bottle returns, and buys the local champion19472026The prologue left a bottle of Thums Up on a desk. This is where it returns. In 1993 the foreign giant did not compete with the local winner. It bought it. The book holds back what that means until the end.
1994New DelhiThe 1994 budget, on 28 February, cut the import duty on application software from 85 percent to 20, and the duty on optical fibre from 85 to 40. The cut fed the one sector that needed no factory licence.
The country’s telecom opening of the same year went the other way, and A Phone at Sea follows it.
The public Internet arrived later still, and from a state monopoly. On 14 August 1995, the day before Independence Day, Videsh Sanchar Nigam Limited launched its first full public service from Bombay, Delhi, Calcutta and Madras, over several 64 kbps links to MCI in the United States. A shell account cost $160 for 250 hours. The software exporters did not wait for that. They ran on the parks.
1995New DelhiBy March 1995 Singh could list a recovery. Growth had been 4.3 percent a year for two years after the trough and was 5.3 percent in 1994–95. Industry grew 8.7 percent in April–November 1994. Inflation, he admitted, was rising again.
For small-scale industry he said it employed 14 million people and made 40 percent of manufacturing output and 35 percent of exports. His answer was credit: a Rs 200 crore modernisation fund at the small-industries bank, equity for tiny units outside the metros, and a hundred dedicated bank branches in 85 districts. The state’s idea of help for the small firm was to lend it money. It was not to remove the reservations that kept others out of the same trades.
Net foreign direct investment that year was $2.1 billion in India and $35.8 billion in China.
1996New DelhiIn May 1996 a general election returned a parliament in which no party could govern alone. A United Front of regional and national parties under H. D. Deve Gowda formed a government from a Common Minimum Programme released on 4 June. Ashutosh Varshney found that only 19 percent of voters had heard of the reforms. Its finance minister, P. Chidambaram, was the first from an avowed regional party. In his first budget, on 22 July, he promised to remove controls on agriculture and industry, keep the economy open and strengthen the central bank and the securities regulator. By early 1997 the government had set up a Disinvestment Commission, with 40 public firms referred to it, and a Tariff Commission.
It is the most hopeful result of the period for anyone who worries that reform needs a strong hand. A coalition of parties that had never run the Centre kept it going. What such a coalition could deliver was limited to what every partner would accept.
1997New DelhiOn 28 February 1997 Chidambaram presented his budget. He cut personal income-tax rates from 15, 30 and 40 percent to 10, 20 and 30, the domestic corporate rate to 35 percent and the peak customs duty from 50 to 40. He promised tariffs at the ASEAN average by 2000, allowed companies to raise the limit on holdings by foreign institutional investors and non-resident Indians from 24 to 30 percent, and said the Foreign Exchange Regulation Act would give way to a new law.
He took a first step on the reserved list for small industry, too: 14 items came off it. That left 822 reserved. He said he had kept all but one of more than forty promises from July, the exception being an expenditure-reform commission:
I wanted an A team and I was not content with a B team.
Rs 4,205 crore was set aside for the Fifth Pay Commission. The budgeted fiscal deficit was 4.5 percent of GDP. It would end the year at 6.1 percent, after the pay award, and growth would slow to 5.0 percent from 7.8.
In the second half of the year the Asian crisis reached the rupee. It had moved between Rs 34.24 and Rs 35.87 to the dollar through 1996–97. Under pressure from late August and again from November, it touched Rs 40.36 on 16 January 1998 and ended March 9.1 percent weaker. The Survey stressed India’s fundamentals: a current-account deficit averaging 1.1 percent of GDP and short-term debt of 7.3 percent of the total. India did not have a currency collapse.
1998New DelhiThe Pokhran sanctions landed on this economy. Finance Minister Yashwant Sinha’s budget of 1 June, the first of the new government, called May a defining moment, said swadeshi did not mean isolation, and admitted that growth had slowed to 5 percent, farm output had fallen, industry had grown 4.2 percent and the fiscal deficit had reached 6.1 percent of GDP.
Industrialists, the BBC reported, pointed across the border: foreign investment had kept flowing into China after 1989, when Western governments also imposed sanctions. Short-term debt had been only 7.3 percent of the total at March 1997, which left the country some room to take the blow.
The government’s answer to the sanctions was to ask the diaspora. A Resurgent India Bond for non-resident Indians was open from 5 to 24 August, twenty days, and raised $4.2 billion. Reserves rose from $26.0 billion in March 1998 to $27.4 billion by January 1999, even though foreign direct investment fell 38 percent in April–December. The same budget set a ten-year aim of making India a global information-technology power, with a National IT Task Force, and it began the 13,000-kilometre National Integrated Highway Project that included the Golden Quadrilateral, partly paid for by a levy of one rupee on every litre of petrol.
And the sector the budget was reaching for was already growing faster than the economy by a long way. Software industry growth ran above 50 percent a year compounded over five years; in 1998–99 turnover was about $4 billion and exports about $2.6 billion. Software exports had grown nearly 60 percent in 1997–98 alone. Earnings that the balance of payments lists as miscellaneous invisibles, software among them, had gone from $1.4 billion in 1992–93 to $4.0 billion in 1997–98. The following year’s budget let firms treat Y2K remediation as ordinary revenue expenditure. A sector was growing without needing a factory floor, a land acquisition or a licence. That was the lift.
Set the lift beside the rest of the building, using the state’s own tables and the World Bank’s. The $2.6 billion of software exports was about eight percent of India’s $33.4 billion of merchandise exports in 1998. China’s merchandise exports that year were $183.7 billion.
Manufacturing fell from 17.9 percent of India’s GDP in 1995 to 15.7 in 1998. By 1997–98 the country had 3.01 million small-scale factories employing 16.7 million people, up from 2.08 million units and 13.0 million jobs in 1991–92. In cloth, the same story ran in miniature. Composite mills made 7.9 percent of India’s fabric in 1994–95 and 5.0 percent in 1998–99, while powerlooms went from 69.0 to 74.7 percent. The industry that Asia’s other climbers had used to learn scale was still being made in small units. Six items of farm machinery, three leather items and electronic toys came off the reserved list that year, and the Survey said in print that the Industrial Disputes Act restricted labour flexibility and discouraged employment.
The step the lift skipped was a factory that could grow. The other chapters of this part tell what it cost. In 1998 the state itself drew the comparison. The Economic Survey printed the Planning Commission’s poverty ratio, down from 54.9 percent in 1973–74 to 36.0 in 1993–94, beside a table in which China’s fell from 59.5 percent in 1975 to 22.2 in 1995. Over 1980–95 China’s GDP had grown 11.1 percent a year and India’s 5.6, and the Survey concluded that the faster the growth, the faster poverty fell.
The lift did not stop at the end of the 1990s. By 2003–04 software was 48.9 percent of India’s services exports, up from 10.2 percent in 1995–96.
In 2009 one of the passengers came back down. Nandan Nilekani, a co-founder of Infosys, left the company to head the new Unique Identification Authority with cabinet rank. What he built there, an identity number that private firms and banks could build on, is told in A Second Thumbprint.
By fiscal 2025, Nasscom estimated, India’s technology industry earned about $224.4 billion in export revenue, and its workforce of 5.8 million served exports and the home market. That is the one working Indian in a hundred that A Staircase counted.
A Staircase called the lift a real miracle and a narrow one. This chapter has shown where both halves were set. The people it lifted were few, and they did not need the staircase. What they had was a dish, a holiday on tax, and an anchor tenant from abroad.
The sanctions that followed Pokhran were partly lifted in November and December 1998. The dish of 1985 had been followed by a park, a holiday and a boom. The factory floor had not followed it.
Across the border, China met the same Asian crisis with merchandise exports more than five times India’s, and Beijing’s answer to it was not a bond for the diaspora. The next chapter follows that answer.