By Manjeet Kripalani July 1, 2001, was an extraordinary day for India. On that Sunday, Indians woke up to the news that J. Jayalalithaa, a former actress and new Chief Minister of the southern state of Tamil Nadu, had engineered the midnight arrest of her political rivals, including two ranking Cabinet Ministers of the federal government.
Later that morning, in the neighboring state of Andhra Pradesh, Chief Minister Chandrababu Naidu lit a ceremonial lamp in the courtyard of the new 250-acre Indian School of Business, still under construction in Hyderabad. An eager group of 130 students, execs, and local celebrities looked on, as well as representatives from the school's chief promoters, consulting firm McKinsey & Co., the Kellogg School at Northwestern University, and the Wharton School at the University of Pennsylvania.
MIDNIGHT ARRESTS. The contrast between the hope and despair of India could not have been more stark. One scene featured a country of immature politics and irrational machinations. Television screens across India repeatedly flashed the images of the vendetta in Tamil Nadu: Ministers being dragged rudely from their beds at midnight, manhandled by police officers, and thrown in jail. India, an ancient, high civilization, seemed no better than a banana republic.
The other scene featured a community of smart professionals focused on growing economic global integration. The contrast didn't go unnoticed in the courtyard of India's hopeful new institution, rising grandly from the rocky plateau that is Hyderabad.
Businessmen and politicians privately worried that the Tamil Nadu drama would once again make investors think twice about the subcontinent. After all, foreign investors shun instability. The further desecration of public office, many feared, could set a dangerous precedent in other Indian states. But when Minister Naidu declared, "I hope ISB students will go out and conquer the world," the audience applauded loudly.
VANISHING GAINS. Make no mistake: Indians truly want to triumph in the New Economy. They want to overcome their poverty, their entrenched political problems, their image to the outside world is a nation that can never quite pull itself out of the ranks of developing nations.
Each time the country moves forward a step, however, its democratic adolescence sets it back two.
The arrests in Tamil Nadu were significant for many reasons. This is considered a premier state in southern India, a region where per-capita income and investment levels are above national norms. In the last few years, much of India's foreign investment has been attracted to calm and educated south India, far from the bewildering lawlessness of over-populated northern states like Bihar and Uttar Pradesh. The country's shining technology revolution began in south India.
NEW DELHI STEPS IN. Most importantly, the country's fledgling federalism has actually flourished in South India. When the country liberalized its economy in 1991 after 40 years of socialism, the central government began to lose its tight control over the states, which wanted to decide their own destiny. National parties like the Congress, which had ruled India for nearly 50 years, splintered into independent regional players. Tamil Nadu's Jayalalithaa is one such regional player. So is Hyderabad's Chandrababu Naidu. His Telegu Desam Party is the largest regional party and a key ally of India's ruling coalition, which is led by the Bharatiya Janata Party.
Federalism's strength, however, still depends on a strong union. And the arrests of two federal Ministers has disturbed the essence of that union and halted the momentum of the federal movement, says Monu Nalapat, professor of geopolitics at Manipal Academy of Higher Education in Karnataka, another southern state.
Indian Prime Minister Atal Bihari Vajpayee acted fast. Two days after the arrests, New Delhi issued orders that the Ministers be released. Now there are cries for Tamil Nadu to be declared a state under "President's rule," an emergency condition imposed when the Indian Constitution is flouted, and for Chief Minister Jayalalithaa to be removed.
"KNOWLEDGE CAPITAL." Whatever happens next, Indians -- and foreign investors -- likely won't forget this incident soon. Hyderabad's Naidu sees a silver lining -- investment meant for Tamil Nadu could now come to his state instead. He's ready for it: On July 1, Emirates, the largest West Asian airline, began operating daily direct flights from Hyderabad to Dubai, and from there on to the rest of the world. Naidu wants more institutions to set up shop in Hyderabad and the surrounding region so that he can make his state "the knowledge capital of India."
Naidu's brand of federalism is what India needs. Perhaps the new knowledge base taking root in Hyderabad will eventually spread to its southern neighbor Tamil Nadu -- and then to the rest of India. Reflecting that mood, Sumantra Ghosal, London Business School management guru and ISB founding dean, sounded the call for a new leadership model for India: "Not the practice, but the value of leadership has to change. The Indian School of Business can drive that change." It was the most hopeful statement made in India that day. Kripalani is Bombay bureau chief for BusinessWeek