Magazine

India's Moment of Truth


Its response to the terrorist attacks will have a huge effect on its economic future

Of the 200-odd past columns posted on our Web site, few elicit more comments than "Who Will Rule the 21st Century?"—a piece we wrote in 2007 that predicted continued U.S. economic leadership, with India and China coming into parity in a matter of decades. As for which country would offer better chances for investors, we essentially took a pass, saying that the answer hinged on how well India and China capitalized on their huge advantages and handled their complex challenges.

Since that column appeared, a week hasn't gone by without at least a dozen questions continuing to press the matter. Readers often ask where foreign direct investors should place their bets: China, India, or if both, in what measure? Usually, we just set these questions aside. There wasn't much more, we reasoned, that we could say.

Sadly, with the terrorist attacks in Mumbai this week, there now is.

We love India. Its people have insights, creativity, and positive energy to spare; its entrepreneurs possess a rare indomitable spirit. Over the past 20 years, India has proven it can educate managers and front-line workers alike. And while it has struggled with road and energy infrastructure improvements, it has managed to muddle through with real progress.

But today, India is being tested as never before. And in the coming months the world, and in particular the global business community, will be watching for the answer to a crucial question: whether India can overcome its greatest obstacles to advancement, which include both terrorism and India itself.

Look, like too many countries today, India is no stranger to terrorist violence. Its parliament building was infiltrated and a dozen slain in 2001, and countless other attacks have occurred in Delhi, Jaipur, and Assam, leaving thousands dead. Even Mumbai has been struck before; seven synchronized train bombings in 2006 killed 186. Some of these attacks were conducted by homegrown groups. But the country is embroiled in a long-standing conflict with Pakistan (and, as a result, Afghanistan), and no one disputes that many of India's terror incidents have been perpetrated by outsiders.

None of this is news to India's foreign direct investors. What will be news in the months ahead is how the government responds. Because the attack in Mumbai, striking as it did at India's financial heart, showed just how risky doing business in India may become.

If other countries serve as any indication, India's future remains bright. September 11 revealed severe weaknesses in America's homeland security apparatus, just as the Mumbai attacks did with India's, and yet the U.S. swiftly organized a multipronged response. Similarly, Spain and Britain bounced back from brutal attacks in 2004 and 2005, respectively. Their governments redoubled anti-terrorism measures, and their people rallied.

Expect Indians to rally, too. They'll find the will to fight back, but can India's government provide a way? The changes required in homeland security will be massive. The country, for instance, is reported to have only 3,500 intelligence agents for 1.1 billion people. Compare that with the U.S., where the FBI employs 12,000 agents for 300 million residents. Perhaps more daunting is the challenge for India—with 22 official languages, dozens of political parties, and a Byzantine and often corrupt bureaucracy—to make the changes it needs with due speed. The country is led by an honorable man, Prime Minister Manmohan Singh, but his toughness is an issue, and with elections approaching, the opportunities for political mischief will be many.

With such a mixed picture, all foreign companies can do right now is boost security for their people—and wait. Meanwhile, many investors will be thinking about tilting the balance to China. That's understandable. Despite persistent worker protests, the Olympics this summer left little doubt of the country's ability to manage itself.

But China isn't really India's biggest economic challenge right now. India is. How its leaders respond to the Mumbai attacks will tell the business world what it wants and needs to know. Not just whether to pull back from India but how risky pushing forward will be.

Business Exchange related topics:

Indian Economy

Business and Terrorism

Emerging Markets

Jack and Suzy Welch look forward to your questions. You can e-mail them and view their new website at www.welchway.com For their podcast, go to www.businessweek.com/search/podcasting.htm.

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