This paper contains the substance of remarks delivered by Mr. Everett at the Harvard Asia Business Conference on January 29, 2000. Mr. Everett notes that India’s vast human capital has been stifled by its quasi-socialist bureaucracy, leading to stagnant growth in India’s recent history. However, with the advent of the Internet and the increasing flow of information, the Indian bureaucracy will no longer be able to stifle new businesses based on information and knowledge.

Jonathan J. Everett is a principal of the VIEW Group (VIEW is an acronym for Venture Investors in the Emerging World) and has responsibility for the strategic direction and general management of the firm. The VIEW Group is a venture capital firm that focuses its efforts solely on India with offices in Boston and New Delhi. Prior to joining the VIEW Group, Mr. Everett was a partner at the law firm of Skadden, Arps, Slate, Meagher & Flom. He received a B.A. in history from the University of Chicago and an M.A. in history from Harvard. He spent a year studying at Christ Church, Oxford as a Knox Fellow, and his legal education was at Harvard Law School. He can be contacted by e-mail at This e-mail address is being protected from spam bots, you need JavaScript enabled to view it .

Roughly five years ago, I gave up practicing law, which I had been doing for seventeen years, and decided to make a career of investing in India. I wanted to have fun, make money, and do some good for India, in that order. The results so far are a little unclear. I definitely am having fun; I won’t know if I am making money until some of our investments mature; and if I make money, I will do some good for India, because I will help create well-paying and productive jobs, which India needs perhaps more than anything else.

I sometimes wonder what made me think that investing in India would be a good thing to do? Why is India as a destination for venture capital attractive or not attractive? Why did I choose to stake my professional future on India? And what are the prospects for economic growth in India? Below are thoughts on my personal perspective of that issue.

My perspective on India and investing is not all positive, but it is an effort to tell the truth as I see it. Many of the less positive aspects concern the role of the Indian government and its proper role in the development of technology companies in India. That's why I have subtitled my paper, "What’s a nice government to do?" To those in the audience who are part of that government, I extend my apologies in advance for anything unpleasant they read below.

I first went to India in 1994 to work on a project to build a large electric power generating station. The project is sponsored by Enron and is the largest foreign investment in India’s history. In India, I was astonished by the opportunities I saw. It seemed that there were dozens of products and businesses that simply were not available or were available only in sub-standard form, which could be profitably supplied. I also saw enormous human resources that were not being used to their full potential. I still believe that is the case, but I see now much more clearly than I did then some of the problems that exist. First, I have learned that many good products cannot be marketed profitably in India because the number of people who can afford them is too small. I tend now to focus less on Indian markets and more on the human resources India has to offer the rest of the world that have more value outside India then they do in India. I also have had some experiences dealing with various arms of the Indian government that have been less than edifying.

In preparing for this paper, I tried to distill my thoughts and experiences about India and its prospects as a destination for venture capital and its prospects for economic growth in the near term. I came up with three rather simple points. India has one great strength, one great weakness, and one great hope. Its great strength is its people; its great weakness is its government; its great hope is the Internet.

First, India's great strength is its people. India has one billion of them, which is a number that is almost beyond the ability of our minds to conceive. The quantity and quality of the human resources of India are, in my view, at least as good as those anywhere in the world. And vast numbers of them speak English, which is a great advantage in the world's markets. The quality of the human resources available in India may seem obvious to those in this room, but let me take a two-minute tour of Indian history to illustrate this just a bit. Four thousand five hundred years ago, the Indus valley was one of only four places in the world—the other three being Mesopotamia, China and Egypt—where there was what we consider civilization, complete with plumbing superior to that of many Indian villages today, sophisticated mathematical knowledge, and active trade relations with the other centers. For centuries beginning roughly 600 B.C., India was the mother lode of philosophical and mathematical thought for many other peoples. To take some examples, its philosophical and religious tradition informed the teachings of Buddha. Buddhism, of course, became the most influential philosophic and religious tradition of Asia. The system of numbering we use today came from India, although we call it "Arabic" because it came to Renaissance Italy via the Arabs of North Africa. It includes the crucial concept of a space holder—in other words, zero. This concept allows vastly more complex and useful calculations to be performed than could be performed with the Roman numbering system used in Europe previously. In the centuries after its introduction, it revolutionized European science and ultimately led to, among other things, the base-2 system that is the foundation of the digital computer.

In our more immediate history, the twentieth century has been a century full of revolutions and revolutionaries. Arguably the greatest of them were Gandhi, Nehru, Patel, Ambedkar and their colleagues. These leaders not only freed India from foreign oppression, they also established a genuine democracy, complete with a free press, a real legal system, and extensive personal freedom. To appreciate what this means, one can compare them with some of the other successful revolutionaries of this century, such as Lenin, Mao, Pol Pot or Ho Chi Minh. Each of them established authoritarian governments that tortured, murdered and brutalized huge numbers of their own people. Nothing of the sort happened in India.

The quality of the human resources of India is well illustrated by one startling fact: according to a recent survey, Indians who have emigrated to the US have an average income higher than that of any other American ethnic group.

Besides its human resources, India has some other advantages from an investor's perspective and from the perspective of economic development. Most importantly, it is stable politically. India has been a multi-party democracy since its independence in 1947, with only a short interruption during the 1970s. In 1996, the voters turned the Congress Party, which had governed India for all but two brief periods since 1947, out of office. There were no talk of annulling the elections and no rumblings from the military.

India also has certain other fundamentals that contribute to political stability and the protection of investors: a free press, reasonably good accounting standards, and an independent judiciary. The judicial system, although slow and archaic, offers meaningful protection to foreign investors from arbitrary action by politicians, as the recent scandals involving the retail outlets of KFC (Kentucky Fried Chicken) has shown. After local officials closed two KFC outlets on blatantly phony health grounds, they were opened again under court injunctions against the local officials. That sort of protection is not something available to investors in Russia, China or most other emerging markets.

Given the human and educational resources of India, given its relative political stability, given its well-developed legal system, all fundamental prerequisites to the building of wealth, why does India remain so poor? And why is there so little venture capital investment? Why has the poverty become worse since independence, at least in comparison to the rest of the world? And why do Indians who emigrate do so much better on the average than those who stay in India?

To get a sense of India’s poverty, the average per capita wealth in the US and Europe during the 50s was 6 times that of the average per capita wealth in India, taking into account purchasing power differences of the currencies; by 1990 it was 12 times. As for the venture capital, according to estimates published a couple of years ago in the Asian Venture Capital Journal, the pool of venture capital in India-specific funds is the lowest in Asia except for Pakistan. It is the lowest on a per-capita basis—which one might expect—but it is also lowest as a percentage of gross domestic product, which one would not.

The answer to all these questions, which are related, is not hard to find. In three words: "the Indian government." This is India’s great weakness. It consumes vast economic resources that could be more profitably employed elsewhere and inhibits the efficient application of resources in the private sector.

There is a saying that the British introduced bureaucracy to India, but the Indians perfected it. As I'm sure many of you know, "red tape" is still in use–literally. It is cloth tape that wraps the files circulating endlessly within the various ministries. In fact, that's where the expression "red tape" comes from; it’s not from sticky tape. Horror stories of foreign investors caught in the tentacles of the Indian bureaucracy and Indian politics are legion and legendary. I saw the consequences first-hand on the Enron project which was delayed and subjected to enormous additional expense—hundreds of millions of dollars—by the government of Maharashtra, essentially for political reasons.

This is frustrating to me personally, but it is the least of the ways in which the government interferes in the Indian economy to its detriment. India's government is a powerful drag on India's economy. In fact, it's more than that. The past policies of the Indian government—Swadeshi socialism—constitute a human tragedy of immense proportions. In the last one hundred years, the economic growth produced by the relatively free markets of Canada, the US, Europe and Japan has brought previously unimaginable wealth to the average citizen. In the last thirty years, more and more countries have participated and generally have grown economically in rough proportion to the extent they have freed their markets. India has largely failed to participate in this process of building wealth since independence, because of the Swadeshi socialist path its government chose. Two generations of Indians—hundreds of millions of people—have been condemned to a life of poverty because of it.

So, as Vladimir Lenin famously said, "What is to be done?"

The best thing that could be done, from the perspective of economic growth in India—and incidentally, the prospects for venture capitalists—would be for the government to get out of the way. That's all that's necessary. Nothing more. Just get out of the way. If it did, India would bloom economically in ways that we cannot even imagine today.

Many people believe that government should do more than get out of the way. They believe it should support certain types of businesses or channel investment into favored sectors through special tax breaks, tariff barriers, special zones of various kinds or direct investment. Some advocate that the government set up its own venture capital investment arms or establish programs like the small business investment company program in the United States. I don’t agree.

The reason I don’t agree is simple: even if their intentions are good, governments all over the world—not just in India—are always a step behind. They lack the instant feedback provided to private enterprises by having to live or die according to their success in the free market. Silicon Valley became what it is today without any significant help from our government in Washington. In fact, many suspect that it would not exist if it hadn’t started in California, three thousand miles away from the politicians in Washington.

Many efforts by governments to intervene in the economy at least purport to foster development. Usually these involve a subsidy of some sort, direct or indirect. Every business likes a subsidy, such as a tax advantage or facilities provided at below-market rates. In general, we encourage our portfolio companies to take advantage of them. But such subsidies never make the difference between success and failure of a business. The marketplace determines that. The subsidies are just arbitrary gifts from the taxpayers to shareholders.

I should add that I include lowering taxes to the extent possible in the general concept of "getting out of the way." There is a Marxist aphorism that "Property is Theft." In my view, it's more accurate to say that "Taxation is Theft." So I'm always in favor of lowering taxes. However, special tax breaks for specific types of business—such as infrastructure or software or export businesses—is, to my mind, bad policy. It distorts decisions regarding allocations of resources away from what is efficient. Obviously, I love it when it favors a company in which we invest. But I think it’s a bad idea from the perspective of India’s development.

I should also elaborate a bit on the subject of government-provided venture capital. I actually think there is no such thing. There is quite bit of money provided to entrepreneurs by their governments, both here and elsewhere, but it’s not venture capital. It’s not venture capital because the people who dispense it aren’t venturing anything themselves. What’s more, it leads to what economists call a moral hazard, i.e., the degradation of prudential standards that occurs when the people who dispense the money don’t bear the risk of its loss. Part of the money that my fund invests is my personal money. Although I am prepared to take risks with that money, I am only prepared to take what I regard as prudent risks, and I have a very personal stake in trying to insure the success of each company in which we invest.

No employee of a government-funded firm, or for that matter, no employee of a large private financial institution, has the same personal risk. This is why in the US, the most successful and prominent venture capital firms, such as Greylock Partners, Kleiner Perkins or Sequoia Capital, are relatively small independent entities. The partners may have much capital to invest, but a significant portion of it is their own. And they don’t have conflicting agendas: They apply all their knowledge and resources to contributing to the success of their investee companies and the consequent return to themselves and their investors. They don’t have to struggle with people in their organizations who may have different agendas. They aren’t worried about how what they are doing will be viewed by the corporate or political superiors. They don’t have the prospect of moving on to another position in their institution or the next Indian Administrative Service posting to dull their commitment.

The Indian government announced recently that it is going to establish a venture capital fund for investment in technology companies with taxpayer dollars. This has already acquired the sobriquet the "Nephews and Nieces Fund," since most people in India expect that it will be used mainly to fund companies owned by relatives of the bureaucrats involved and the politicians with which they wish to curry favor.

Similar government-funded efforts in India in the past have, for the most part, produced bad results. Historically, the "soft money" available from the Indian financial institutions and their affiliated investment arms have resulted in companies being funded that shouldn’t have been funded and deals being done that shouldn’t have been done. The result has been bad for the Indian taxpayers, who have shouldered the loss when the deals turned sour, and bad for the entrepreneurs, whose ventures have not been disciplined by competition for capital in the free markets. The entrepreneurs also have not been given the other things that a good venture capitalist can bring to an entrepreneur, such as access to technology and customers. They are also subject to political influences and politically-motivated demands from the bureaucrats who sit on their boards of directors. I firmly believe that free markets do the best job of allocating resources, including capital, and that most of those who take money from the government will live to regret it.

The experience with a similar effort in Israel is, I think, instructive. Joel Bainerman, the author of a recent article on government-funded technology incubators there, concludes that "Israel's experience with [government-funded] technological incubators has been a waste of public resources without allowing for the most creative ideas of Jewish immigrants from Russia to come to fruition." This program has been in existence for several years and has invested approximately $100 million. Yet, Bainerman says that the official in charge of the program admits that "not even one profitable project has yet come out of the incubators."

Businesses do need governments to provide what only governments can, such as monetary stability and a legal system that provides an effective means to enforce private contracts and redress corporate wrong-doing. Other than that, their citizens are best served if the government just gets out of the way.

Unfortunately, the Indian government won't get out of the way, at least not to the extent it should, because that's not the nature of bureaucracy. A cartoon by Laxman, everyone’s favorite Indian newspaper cartoonist, shows a Babu sitting in his office in North Block with a group of his subordinates reading a newspaper, and saying: "Cut red tape?? Free the economy?? Why, they're trying to eliminate my ministry!" Too true, and he'll resist it with all his strength.

Fortunately, one weakness of the Indian bureaucracy is that it reacts very slowly to changes in the economy. In fact, in a sense, it is still trying to tax and regulate the economy of 1947. That can be seen as a positive thing in the sense that it has woven its web of tax and regulation around what has historically been the most obvious target: manufacturing in general and especially the physical movement of goods. Most of the government’s revenue is still raised from import duties and similar taxes. It has largely failed to fasten its claws onto the real source of value in our times, knowledge and knowledge-based services. And that gives an opening for the transformative economic phenomenon of the end of the twentieth century to work its magic: the Internet. This is India’s great hope. Through the Internet, the great strengths of India—the intellectual skills and knowledge of its people—for the first time can be brought to where they have the most value. This has happened in minor ways before, through emigration. This can now happen—and is happening—on a vastly greater scale.

Many are already aware that software development services have become the largest source of foreign exchange earnings for India. A more recent development is businesses that use software to provide remote services rather than writing software. General Electric Capital services its US mortgages from an office near Delhi. British Airways handles many back-office jobs for itself and other airlines, such as dealing with errors that pop up in automatic reservation systems from two facilities in India. There are many other such businesses. In fact, as of last year, approximately 25,000 Indians were employed in remote services other than software development, according to estimates of the National Association of Software and Service Companies, an Indian trade group. I suspect that number is too low. McKinsey, the consulting company, estimates that number will rise to as much as three million within the next ten years. I suspect that number also is too low. All these people will work in businesses that, if not Internet-based already, will be soon.

I will add that our investments in India are focused to a substantial extent on such businesses, although not exclusively. Among other things, we have invested in a company called Tracmail. Tracmail provides responses from facilities in India to the flood of e-mails now coming into American companies through the Internet. The companies cannot respond in any satisfactory manner, because the flood vastly exceeds their human resources and it would be too expensive to build up the necessary resources. This leads to the common experience of bad service on the Internet. However, the flood doesn't exceed the human resources of India, which now can be applied anywhere on earth instantaneously and at a cost much lower than comparable resources in the US or other developed countries. Tracmail also offers to US corporate clients the ability to offer live web-based interaction with their customers, again by using its access to the enormous human resources of India. For example, one of its largest customers is a new Internet service called Webhelp.com, which offers real-time help to customers wanting to find information on the web. It does so by using trained "web wizards," as it calls them, located at Tracmail’s facilities in India. The customers of Webhelp don’t know and don’t care where the Web Wizards are; this is the power of the Internet to make geography irrelevant.

The next wave is likely to be businesses that make the potential of the Internet a reality, such as vertical portals for business-to-business e-commerce. So far, most such portals are based in the US. But that won’t be the case much longer. There And this is the essential point: I believe that in the future, not only will they be done in India, but they will be done better in India, at least to the extent that they have a strong service component that requires the human touch, because of the vast human resources available there. These business-to-business (or B2B, in Internet jargon) portals are in fact the current focus of our efforts at VIEW Group. We are investing in several of them that have started recently and are providing entrepreneurs with the capital and other resources to create several more.

Through such uses of the Internet, India's intellectual exports need no longer be in the form of the dribble of expatriates and emigrants but in form of the work product of the world's largest mass of educated, intelligent, and English-speaking human beings. This is how India's great resource will be liberated from its great weakness.

Is all this really going to happen? Is the Internet going to allow India at last to participate in the benefits of the unprecedented growth in the world's economy in the 20^th century? I think so. There is only one thing that could stop it: the Indian government. But I don't believe it will. I believe so for a one reason: the secret is out. Hundreds of millions of ordinary Indians now watch television, both Indian and foreign, which they did not do in 1947 or indeed until the last few years, and they see what they are missing. Many millions have also worked abroad or have relatives who work abroad. And approximately one million are now connected in one way or another to the Internet, the most powerful tool of all for disseminating information. Many of these people may not be able to articulate the economic policies that will be necessary for them to share in the abundance they see abroad. But they see clearly enough who has it and who does not, and eventually will support those who will allow the economy to grow so they can have it also. Even though the impulse of the government to control the economy undoubtedly lives on and progress will be fitful, as the benefits of a free economy become more and more obvious, the extent of its control will decline. And it is unlikely that the government will attempt, as it has in China, to control the uncontrollable, that is, the Internet.

To put it differently, no group of politicians will, in the long run, be able to stand between hundreds of millions of ordinary Indians and their aspirations for the better way of life they can see before them. The ability of the Nehruvian socialist bureaucracy to continue the policies that give its members power and relative affluence at the cost of the continued impoverishment of the vast majority of Indians depends on the ignorance of that majority, ignorance that will not continue in the face of the flood of information now washing into every village in India.