Happy 2021. Break out the innovation

Indian industry must drive our economic recovery through innovation and exports

The Chinese sage Confucius said, “May you live in interesting times.” Confucius meant this as a curse, and we can see why. We live in very interesting times. The global Covid health crisis has prompted unprecedented lockdowns, with devastating economic consequences. Global economic growth in 2020 is forecast to be minus 5 per cent, and in India minus 7.5 per cent. Our goal in 2021 must be to recover, and to put in place processes to grow rapidly for decades. Per capita gross domestic product (GDP) growth is nothing other than productivity growth, a result of capital investment, labour supply and technical change.

A word on labour supply. We have two easy pickings available to us.  Our labour-force participation rate (LPR) is under 50 per cent, and has fallen in the pandemic, as millions have simply given up trying to find a job. Our female LPR, in particular, is shameful — at 21 per cent, amongst the world’s lowest. We would be 60 per cent richer if women participated in the labour market as much as men. And we have too many people working in agriculture. Farmers are half our workforce, but produce 15 per cent of our GDP. The pandemic has seen this worsen, as migrants by the million have returned home from higher productivity urban jobs to lower productivity farming. So we have great potential in fixing our markets for unskilled labour.

But my focus in this article is on innovation. Technical change, or innovation, typically accounts for over half of long-run economic growth. To grow at rates of 7, 8, 9 and 10 per cent, we must understand how to build technical capacity across the economy.

The Atmanirbhar (AN), or self-reliance, programme aims to deepen technical capability within Indian industry. It has been supplemented by a production-linked incentive (PLI) scheme. AN-PLI has identified 13 sectors where supply chains must be deepend. For example, not just mobile phones, but the components that go into them, and not just pharmaceuticals, but the active pharmaceutical ingredients they are made of. It provides firms with a subsidy of Rs 2 trillion over five years, almost 1 per cent of annual GDP. The government has also increased protection of Indian industry, with thousands of items seeing higher tariffs over the last four years.

Illustration by Binay Sinha

The government emphasises that its objective is not inward-looking, but to build a more competitive and globally robust Indian industry. Will it work? Will Indian industry emerge stronger, with deeper domestic supply chains and value added? Or will we revert to our 1970s-style economy of an uncompetitive industry sheltering behind high tariffs? Whether we succeed or not will depend on the following.

First, we need a much stronger export-oriented stance. All tariff protection must be limited in time — with a clear and announced road map for reduction to zero in, say, five years. This must be combined with a pro-trade policy — with free-trade agreements in place to access our most desired markets on attractive terms. Rejecting the Regional Comprehensive Economic Partnership was a blunder, one we will have to work very hard to make up for. And we need to shed our misplaced preference for a strong rupee — Rs 100 to the dollar would completely address protection without tariffs, and be the greatest export incentive around. The government can go further, and tie paying the PLI subsidy to the fulfilment of export commitments.

Second, industry needs to have a much more aggressive investment strategy for technology and international markets. In-house Research & Development (R&D) investment by Indian industry accounts for 0.3 per cent of GDP, compared with 1.5 per cent for the world. We must scale our investment in R&D by a factor of five. This requires much change. Of the top 2,500 R&D spenders worldwide, 32 are from India, while 507 are from China. China has a significant presence in all the top 10 industrial sectors. We have no firms in five of them, and are most glaringly absent from technology hardware and electronic equipment, where China has over 100 firms. And our largest firms, with the exception of the Tatas, are missing from the world’s list of R&D giants. Our big software firms, that lead the world in profitability, are nowhere when it comes to R&D. A single Chinese firm, Huawei, invests twice as much in R&D ($15 billion) as every firm together in Indian industry ($7 billion).  

Third, the government needs to understand that investment in public research is not of value if it continues in autonomous state R&D laboratories. This investment has to progressively move to the higher education sector, where most of the world does it. Public research in our higher education sector accounts for 0.05 per cent of GDP, compared with 0.4 per cent worldwide — so it needs to scale by a factor of eight. The objective is not research output; that is at best a nice bonus. The goal of public research is talent, to develop brilliant students who learn to be good researchers alongside their professors. The Institute of Chemical Technology in Mumbai, previously the University Department of Chemical Technology (UDCT), has a well-deserved reputation of being our country’s premier research-teaching institute. It has produced fine research output for decades, with hundreds of patents, thousands of consulting assignments, and a close connection with industry. But this contribution of its research output pales in comparison with the value it has added through its graduates — which include Mukesh Ambani of Reliance Industries, Madhukar Parekh of Pidilite, Keki Gharda of Gharda Chemicals, Ramesh Mashelkar of NCL/CSIR, Anji Reddy of DRL, Narotam Sekhsaria of Ambuja Cements, and M M Sharma of UDCT (who himself did so much to build UDCT into the powerhouse it is). Thousands of lesser known graduates form the foundation for our successful pharmaceutical and speciality chemical industries. The UDCT story needs to be writ large across sectors and disciplines. We must build talent for India, by moving our public research funding from the state autonomous R&D institutes to higher education.

If we place export and innovation at the heart of our growth aspiration, we will sustain rapid progress for years. 2021 must see us rebuild our economy, and set the course for decades of rapid growth. Happy New Year.

ndforbes@forbesmarshall.com. The writer is co-chairman Forbes Marshall, past president, CII, Chairman of Centre for Technology Innovation and Economic Research and Ananta Aspen Centre