The government’s policies have unwittingly tilted the balance in favour of innovating for the world rather than creating conditions that encourage innovations for India’s own needs.
With a large engineering workforce and links with the English language, India already has some natural advantages in providing knowledge workers to global corporations. In addition, government policies that have made foreign investment increasingly easy, coupled with tax holidays in Special Economic Zones that only large corporations can afford to move into, have provided excellent incentives for setting up export-oriented captives in India.
In the last 10 years, the number of global research and development (R&D) captives in India has been progressively increasing. A recent study by Zinnov Consulting found that nearly half of the top 500 global R&D spenders have set up shop in India. These captives and their service providers together have created a globally exposed and competent workforce in India in addition to a new wealthy class of a few white collared professionals. The positive impact that this has made to the country is significant and real, even if it is limited to a small percentage of the population. To replicate this success in manufacturing seems a worthy objective, but with lessons from the past, we can and should aim higher.
Innovation has two beneficiaries — producers and consumers. For example, creating the light bulb was a profitable venture for Thomas Alva Edison but it also benefitted millions of consumers with the innovation.
In most cases, the knowledge workers seem to be pursuing problems of their employers in western countries. The output of their work often tends to be irrelevant in India. Thus in this increasingly interconnected world, one can effectively create islands of producers and consumers that are far removed from each other. The value created is shared by a few producers in India and a lot of consumers in western countries. The recent ‘Make in India’ campaign is trying to extend this trend into manufacturing from services.
There is a silver lining to this approach. While the output of what workers create is removed from the needs of their country of residence, the skills and capacity that they develop in the process are transferable. For example, workers from the very same pool, using similar tools and processes, created the first of its kind Unique Identification project in India. Aadhar aims to give a billion unique biometric IDs to Indian residents and has already achieved half of its target within a few years.
However, where government policies in attracting more FDI and in encouraging the Indian outsourcing industry have been a success, the track record in encouraging companies to innovate and make in India and for India has been poor. With a dismal rank in the ease of doing business index, there is a systemic advantage that existing businesses enjoy versus the problems that new innovative companies seeking to disrupt them have to face. However, improving the country’s rank on this well-established score doesn’t seem to be an important priority for the Indian government. Apart from the many sound bites, no concrete action is forthcoming.
The initiative of implementing a uniform Goods and Services Tax will do more to create an integrated domestic market than anything else. Equally important is to be able to move goods across state borders without being subjected to harassment.
However, an export-oriented manufacturing policy sidesteps this issue since the goods produced will mostly go out. Another key issue in India is a broken credit system that makes it difficult for new businesses to raise debt. The ‘Make in India’ initiative will even further tilt the balance in favour of large domestic firms that hog all credit and can also tap international markets or foreign firms that have better access to capital in their home country. These are barely two in a long list of reforms that India awaits.
Software as a service
We can already see examples that frustrate businesses trying to make for India in the software sector. The recent trend of delivering software as a service has proved to be an ideal solution for a capital-scarce country where consumers and small businesses are happier with a pay-as-you-go system rather than investing upfront for using software tools. However, the one thing that such businesses need — an ability to easily collect recurring payments online — is tedious in India. This makes it is easier for an Indian company to serve customers in the U.S. than in India. This is tragic, apart from being strange.
The collateral advantage of learning from exposure to western markets also comes with the inherent bias for creating products and services more relevant for the richer countries. Innovations perfected in India on that scale would also find relevance in emerging economies all over the world.
However, that is an unlikely scenario given the current policies we are pursuing. Right now, we are trying to encourage creation of figurative islands in India with a red carpet for setting up factories and exporting those goods. We have done that successfully in services and seen the limitations. A focus on ‘Make for India’ will spur ‘Make in India’ export-oriented businesses too but the reverse doesn’t happen automatically. We have the opportunity to get it right this time. The track record in encouraging companies to make in India and for India has been poor .
This piece was first published in The Hindu on October 18th, 2014.
Photo: Meena Kadri