Need to wake up to the realities

Prabhudev Konana
The Hindu, 22 September

The global success of “brand India” and continuous reinforcement of successes cloud many perceptions of reality. It is important for us to be more inquisitive about our claims of hackneyed success stories.

I had the privilege of listening to numerous presentations on India from business, government, and academic leaders. Most presentations are strikingly similar. There is excitement, optimism, and enthusiasm that bode well for India. But the global success of “brand India” and continuous reinforcement of successes cloud many perceptions of reality and fall into the trap that researchers call persuasion bias. Without adjusting for repetition of the same information, this persuasion bias continues to perpetuate and exacerbate certain fallacies and inconsistencies. Often, the facts are not consistent with the braggadocios. Further, leaders exhibit classic self-attribution bias that successes are due to their actions and failures are due to others like the NGOs, farmers, or society. This article is to question the myths and to wake up to the realities.

Fallacy of leapfrog

Leaders proclaim India’s strength lies in its ability to bypass industrial economy and leapfrog from an agricultural economy to a service-based economy. The supporting argument is that most developed countries are service-based economies. Unfortunately, there is a lack of awareness on how developed economies got there. Even worse is that they often cite how GE, IBM, and other leading companies make more significant profits and revenues from services than from selling tangible products. Although this sounds exciting for the believers, let us not lose sight of the incredible dependencies and blurring of boundaries between manufacturing and services of these firms. GE and IBM make money over the lifecycle of the products they sell since the initial cost is just a fraction of the total lifecycle value. GE makes little profits selling jet engines but reaps significant revenues and profits from servicing and upgrading those engines over the next 40 years. The same applies to IBM. Further, firms make money financing the purchase of their products; this applies to General Motors, GE or Dell. Without making tangible products, however, these firms have little to stand on.

We also hear that India can leapfrog to new technologies without having to deal with legacy issues. The rapid diffusion of cell phone is used to support the argument. But this argument is fragile and meaningless. Based on this argument, it is prudent to wait for another decade to see if cheaper wireless options are available for very high-speed broadband connection to avoid laying expensive fibre or cable that is in place in most parts of the developed world. Unless there is a technological innovation available now, a country needs to dig trenches to lay fibre or cable. Using the same cell phone example, however, India would have benefited immensely by creating new jobs for the whole spectrum of the workforce through manufacturing of cell phones and their components.

Often, talks revolve around symbolism like e-Choupal (ITC’s electronic portal and marketplace for agricultural goods), e-learning, and an IT-based emergency management system to support leapfrogging arguments. Can e-Choupal replace good transportation system, reliable water source, basic education, access to credit, and communication infrastructure? Super fast transportation and distribution systems to distant places can create new markets that can get farmers better prices. A sophisticated IT-based emergency management system is as good as the infrastructure itself. In an accident, a meaningful system is one where the ambulance can reach the accident site in a reasonable time. The much touted e-learning system is not a substitute for good buildings, teachers, notebooks, and blackboard. Unfortunately, we focus on solving the easy part of the problem with IT and claim success. IT can complement but cannot substitute or leapfrog the need for basic infrastructure.

In a way comparable to the early industrialisation efforts of the developed economies, India should put more resources into making the traditional manufacturing base (such as textiles and steel industries) efficient and globally competitive. These sectors have enormous forward and backward linkages in the economy that can benefit a whole spectrum of the workforce. For example, the textile sector links farmers, manufacturing, handlooms, retail stores and malls, and the service industry (e.g., designers, dry cleaners, models). This doesn’t mean we ignore the IT sector. But any subsidies and incentives must be given to these traditional sectors where the impact on the masses is significantly more. Let the profitable sectors manage themselves.

Entrepreneurship and innovation

Many argue that India is better placed to succeed than China since India’s growth is primarily driven by home-grown entrepreneurship and innovation unlike that of China built on foreign direct investments (FDI), primarily from the Chinese diaspora. While the comparison with China is hackneyed, is there any merit to this argument? Notwithstanding the recent surge in India’s FDI to $11 billion, let us be honest: the inability to attract FDI is related to the lack of infrastructure, the bureaucracy, political stability, economic policies, and a willing Indian diaspora. It wasn’t a surprise that Intel set up manufacturing plants in Vietnam and China over India.

We must recognise that innovation is often captured in patents and indicates the level of innovative activity within an economy. Here again the biased opinions of India’s strength do not hold water. China beats India handily in both resident (domestic) and non-resident (foreign) patents. Rather than shrinking, the gap between India and China continues to expand. According to the World Intellectual Property Organisation (WIPO), China’s patent filings grew by 32.9 per cent in 2005 while that of India grew by a meagre 1.3 per cent. While resident Chinese patents grew by 42.1 per cent, India’s actual resident filing dropped by 8 per cent. In 2005, active patents in enforcement for China were 59,087 as against 2,882 for India. China is nearly 360 per cent more than India in the number of patent filings per million dollar of R&D expenditure. One can slice and dice patent filings by any metric, India lags behind China.

Further, the leaders argue that China’s economic growth will not be sustained owing to its lax intellectual property protection. It is a reasonable argument but it does not explain why major companies worldwide continue to rush to China to invest and even share sensitive design information. Airbus agreed to set up the A320 Family Final assembly line in China, and Intel announced a $2.5 billion manufacturing plant in China. With FDI, competition, and knowledge accumulation, China may be better positioned to improve its technological capabilities and invigorate the domestic innovation and educational system. In fact, the deluge of foreign competition in the two-wheeler market in India forced Bajaj Auto and others to improve quality and efficiency. If not, India would still have 1950s Vespa technology.

Myths of knowledge economy

Leaders often use India’s success as a transition to “knowledge economy” even though most have problems articulating the meaning. While there is no consistent definition, economists refer to a knowledge economy in the following terms: creating wealth through new knowledge that requires huge upfront costs for development, a sustained focus on research, and innovation policy. Knowledge here has greater economic value than physical assets and creates new value by making competitors irrelevant. Often such an economy uses greater levels of information technology, education, and scientific and technical knowledge. However, there is little evidence to support the thesis of India’s transition to a knowledge economy.

A small fraction of the workforce in call centres, software services, and design centres is not an indicator, but R&D expenditure is. India’s R&D expenditure as a percentage of GDP continues to lag behind developed and some developing economies. According to the Organisation for Economic Cooperation and Development (OECD), India’s R&D expenditure dropped from 0.77 per cent in 2000 to 0.69 per cent in 2004 of GDP, while that of China increased from 0.9 per cent to 1.23 per cent. Finland, which has remarkably transitioned into a knowledge economy, has increased R&D expenditure from 1.86 per cent in 1990 to 3.51 per cent in 2004. The U.S. spends 2.68 per cent of its massive $13 trillion GDP on R&D alone.

The ability of a nation to create knowledge is also indicated in research publication in elite journals. According to the U.S. National Science Foundation, China’s science and engineering (S&E) research output has quadrupled in a decade, surpassing India’s in 1996 and Russia’s in 2001. In 2003, China accounted for 4.2 per cent of the world’s research articles compared with 1.4 per cent in 1993. However, during this period India’s S&E articles as a percentage of global output has remained stagnant at 1.8 per cent, and research output has grown only 31per cent despite spectacular economic growth.

The increases in patent and research publications provide key insights. India must emphasise and incentivise R&D; inculcate a research mindset and culture in universities; make it easy to patent innovation; and strive for universities to become hubs for innovation and ideas and not just graduate students by disseminating information.

While India can be proud of its IITs, let us not kid ourselves into believing that they are better than Harvard, MIT, and Princeton combined, as often stated in major newspapers and television programmes. It is one thing to be proud of the admission process, but it is meaningless to believe well-intended exaggerations as the truth. Institutions are known not only for student quality, but more importantly they are assessed for research and knowledge creation. In India, a few institutions like the Indian Statistical Institute, the Bose Institute, the Indian Institute of Science and isolated researchers in various institutions have had a record of research of global importance.

We are made to believe knowledge economy is all about IT or biotechnology. However, R&D in the jute industry that may lead to biodegradable diapers or packaging material to replace plastics has enormous economic and social value for the world and is very much a part of the knowledge economy. It is important for us to be more inquisitive about our claims of hackneyed success stories.

(The author is a Distinguished Teaching Professor at the University of Texas at Austin and can be contacted at pkonana@mail.utexas.edu.)