Lead by innovating

Analysis

‘Make in India’ faces the following drawbacks:

~~ Competition from existing manufacturing hubs such as the Philippines, Indonesia, Bangladesh. Increased competition may lead to a situation analogous to a ‘price war’ on cheap labour

~~ A focus on manufacturing sector provides a short-term solution but is not sustainable in the long term

The biggest factors going for India are engineering talent and the low cost of manufacturing. However, cheap labour, which is a key factor in low-cost manufacturing, is not sustainable owing to competition from other manufacturing hubs. Hence, India should focus on reducing the costs associated with other factors, such as raw materials and infrastructure, which comprise a significant share in the overall cost of manufacturing.

Consistent technological innovations can greatly help in reducing these costs and offer a sustainable solution. For instance, over the last few years, the demand for steel has outpaced growth in domestic production, and this has increased import dependency. Innovations in the steel sector can help increase productivity and meet domestic market needs at lower costs. Thus, innovation can aid India to eventually achieve ‘cost leadership’.

Chart 1 shows how innovations in any industry where raw material constitutes the major part of total cost can eventually result in increased employment of unskilled labour. Innovation in such a context can be achieved by prioritising research and development (R&D).

R&D in India

In 2014, investment in R&D in India stood at 0.9 per cent of GDP, while it was 2.0 per cent and 2.8 per cent in China and the US respectively.

In developed and emerging economies, the ratio of private to public investments in R&D is around 2:1. However, in India it is about 1:2.

This is due to two main reasons. One, Indian economy was highly regulated during 1990s. Hence, the private sector firms did not see the need to invest in R&D as there was very little competition in the market. Two, the majority of patents in India are held by MNCs rather than domestic firms. This reflects on the lack of risk-taking culture in the country.

Recommendations

Creation of R&D ecosystem

R&D is a long-term investment for the success of an economy. Developing a ‘risk-taking’ culture involves successful creation of an ecosystem that enables firms and individuals to explore new opportunities. Following are the key requirements for establishing such an ecosystem:

~~ Investments in human capital

Establishment of new IITs, NITs and IIMs are in line with this requirement. The availability of a talent pool is a big asset in building India as an innovation hub. However, it is also important to ensure that the educational institutes have courses that are designed to trigger creative thinking.

~~ Projects at R&D organisations with commercial vision

Projects at organisations like Council of Scientific and Industrial Research (CSIR), Defence Research and Development Organisation (DRDO) and Indian Institute of Science (IISc), which work on R&D activities of various sectors, should be carried out with commercial vision and close collaboration with entrepreneurs

~~ Availability of capital at all stages of R&D

Availability of monetary aid, right from conceptualisation to developing commercially viable products, should be ensured. This will foster an environment of risk-taking and innovation, and also speed up many ongoing products

~~ Active government support

Government plays an important role in nurturing innovation. Initiatives like ‘Start-up India’ motivate institutions and individuals to inculcate a risk-taking culture. Uniform tax regimes (such as GST) and incentives for research will encourage firms to invest more in the R&D sector.

(The first runners-up are PGP students at IIM Indore)