Does India need hi-tech industry?

Despite some recent stumbles, most economic and demographic metrics favour India’s growth for several more years. India’s economic expansion is typical; it comes from its current low levels of physical, technological, and human capital deployed and its absorptive power for additional such capital.

Although the Indian economy is fairly broad-based, it does suffer from some imbalances: The export sector is small, manufacturing is underdeveloped, and there is little high technology industry.

What is a hi-tech industry? While there are several definitions, good examples of hi-technology are telecom and networking, computing and automation, modern pharmaceuticals, commercial jet aircraft, and advanced instrumentation such as MRI machines. Emerging hi-tech areas include genetic engineering and nanotechnology.

Hi-tech industries have some common elements, as they:

need highly skilled scientific and engineering personnel;

require high recurring R&D investments, typically a tenth to a third of annual sales;

demand large initial investments that are often orders of magnitude of the unit sale price; and need very large global markets and are, therefore, often near-monopolies.

All of this makes breaking into hi-tech industry very difficult.

Recent examples from China have shown that it can be done with strong support of the national government and some preferential access to the domestic market. Qualcomm in wireless chips, Intel in computing, and Airbus for commercial jets all generally fit this model.

ROLE OF ICT

Does India need a hi-tech industry? The answer is a clear yes. Consider national security which includes any resource critical to the nation’s well-being. For example, Information and Communications Technology (ICT) infrastructure is a good example, as it is clearly crucial to banking, stock market, and air and rail networks. Protecting this infrastructure from cyber-attack is hard enough for countries such as the US, which dominates in this technology. It is much harder for India which does not have an ICT capability.

What about economic value? Again, taking the telecom industry as an example, India imports many tens of billions of dollars of ICT equipment annually. A vibrant internal industry can serve much of India’s needs and also be a major exporter, creating thousands of high-end jobs. Another reason to develop a hi-tech industry is that about half of GDP growth in developed countries comes from the hi-technology sector. India too will have to soon seek its growth from this sector, since the current growth engines will inevitably slow down.

A final argument for a hi-tech industry is that it promotes national unity and cohesiveness. Hi-tech companies are global and demand a highly educated work force, all of which reinforce ownership and nationhood. Research from the Kaufmann Foundation in the US has repeatedly found that locally-owned industries have a strong effect on national stability. In India, the growth of Infosys and Wipro, albeit only technology service companies, has reinforced national identity and pride.

INDIA FALL BEHIND

What is India’s record in hi-tech? India is a big consumer of hi-tech, from cell phones and laptops, to jet travel and CAT scans. However, India adds negligible value in these hi-techn areas. It has fallen way behind China, Taiwan, South Korea, and Singapore, to name a few of its Asian neighbours. It does not have an EDAS or even an Embraer for passenger jets, no Huawei for telecom equipment, no Qualcomm for wireless semiconductors and no TMSC in semiconductor fabrication.

India does add value in hi-tech through design services undertaken by Wipro, Infosys, and Tata Elxsi among others. I would estimate that about 3-4 per cent of global ICT design gets done in India under contract services to the US, Europe, Japan, and now Chinese companies. Though Wipro and Infosys and others are very successful businesses and a source of very legitimate pride for India, their model does not offer India a path to ownership of high technology.

While India has between 15 per cent and 18 per cent of the world’s semiconductor chip designers, most of them work within the offshore operations of MNCs. In hi-tech manufacturing, again MNCs such as Nokia, Motorola and Samsung assemble phones in India, though the value addition is only about 5-7 per cent. Despite a 900-million plus wireless subscriber market and a $15-billion annual equipment market, there has been no serious attempt to promote high value-addition in telecom, let alone succeed at it.

CHINA’S STRATEGY

India’s neighbour, China, offers a different picture. It has successfully leveraged a committed bureaucracy, the financial resources generated from low-to-medium tech manufacturing, and the power of its huge internal market to build its hi-tech industry.

The state capitalism model has largely failed in India, but has been a success in China.

Perhaps China’s leadership is tech-savvy and its bureaucrats are held to a higher level of accountability with many incentives for delivering success. Huawei is a typical Chinese hi-tech success story. India uses a wide range of Huawei products, from optical transmission to wireless to switching. About a fourth of new equipment installed in India between 2008 and 2009 came from Huawei.

OPTIONS FOR INDIA

How can India build an internal hi-tech industry? The country has many assets that can be harnessed to build such an industry, at least in sectors like ICT. India has strong core engineering skills in telecom design, thanks to years of learning through off-shoring and outsourcing to India. Private sector companies such as Tata, Wipro, and Infosys have built global practice in engineering services. In some manufacturing sectors such as automobiles and pharmaceuticals, India is beginning to have a global presence.

All of this has deepened India’s management skills. Knowledge of English has been a big advantage for operating globally and has helped India’s success in engineering services. The IITs and NITs graduate a sizeable number of undergraduate students in science and engineering. By statistics alone, the top 1-2 per cent of the engineering student cohort, who enter these institutions, are extremely talented. So, both human and organisational capital for a telecom industry is in place.

On the other hand, the right kind of investment capital — private capital — is hard to attract, given the high levels of investment and very high risk. State capitalism — India’s initial route to hi-technology by creating state-funded public sector companies — has proved to be very disappointing. The Indian Telephone Industries and Semiconductor Corporation Ltd. are examples of this disappointment. India needs to attract private capital to build this sector.

A policy framework should reduce the risk for private capital by a variety of measures, including preferential market access, soft debt financing, R&D investments, spectrum policy geared to promote telecom technology, and downside risk mitigation for venture capital.

(This article is by special arrangement with the Center for the Advanced Study of India, University of Pennsylvania.)

(The author is Professor (Emeritus), Department of Electrical Engineering, Stanford University.)

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