Industry needs ‘national innovation system’

The share of manufacturing in India’s GDP has stagnated at 16 per cent since 1991, despite economic reforms. No country ever became a manufacturing force without (a) a design capability; and (b) an institutional system that incentivises and sustains innovations. India needs a system to develop human and technical capabilities at both the enterprise as well as at the national level.

Within a broader industrial policy, a critical dimension will remain building a design capacity in enterprises. To quote Joseph Stiglitz, you can only ‘learn by doing’ — the ‘technology’ “in most products is under the skin, in the parts inside the assembled products. And, even deeper, in the machines and tools that make the part.”

The argument, often made by Indian economists and importers, that to grow a sector one must enable it to get the best and least expensive inputs it needs, is short-sighted. So, to build technological depth in our industries, we must foster the production of electronic hardware, and machine tools, and capital equipment — all of which India is now importing from China. But design capability is only one element of a National Innovation System (NIS).

Building a NIS

India has many strengths in R&D, but it still lacks the key ingredients of a NIS. Let us discuss India’s strengths first. Herstatt et al (2008) in a survey in India found several reasons for India’s prominence on the world R&D landscape: (a) the market potential; (b) the relative safety of intellectual property rights; (c) the availability of skilled labour and (d) its low cost.

Plus the similarity to Western/British judicial system is considered by multinational firms as a major advantage since it gives them a better idea of the system and a sense of security. In fact, in 2018, there were over 1,500 international firms that had set up their R&D centres in India, drawing upon these comparative advantages. However, there are few spillover effects of such firms’ R&D operations into India.

More importantly, Indian private firms have yet to demonstrate similar enterprise in respect of R&D. Major challenges remain for India’s incipient NIS. The creation of a ‘Learning Society’ (Stiglitz, 2014) needs some extensions in India — to ensure ‘learning by doing’.

Three such extensions are needed. First, the absence of an industrial policy has prevented India from becoming a manufacturing hub, leaving innovation stunted and total factor productivity lower than its potential. The second challenge is that multiple failures in the entire education system have led to poor educational outcomes for the current workforce.

For the Science, Technology and Innovation (STI) infrastructure created over 70 years to lead to inclusive growth, the education and learning levels of the workforce must improve. Thus in 2015-16, 38 per cent of manufacturing workforce had primary or less education; an additional 19 per cent had 8 years of schooling. Only 10 per cent of the workforce in manufacturing had formal or informal vocational education/training (VET).The services sector fared only slightly better.

Secondary enrolment reached 85 per cent (2015) and higher since; higher education enrolment reached 26 per cent; literacy will reach 90-95 per cent by 2021. But,

* massification of higher education has not meant learning levels are high; there are serious shortages of STEM teachers at secondary/higher secondary level;

* At the tertiary level, engineering, manufacturing, and science account for only 39 per cent enrolment (of which science 5 per cent).

What is needed is much greater private and public investment in education; 4 per cent of GDP won’t suffice.

Moreover, structural shifts are needed to align Industrial Policy (which India has not had since 1991) to Education/Skills policy for India to become a serious STI hub in such areas as Industry 4.0. However, this also requires millions of 15-18 year-olds to be diverted into VET. In India, VET is very much government-driven and supply-driven.

What is needed is a demand-driven and employer-led, and industry-financed (not mainly government funded) VET system. Such a poorly educated workforce is being given short-term training (at most 3-month long vocational training by the National Skill Development Corporation-funded private training providers), which has failed to improve their employability.

The third challenge in building a NIS is that India allocates only 0.72 per cent of GDP to R&D, while China invests 1.8 per cent, the US 2.9 per cent, and Japan 3.4 per cent. India currently underspends even relative to its income level. In addition, most other countries, especially East Asian countries like China, Japan, and Korea, have seen dramatic increases in R&D as a percentage of GDP as they have become richer. India, on the other hand, has only seen a slight increase.

Despite spending only 0.72 per cent on R&D, there has been impressive growth in scientific publications (6th in the world) and patents filed (7th). But the challenge is to transform knowledge/technologies into commercially attractive solutions through entrepreneurial communities. Knowledge from supported grants is not utilised and most patents rarely get used. The result is that government efforts to provide downstream support like setting up technology parks, incubators and incentives for start-ups (all of which have characterised such Union government initiatives as Start-up India, Atal Incubation Mission) are unlikely to yield results.

India’s distribution of R&D expenditure across corporations (44 per cent), public research institutes (52 per cent) (i.e. CSIR labs), and universities (4 per cent) is another issue. The global average for corporates’ share is 71 per cent, of public research institutes, the lowest at 12 per cent, and 17 per cent for universities. So the question arises: why is Indian private firms’ R&D expenditure so low? Forbes (2016) suggests that the top sectors that account for 70 per cent of global industrial R&D are five: pharma, auto, technology hardware, software, and electronic and electrical equipment.

As India is not a major producer in these sectors (except pharma and auto) Indian firms’ R&D expenditure is also low. Much innovation happens without relying upon formal R&D. R&D started to contribute significantly to Korean and Taiwanese industrialisation only in the 1980s, and to China’s only in the 2010s. Industrial development must precede the choice of investing in R&D. We have a manufacturing structure focused on skill-intensive and capital-intensive sectors – sectors which require constant innovation.

The writer is Professor of Economics at the Jawaharlal Nehru University, New Delhi

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