Innovate to achieve SCALE

NEVER WASTE a good crisis. That ‘commandment’ acquires compelling significance for India as it comes to term with an evolving geo-economic landscape in the light of the COVID-19 pandemic. The severe disruption in the global manufacturing value chain last year, as a consequence of the gravest public health emergency in a century, has prompted countries around the world to reflect seriously on the need to diversify their manufacturing base. And although the ill-effect of the pandemic is still not fully behind us, the prospect of a realignment of the manufacturing value chain around the world holds enormous potential for India. Indeed, in some ways it is a godsent opportunity for Indian manufacturing to demonstrate its prowess. 

It appears that the Indian government is sensitive to the fierce urgency of the present moment and is keen to seize this once-in-a-lifetime opportunity. The campaign for atmanirbharta channels that positive sentiment and looks to build on India’s manufacturing strengths (where they exist) and to remedy any failings there may be. 

The areas of success – and inadequacies – in Indian manufacturing are somewhat self-evident. The automotive industry and the pharmaceutical industry represent two of the more striking examples of success. Since the reforms of 1991, the auto industry has grown at a compounded annual growth rate of 8.2%, and today accounts for nearly half of manufacturing GDP. And 27% of the industry’s output, by value of vehicles and components combined, is exported. The sector has a highly integrated ancillary base, invests substantially in R&D, and generates employment for an estimated 37 million people, directly and indirectly. 

As Chairman of the Steering Committee for Advancing Local Value-Add and Exports (SCALE), set up by the government to propel manufacturing growth in some champion sectors, I have been looking up-close at the factors that have contributed to such manufacturing successes in India. 

However, for all the inherent strengths of Indian industry, I believe that a change of mindset – away from the incrementalism of the past – is imperative if we are to achieve the goals we have set for ourselves. Specifically, Indian manufacturing suffers from a lack of global scale, which is perhaps a function of the fact that investment decisions have in the past been very conservative. India also has cost disadvantages because of the relatively higher costs of power, logistics – and funds, and the burden of excessive regulatory compliances. 

The effect of this shows up starkly in India’s sub-par performance in high-tech manufacturing. The country’s share of global high-tech trade is under 1%; comparatively, China’s is 26%, Germany’s is 8.3%, and South Korea’s is 7.7%. India’s high-tech exports are about $20 billion, barely a fourth of Vietnam’s. And India does not have a strong manufacturing brand, and given that investment in R&D is inadequate, there are very few sectors in which Indian companies own cutting-edge IPR. 

Given these sobering realities, how best can India grab a fair share of global manufacturing, and enhance its high-tech exports profile? 

To my mind, the key to achieving these is to invest in technology-led innovation and in capacity. Until now, manufacturing exports from India have centred on cost-competitiveness. With time, many emerging economies have caught up on manufacturing capabilities and now offer equally competitive manufacturing bases. Cost consideration will no doubt continue to be important, but to secure a greater global market share, we need those investments in innovation. 

India’s aspiration to become a global hub for technology and manufacturing in select industries can be realised – with greater investments in technology and capacity-building. Currently, India invests barely 1% of GDP in R&D, against South Korea’s 4%. Furthermore, in Korea, nearly two-thirds of the R&D investment is made by industry; in India, it is only a third. 

China’s manufacturing muscle was shaped by a ‘build it and they will come’ mindset. On the other hand, Indian manufacturers typically wait for volume visibility before embarking on capacity expansion. That gives birth to a chicken-and-egg situation. Many global manufacturers want to relocate to India, and are looking for plugandplay infrastructure, but we don’t have it because we haven’t invested adequately in it.

The road to atmanirbharta is long and hard. It is often easier to import than to commit to local value-add. It is also easier to buy or license technology as opposed to developing it ourselves. More generally, it is easier to follow than to lead. 

But that mindset needs to change. India has several things going for it – among them a big domestic market, abundant natural resources, a large pool of working-age population, a strong private sector, and strategic geo-location. With a tweak of the passive mindset, and by firming up our resolve, India can take the lead in several sunrise sectors.

Until recently Managing Director of Mahindra & Mahindra, Pawan Goenka is Chair of the Government’s Steering Committee for Advancing Local Value-Add and Exports (SCALE), and Chairman of the Board of Governors of IIT Madras and IIT Bombay.