A strengthened public sector will create more opportunities for private companies
Every time a tech giant chooses an Indian-born tech geek as its leader, pride in the country rightly grows, but so does a certain disappointment. Even though India has so many famous technologists around the world why is India still not a major player in technology? India has the potential to occupy the upper echelons of global technology leaders, if only it recognizes its shortcomings and reacts to them urgently.
The popular narrative has it that India’s failures are linked to its inability to capitalize on market-driven growth opportunities. The country’s earlier involvement in planning and in the public sector harmed its chances, so the argumentation, even after the economic reforms of 1991. And so the talents left the country in droves for the USA. In fact, there were 2.7 million Indian immigrants in the US in 2019. They are among the most educated and professional churches in this country.
An invisible hand
The US is undoubtedly a country with incredible opportunities. Less known, however, is that an invisible hand of government sustained each of the so-called entrepreneurship and free market triumphs. Research by Mariana Mazzucato shows that the state has played a crucial role in introducing the new generation of technologies, including computers, the Internet and the nanotechnology industries. With public sector funding, the algorithm was developed that eventually led to the success of Google and helped discover the molecular antibodies that formed the basis of biotechnology. In these successful episodes, government agencies were proactive in identifying and assisting the more uncertain phases of research that a risk-averse private sector would not have entered.
The role of government plays an even more important role in shaping the economic growth of China as it races with the US for supremacy in technology. A little over a decade earlier, China was known for its low-wage manufacturing. Though touted as the “factory of the world,” China was stuck in the low-added-value segments of global manufacturing networks and earned a fraction of the price of the goods it made. However, as part of a government plan in 2011, it has made successful forays into “new strategic industries” such as alternative fuel automobiles and renewable energies.
The Chinese experience
China’s accomplishments did not come because it became “capitalist,” but rather through the combination of the strengths of the public sector, markets and globalization. China’s state-owned enterprises (SOEs) were seen as inefficient and bureaucratic. However, instead of privatizing them or allowing them to be weakened through neglect, the Chinese state has restructured the state-owned companies. On the one hand, the state withdrew from light industry and export-oriented sectors and left the field open for the private sector. On the other hand, state-owned companies increased their presence in strategically important sectors such as petrochemicals and telecommunications as well as in technologically dynamic sectors such as electronics and mechanical engineering.
When India introduced planning and industrialization in the early 1950s, it was possibly the most ambitious of these initiatives in developing countries. Marks of this effort have included public sector funding for the latest technologies of the time, including space and nuclear research, and the establishment of institutions such as the Indian Institutes of Technology (IITs). Many of these institutions have achieved world class standards over the years. The information technology and pharmaceutical industries have grown fastest in Bengaluru and Hyderabad. However, there were many barriers to progress, including India’s poor performance in school education.
When India embraced markets and globalization in 1991, it should have redoubled its efforts to strengthen its technological capabilities. Instead, the share of spending on research and development in GDP in India decreased from 0.85% in 1990-91 to 0.65% in 2018. In contrast, this proportion rose over the years in China and South Korea to 2.1% and 4.5%, respectively. , or until 2018.
Supply and demand factors
Despite the setbacks, India still has favorable supply and demand factors that can bring it to the forefront of technology. The number of people enrolled in tertiary education in India (35.2 million in 2019) is well above the corresponding numbers in all other countries except China. In addition, the proportion of STEM (Science, Technology, Engineering and Mathematics) graduates in all 2019 graduates for India was 32.2%, one of the highest among all countries (UNESCO data).
India undoubtedly needs to greatly increase its public spending to improve the quality of and access to higher education. An overwhelming proportion of tertiary students in India are enrolled in private institutions: in 2017, the figure was 60% for those who had enrolled for a bachelor’s degree, while the G20 average was 33%, according to the OECD.
India – which will soon have twice as many Internet users as the US – is a big market for all kinds of new technologies. Although this is a great opportunity, the domestic industry has not yet managed to take advantage of it. For example, the country is operating well below its potential in electronics manufacturing. Electronic goods and components are the second largest item on India’s import bill after oil. Also, the country’s imports are almost five times the exports in this industry (based on data for 2020-21).
High-quality electronic components, which are required in the manufacture of cell phones, for example, are technology and design-intensive. Large multinational corporations control these technologies and generate most of the revenue. China has used its large market size as a bargaining chip in negotiations with foreign companies: Only stay in our markets if you localize production and share technology with local companies. Meanwhile, there has been an aggressive effort to strengthen China’s own technological strengths through its research institutions and state-owned companies.
The Make in India initiative must go beyond increasing business convenience for the private sector. Indian industry needs to deepen and expand its technological capabilities. This will only happen if universities and public institutions in the country are empowered and encouraged to get into areas of technology development for which the private sector may not have the resources or the patience.
For the past three decades, PSUs in India have been judged mainly on their short-term tax advantages. Instead, they should be valued for their potential long-term contribution to economic growth, the technologies they can develop, and the strategic and knowledge resources they can build. A strengthened public sector will create more opportunities for private companies and expand the entrepreneurial base. Small and medium-sized entrepreneurs will thrive if there are mechanisms in place to diffuse publicly created technology, as well as greater availability of bank credit and other forms of assistance. The next big story of Indian skill doesn’t have to come from the United States, it could come from thousands of such entrepreneurs in remote corners of the country.
Jayan Jose Thomas is Professor of Economics at Indian Institute of Technology Delhi and China India Visiting Scholar at Ashoka University for 2020-21