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India Has to Create Big Waves to Succeed

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Wave for Leader

India’s economy has recovered from the sharp slowdown it saw over the previous two to three years, which saw growth decline from c.10% to under 5%, and appears to be back on a 7-8% growth trajectory. The new government, led by Prime Minister Modi, has moved decisively on reforms in a number of key areas including FDI liberalisation, privatisation, improving clearance and approvals processes, labour laws, amongst others[1]. Progress across these key areas combined with announcements of further reforms has created the hope that India can build on this momentum and accelerate further and compensate for declining or stagnant growth in China and other major Economic Blocs such as Europe. From India’s perspective, its economic success will depend not just on the necessary structural and macroeconomic reforms being implemented, but on whether it can create broad-based economic growth and job creation on an unprecedented scale. This requires not just reforms, but the creation of innovative globally-competitive industries across services, manufacturing and agriculture and go well beyond the successful albeit narrow technology focus it has created to date. Doing this simultaneously across agriculture, industry and services requires a Graph 1.comprehensive plan for India to develop the next generation of scaled economic “hubs”.

India’s Bangalore is famous for being India’s version of Silicon Valley and is a source of national pride given the quality of IT talent and the large IT services industry that it has spawned. However, given India’s development challenges, this is nowhere near enough. Most other large countries have matured gradually from agrarian societies to manufacturing and industrial hubs eventually to innovative services and technology driven economies. This allowed these countries to focus their national policy and resources around creating high growth industries. In recent years, many countries, including the US and certain European and Asian countries have focused on developing their countries into technology India’s central challenge is to create all three of Toffler’s waves (see box) of civilizational development – in agriculture, in industry, and in information and innovation, simultaneously. To do this, it will not only need to move forward aggressively on its overall structural and macroeconomic reforms, it will also need a proactive diversified multi-sector strategy to build out a number of sectors in parallel to one another.

India’s Next Phase of Development: Creating Scaled Waves of Agriculture, Industry and Innovation

Given the importance of developing all three “waves” simultaneously, the most obvious question is where to start and which specific industries India should focus on developing. India is a diverse country not just in terms of language and culture, but also economically and demographically. Certain states and regions, particularly in Northern and Central India are significantly poorer than the states in Western and Southern India and are at an altogether different sQuote 1tage of development. Education clusters have emerged throughout the country and are creating new talent pools. These considerations, and others, need to ultimately drive the selection of industries for focus. While the most important consideration must remain on the potential economic impact – in terms of jobs created and output added, India also needs to invest for the long-term in innovation-driven sectors to help fully leverage its talent pool and position itself as a global competitor in the industries which will drive the future. For each of the waves outlined above, we take a closer look at specific industries which India can develop into globally-competitive sectors across all three areas – agriculture, industry and innovation. The list is not exhaustive and there may well be other industries where India can establish global leadership. However, even a focus on just the sectors outlined below would significantly change India’s position in the global economy – and help it achieve its objective of simultaneously launching all three waves of development.

Wave I: Development of Agriculture for India to Become one of the World’s Largest Food Suppliers

India has the world’s second largest stock of fertile arable land (behind the US) and the largest under-exploited land in the world[2]. The first step for India is to rapidly develop it large agricultural sector which accounts for c.US$300 billion of annual output into a sophisticated, value-added food processing industry to improve the lot of subsistence farmers and the c.50% of the labour force which is dependent on agriculture.

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Wave II: Development of Modern World Class Industrial Base and Global Leadership in Key Industrial Sectors

The proportion of Indian GDP that comes from industrial production is only 16% and US$293 billion in absolute terms relative to China’s US$4 trillion industrial sector. In addition, as the agricultural sector develops, capital intensity and scale will help to improve yields and additional value will be added from managing the full value chain, the proportion of workers in the sector is likely to reduce with additional capital intensity and scale. Thus, India needs to also focus on the development of manufacturing industries where it can become a globally-competitive hub. Three of the areas India will need to focus on to launch this wave, along with illustrative sectors, are outlined below. Focusing on developing these and other industrial sectors such as chemicals (US$144 billion industry), electrical machinery (US$100 billion industry by 2022) and electronic systems (US$94 billion industry in 2015) will help drive India’s industrialisation and job creation[3].

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Wave III: Developing Information and Innovation Industries

 India’s IT industry has played a disproportionate role in its reputation and its contribution to GDP and employment – accounting for 7.5% of GDP, three million direct jobs and nine million indirect jobs. Of course, given the size, diversity and readiness of India for progress, it should not and does not need to wait for agricultural development and industrialisation to happen in order to start focusing on the innovation and information driven industries. It has already proven its global prowess in IT services by establishing Bangalore as a global IT hub with world-leading technology services companies such as TCS and Infosys. With traditional IT and BPO sectors reaching a stage of maturity, their growth will slow and profitability will also decline – and the nexus of growth shifting to emerging technology areas. Below we outline four key areas of the information economy with illustrative sectors where India can leverage its large, educated, English-speaking talent pool to establish globally competitive domestic sectors.

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Establishing Global Leadership: Turning Industries into Globally Competitive Value Creation Hubs

In order to successfully implement sustainable waves, India will need to develop scaled and global competitive industries. Basic industrial policy aside, it will need to create and execute strategies that transform existing sectors and create entirely new ones on a massive scale.   Lessons from other countries have shown that for most industries the more efficient growth strategy is tied to the creation of large scale hubs to concentrate capital, lQuote 2abour and intellectual property in a virtuous circle. Government has an important role to play in creating hubs as the inset from China’s various government inspired hubs and valleys shows. However, this is not just a top-down exercise; the study of success and failure in hubs shows it takes time and requires various factors to come together to create momentum and reach a level that continues to inspire innovation and entrepreneurship and also to make it more difficult for future governments to inadvertently damage.

 

To this end, Silicon Valley, perhaps the best example of a self-sustaining technology hub, is an interesting case study of how leading hubs can develop. In the early 1970s, the areas surrounding San Francisco near the Stanford University campus started rapidly transforming from an area largely consisting of fruit orchards to an industry cluster which would over the subsequent decades transform not only the US economy but indeed the entire world. Silicon Valley has helped create three of the four largest companies in the world by market capitalisation (Apple, Google and Microsoft). Today, the US technology industry accounts for 20% of the total market cap of the S&500 index[4]. Apple, which was founded in the Valley in 1976 and successfully listed for US$1.3 billion in December 1980, is now worth c.US$750 billion and is the most valuable company in history, worth twice as much as the second most valuable company, Google, another Silicon Valley firm. Beyond these and several other large technology companies based in the Valley are the wide range of billion-dollar technology and innovation driven ‘start-ups’ which over the last decade have rapidly transformed nearly every aspect of our lives from how we interact with friends, to how we shop, to how we call a taxi – both creating new industries and displacing existing ones.Table 9

 

Outside of the US, other countries have also both by design and by accident created hubs or clusters that have driven their domestic companies into positions of global leadership – including a number of East Asian countries. Japan and Korea’s experience in the automotive and consumer electronics industries in the 1970s and 1980s helped create a number of leading global companies such as Sony, Hitachi, LG, and Samsung, while Taiwanese companies established leadership in the semiconductors sectors. Scandinavian countries also established hubs for mobile communications giving rise to companies such as Nokia and Ericsson. India has also demonstrated that it too has the ability to create globally-competitive, knowledge-driven industries such as IT services, business process outsourcing and pharmaceutical manufacturing. Bangalore has created a robust ecosystem for entrepreneurship and knowledge which has allowed companies such as Infosys and TCS to join the leadership group in their segments. However, other than a few e-commerce companies which are establishing dominance in the domestic market, India has largely failed to create scaled players in software and hardware products. With the market rapidly shifting to the next wave of innovators, Bangalore, and by extension India, risks being left behind the other IT hubs, particularly Silicon VallQuote 3ey itself. Bangalore has created some emerging global competitors such as Flipkart in e-commerce or Mu-Sigma in analytics to re-invent itself from traditional IT services, however this phenomenon needs to happen at scale in all the emerging technology areas including cloud computing, social media, and mobility, big data analytics and the internet-of-things for the hub to survive. If India wants to build self-sustaining industry hubs which can produce wave after wave of globally-competitive companies over the next two decades and beyond, it will need better strategy to establish and grow hubs.

 

Launching Hubs to Help Start Waves: The Basic Recipe

India’s real challenge is to catch up on two shifts in global civilisation, namely the Agricultural Wave and the Industrial Wave, and to be an integral part of the present wave, the Information Wave. Clearly, the bar is much higher for the first two waves than when they first impacted the world. Both the Agricultural and Industrial Waves are characterised by the use of modern technologies, in all aspects of the value chain, research and development is an important component in creating and sustaining differentiation, scale is critical to economics and globalisation is critical to market access among other things. The important role of technology is one of the ingredients that plays well to India’s fledgling position in global information technology and innovation; fledgling because the definition of the wave is far beyond IT services, where India has carved out its position.

 

Hubs can play an important role in the time-compression that India seeks in launching the nation into the three highly impactful waves. However, these are not easy to bring to a successful outcome. Even in IT services, where India has the role model of Bangalore, various state governments that have made efforts to replicate this success, appear to have thus far not seen the traction that Bangalore was able to achieve. The key reason for this is that technology, industrial and agricultural clusters and hubs need a number of ingredients to come together. The objective is to launch a programme that will create a robust self-sustaining ecosystem. The five key factors which needs to be put in place in order to develop a successful hub are:

 

  1. Talent Pool Availability. A high-quality, flexible, well-trained pool of talent is the basic condition which can help attract companies to a hub. Government investment in higher education and professional education institutes in perhaps the biggest area where it can influence the creation high-technology innovation hubs, however other sectors such as manufacturing require a fit-for-purpose labour pool. The presence of great educational establishments has been a factor in most of the successful valleys. This needs to be supported by highly flexible labour laws.
  2. Access to Venture and Other Risk Capital and Financing. Access to financing and, in today’s environment, this means a robust ecosystem complete with a deep bond market (critical for industrial development), a vibrant private equity and venture capital industry (critical for both industry and services) and a strong, independent and efficient banking system to support entrepreneurs through launch, growth and competitive positioning. Venture capital is a key ingredient and it should not come as a surprise that the US VC industry has largely clustered around Sand Hill road in the Valley or that India’s VC funds tend to locate in Bangalore rather than Mumbai – the country’s ‘financial capital’.
  3. Robust Physical Infrastructure. Aspiring hubs need both world-class physical infrastructure (in the form of good roads and reliable access to basic utilities and telecommunications networks) and soft infrastructure (schools, hospitals, parks, urban environments) to attract existing companies, entrepreneurs and the best talent and retain it. Bangalore has many examples of corporate complexes that are creating a new and modern work culture. Such cultures tend to be specific to the nature of the hub (i.e. tech hubs require quite different infrastructure from automotive hubs) and many need the support of government to create the appropriate infrastructure.
  4. Favourable Local Policy and Governance. Although financial and business incentives (such as tax breaks, etc.) for investors are an important tool to compete with established and aspiring hubs, they rarely work in isolation without extremely effective administration and governance in the hub. Tax, investment incentives, employment subsidies and many other financial tools support the success of a hub.
  5. Central Government Role on Hubs, Special Zones and Industrial Policy. Central policy can support the success of hubs by creating industrial policy that favours scale and at the same time the setup of small businesses, the zoning policies that support land to be designated special and the giving of contracts to national champions. Although there are many counter arguments for each of these, such policies have been successfully used by Japan’s MITI, China and the Asian Tiger economies.

 

 

Within this matrix there are a many different types of hubs, and the mix of the above will be very different depending on the sector and the location of the hub. Innovation hubs are typically driven by entrepreneurs and industry hubs by established corporates; and while academia and education has a critical role to play in technology hubs, its role in manufacturing is more limited. Venture capital is more important in innovation and technology driven industries, however access to bank financing and private equity is critical for traditional manufacturing and service sectors. India will need to develop hubs that leverage and are suitable for local conditions and factors. This is critical for India where the inter-state disparities are significant in terms of natural resources, demographics and the talent pool, structure of the local economy and average income (not to mention India’s extreme ethnic, cultural and linguistic diversity), and it cannot afford to get this wrong. The German state of Bavaria for example tried to establish Europe’s leading innovative biotech cluster in the city of Munich, and created world class infrastructure and a series of attractive government policies to encourage start-ups. However these policies could not make up for a fundamental lack of business-starting entrepreneurs in a country where most innovation comes from academia partnering with large enterprises, and the “hub” today has many fewer start-ups than even nascent biotech clusters such as Shanghai and Hyderabad[5]. Had Bavaria, in a country that invented the modern pharmaceutical industry, sought to build a successful life-sciences hub it would have been better off working with the established biopharma players already in place. India will need to learn this lesson well.

Of course hubs are not the only way and sometimes not even an appropriate one to maximise the impact of a wave. The Agriculture in particular is by definition distributed rather than concentrated based on the disposition of arable land rather than on the concentration of other productivity factors. However, they key upstream inputs and drivers of modern agriculture, including mechanised equipment, chemicals and fertilisers and seed and plant technologies, are certainly suited for hub based development,. Further, moving down-stream from primary production, food processing lends itself well to development in hubs, benefiting from increased concentrations of infrastructure, and labour as well as from the execution scale that hubs deliver. Therefore, while industry hubs will not be the only consideration for India’s industrial planners during the next decade, they will surely be among the most important strategies the country will execute as it seeks to build its development waves.

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Conclusion: It is Time for Grand Strategy in Remaking India – Launching Multiple Development Waves Needs to be Part of the Plan

Mr. Modi’s reform efforts to date have been sound in addressing multiple issues. However, it has not yet involved the implementation of a Grand Strategy to transform the nation. The sweeping electoral mandate created the conditions that can support transformational agendas. Launching three waves, all of which have transformative in human history, simultaneously can underpin such an agenda.

The analysis of how to execute this successfully needs to recognise that there is no precedent for any country creating multiple development waves simultaneously across agriculture, industry, services and technology. Therefore, there is no one template which India can follow – and it will need to draw on various lessons from history and exemplars around the world for the success of the different waves. Mr Modi has certainly courted the right people who could support the execution of a big vision; this would include the US and a wide range of other sovereigns such as Japan that have successful hubs as well as and the Indian diaspora which plays an important role in Silicon Valley itself.

For India to succeed in this endeavour, it will need to think about itself as a collection of many countries – some with under-exploited agricultural assets, some with masses of people who need to be employed making things and some with skills and aptitude for creating value from knowledge – and this will enable the plan to encompass launching multiple waves and industries across the country. The experience of other countries, as well as some recent experiences in India, prove that this is indeed possible with coordinated government action to create the enabling ecosystem for private sector development across key sectors.

China provides an important lesson in how central government set the measures and incentives to focus each provincial leader on a few simple goals and provided the support for them to succeed. China’s model thereby reported and promoted those who delivered across the country. India’s government can try to do something similar with its bureaucracy by mobilising those who deliver on development in each of the waves across the country. This has a chance of turning politicians into the allies of entrepreneurs and providing successful politicians, regardless of their party affiliation, with the visible track record of delivering on development and growth for their constituents. Mr. Modi in his previous role of State Chief Minister helped turn Gujarat from an entrepreneurial state to a national hub for manufacturing in areas such as automotive and chemicals, and was rewarded with the opportunity to lead the country. Other successful politicians will rise to that opportunity too and indeed Indians, hungry for realise their potential and work towards the development of globally-competitive industries, seem increasingly inclined to reward politicians with their votes if they show signs of emulating “The Gujarat model”. Indian leaders – both from the government as well as private sector entrepreneurs – who can see the long-term potential which India offers and successfully leverage its many advantages to create globally leading companies and industries will ultimately be the ones who will shape India’s destiny and this will earn them the right to play on the world stage.   Embracing all three of the waves that mark the maturing of civilisations seems to be an essential ingredient in the realisation of India’s potential.

 

2 See the Sign of the Times Leader from Dec-2014, The First Steps in the Creation of the New India Story: How the Modi Government is Seeking to Reshape India
3 Source: UN Food and Agricultural Organisation (FAO) Database
4 Source: India National Accounts, GPC Analysis
5 Source: India National Accounts, Reserve Bank of India Database
6 Source: D&B Research (https://www.dnb.co.in/Food%20Processing/overview.asp)
7 Based on current agricultural sector size of US$325bn and estimated food processing sector size of US$650bn
8 Industry sizes and estimates from Government of India’s Make in India website (www.makeinindia.com) and include the domestic market and exports
9 Source: D&B Research (https://www.dnb.co.in/Food%20Processing/overview.asp)
10 Source: India National Accounts, GPC Analysis
11 Source: Economic Times
12 Source: Stockholm International Peace Research Institute Yearbook on Global Military Spending
13 Source: IDC
14 Source: Ministry of Human Resource Development
15 Source: PwC Research
16 Source: Renewables Energy Network for the 21st Century
17 Source: Market Line Research
18 Source: GTM Research
19 Source: Ministry of New and Renewable Energy; Note: Renewables analysis does not include hydro-electricity
20 Source: Centre for Wind Energy Technology India
21 Source: World Health Organisation
22 Source: GlobalData Research; Figure refers to the R&D expenditure of the world’s 30 largest pharmaceuticals companies
23 Source: CapitalIQ
24 Source: www.totalbiopharma