Neelkanth Mishra Writes: How to Make India a Product Nation

Over the past year, the phrase “India as a product nation” has leapfrogged into public discourse, appearing in manifestoes of political parties, and emerging as a policy priority for the government. To be a product nation, the economic ecosystem must shift from a focus on providing services that are relatively low value-added to making longer-term investments in brand building and product development.

This transition is critical for India to retain strategic autonomy in a world with fast-changing geopolitics, by increasing the country’s control on critical technologies. It will also help avoid the “middle-income trap” that many emerging markets get caught in on the way to prosperity.

Countries like Taiwan, South Korea and Spain have become developed countries over a few decades by dominating a handful of sectors like semiconductors, electronics, biotechnology and automotive manufacturing. For their smaller populations three to five sectors sufficed. Given its size, India would need to establish leadership in at least 15–20 sectors.

In most such industries profit pools tend to be concentrated in the top few companies or countries. This is because over the past few decades, the importance of intangible assets has grown substantially. Many of the most-valuable companies today, like Apple, Microsoft or Nvidia, do not own factories. Neither do the most valuable biotechnology or pharmaceutical firms.

Their value comes from the brands and intellectual property they own. TSMC and Samsung do run factories, but it is through high-end technology that they capture a disproportionate share of industry profits. In each high-technology industry, only three to five firms account for most of the industry profits. While tangible assets like factories have natural limitations on output, intangible assets do not. Successful companies therefore generate large surpluses, which when reinvested into new product development, trigger a virtuous cycle, driving consolidation.

It is therefore important to have companies achieve global leadership in their industries. Not only do these firms capture a significant part of the industry value-add, but they also help support the growth of other firms, be they upstream or downstream.

Conducive Conditions

The fertile ecosystems that foster development of such firms have abundant risk capital (either within firms or in investment funds), elevated competitive intensity that drives the continuous improvements needed to establish and maintain global leadership, forward-looking regulators, skilled manpower, a research culture and close integration with academic institutions.

The challenge is, given the large number of necessary conditions, ecosystems tend to form equilibriums—successful ones have all the above, and the difficulty in developing all at the same time makes it hard for other economies to replicate the success.

So how should India go about it? There are lessons from the successes India has had, say in the development of digital public infrastructure (DPI), and growth in the information technology (IT) industry, which are ecosystem success stories, where the government and corporates worked together for a long period of time.

In DPI, for example, while much of the innovation behind mobile phones and computing occurred outside India, a large number of financial institutions, regulators, venture-capital firms and the government (through Aadhaar) worked together for a decade and a half to build the various layers of the India stack.

Similarly, for Indian IT, central and state governments, technology firms, universities and training institutions had to come together to develop the supply chain of skilled manpower, the real estate to house them, and the robust processes needed to become the technology service provider for the world. The government’s role in seeding the industry with investments in computing infrastructure in the 1960s and 1970s also played a critical role.

What Needs to be Done

An important part of both these success stories was an intermediary—Nasscom for the IT services industry, and iSpirt for DPI—that held the thread through various stages of growth—the sutradhar—that helped shape regulations and maintained trust of both the government and the corporate sector.

For each of the sectors that India wants to build an edge on—be it artificial intelligence, telecom equipment, quantum computing, vaccines or space—an institution (often led by an inspiring individual or group of people) needs to set a 15–20-year roadmap towards global leadership. These ecosystems need to keep market competition as part of the system design, lest the effort descends into crony capitalism.

The government also has a role in providing funding for commercialising new technologies (the Rs 1trn fund announced in February is a step in this direction), making regulators more progressive, and sometimes providing support to domestic industry through its own procurement. Efforts in expanding academic institutions, nudging them towards more industry partnerships and giving them more freedom in designing curricula, would also be necessary.

At the same time, sustaining progress and breaking through the middle-income trap also requires better quality manpower, which means significant investments in early-childhood health and education. Even when Taiwan and South Korea were lower middle-income economies, their high school and college enrolment rates were high. As they transitioned from labour-intensive manufacturing to higher end services, these workers were then capable of making the transition.

Countries like Mexico and Brazil struggled on this front, and recent research shows that China too is facing challenges.

We must work relentlessly on these fronts given the short window of 2.5–3 decades available for India to progress to developed-country status, as the pace of demographic transitions is usually faster than that of economic change.

The writer is chief economist, Axis Bank and head of global research, Axis Capital