Labor-intensive manufacturing has historically been the best-known recipe for driving economy-wide productivity enhancement. Over time, several countries, notably those in East Asia, managed to move unskilled workers from farms in rural areas to factories in urban settings. This transition increased both individual incomes and national GDPs, ultimately boosting productivity.
Not all countries have taken to manufacturing, though. Some of them have experienced premature deindustrialization, which economist Dani Rodrik has analyzed extensively. India’s manufacturing sector never reached full potential because of this phenomenon.
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Instead, India ended up with the “premature servicization” of its economy. This diminished its capacity to create enough well-paying jobs for its large population and did not allow for increased productivity.
India’s Drive to Industrialization and Innovation
Services now comprise more than half of India’s GDP. As alluded to above, services do not deliver productivity growth in the same way as industry. Those who argue for free trade believe this does not matter. India can import industrial goods like cars and cellphones while exporting software writing and call center services.
Such arguments for a trade-based economy fail to recognize, or in many cases deliberately omit, increasing trade deficits when a country has poor manufacturing. In a volatile and uncertain world, these deficits can become a geopolitical liability for any nation because manufacturers can shut off access to the most basic of goods. Manufacturing does not only increase productivity and enhance security, but it also creates jobs and lowers inequality. For these reasons, India has recently embarked on a reindustrialization program.
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The new Production Linked Incentives (PLIs) seek to attract the more reputed global manufacturers, the best brains in industry and high-quality, long-term investments to India. Under PLIs, participants can manufacture for the domestic and/or export markets. The government applied these incentives to 14 sectors, of which telecoms, cellphones, electronic equipment and automobiles are benefiting already.
Many manufacturers station their Global Capability Centers (GCCs) in India, which has become a global base for services operations. A June 2021 report by Deloitte and NASSCOM states that 1,300 GCCs employed more than 1.3 million professionals and generated $33.8 billion in annual revenues in the financial year starting April 1, 2020, and ending March 31, 2021. Another report estimates that GCCs are likely to grow by 6-7% per year and rise to over 1,900 by 2025. It also says that these GCCs are evolving from back-office destinations to global hubs of innovation.
Digitization is aiding this transformation of GCCs. Now, industrial design is no longer a monopoly of a headquarters in Michigan or Munich. Thanks to fast-speed internet and powerful computers, research, design and development of new machines, goods and consumption articles can take place anywhere in the world. Software is playing an increasingly bigger role in creating new hardware, driving additive manufacturing and automating factories. A process of disintermediation of manufacturing is under full swing, leading to what can be called a “servicization of manufacturing.”
This trend gives India a unique opportunity. Global businesses need rapid, at-scale and cost-effective innovation. With its cost advantages and services ecosystem, India can provide that innovation to the world. Conventionally, innovation is associated with creating something new such as an iPhone or a Tesla. However, innovation occurs in less flamboyant ways as well. Any change in design or development that creates new value for the firm or provides an operational competitive advantage is an innovation too.
A Unique Opportunity to Takeoff
Global companies aiming to operate faster, cheaper and better are increasingly operating in India. The country has become more innovative over the years. India granted 28,391 patents in the financial year 2020-21, up from 9,847 in 2016-17 and 7,509 in 2010-11. Last year, the press reported that India registered as many trademarks in the past four years as in the previous 75. India’s rank on the global innovation index has moved up from 81 in 2015 to 46 in 2021. The World Intellectual Property Organization also recognized India as the second most innovative low and middle-income economy after Vietnam.
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India missed out on the first and second industrial revolutions. The first one took place in Europe between the mid-18th and mid-19th centuries when India was fragmented and undergoing colonization by the British East India Company. The Second Industrial Revolution occurred in the 20th century, but India was ruled by the British government directly, which had no interest in industrialization. London’s incentive was to use India as a provider of raw materials and as a captive market for finished British industrial goods.
After independence in 1947, India failed to industrialize unlike its East Asian counterparts. It chose a Soviet-style planned economy that was closed and protectionist. Only in 1991 when the Soviet Union collapsed did India embrace market reforms and liberalized its economy.
Today, India is growing at 9% and its GDP is about to touch the $3-trillion mark. With strong global tailwinds, India can embrace industrialization and innovation, and finally enter what American economist Walt Rostow has termed the takeoff stage of economic growth.