Right after independence from the British colonial rule, India embarked on developing an industrial economy for leveraging science and technology. In this regard, India adopted three crucial strategies. The first one was import substitution-for locally producing imported industrial products. The next one was to create a supply of high-end engineering graduates. And the 3rd one was to start building scientific knowledge, inventing technologies, and innovating products. For import substitution, India adopted policies of liberalising import of capital machinery, product designs, and intermediary components and increasing barriers for import of finished products. India started setting up higher educational institutions like the Indian Institute of Technology (IIT) to supply the needed human capital with sound technology and engineering background. For scientific discoveries and technological inventions, India adopted the policy of setting up the Council for Scientific and Industrial Research (ICSIR). These three building blocks appear to be well thought out strategic interventions for developing the industrial economy from the production for local consumption and innovation of products and processes with their research capacity and human capital. Unfortunately, import substitutions have not grown as global success stories; IIT graduates have been migrating, and inventions out of ICSIR have not created economic success stories like Silicon Valley. By the way, many other less developed countries, upon following India's model, have experienced similar destinies. But, untapped innovation potential beacons India to achieve the dream of being an advanced economy. Here are a few examples.
Automobile: Among the import substitutions, automobile comes at the top. Within a period of little more than ten years of independence, India's home-built car Ambassador showed up in 1958. That is the replication of the British company's Morris Oxford Series III by India's Hindustan Motors. Despite the success of rolling out the replication of the famous British brand, Hindustan Motors kept producing the same car for decades. As protection ensured profit, Hindustan Motors kept shying away in pursuing innovation of both products and processes.
On the other hand, due to India's strategy of labour-based job creation in the industrial economy, there was no incentive for advancing the production process out of automation. Hence, the role of IIT graduates became limited to knowing imported technologies and maintaining them. On the other hand, ICSIR did not find much relevance in its research mandate to help Hindustan Motors keep producing the same car. Hence, India's success in producing automobiles became limited to operating imported capital machinery to keep making cars as per imported designs with the support of local labor.
But countries like Germany, Japan, and the USA kept focusing on consistent improvement of components, design of automobiles, and production process. Notably, Japanese companies focused on standardisation and automation of the automobile production process for consistently increasing precision, lowering defects, and reducing wastage. Innovation for labour-saving automation, in contrary to India's measure of success of the industrial economy, has been a consistent driver of improving the quality and reducing the cost of automobiles. Consequently, India's replication and labour-centric import substitution led to the closure of its flagship early achievement-losing the domestic market to Japanese Suzuki. In addition to Hindustan Motors, there have been developments like Tata Motors and Mahindra. For sure, their successes have been noticeable; but in the innovation race, they are far behind Japanese or German car makers.
Despite slow progress in the global innovation race, India's domestic automobile industry, with a revenue of $118 bn, produced 26.36 Mn vehicles in 2020. Automobile industry revenue constitutes 7.1 per cent of GDP, 27 per cent of Industrial GDP, and 49 per cent of manufacturing GDP and provides about 37 mn direct and indirect jobs. But worsening air quality of major Indian cities has been limiting further diffusion of India's remarkable success. Hence, there has been policy support to phase out internal combustion-based automobiles with Electric Vehicles. Although EVs will improve air quality, it will reduce the demand of Indian labour for making them, as EVs require far less labour to make fewer moving components and demand far more imported parts. As a result, India's value addition in the automobile will sharply come down during the era of EVs. High focus on labour-based replication and low focus on innovation appear to be the underlying cause of this unfortunate reality.
Semiconductor: As early as 1983, India established Semiconductor Complex Limited (SCL) in Chandigarh (Punjab). In collaboration with American Microsystems Inc., SCL commenced production of "5 micron CMOS' devices in 1984. It is a vertically integrated facility offering the scope of assimilating design, fabrication, testing, bonding, and packaging skills of silicon chip making. This could have been an excellent opportunity for India to join the global race of incremental innovation of silicon chip production process and spin-off commercial ventures. Instead, India has turned it into a captive facility for serving the missions of space and defence. By the way, that is nothing wrong.
On the other hand, instead of keeping operating imported capital machinery for making silicon chips, Taiwan focused on incremental advancement and spin-off ventures to offer commercial services. Taiwan's aberration from operating to incremental innovation has led to the formation of a mega-scale silicon success story creating companies like Taiwan Semiconductor Manufacturing (TSMC) and many more. In addition to earning export revenue of more than $100 billion, Taiwan has now taken over silicon processing edge from the USA's Silicon Valley. With high calibre IIT graduates and the facility of SCL, India could have attained similar or better success. Unfortunately, as opposed to achieving the capability to compete with, India has been in a race to offer incentives to allure Taiwan to set up a silicon processing plant in India to grab the domestic market, which is expected to reach $100 billion by 2025.
Mobile Phones: Due to policies for supporting import substitution, India witnessed a rapid growth of domestic mobile phone handset makers. According to Counterpoint Research, Micromax was predominant with a market share of 16.26 per cent during the 2nd quarter of 2014. But unfortunately, that share had come down to 0.71 per cent in July 2020. India's domestic mobile handset making is now dominated by China's Xiaomi, Vivo, Oppo, Realme, and South Korea's Samsung. The underlying cause of eroding the market share of Indian homegrown handset makers has been due to reliance on labour for assembling imported components with the support of imported capital machinery. On the other hand, foreign brands succeeded with their underlying force of innovation.
Grassroots and Frugal Innovation: India is a land of creativity, craftsmanship, and grassroots innovation. National Innovation Foundation (NIF) of India has so far developed a database of more than 300,000 of them. Furthermore, NIF has been recognising them by giving awards and supporting their rollouts by offering seed capital and even patent-filling services. Although many great innovations like Airplane and Automobile emerged as grassroots innovations, none of India's Grassroots innovations have scaled up to that extent. On the other hand, upon losing RS 1000 crores from Nano (strip down version of a family car), Tata got a lesson that frugal innovations run the risk of failing to create economic value.
A steady progression of innovation of both products and processes has been eroding the advantage of labour, natural resources, and domestic market. Hence, India's strategy of labour-centric replication in leveraging a sizeable domestic market has been weakening. On the other hand, rising automation also limits India's job creation agenda out of the industrial economy. But the strategy of protection and slowing down process innovation is failing to protect jobs. Hence, it's time for India to change its strategic focus from replication to innovation. But the challenge has been turning innovation into a force of job creator so that the net effect on both competitiveness and employment turns out to be positive. Less developed countries, aspiring to be high-income economies, should also draw a lesson from India's journey of leveraging the industrial economy to create prosperity.
M. Rokonuzzaman, Ph.D is academic and researcher on technology, innovation, and policy