A manufacturing strategy for India

Indian manufacturing has failed to be an engine of growth, which it must urgently become. Rather
than exceeding and leading the overall growth of the economy as it should, manufacturing has
just about come along. Moreover, the formal manufacturing sector has added few jobs in the past
decade.

And worryingly, it is losing depth. While China's GDP is 3.8 times larger than India's, its
production of machine tools, the 'mother industry' of manufacturing, is 55 times more! India needs
a strategy to grow manufacturing 12% to 14% per annum, create 100 million new manufacturing
jobs in the next 15 years to realise its 'demographic dividend', and create more depth in capital
goods industries and innovation for its manufacturing sector to be competitive and sustainable.

China's remarkable success in manufacturing is the result of a strategy to win, as was the growth
of the other Asian industrial powerhouses, Japan and South Korea. Having built its manufacturing
base, China is scaring the world with its strategy to build 'indigenous innovation'. India too has
announced its intention to strengthen innovation. An innovation strategy must be closely
intertwined with a manufacturing one.

Science results in innovations when ideas are converted into real things that people can use.
Therefore, it is not surprising that China's strategy to stimulate 'indigenous innovation' includes
policies about what must be manufactured in the country, what the ownership of these
enterprises must be, and what ownership rights these enterprises must have on the technologies
used in their products.

Indian policymakers are dancing around the same issues. The idea of an industrial strategy
evokes fears of returning to a planned economy. India must be open to foreign investments and
new technologies from abroad. But they must result in jobs, innovations, and manufacturing depth
in India. Appropriate receptors are required within a developing economy to absorb foreign
technology.

The receptors are production organisations in the host country that use the technology to produce
things for the market - domestic or export. Merely an R&D lab as a counterpart to a foreign R&D
lab will not result in the absorption of technology. Indeed, even domestic R&D labs require
production organisations to convert their ideas into usable innovations: hence the need for strong
industry-lab partnerships.

The quality of the industrial partner in the host country and its ambitions to learn, apply, and
improve the technologies determines whether the technology is well absorbed or not. This has
been empirically established by studies of the growth of technological capabilities within
developing countries, including Indian experience in the auto and pharma industries.

The local partner must have an 'industrial' orientation, not merely a 'trading' one: a long-term
ambition to create an institution with technical depth, not merely an ambition to sell things and
make quick profits. Therefore it is not surprising that absorption most often happens in private
sector companies, which have ambitions to prove that 'it can be done in our country, and we will
some day do it even better than you'.
This is the spirit that drove the Japanese and Korean industrialisation strategies. In the absence
of enough such private sector companies, governments turn to PSEs as the reliable receptacles
for receiving the foreign technologies, which is the case in China. Indian strategy should wean
itself away from PSEs. However, for India to succeed in strengthening 'indigenous' innovation,
our policymakers must consider the question of who are good receptors.

A strategy for growing 'Indian' innovation/industrial capabilities must explain why 'Indian-ness'
should matter and what is 'Indian'? These questions surface, not only in India, but even in the US,
when defence, telecommunications, and security are involved. Governments are accountable to
their people for security - even if they leave industrial development to market forces.

Therefore governments must ensure that the means for maintaining security can be commanded
by them whenever required. So, they would require that organisations in critical, security-related
areas have national security as an objective overriding their obligations to their financial
stakeholders. This is the reason why governments may insist that defence and security must be
in public hands; and if not, then in the hands of 'domestic' companies.

But what is a 'domestic' company? A company must be responsible to its shareholders, wherever
they may be. Whereas national governments, whether elected or not, must be principally
accountable to their own citizens. The mismatch between the objectives of global corporations
and national governments is leading to thorny governance issues even in the US: of reconciling
what accountability means to a global corporation and what it means to a national government.

China's approach is very clear. Policies will be framed to strengthen domestically-owned and
managed capabilities. One of the principal fears that foreign companies have is that China will
steal their intellectual property. China has a large market that tempts foreign companies to stay
even when Chinese government policies turn inhospitable, as regards intellectual property.

In fact, the Chinese government is framing IPR rules to further its own interests, suspecting that
the rules being imposed on it have been devised principally to protect foreign companies'
interests. China is using the lever of purchases by government agencies to develop indigenous
technology.

It is also using the lever of national standards drawn up to suit local enterprises and shut out
foreign competition. In contrast, India's position regarding IPR must be to actively engage in the
discourse with global advocates of strong IPR. However, whatever these advocates propose
need not be accepted as proven truths about the value of IPR. India must discover the best
approach to IPR for stimulating the ongoing innovation it needs without creating monopolies
through IPR rules.

The time has come for Indian policymakers to shape a national manufacturing strategy. The
sustainability of India's growth story depends on it. We must, of course, overcome weaknesses in
infrastructure and administration. But we must also address tough policy questions to promote
Indian enterprises. And the strategy cannot be a return to a planned economy. Nor can it be an
imitation of China. This is the challenge for Indian policymakers.