The global slowdown has finally forced Indian IT companies to look at new markets outside the US and Europe?Infosys, for example, has just announced a foray into Australia. IT companies are also looking at new verticals like energy, retail and healthcare instead of just focusing on banking and financial services that have taken a big hit after the financial meltdown. Unfortunately, these new strategies do little in terms of moving up the value chain in the IT industry, which is the only sustainable growth path?Indian IT?s low-cost advantage is already being eroded by competitors from Africa and parts of Asia. However, a move up the value chain requires heavy investment in research & development by companies in particular. It also requires the government to invest directly in R&D and indirectly by expanding higher education opportunities in science & technology. At the moment, we have quite a distance to cover before we can aspire to move up value chains not just in IT, but also in other sectors like pharma and auto where R&D is a crucial component of growth. India?s domestic R&D spending has remained almost stagnant at 1% of GDP since the late 1980s. In 2007, India spent 0.8% of GDP on R&D?approximately $8 billion?with 80% of that being publicly funded. China, on the other hand, spent $47 billion on domestic R&D, and only 30% of it is done by the public sector. The government plans to increase R&D spending to 2% of GDP by 2012 under the 11th Five-Year Plan, but even that may be too small an ambition. That said, there are early signs of some very limited private sector initiatives: just three Indian companies?Ranbaxy, Dr Reddy?s and Tata Motors?make it to a list of the top 1,250 companies in the world in terms of R&D spending. Interestingly, no Indian IT firm makes that list.
At a more fundamental level, India suffers from an acute shortage of qualified scientists and engineers. We have about 120,000 scientists in our country while the United States, which is approximately a quarter of our size demographically, has ten times as many. In fact, there are more Indian scientists working in the US (about 150,000) than in India. Much of US IT?s original research and proprietary software is written by Indian software engineers at Microsoft and other leading Silicon Valley firms. In India, Nasscom has continuously identified a shortage of qualified workers to satisfy the demand for outsourced R&D, even though the number of engineering students who graduate per year has increased from around 44,000 in 1992 to 230,000 in 2006, according to Nasscom figures. Tellingly, from an innovation perspective, only 1% of these typically go on to complete PhDs, compared with 9% in the US and 10% in the UK. We clearly need to begin working at the base before we can aspire to move up global value chains.
