At last month’s NCAER-Brookings India Policy Forum, Sajjid Chinoy presented joint research with Toshi Jain, in which they analysed a key driver of economic growth: what economists call total factor productivity (TFP). TFP is the residual contributor to measured GDP growth, after growth of physical capital, the labour force, and education and skills (human capital in economists’ jargon) have been accounted for. They found TFP growth in India had slowed over the last decade, partly because of global and cyclical factors, but also because of deteriorations in India’s public investment, industrial credit, and openness to global trade.
Economic theory suggests that without robust TFP growth, overall economic growth will peter out as diminishing returns set in. India may be a long way off from that situation, but higher TFP is, in some respects, a freebie—it increases output without increasing measured inputs. Of course, the story cannot be that simple. TFP growth is usually the result of some kinds of investments—ones that are not always measured effectively or at all, so it is not just a case of getting something for nothing. The best example is expenditure on R&D, which, if translated into the right innovations, can boost productivity.
The three variables highlighted by Chinoy and Jain point to possible mechanisms for productive innovation. Public investment has spillover benefits that are often not measured—like better roads reducing transport times. Adequate credit is needed to translate ideas into concrete innovations; for example, through investments in new machines or factories. And trade openness both creates competitive pressure for innovation, and improves the flow of ideas across international borders.
Is there some underlying framework for understanding the process of innovation in an economy? While several classical economists emphasised innovation, the modern idea of a ‘national innovation system’ seems to have first been systematically explored by Christopher Freeman, a British economist, beginning in the 1980s. Many European economists have followed the same intellectual path, but the idea has not seemed to be as prominent in Indian economic policy thinking, at least judged by public attention.
An exception is the Centre for Technology, Innovation and Economic Research (CTIER), based in Pune. One of the leaders of CTIER is Naushad Forbes, co-chairman of Forbes Marshall, and a former president of the CII. In 2016, he provided a comprehensive analysis of India’s innovation system, in which he evaluated its progress in the quarter-century after the big-bang reforms of 1991, as well as areas of continuing deficiency. He noted the failure of India to make headway in several technologically dynamic sectors, such as technology hardware, electronic equipment and aerospace and defence. He also noted the need to leverage India’s stock of skilled people in enhanced R&D efforts, and the need to upgrade the higher education system in the right directions, including improvements in articulation with industrial research labs.
In 2018, Swati Mehta, of Guru Nanak Dev University, confirmed Forbes’s insights with a formal quantitative analysis. For example, she found that expenditure on R&D by government, the stock of science and technology personnel, the world’s stock of patents and the country’s trade openness index all had positive effects on innovation. In line with Forbes, though not in as much detail on the policy front, she noted that national policies should be geared towards enhancing inputs that increase innovation.
Reviewing India’s policymaking over more than seven decades of independence, it is clear that successive governments have always paid some attention to science and technology, and to innovation. Arguably, the current government, going back to its first term, and continuing in its current term, has been more focused than ever on improving India’s performance in areas that should enhance innovation, such as digital technology and electronics manufacturing, among several other strategic areas. In the light of this emphasis, the failure of India’s national innovation system to transform in the manner envisaged by Forbes suggests that something is still missing. I would conjecture that more trade openness, better financial intermediation, and more public investment, while desirable, may not be enough for a transformation. That may require tapping more into the global pool of human capital, in both the private and public sectors, in education and in R&D, with institutional innovations to make that effective.
Professor of economics, University of California, Santa Cruz