India’s economic future lies in modernising for the masses

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Updated: January 24, 2021 10:11 AM

The growth of a technologically advanced start-up ecosystem is not a substitute for faster growth in labour-intensive manufacturing

In addition to the obvious acceleration of digitisation created by the pandemic, specific sectors such as health, education and finance provide global growth opportunities for India.In addition to the obvious acceleration of digitisation created by the pandemic, specific sectors such as health, education and finance provide global growth opportunities for India.

The farmers’ protest over the new agriculture reform laws have highlighted some severe policy deficiencies in how the national government handles the agricultural sector, including its policies for domestic food security. Many, including myself, have now written on these topics. But, the protests also should draw attention to another, even more important, national policy failure, in the realm of industrial development. Despite the government’s attempts to accelerate the growth of India’s industrial sector, including activities that might fall under a traditional classification of services, as well as the more obvious case of manufacturing, progress has been slow. The lack of growth of employment in the industry has left too many people stuck in agriculture, or in rural areas more generally, or struggling on the margins of the urban economy if they abandon their places of origin. Punjab, at the forefront of the farmer protests, is merely the starkest example of India’s failure to “modernise” for the masses.

Since we are starting a new year, where one traditionally looks for signs of renewal and hope, perhaps we can find it in a new NASSCOM report (prepared in partnership with consulting firm Zinnov) on India’s tech start-up system. The report describes a vibrant and resilient ecosystem for tech start-ups. Somewhere between 11,000 and 12,500 were born since 2015, the cumulative number growing at 8-10% a year. Of these, 38 have valuations over $1 bn, the fabled status of “unicorn,” with a dozen of those entering that category in 2020. Another headline number is the existence of over 500 incubators and accelerators, spread across more than 100 cities. More broadly, India has over 750 mn Internet subscribers, and increasing “digital maturity” among Indian enterprises.

Other important features of India’s start-up landscape are its breadth and its presence on the frontier of technology. The first is captured in the range of sectors where start-ups are emerging, including retailing, finance, education, health and media, as well as technologies that come into play out of sight of consumers, inside the operations of businesses or in their supply chains. The second is described in the report as “deep-tech,” a term that covers a range of frontier areas, including artificial intelligence, blockchain and big data. In this context, it is worth recalling how India’s foray into digital technology started out, doing routine and back-end services for global leaders, to the extent that the country’s software workers were dismissed by at least one Western academic as “techno-coolies”. The point to be made is the history of India’s dynamism in this sector. Another important observation is that serving global customers allowed India’s firms to learn by doing, and meet international quality standards, something that will always matter.

There is much more in the report that gives cause for optimism. In addition to the obvious acceleration of digitisation created by the pandemic, specific sectors such as health, education and finance provide global growth opportunities for India. But, what are the cautions that we should register? The growth of a technologically advanced start-up ecosystem is not a substitute for faster growth in labour-intensive manufacturing. India has too many people who need good jobs to not make that a priority. But, we know that the growth of tech firms can create ancillary jobs, and not just receptionists and drivers. What is sometimes underappreciated in India is the large number of jobs that are required to maintain the hardware and software infrastructure for a digitally-based economy. The range of skill sets required here is substantial, from identifying physical problems with networks and equipment to managing software upgrades and cybersecurity issues. India’s digital infrastructure is probably less robust than raw statistics such as access numbers indicate, because of the inadequate bandwidth, too much downtime, obsolete equipment, and so on.

The NASSCOM report does not shy away from listing challenges and outlining areas where government policy could be more supportive. Certainly, the perspectives in this report are much more useful in thinking about where India can and should be heading, as compared to the national government’s own formulation of “Digital India”. There are also unanswered questions in the report: tucked away toward its end is the observation, “However, to date, success rates of I/A [incubators/accelerators] are abysmal”. But, I could find no analysis of why this is so. My guess is that the answer may lie in the culture of government and of universities, neither of which supports experimentation, risk-taking or results orientation. Again, the report praises the Bharat Inclusion Initiative at IIM-Ahmedabad, but one cannot get a sense of what sets it apart from so many other efforts to support innovations on the long road from idea to commercial success.

Ultimately, a report like this one has to be dissected, challenged and absorbed to the point where it changes policies and institutions on the ground. This will happen at the level of states and cities, though the national government has a role to play in areas such as tax policies that incentivise risk-taking, or building out the core digital infrastructure. The framework of this report has the potential to launch a new chapter in the decades-old saga of how a handful of IT firms, new and old, showed that India could hold its own on the world stage.

The author is Professor of Economics, University of California, Santa Cruz. Views are personal

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