Why PM Narendra Modi government must not miss the servitisation revolution bus in new industrial policy

Growth of servitisation faces hurdles around the lack of skills—both for its own needs in India and to exploit the huge opportunity for providing such services to global firms—ill-defined privacy laws, etc.

Narendra Modi, Narendra Modi government, servitisation revolution, industrial policy, new industrial policy
Prime Minister Narendra Modi. (Image: PTI)

There were reports in the media recently that the government is working on a new industrial policy, which was last revised in 1991, when the licence raj was abolished and many of the restrictions that constricted the scaling up and competitiveness of the sector were removed. Without doubt, 1991 was momentous point in time for India as the country faced a deep economic crisis, and it was a period that coincided with growth of what is now recognised as the third industrial revolution launched by the development of internet and WTO-led efforts to open up global markets. In the 25 years since the launch of the last policy, the industry’s share of GDP has stagnated at around 30% (the share of manufacturing remained around 15%) while the share of services grew by 15% to nearly 54% despite the lack of an explicit policy guiding the sector’s growth. While the policy unshackling probably held back any fall in the share of industry, not addressing all the inter-related challenges of the industrial system (e.g. labour, infrastructure, ease of doing business, etc) at the same time, within the emerging global industrial context, ensured that we failed to exploit the huge opportunities from the third industrial revolution—unlike China, which re-wrote the history of industrial development. India is at another such juncture with regards to industrial development which, coincidentally, comes at a time when digital technologies, collectively called the Internet of Things (or IoT), are transforming industry—a phenomenon many are terming as the fourth industrial revolution.

While the economic crisis caused by the dire balance-of-payment situation led to the ‘India moment’ in 1991, in 2017, as the fastest growing large economy in the world, it would seem we face no such crisis-driven compulsion. However, in reality, we face another equally serious crisis, that of not creating sufficient jobs in a country which will have the largest working age population in the world by 2050. So, the objectives of the new industrial policy are clear—facilitate the creation of millions of new jobs in the context of the fourth industrial revolution which, ironically, makes job creation more difficult.

More importantly, the core question of ‘what is industry?’ is being raised by the shifts in global business models in the fourth industrial revolution. This is also something the new policy must address. How can the proposed 2017 industrial policy address these issues that seem like dichotomies? The answer, surprisingly, in lies in discarding the labels of ‘industry’ and ‘services’ that we have all gotten so familiar with and that have guided our policy thinking and making in the past decades. No one questions the profound impact on work profile, type of jobs and number of jobs created that the fourth industrial revolution will have. It will transform global supply-chains, competitiveness of industries and countries.

But what is perhaps less recognised is that it will also blur the boundary between industries (e.g., Google and Apple getting into car-making) and, even more importantly, the boundary between ‘industry’ and ‘services’ (e.g., are Uber and Ola part of automotive value-chain or the services sector?). This rapidly growing phenomena (we have termed this as ‘servitisation’ in BCG—products being sold as services/solutions) is potentially transformative for policy-making. Thus, to have an effective industrial policy for the 21st century digital world, we need to re-set our past mental models, definitions, and industrial framework for policy development. Doing so leads to the emergence of four inter-connected ‘transformational’ themes:

Smart manufacturing: If we do not want to miss the global manufacturing-growth bus, like we did at the time of the third industrial revolution, we have make our industry ‘smart’ by rapidly and widely adopting Internet of Things even if this means that the job elasticity of growth will fall. Here, my submission is that it is not enough to make our manufacturing companies ‘smart’, but the policy should also support the emergence of India as a research-&-manufacturing (e.g., sensors) hub for smart manufacturing technologies and development of standards, that are still at an early stage of development. This will sustain the future competitiveness of the country.

Servitisation: This trend will be a defining characteristic of the fourth industrial revolution. For many global companies, this is already the fastest-growing revenue stream. Growth of servitisation (this is true world-wide) faces hurdles around the lack of skills—both for its own needs in India and to exploit the huge opportunity for providing such services to global firms—issues of standards and inter-operability for seamless data flow, ill-defined privacy laws, etc. How we define the value-chain of products and services for the purpose of taxation will also have a huge impact. The new policy should articulate this opportunity and how to address the challenges of moving to digitally-delivered solutions to both industrial and individual customers.

Micro-enterprises: A key characteristic of the fourth industrial revolution is the emergence of a new industrial and work structure, which is changing the way enterprises and entrepreneurs function and compete with each other. Digital technologies are now enabling firms, however small they may be, to overcome the barriers of scale and access resources, customers, and suppliers easily. Individuals are finding it easier to become micro-entrepreneurs, rather than only job-seekers in larger organisations, offering their time and talent in the market via the on-demand/platform economy. Growth of servitisation is pushing this even further as micro-entrepreneurs become an important part of the last-mile ecosystem delivering solutions to the customer.

India has had a ministry for MSMEs for many years, and has launched a major initiative in Start-up India. But we still continue to face major challenges in building a dynamic environment for both, not the least of which comes from their working in silos. Addressing this challenge has to be one of the central themes of the new policy. Life-long learning system and labour laws for the 21st century: Lack of skills and scale, as a result of our archaic education system and labour laws, respectively, have been the black-spots of our economy. I have intentionally put these together, as one without the other will be ineffective to create the enabling environment needed to deliver against the opportunities in the fourth industrial revolution.

The new industrial policy has the unique opportunity to address both as increasing digitisation and transformation of work will require a fundamental change in our approach to skilling and types of skills, content of work and the types and definition of jobs and their regulation. For example, ‘Uber-isation’ of jobs will only accelerate as we see a step-jump in micro-entrepreneurs, and these jobs will need very different approaches to both skilling and labour regulations. Large companies will have fewer jobs and more jobs will be created in services than hard manufacturing. While the industrial policy itself cannot address both these themes in depth, it is clearly the overarching document that articulates the new industrial context which should guide the framing of laws and policies by their respective ministries. India ‘missed the bus’ with the third industrial revolution. The new policy has the opportunity to make sure we do not do it once again with the fourth industrial revolution.

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