India’s Industrial Policy and
Export Dynamism:
Model, warning or source of
healthy doubts?
World Bank, Washington DC, April 2006
Introduction
• India’s export dynamism – a half-full/halfempty glass
• We are on the right trajectory of technical
capability building for exports, but at the start
of that trajectory
• What role for industrial policy in India’s
industrial success?
• India’s emerging champions: industries, BCG
21, a few firms
• What role for the state? Essential, useful and
“soft”
Background: export dynamism
and technical capability
• Export dynamism – what is it?
– Strong and growing exports
– Exports account for a significant proportion of
industrial value-added and employment
• Export dynamism and Technical capability
– An ability to Innovate (something new for
commercial advantage)
– Demonstrated capability to move exports up the
value-chain as wages rise
India’s Exports: a half-full glass
• India’s exports have grown at 20 % per year for
the last three years
• Our exports are concentrated in relatively higher
value-added activities
– IT Services - $17 bn (17 % of India’s total exports)
– Engineering - $15 bn (15 %)
– Pharmaceuticals - $ 5 bn (5 %)
• Several emerging Indian MNCs
– Export dynamism of our top firms
– India’s emergence in cross-border M&A
India’s exports: a half-empty glass
• After 15 years of liberalisation, India accounts
for 0.8% of world exports. Up from our low of
0.5% but much lower than the 2.4% we were
at in 1947
• Total exports at $ 100 Bn - China ($ 400 bn),
Mexico($ 213 bn), Brazil ($ 120 bn), Malaysia
($ 147 bn), Thailand ($ 110 bn)
• Garment exports – China ($ 30 bn),
Turkey($18 bn) India ($ 6 bn)
• Tourism – India 3 m visitors – China 50 m,
Thailand 12 m, Singapore 9 m
Technical capability and
export dynamism
• A growing list of Indian firms using proprietary
technology to build their international presence – though
the overall numbers are still small
• R&D spending – growing focus in many Indian firms, but
numbers show little change for R&D spending as % of
GDP (about 0.7%) and under 40% of national R&D is
done in firms
• India today gets about 500 US patents, up 10x in 10
years, but still 1/10th South Korea or Taiwan
• Overall the trajectory seems right but we are at the start
of it
Industrial policy and
industrial success
Role of policy
Crucial role
Helpful role
Pharmaceuticals Patent Act of 1970 Human capital
IT Services
Human capital
Low mfg growth
IT parks
Engineering
Protection
Local content
regulation
Human capital
Textiles &
Garments
Negative
India’s emerging champions
Pharmaceutical - Ranbaxy,Cipla, Sun Pharma,
Wockhardt, Nicholas Piramal, Glaxo, Cadila, Lupin,
Aventis, Dr.Reddy’s lab, Shasun Chemicals
IT Services -TCS, Infosys, Wipro, Satyam, i-flex, Patni,
HCL, Polaris, MBT, L & T Infotech, Mastek, i Gate
Engineering - L & T, Tata Steel, TATA Motors, Bajaj Auto,
Hero Honda, M & M, Crompton Greaves, Elgi
Equipments, Bharat Forge
Garments - Arvind, Raymonds, Gokaldas Exports, Zodiac,
Ambattur, Wellspun, Vardhaman, Alok, GHCL
India’s emerging champions (2)
A recent BCG study of 100 “global challengers”
from emerging markets
• India accounts for 21 of the 100 firms
– 20 of 21 Indian firms were private (vs 4 of 44 Chinese firms)
– Accounted for $ 61 B in revenues, growing at 30% annually
since 2000
– Exported 35 % of turnover
– Earned an operating profit of 25%
– Are the most active in international acquisitions – making 47 in
five years, 21 in 2005 alone
– 11 of the 21 are judged to be turning low cost “engineering into
global innovation”
• In total, Indian firms made 192 acquisitions in 2005, from
a standing start in 2000
India’s emerging champions (3):
a few impressions
• TCS, Infosys, Wipro – are the three top recruiters of
engineers in the world (each > 15,000 engineers per
year). They count over half the Fortune 500 as
customers
• Ranbaxy is India’s largest drug firm, grew by reverseengineering patented drugs, is now one of the top 10
generics firms in the world, and spends $ 80 m a year on
R&D
• Bharat Forge established itself by catering to a protected
Indian CV market, now gets > 50% of revenues from
outside India, is the second largest forging company in
the world, and competes on time to market
India’s emerging champions: what role
for the state?
Essential role for the state: make it cheap to do
business
•
•
•
•
•
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Infrastructure
Reducing transaction costs of imports and exports
For firms to start, and to go bancrupt
To hire people – and fire them
To hire qualified people, by educating them
Make information cheap – in India, by unleashing the
power of competition in a market of 1000 m
India’s performance is mixed
India’s emerging champions: what role
for the state? (2)
Useful roles for the state
• Infant-industry protection now only means permanent infancy
– If it had been removed 10 years earlier, we would have seen India
emerge 10 years earlier. If it had never been there, perhaps not!
• Tax incentives for R&D – helpful as it raises the profile of R&D.
These exist for pharma and auto, but make them broad-based.
• Subsidising public research as follower to industrial
development – picking those fields where India has emerging
champions
– Healthcare – not happening as < 1% public R&D funding is on
health
– Metallurgy – for foundries and forging units
– Computer science
Here is Mill on infant-industry protection:
“The only case in which, on mere principles of poilitical economy, protecting
duties can be defensible, is when they are imposed temporarily (especially
in a young and rising nation) in the hopes of naturalising a foreign industry,
in itself perfectly suitable to the circumstances of a country. The superiority
of one country over another in a branch of production often arises only from
having begun it sooner. There may be no inherent advantage in one part, or
disadvantage in another, but only a present superiority of acquired skill and
experience…But it cannot be expected that individuals should, at their own
loss, introduce a new manufacture, and bear the burden of carrying on until
the producers have been educated to the level of those with whom the
processes are traditional. A protective duty, continued for a reasonable time,
might sometimes be the least inconvenient mode in which the nation can
tax in itself for the support of such an experiment. But it is essential that the
protection be confined to cases in which there is good ground for assurance
that the industry which it fosters will after a time be able to dispense with it;
nor should the domestic producers ever be allowed to expect that it will be
continued to them beyond the time necessary for a fair trial of what they are
capable of accomplishing”.
India’s emerging champions: what role
for the state? (3)
Soft roles for the state
• Articulate a vision of the future
• Set the tone for discourse on technology
– Fostering openness and self-reliance simultaneously
– Emphasising pragmatism in policy making over ideology
• Setting the right climate for business
– Encouraging international ambition
– Expecting the best from firms, and supporting them without
colluding with them
Conclusions
• A growing number of Indian firms are showing strong
international performance
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–
–
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Export performance, competing in technically sophisticated fields
Increasing international acquisitions
A private-sector story
A story of growing technical capability – sectors, proprietary
technology, R&D spending, patents
• The state has played a key role in this story – by
providing (too many) decades of protection, by protecting
technology, by investing in education well ahead of
demand
• The Indian story is one of entrepreneurship, it is
increasingly one of innovation, but is it a model for
industrial policy?