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Igniting Total Factor Productivity Growth in Indian Economy

Praveen MenonTtt5
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19-25 minutes244

For decades, India has looked upon China as competitor in the economic sphere and
rightly tso. Indian civilization has historically been an5 economic superpower for
centuries ahead ogr4gtf China. It was inevitable in contemporary econotftmic
history that a giant li5tke China which is comparable to India in size and
population fwas looked upon as an economic challenge while a failed state like
Pakistan occupied mind-space as a military challenge. The frequent border clashes
as well as terrorism em4455tanating from Pakistantt and the economic battle for
higher growth and investments than China cemented the mindset.[t When China
launched its reforms in 1978, its economy was just $10 billion bigger than
India’s.ttt77t The fact that Chinese economy is $10.9 trillion bigger than India
today might weigh heavily in the minds of Indian economic and military strategists
al5555555eeike. The huge t 9.5 percent in the period compared to 5.8 percent for
India.(Frost 2020) While the extent of damage to current Indian economy can be
judged only whetnt the Covid-19 crisis is behind us, it’s right time for[tt a
rethink of approach.5

Starting in 1978 with the economic reforms, China under Deng Xiaoping had a first-
mover advantage. After the Mao regime resulting in un57tyt88888[9inecessary deaths
of estimated 80 million (estimates vary widely), the country was in chaos with
Cultural Revolution. Being the first-mover compared to India, the learning curve
was long for China due to lack of precedence. Deng Xiaoping’s policy statements and
actions over the years reflect the practical approach of tinkering with different
things to improve the performance of Chinese economy and raise living standards.
(London School of Economics 2017)

The Chinese economy opened up starting 1978 while it took a crisis more than a
decade later in 1991 when India would be left with no choice but to open up. In
what would be radical departure from Mao, Deng explicitly said that some people
should be allowed to get rich first.(Chorzempa 2018) The Indian political system
without the baggage of Communism even today will fear to say or appear to be seen
doing so. While explicitly saying or out rightly doing it will be shunned upon
given the nature of democracy whether in India or USA, the Indian system hasn’t
been conditioned with a free market economy even in three decades of
liberalization, privatization and globalization. The public opinion still shuns
privatization in key sectors and a chunk of voters negatively view the stake sale
in PSU’s or privatization of some operations in Railways.

For a country like a China, it was a radical experiment in liberalization starting

with Guangdong’s acceptance of foreign investment and special economic zones (SEZs)
to facilitate exports. On one hand, the industry was opened up while on other hand
rural reforms based on de-collectivization and liberation of households to produce
for their consumption and sale were carried out. The first period of reform in
1978-83 saw growth of around 9% and continued at that rate for several years. Grain
production meanwhile had grown to 400 million in 1984 from 300 million in 1977 and
income of peasants doubled over this period in what was a sign of inclusiveness of
growth with both peasants and industry benefitting. The experiment of Deng Xiaoping
was rewarded by fate with “beginner’s luck” and continued thereafter. Even while
investments grew over the next few decades, ‘total factor productivity’(TFP) was
consistently above 3% for next 3 decades signaling a healthy growth rate and not
just driven by foreign inflows or export driven. India has never achieved a
consistent TFP growth for a reasonable period while China sustained it for much of
the last 3 decades.(Chakraborty 2018) Investment and productivity is the key to the
Indian growth story and China with a much bigger economy than India competes for
investment due to the sheer size. Productivity benefits accrued to Chinese due to
scale and experience in its way to being a manufacturing economic power that can’t
be beaten easily either.

While China would undertake reforms which were radical for the times, Indian
reforms in 1980s were more cautious until a crisis in 1990s accelerated the pace.
The reforms like import liberalization, extension of export incentives and liberal
access to credit and foreign exchange were the key steps during the 1980s. It would
take another decade for sweeping pro-market reforms like i) abolition of industrial
licensing ii) liberalization of FDI iii) Elimination of import licensing iv)
liberalization of important sectors like telecommunication v) major financial
sectors. (Kalpana Kocchar 2006)

It isn’t open to debate that more the investments for a given level of positive
productivity, the more will be the growth and India was forever competing with
China pitching the size, democratic credentials and promise. Even while western
economies in theory believed the advantage of democracy in sustaining economic
growth themselves being democratic, they chose their first-hand experience of
lesser red tape and good return on investment (ROI) from China over India. The
first mover China had by then the scale advantage and today is the biggest economy
in the world in Purchasing Power Parity (PPP) terms. China can today position
itself as a huge market comparable to USA while the Indian kitty won’t be seen as
deserving the allocation which the giant Chinese economy can absorb. The fact that
too-much focus on investments wasn’t working and a me-too India wasn’t attracting
enough investments can be gauged from the statistics that only in 2018, Foreign
Direct Investment (FDI) inflows pipped China for the first time in 20 years. The
Me-too approach alone clearly didn’t work for 20 years and first-mover continues to
have the edge.(Times 2018)

With reforms coming in a staggered manner, India was always playing catch-up for
the prized investments which it was seeking to invite. In business parlance, India
tried playing catch-up and became a me-too brand. A brand which positions itself in
the marketplace without a ‘Unique Selling Proposition’ (USP) but against a well-
entrenched brand with first mover advantage was always destined to grab only
“leftovers” in terms of market share. India grabbed a small chunk as any other me-
too brand grabs when the original brand didn’t appeal to a small section of users.
A number of other factors prominently the currency manipulation by the Chinese
contributed to competitiveness of China while Indian companies continued to remain
insulated to competitive pressures due to higher taxes on foreign companies and
similar advantages. As a democracy, it didn’t seem like a palatable idea to let
Indian companies and foreign companies compete on an equal footing.

The question which begs the answer then is: What else if getting investments alone
won’t suffice?

A Business which brands itself as an alternative and not as a substitute has higher
chances of success to be a potent second player before reaching close enough in
market share to topple the No.1 ranked. However nations aren’t businesses and a
multipronged approach devoid of obsession with Investments would be the need of the
hour. The current Covid-19 and the resulting decoupling of the western economies
from China offers unique opportunity for India to regain a small part of the ground
it lost over the decades. The suggestion in Economic Survey 2018-19 that India
should use the disruptions caused by trade wars to “insert itself into global
supply chains” should no doubt be carried to the hilt while chasing the $5 trillion
dream. (Line 2019) Through aggressively pitching for investments while charting its
own path in another domain and creating an expertise and reputation in it will
bring in the addition to TFP as well as investments. The ruling Government to its
credit is aggressively pushing the pitch for investments including several states
making amends to laws to facilitate it while also marking land for the possible
investors. The other domain where India should compete where scale and investments
matter less is: Research.

While on one hand, India should continue competing with China for investments and
get a bigger pie in a zero-sum game, there is the research domain where the game
isn’t zero-sum.

Thomas Jefferson, the founding father and third US President wrote “That ideas
should freely spread from one to another over the globe, for the moral and mutual
instruction of man, and improvement of his condition, seems to have been peculiarly
and benevolently designed by nature, when she made them, like fire, expansible over
all space, without lessening their density at any point.”

India’s gain shouldn’t necessarily come from China’s loss as the last 3 decades
experience shows that it didn’t work out that way. Economic growth can arise from
people creating ideas. Ideas are nobody’s monopoly.

China can’t be sure of outwitting India in the ideas game with its scale if India
gets it right. Deng himself believed that China needs large number of path breakers
who dare to think, explore new ways and generate new ideas.(Lahiri 2018)
Conventional wisdom therefore suggests a democracy is more suitable for economic
growth unleashing the best minds to think and act free. India historically didn’t
focus adequately on idea generation and research to fuel the growth.

In the 1995 treatise “R&D based models of Economic Growth”, Charles I. Jones argued
against the “scale effects” of R&D spending. The proportional relationship between
quantum of capital resources spent on R&D and its effect on per capita output
growth doesn’t exist. Success in research depends on tinkering and a large number
of people toying with ideas and not necessarily people better funded can change the
dynamics. With approximately as much manpower as China, India can compete in
getting the most research minds if not well-funded research. Big Data suggests that
“every winner begins as a loser”. However the scientific realm progress is marked
by successive attempts at tinkering learning and modifying from earlier experience.
The key indicator of research success is that time between consecutive failed
attempts should decrease steadily. In other words, more the number of attempts are
made at research; more likely the success”. (Dashun Wang 2019)

The United States is seeing a slide in research productivity across all major
industries despite increases in research efforts. Aggregate research productivity
in US falls at an average rate of 5.30% every year implying a doubling of research
effort every 13 years in order to maintain the same level of economic growth.
(Nicholas Bloom 2020)

While China is ahead of India in research too, Indian Government should through
careful cultivation of a research mindset fuel the growth without a need to rival
but add to the knowledge data base in the world. The Western World with declining
TFP will invest in Indian efforts for much more asymmetric returns on investments
than home country. A series of successful inventions has the potential to change
the growth trajectory of India completely than counting on investment-led or
export-driven growth.

Indian society unlike the western culture shuns failure and research field is
studded with grave failures and “learnings” which mark technological progress.
Unless the basic risk aversion imbedded in Indian psyche is replaced with a system
of rewards through a suitable ecosystem, India can’t provide the world which it
desperately seeks – Ideas at cost-efficient prices and Economic Growth.
All India Research Excellence

The most important step to tap the student community and veer them to the path of
research is academic rewards. The education system and its emphasis on rote
learning is a matter of popular media and successive Indian governments have not
been unaware of the same. Even with a series of government interventions to focus
on ideas, the obsession of the Indian students and parents alike to the grades
hasn’t been weaned off. The creative mind languishes with lack of recognition while
the strong memory boasts of good grades which translate into better prospects for
higher education and access to well-known centers of learning. The All India
Ranking (AIR) is the coveted prize for the top performers in memory contest with no
parallel means for the man of ideas to showcase his ideas. The competition, the
resultant stress of students forcing extreme means even forced certain State
Governments to move to grading system. However the goal post merely got shifted
from absolute marks to securing straight A+ in all subjects.

The Introduction of All India Research Excellence (AIRE) ranking which would be a
bigger status symbol than AIR for major competitive exams will skew the balance in
favour of ideas away from rote learning. AIRE ranking which goes to select
excellent students in research whose discovery/invention should be graded on the
impact on area of study will pave way for a status symbol beyond the AIRs, IIMs and
IITs. Rewards including waiver of exams for successfully patenting a product will
not only ensure that emphasis on learning will continue rather than “uncertain”
research. An average Engineering student would have the prospect of skipping all
academic exams or do-away with mark-sheets altogether and receive the AIRE ranking
which ranks above the AIR. The average parent while still emphasizing on memorizing
to clear the exams will have an incentive to have their wards toy with ideas for
the remote possibility of the coveted trophy.

Whether or not this idea will work, Indian education and outlook towards learning
may drastically change with the introduction of AIRE rankings in entire higher-
education system as a default parallel without need for specific enrollment. There
are chances that students who are otherwise bright at memorizing may attempt to
neglect academics (i.e. AIR) to shoot for the AIRE ranking secured only through
patenting an idea and may end up without both. Research efforts whether in India or
abroad are strewed with failures and the students will be no different. Chances are
that Indian parents who invest heavily in success of their children unlike western
economies may even invest in equipment’s from their pockets if educational
institutions infrastructure is deemed unfit marking a radical change in attitude
towards education. The successes of a miniscule number of students out of many
intelligent students aiming for AIRE will more than make up for the failures.
Chances are that most of the students who failed to make AIRE ranking by patenting
something may have secured a broader perspective and education than just enough
marks/grades to clear the academic year.

The recent step of Union government to launch “Accelerate Vigyan” by the Science
and Engineering Research Board (SERB) is an excellent initiative. The Atal
Innovation Mission promoting Atal Tinkering Labs should be actively engaged for
creating an nurturing ecosystem of intelligent minds tinkering enthusiastically in
the spirit of scientific advancements, noting their observations, improving their
attempts to arrive at new ideas which can fuel growth. The current dispensation has
introduced a slew of measures which needs to be continued and active engagement and
interest in fostering a culture of research imbedded into the same. However,
nothing can involve the largest numbers more than a parallel opportunity like AIRE
within the existing education system for a student of ideas to beat their
counterparts who have stronger memories. After all, memories are about prior
experiences & second-hand knowledge-base while ideas can be unique.

Research
The Western world invests in research but faces diminishing returns on the research
budget while Indian allocation to research is miniscule in comparison. An
opportunity for win-win exists in research collaborations even though western
economies would hesitate to transfer technology or know-how. Indian Government
should make the first move by emphasizing and increasing budgetary allocation to
research while also providing incentives for private sector to do so. What holds
back the Indian government is probably the same reason private companies hold back
– high failure rate. However, India should within the system and in private
community increase recognition of the fact that one breakthrough out of numerous
failures can more than cover up the economic costs just like business model of
venture capital firms who invest in high risk startups. A higher proportion of
Indian budgetary allocation should go towards high-risk high return investments
while also continuing with infrastructure built up like roads and highways. An
announcement of Rs.8000 crore in the last Union budget for a new national mission
on quantum technologies is a right step for opening new frontiers in computing,
communication and cyber security.

India had filed 14961 patent applications in 2017 while China filed 1.24 million.
The competition in research domain can’t be reduced to mere numbers simply because
quality matters. However, India has been scoring low in citations too which aren’t
completely indicative of quality. It’s the race to discover the next big invention
and not just the number game. India and China spent a similar portion of their GDP
in R&D in 1996. While India in recent years spends less than 1% of GDP, China with
a much larger economy spends 2.11% while South Korea spends 4.23%.(report 2019)
Further, it also needs to be underlined that the proportion of investments is of
less import than the quality of output. Just one invention the wheel saw mankind
taking giant strides which millions of published papers and research put together
can’t. Internet changed the world forever and connected mankind like nothing else
before. It’s not about size of investments in research but about the impact
although a bigger size increases the odds. China can’t necessarily beat the USA and
replace their Top 10 Tech companies even with a bigger spend on research.
Conversely, India can in theory beat the Chinese in research with a smaller budget
relative to China. Israel stands out as a brand known for technology and impactful
research with a much smaller size.

Apart from budgetary allocation and creation of physical research infrastructure, a

dedicated team to invest time and efforts to build an ecosystem should be focused
on. Vishwajeet Scheme of Central government has the potential to create
disproportionate impact and more budgetary allocations and monitoring should go
towards its implementation. Behavioral economists can play a key role in ensuring a
structured system to enable such an ecosystem in the highest centers of learning
while accreditation of educational institutions and privileges based on research
activities will force the academic institutions to invest their bit in improving
their rankings. A number of institutions sprouting up across the country doing
independent research and patenting their output will provide necessary impetus to
our GDP over the long term.

India is a country bustling with ideas and a democratic system has enabled an
ecosystem of conflicting opinions to thrive. The need of the hour is to channelize
the ideas so that on ground ‘jugaad’ in the face of lack of resources is replaced
by serious research and innovation. An enterprising citizenry is sometimes less
about technology itself and more about building a unique business model based on
existing technology. At the end of the day, all new ideas with utility turned into
commercial purposes adds on to GDP. The National Research Foundation shouldn’t be
hesitant in associating with the best minds in the world even if it ends up with
the decision-makers being non-Indians. After all India is a nation which has a
tradition of openness to ideas right from ancient times evident from Rigveda that
says “Let noble thoughts come to us from every side”.
By 2030, India will have the largest working age-population in the world. A
generation which grew amidst an education system which also rewarded exceptional
ideas and new research might be markedly different in quality than the era gone by.
Indian economy should stop obsessing over the catch-up game and chart its own
independent course while making the most out of the opportunities presented by
current global economy.

(The paper is the author’s individual scholastic articulation. The author certifies
that the article/paper is original in content, unpublished and it has not been
submitted for publication/web upload elsewhere, and that the facts and figures
quoted are duly referenced, as needed, and are believed to be correct). (The paper
does not necessarily represent the organisational stance... More >>

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