Recently, I came across this article, ‘India’s Innovation Deficit and How It Has Fuelled Dependence on China’1.
The Indian business world has been suffering from serious weaknesses in terms of innovation for many years because, primarily, of the protectionism under which it has long operated: until the liberalisation of the 1990s, Indian companies had a captive national market due to the customs barriers the country had built up (average customs rates were 80% at the time)
While it is true that protectionist policies pre-1990s did reduce competition, blaming them for how unsuccessful neoliberal economic policies have been in India is silly. It has been 33 years since India liberalised its economy, and yet the promised ‘economic miracle’ didn’t occur, unlike in South Korea or China. Also, bear in mind that China too only opened up in the 1980s, a bit before India but around the same time. So, why are we still blaming protectionist import substitution policies for India’s lack of corporate innovation?
Moreover, the author overlooks the significant external shocks that India faced during the pre-1990s period, which hampered its ability to pursue Import Substitution Industrialization policies effectively. The Arab-Israeli War and subsequent oil price spike devastated India’s economy, making essential imports expensive and straining the balance of payments. Then came the Volcker Shock, resulting in capital outflows and further worsening balance of payments issues. Blaming slow growth solely on India’s domestic economic policies is ridiculous. Neoliberals often do this because they want India and the Global South to keep much of their population in poverty and unemployment.
Before I go into the real reason why India isn’t innovating, let’s look at another point the author makes.
In addition to this legacy, the Indian capitalist milieu was often quicker to seek rents than to innovate, partly because it was largely drawn from merchant castes who did not necessarily have an industrial culture, nor the taste for risk that was supposed to go with it. These historical and sociological characteristics often led Indian industrialists to buy the technologies they needed rather than inventing them themselves.
It is true that Indian oligarchs prefer to rent-seek rather than increase productivity or employment, and some of this can be explained by the ‘historical and sociological characteristics’ of Indian oligarchs. However, this reduces a macroeconomic problem to a micro behavioral issue. Why are Indian industries operating with spare capacity? Why is the demand for goods so low?2
Another point I wish to make is that the Western governments have been practicing austerity. Obviously, when COVID came about, there were some stimulus packages, but most of these went to the top 1% who didn’t consume or invest. Since the end of lockdowns, Ukraine War, OPEC maneuvers, and corporate price gouging induced (mainly) supply-side shock inflation, most Western governments have rolled back even these meager policies. This has resulted in stagnant aggregate demand for goods, and on top of that, inflation has eroded purchasing power. The U.S., for example, experienced negative real wage growth throughout 2022. If demand is low in global markets, India won’t see exports increase.
Another thing to keep in mind is that none of these ‘economic miracle’ countries would have achieved such growth with a significant private sector presence if the government hadn’t provided them with infrastructure, technology, and direct subsidies. Let’s not forget that in both China and South Korea, there was massive government support provided to the private sector in forms of subsidies, infrastructure spending, etc. Never forget that most of China’s largest corporations are state-owned enterprises (SOEs).
History (Great Depression) has shown that in absence of private sector investment, the only party that can unconditionally increase demand is the government sector, through its fiscal policy.
The shortage described above is linked to the meagre efforts of the private sector in this area: in 2020-21, the private sector accounted for only 36.4% of the country’s R&D expenditure, compared with 43.7% from the central government, 6.7% from the states of the Indian Union and 4.4% from state-owned companies (the balance of 100 being provided by higher education, which is largely public). The share of the private sector has declined from 45.2% in 2012-13 to 40.8% in 2020-21, while that of the state has increased from 54.8% to 59.2%.
This only indicates that the Indian government isn’t spending enough to encourage the private sector to invest more in R&D.
The lack of significant investment in R&D partly explains the mediocre competitiveness of Indian industry, which has resulted in low export capacity, two phenomena particularly significant vis-à-vis China.
This is a major flaw in the neoliberal analysis of the economy. According to this view, India can increase its exports simply by increasing investment in R&D. But how is that possible? Exports are only viable when global market demand is sufficiently high, which depends on aggregate demand in importing countries. However, with insufficient government spending in developed countries, no nation can grow through exports the way China or South Korea did during capitalism’s heyday.
Another crucial question is how India can maintain consistent current and trade deficits with China. India is only able to sustain these deficits because it provides China with dollars, dollars that India acquires through foreign investments in its financial sector (capital account). Without these investments, India’s trade and current deficits would shrink to zero.
Export demand is largely dependent on the policies of the governments of importing countries. As a way to counter China’s ‘dominance,’ the U.S. itself has been trying a kind of import-substitution program; the CHIPS Act, for instance, is a good example of it. But the issue is that this doesn’t help India’s export demand since the U.S. is not completely seeking to replace its imports from China with imports from India and Vietnam.
For China to run a current account surplus, it must not only be willing to export goods but also to accept IOUs. This is only possible because domestic demand in China isn’t high enough, at least within the framework of a mixed capitalist economy.
What must India do?
I believe India should focus on increasing employment first, and as I’ve mentioned several times in previous blogs, it must implement a universal job guarantee. An increase in demand will push capitalists to invest more in R&D, thereby boosting productivity and employment. But what if they don’t do enough? In that case, the solution is to expand the public sector and provide high-quality public sector jobs for everyone.
India must reduce reliance on crude oil, which will give it much greater space and reduce dependence on global markets. For this, it must make investments in renewable energy and nuclear power. People criticize nuclear for being dangerous; however, there is nothing more dangerous than fossil fuels; both environmentally, economically, and in India’s case, external sector-wise. With the lack of energy storage in solar and wind, only nuclear can ensure a stable supply of energy. I’m not against solar and wind, the storage issue must be kept in mind when replacing the entire fossil fuel industry with it.
There must be investment in high-speed rail and electric vehicles (not just private but commercial vehicles particularly). If India cuts away fossil fuels, which is the largest part of its import bill, it will be a great and allow it to import more capital equipment. All this will require an increase in the government sector of the economy, especially nuclear energy, as the private sector cannot and should not be trusted with it.
India has since the 1990s accumulated massive amounts of foreign exchange reserves and is no longer vulnerable in the same way it was pre-liberalization. Sure, exchange rate depreciation is a threat, but if accompanied by proper government policies, impacts can be softened. And keep in mind there hasn’t been an oil price spike of the magnitude of the 1970s.
Indian Central Government has no financial constraint; it is only limited by real resources.
That’s all.
- https://thewire.in/economy/indias-innovation-deficit-research-development-china ↩︎
- https://thewire.in/macro/consumption-data-shows-the-indian-middle-class-is-shrinking ↩︎