Strengthening India's
knowledge-based manufacturing skills

Boost Investment in R&D
for advanced innovations

India is emerging as a manufacturing base for a variety of industries. But the country is lagging behind in developing knowledge-based manufacturing skills. V. Govindarajan, Member-Secretary, National Manufacturing Competitiveness Council (NMCC), points out that investment in Research and Development is essential to raise India's capability in especially in knowledge-based manufacturing. Excerpts from his address at the Third Indo-US Economic Summit

India is increasingly seen as a potentially major knowledge-based manufacturing destination. The importance being attached to knowledge-based development is evident from the outstanding presentations I have heard today.
I am not a practicing technologist nor am I a manager of a knowledge-based manufacturing company. We in this NMCC are concerned with the competitiveness of Indian manufacturing sector. Needless to say that technology has an overwhelming role in improving competitiveness. In the history of economic development, technological breakthroughs have invariably contributed to improving competitiveness, which enabled leapfrogging of companies in size at one level and rapid growth of the economy of the country concerned at another level. Competitiveness of manufacturing sector is achieved through improvement at two levels. The first is the firm level competitiveness and the participants of this session are the experts and you have explained so well. The second level is what is generally known as the National competitiveness. It deals with creation of necessary business climate through appropriate policy regimes by both the Central and the State Governments. It is here that I would consider that we in the NMCC have done some study and my remarks will elaborate on them.

I would like to approach the subject in four parts. They are:
• first, the role of knowledge in the development of an economy;
• second, is India a knowledge-based economy and where do we stand?
• third, what is it that we need to do to make India a knowledge-based economy; and
• fourth, the recommendations of the NMCC in respect of knowledge-based manufacturing.



The Role of knowledge
Increasingly modern economists have come to recognize knowledge as the fourth dimension of economics which enables wealth creation in addition to the three traditional factors of production, viz., land, labour and capital. In fact, in the recent years, these economists have been stressing that knowledge is even more important than the conventional three factors of production for the growth of the economy. Starting with the seminal paper of Robert Solow "A contribution to the Theory of Economic Growth" in 1956 economists have come a long way in recognizing the role of knowledge as an important factor of production. In fact, Paul Romer of Chicago University created a model of growth with knowledge as a fourth factor of production. He propounded in the 1990s that "new ideas, more than savings or investment or even education are the key to prosperity, both to private fortunes, large and small and to the wealth of nations." This was further elaborated by David Warsh in his book "Wealth of Nations". He said that knowledge and new ideas affect economics of everyday life through knowledge related activities like designs, practices, intellectual Property rights etc. These economists feel that benefits from growth of knowledge are so huge which can be widely shared for the welfare of the people at large. They argue that Governments should accord high priority to knowledge development as a part of their quest for growth and equity. Any modern economy therefore has to be driven by knowledge-based productive activities.



Is India a knowledge-based economy & where do we stand?
Is India really somewhere there as a knowledge economy. We have become an outsourcing hub for the BPOs and the KPOs and we are exporting a lot of IT and ITES products. Does it make us a knowledge-based economy? I do not believe it is so.
More than 97 per cent of the software developed in India is exported and which in turn makes the importing country that much more competitive. It is common knowledge that the embedded software in many IT and Electronic products is made in India and the revenues the Indian software developers realize is just a mall fraction of what the final product maker charges from the customer for that part. The knowledge base of the country is thus not getting used to add value domestically or improve the competitiveness of our own manufacturing or services.

How do we change this?
A knowledge-economy as I said earlier is one where the strength of knowledge contributes to creation of wealth in the economy. Such an economy creates, disseminates and uses knowledge as a tool to enhance growth and improve welfare. The knowledge economy is not merely IT and communication technology or high technology industries. It is the economy which uses the knowledge to improve the productivity across the board in all the three sectors, viz., the agriculture, industry and services and ensures wealth creation all the way.
In India we have a great opportunity to use our strengths in improving productivity in agriculture, in our manufacturing industries and services, by turning them into more productive and modern sectors. Our advantages are that we have a critical mass of skilled English speaking people especially in the field of sciences and technology. We have through our Non-Resident Indians a valuable knowledge linkage. Our economy is fast growing and we have many institutions that are required for development of knowledge. The list goes on. Despite shortcomings such as infrastructure, it is these strengths that have attracted several skill based modern industries in the fields of electrical and electronic components, specialty chemicals, Automobiles and Auto Components etc. However, we are still a small player in the world map when it comes to the exports of all types of knowledge-based industries.



The United States has imported in the year 2004, US$ 238 billion worth of 10 Advanced Technology Products (ATPs) according to a paper prepared by Manufacturing Policy Project on US-China Advanced Technology Trade. Imports from China constituted close to 20 percent of this. The imports from what the report calls "China Sphere" which consists of China and 10 other countries surrounding China form as much as 59 percent of the total ATP imports into the United States. The European Union on the other hand managed only about 21.5 percent of these imports to the US. India does not figure at all in the report being an extremely small player. What are these 10 ATPs? They are Biotechnology, Life Sciences, Electronics, Optoelectronics, Information and Communications, Flexible Manufacturing, Advance Materials, Aerospace, Nuclear Technology and Weapons. We have a wealth of skilled and knowledgeable people in most of these sectors. What this statistic reveals is that while India can be proud of its mass of skilled manpower and its development of IT and ITES sectors, we are clearly unable to convert this advantage into developing and manufacturing high value Advanced Technology Products that can be exported. Now let me turn to my third part.

What is it that we need to do to make India a knowledge-based economy?
This situation I described above needs to be seen both as a challenge and as an opportunity for the Indian companies. The opportunity is clear. The challenges posed are several and cover various aspects of economy in general and some specific to the knowledge economy. These are:
• availability of adequate number of educated and skilled persons
• creation of an innovation system which delivers
• develop information infrastructure
• ensure basic economic infrastructure is in place.
Of these, Research and Development and innovation in particular are extremely important. In India, only about 0.8 percent of GDP is spent on R&D as against 1.2 percent in China, 4.3 percent in Sweden and 2.7 percent in the US. Nearly 70 percent of the R&D is in our country is by the Central and the State Governments and 27 percent by the enterprises (both public and private) and less than 3.0 percent by the Universities and other higher educational institutions. This is in contrast with most of the developed countries where the private sector spends 50 to 60 percent of the total R&D expenditure. Universities in these countries also undertake research to a much larger extent and have stronger linkages with the corporate world. We need to ensure that more funds are spent on R&D and Innovation. Industry must also realize it is in their long-term interest to invest in R&D and innovation for maintaining competitiveness. A start has been made and the Pharma Industry is taking the lead in investing more and more in R&D.
In order to strengthen the innovation system, we need to look at the following policies.
(i) supply of technologically trained people of high quality
for R&D;
(ii) improving Physical Technical Infrastructure;
(iii) Incentives for encouraging Innovation; and
(iv) encouraging technology-based ventures through
Venture capital funds.
Both the Government and industry should together work towards achieving these goals. Now let me move to the last part.

Recommendations of the NMCC in respect of knowledge based manufacturing
The NMCC has submitted to the Government the National Strategy for Manufacturing (NSM), which essentially contains recommendations for making Indian manufacturing competitive. The goal set in the NSM is to achieve an average long-term growth rate of 12 percent in manufacturing as against the 7.0 percent achieved in the last two decades of the 20th century. This can be done only through improving the competitiveness of our industry and competitiveness cannot be improved unless we modernize our production and innovate to improve efficiency as well as create new products. The NSM recognizes this imperative its recommendations deal with it exhaustively. Among its recommendations, the NMCC has gone into the issues relating to the quality of personnel and all the aspects that would contribute to develop India as a knowledge-based economy. These include -



• strengthening education and skill building; investment in innovations;
• increasing the usage of Information and Communications Technology in manufacturing sector; and
• encouraging Intellectual Property Rights (IPRs) in the manufacturing sector.
Some important recommendations relating to knowledge-based manufacturing are creating Centers of Excellence in Manufacturing, setting up a group to study the potential for manufacture and export of Advanced Technology Products, establishment of Technology Parks around institutions of higher learning apart from fiscal and other incentives etc. The report has also dealt with in detail the increased use of Information & Communications Technology in the Indian manufacturing sector. A number of recommendations on all these aspects have been made. Recommendations have also been made in respect of increasing the awareness of IPRs among the manufacturing companies.
A question is often asked whether the host of recommendations and good intentions in such reports as the NSM would be converted into actions. Skepticism is understandable since many reports and expert recommendations get bogged down in procedural rigmarole and are implemented very slowly. In order to ensure that the recommendations of the NMCC are implemented at a quicker pace, the Government has constituted a High Level Committee on Manufacturing (HLCM) Chaired by the Prime Minister and consists of the Ministers concerned as members to take speedy decisions on the recommendations of the NMCC in respect of the Manufacturing sector. The first meeting of this Committee took place in the month of August 2006 at which the Committee identified four manufacturing sub-sectors, namely, Textiles and Garments, IT Hardware and Electronics, Food and Agro Processing and Leather and Footwear Industries for priority attention. In addition, two generic issues namely Skills Development and problems of Small and Medium Industries including Cluster Development will also be taken up on priority. The NMCC in consultation with the Ministries and the stakeholders is in the process of preparing the papers for the Committee.