Sunday, July 20, 2014

Innovation in India: Time To Start Thinking

The Global Innovation Index, produced by INSEAD and others, is built around seven factors - Institutions, Human capital and research, Infrastructure, Market sophistication, Business sophistication, Knowledge and technology outputs and Creative outputs - and measures an economy's ability to innovate. India has continually slipped in the rankings, from 62nd in 2011 to 64th in 2012, to 66th in 2013 and now at 76th in 2014. Indeed, it is useful to contrast India with China, acknowledging the coveted hyphenation that many Indians desire: China has remained on the 29th position during this time, losing and recovering the lost ground during the in-between years (though China includes the territory of Hong Kong, which is treated separately and is a top 10 territory in these rankings).

Not that rankings matter much, but they are useful reminders of where one is going. India's decline tells a story in the context of the rest of the world. In the past rankings, India was ranked 2nd in terms of innovation efficiency in the previous years, underlining its ability to innovate despite institutional constraints, just behind China's 1st position, a celebration perhaps of India's famed Jugaad. However, in the latest rankings, India slips to 31st place even on this (China slips one place to 2nd, after Molodova), indicating somewhat the limits of Jugaad in a modernising economy (see my note on The Limits of Jugaad). 

A look at the detailed data is perhaps useful too. India's big problem predictably comes from its Institutions, though 'Government Effectiveness' contribute to India's lowly scores less than lack of political stability. One would expect that the recent formation of a single party majority government in Delhi in 2014 will fix this. India also suffers from its 'Regulatory Environment', though it outranks all its BRICs counterparts on the Rule of Law (though not Hong Kong); however, it scores the lowest among the peer group in 'Regulatory Quality', because of the lack of dynamism and widespread corruption among its regulators. India is also ranked 128th (among 143 nations) in Business Environment, only better than Brazil among its peer group, reflecting a poor environment for starting a business, resolving insolvencies and paying taxes. The big bet on the new government in Delhi is about resolving these issues: However, some of these expectations are likely to be dashed because India's various state governments, rather than the government in Delhi, control its regulatory and business environments.

India also performs badly in Human Capital and Research, being outranked by all its peer group countries and managing a lowly 96th position among all nations. Its problems come from Education, perhaps predictably, though it manages to outrank Brazil on Research and Development. India's universities (the QS ranking was used here) rank the lowest in its peer group, though the country gets a respectable 27th overall, leading to an Indian newspaper reporting 'Quality of its Universities' as a strength for the country. However, one must note that the rankings concern itself only with the relative rankings of Top 3 universities in the countries: India's top 3 universities, as these will be the IITs, still contribute more to California's economy than India's.

The picture on Infrastructure is mixed, India gets a lowly ranking both in terms of ICT Infrastructure and General Infrastructure. China, rather predictably, is on the 2nd place in the world in terms of General Infrastructure (after the tiny Kingdom of Bhutan), and this is where the gap between two countries are the most obvious even to a casual visitor (compare a journey on Indian Rail with one of China's trains). China also outperforms India in Ecological Sustainability, which is not saying much but may come as a surprise to those who suffered from the terrible air pollution in Shanghai. It also underlines the challenge India faces as it strives to rebuild its manufacturing sector, particularly around Delhi-Mumbai corridor (and later one between Mumbai and Bangalore perhaps).

India outperforms its peers on the Market Sophistication parameter, and particularly in terms of  Trade and Competition. The most interesting among many factors that make up this parameter is perhaps the intensity of local competition, where India ranks 22nd in the world, just behind Sweden, but ahead of France, Denmark, Malaysia and Canada. Western companies, looking at India's crumbling infrastructure, poor governance and bad unversities, all too often equate it with other markets, overlooking the fierceness of competition mostly to their peril.

India, however, does badly in Business Sophistication, though it outperforms its peer group in Innovation Linkages, doing rather well in areas such as Industry-University Partnerships. However, it slips on the 'Knowledge Workers' factor (Rank 110), a surprising result given all the boasting around India's IT services. There are many elements to consider here, but one comparison really jumps out: China ranks 1st in the world in terms of firms offering formal training to its employees, whereas India is 97th, managing to stay ahead of Sri Lanka, Uzbekistan, Azerbaijan and Yemen, barely. In fact, it is on this factor, the gap between India and all the other BRICS nations is the most pronounced, with China (1st), Brazil (20th), Russia (37th) and South Africa (44th) standing in stark contrast with India's 97th.

The above factors are combined make up the INPUT side of the innovation equation, in which India fares rather poorly overall, with an overall 93rd in the world and behind all the peer group countries. It does only slightly better on the OUTPUT side, coming 65th overall and behind all the peer group countries again. This, despite India having the top spot in ICT exports in the world and a respectable 13th spot for Creative Goods exports, somewhat undermines India's claims of ingenuity within a field of constraints. In fact, what's remarkable is that India does not do very well well in terms of its Feature Films and Entertainment Output, which will be the natural conclusion to jump into for India's strong showing in creative output (and excuse for some celebration of India's 'soft power' through Bollywood): Instead, its creative sector may be more invisible, made up of all those back-end work done for global entertainment and gaming industries, where India has indeed emerged as a powerhouse. 

Overall, it is time to start thinking about innovation in India, and whether the Knowledge Economy is still largely a rhetoric than a reality. The picture presented here reflects a fiercely competitive and growing market, riddled with poor infrastructure, institutional and regulatory constraints. The businesses are pushed to innovate to survive, but inefficiencies in regulation may allow cutting corners as viable survival strategy too. One would hope, justifiably, that the rise of a Single Party government in Delhi will solve some of the problems, but it is unlikely to transform India's education sector for better or kick-start the creative industries. In fact, one should study this index alongside other measures, such as Global Creativity Index published by Martin Prosperity Institute, which may underline some of the other issues with India's Innovation capability which have been blurred out here: The cultural factors, the city environments, tolerance, all of which contribute towards new ideas to flourish. As I quoted Kishore Mahbubani in an earlier post (see here), India remains an Open Society with a Closed Mind, in contrast to China's Closed Society with an Open Mind. Rankings such as this are occasions to start thinking, and dismissing all such discussion as a first world conspiracy to undermine India, as it will invariably be seen as, is perhaps proof that we got serious work to do.   

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