In the last few months, the COVID-19 pandemic has been fast spreading across the world. Major economies of the world, including China, South Korea, Italy and USA among others have been hit hard by the pandemic. To control the pandemic, governments across the world, including the Indian government, have instituted lockdowns. In the coming months and quarters, these lockdowns will have a serious economic fall-out all around the world, including India. While this is clearly a threat, I believe that it poses a unique opportunity for India, provided we get our act together, think strategically and think out of the box. Peeking a little into the future, we hypothesize the following effects on the economy resulting from the pandemic.
With many countries initiating lockdowns, economic output, especially in the manufacturing sector, will see a huge fall. Many people may also lose their jobs because of the economic slowdown. This in turn will lead to a rapid fall in consumer demand, which will have a ripple effect and the economy will slip into a recession.
In a recessionary economy, private companies will also find it hard to raise capital. With falling consumer demand and rising cost of capital, many companies may be forced to file for bankruptcy. The worst affected companies in this situation are likely to be startups and SMEs, which typically don’t have a large war chest to deal with such situations.
China is being blamed for this pandemic, because they failed to stop its global spread. It is likely, there will develop a lot of distrust towards the Chinese government and their policies. However, China is an important player in global supply chains, more so in the telecom and electronic equipment industry. The telecom industry, which was gearing up for the rollout of 5G network and services across the globe, might be the one of the most affected segments.
We believe, the world’s continued mistrust of China will cause a disruption in the supply chain and countries may become more and more wary of buying goods from China. This disruption in supply chain will have a short-term domino effect. Since Chinese supply chains will be disrupted, countries around the world will start evaluating critical components from a national strategic point of view. Many countries like Japan are incentivizing their companies to shift production out of China. They will try to switch over to local supply chains.
India too needs to incentivize its companies to take advantage of this, both for design and manufacturing. However, a smooth transition will be difficult in the short run. In the long run, there is a silver lining -Indian telecom and electronics industry can witness a huge transformation. With China no longer a prominent part of the supply chain, India has a golden opportunity to transform the industry.
Two decades ago, the Y2K crisis revolutionized the IT industry of the country. It was further strengthened with the growth of outsourcing across the world. Now, the Indian IT industry has moved up the value chain, from being a mere center of back-office operations to more front-end software development.
An opportunity in the making
The Indian telecom and electronics industry must take this opportunity with both hands. Now is the time to “shed” old skin! This is a God sent opportunity for India – given our demographics and our abundance of talent.
Moving up the value chain will not be easy. For example, until now, we have been focusing on offering doles to Apple, Foxconn and Samsung to set up factories in India. It is time to move up the value chain and implement the following, so we do not miss the bus this time.
The very first priority should be to ramp up investments in the sector. We should not only rely on MNCs to invest. Instead, the government should focus on making policies that encourage local SMEs and MSMEs to ramp up investments. The government must incentivize large Indian private companies to work with domestic MSMEs who build globally competitive products and promote a local ecosystem. Instead of spending money on loss making PSUs, the government must divert those funds towards supporting Next-Gen Indian companies which have the capability to take on the world.
Make in India is a good initiative. It should be ramped up to focus more on the electronics industry. The government should offer more sops to Indian manufacturers to set up and scale up facilities. Apart from just setting up factories and manufacturing units, the need for the hour is to invest in innovation. Countries like China and US dominate the market because they have a large bank of IPs. If India has to compete on the global scale, we have to ramp up domestic innovation. We have a great demographic dividend and we can certainly use it to innovate and build an IPR regime.
Another area of focus should be the Defence Electronics and Telecom industry. Currently, this is dominated by PSUs and foreign companies. Government must develop policies to encourage Indian private sector companies to also invest in the sector. They can identify 3-4 champions in each sector and provide funds for R&D. The armed forces should also be encouraged to look at these private
players to fulfil their requirements.
Government must also restructure defence manufacturing PSUs. As of now, there are labs scattered all across the country. A few of these labs can be merged and made into a larger establishment in a single place. These labs should be used to pair up with SMEs and MSMEs to build a robust ecosystem.
The Covid-19 crisis will delay the roll out of 5G networks worldwide. This gives time for building indigenous 5G telecom gear. India can use the USOF and TDB funds to invest in building solutions for 5G and rural broadband.
The government must develop a strategy and a 5 year action plan by listening to companies who are actually working in the sector, instead of consultants who may not have an ear to the ground. Consultants typically push the case for MNCs whose focus is not on building an Indian presence in the global supply chain.
Steps to make India a 5T$ economy
Focus on IPR and knowledge businesses in the ICT sector: We still tend to use 19th and 20th century models to power a 21st century problem. For example, Make in India is heavily skewed towards replicating the Chinese model of the earlier century. Most polices framed are skewed to facilitate large MNCs to manufacture in India, while ignoring the SMEs.
India’s social media and mobile applications revolution has been instrumental in creation of technology giants in the West. However, these platforms superimpose their own arbitrary policies of censoring content and maintain data outside India. The case of a foreign-owned Video Conferencing facility (with software & servers from China) being used for highly sensitive government meetings was a case in point. Similarly, there are instances of foreign-owned satellites being used for sensitive communication during Indian Elections or to monitor Indian maritime borders for security purposes. This when Indian companies have developed such technologies and the required expertise is very much available. China has done this extremely well by promoting its own mobile apps. Russia insists on media content being stored on servers located on Russian soil. India has an open environment but nothing prevents us from promoting local technology to achieve self-determinism on our social media and not remain a digital colony.
The focus needs to shift to building IPR and platforms that generate and keep the data in the country. Data being the “new oil” must be generated, consumed and monetized within the country. All the current internet and other key platforms are foreign-owned. India’s contribution to the global telecom supply chain is miniscule while being the 2nd largest telecom market in the world. The focus
should shift towards the supply side from the demand side. India imports electronics worth 400B$ and this needs to change.
Ecosystem approach to real tech unicorns
Very often I have heard people lament on why India has not produced a Google or a Microsoft or an Intel! That is a utopian ideal. One cannot plan to build a behemoth, it just happens. One can only create the right environment to build such a company. To do this one doesn’t have to look any further from nature.
Take the example of a crocodile. A fully-grown adult crocodile is a huge creature! How does it get there? Statistics! A female crocodile lays at least 100s of eggs out of which only one or 2 get to adulthood. With the survivor bias, it is easy to imagine that everyone would grow to be a behemoth. Metaphorically, we can build a Google crocodile when there are 100s if not 1000s of small “baby”
crocodiles that are nurtured.
The bureaucracy in India fails to understand this basic tenet of innovation. It is statistical in nature and has failure written all over it. Innovation and failure form a complementary dual pair like the “yin” and “yang” or the “purusha” and “prakriti”. Unfortunately, we have strongly imbibed the western reductionist models with disastrous results.
One structural problem that hinders government promotion of domestic industry is this barrier to government being only able to invest in private sector innovation through government academic institutions or government departments. Government has of late experimented with hackathons and in rare instances given a tentative support to build an ecosystem around NAVIC technology. These small tentative steps need to be scaled up to far more ambitious levels.
One method to promote such innovation in technology could be that a government agency or PSU (like ISRO, BEL, ITI, DRDO etc.) identifies its technology need where it seeks to serve a large market and invites applications from MSMEs to develop it. The entry barrier that is usually put in place to eliminate MSMEs due to minimum thresholds should be reversed (keep a max threshold!) or eliminated. The notion that big companies alone can deliver technology should be discarded because all of the new age tech innovation has come from small companies that went on to become big. The PSU could then evaluate and select an MSME based on technical merit and track record. There
should be no play for the notorious “L1” method where the lowest bidder wins through an unsustainable price irrespective of merit and very often fails to complete delivery. This process may be ok for straight forward manufacturing contracts but fails miserably in technology development and innovation. The selected MSME should then be funded by TDB (Technology Development Board) or similar agency through a grant (NOT a loan) for development of this technology. This would ensure there’s market, funding and a bona fide company that can deliver.
Ridding the socialist “reductionist” mindsets in the public policy spheres
Fritjof Capra in “The Turning Point” argues that the reductionist methods used in every sphere of human activity is the bane of modern society. Reductionism refers to the practice of analyzing complex phenomena in terms of its simpler parts. He says that medicine needs to be saved from overzealous reductionist doctors who look at curing a disease in parts rather than treating it as a holistic solution.
Similarly, this reductionism is all-pervading in the Indian bureaucracy, and we need to save public policy from bureaucrats and the economy from economists who think only in such reductionist terms. Far from being catalysts, this approach ends up not solving the problem due to the lack of a holistic approach. Projects like Aadhaar and UPI created such big value because they were handled in a holistic manner from end-to-end from building pieces to joining them together. On the other hand a piece-meal approach like digitization of cable TV which only put in place a policy for user- addressability to solve loss of revenue, lost out on an opportunity to promote domestic electronics manufacturing of 100 million set-top-boxes with the result that Chinese makers lapped up that entire market! An ambitious project like BharatNet that only plans that optical fiber should reach every Gram Panchayat, but does not worry about delivery of services through last-mile connectivity to the mobile phone of every villager, would only achieve its limited objective of laying fiber but not the larger vision of providing telemedicine to patients, tele-education to students and e-commerce for farmers and artisans of India!
We often hear of bureaucrats avoiding taking bold visionary steps due to a fear of post-facto review or audit by bean-counters which could jeopardize their reputation, service or pension. Any bold plans can always be criticized or conspiracies suspected but such distrust does not provide an
environment for risk-taking and innovation. Changing this environment is a challenge the government must take up if India has to achieve its true potential or India will always be “punching below its weight”.
The world is where it is today not because of the economists but creators like entrepreneurs, engineers, artisans and risk-takers who dared and defied prevailing dogma.
Policies in India are utopian. Take a look at any and one finds that it is a complicated piece of literature that is designed to eliminate the “gamers” of the sytem. In doing so it keeps out all the “honest” doers. If schemes, policies are made fool-proof but burdensome and even non-rewarding only with a view to “keep the crooks out” the problem is the scheme fails to attract good people who deliver results as well. The cost of keeping all “gamers” out make the policies great pieces of literature. I call this the “reverse Chakravyuha”. It tries to keep out the budding Abhimanyu’s. The systems should be designed like a “Chakravyuha”. Allow everyone to participate in a process but make sure there is a big incentive for performers and very big dis-incentive for the “gamers”.
The other problem is the socialist mindset of treating businessmen as crooks and looking down upon them. People hanker for academic degrees and language fluency, but not for substance and originality of thought. If we do have to follow a European model, why not the German “mittelstand”? Mittelstand are a class of small companies predominantly run by classic owner- entrepreneurs seeking to build sustainable businesses with a core ideology of longevity, nimbleness, innovativeness, emotional attachment, employee loyalty, conservative long-term financing, and operating practices. There are a lot of similarities with Indian business ethos.
The ISRO and BARC model for Electronics and Telecom
ISRO is run by a space professional who has risen up the ranks and knows everything about the organization. A professional bureaucrat reports to the Chairman of ISRO. This is one of the main reasons for its success apart from being away from the politics of Delhi. Contrast this with the Telecom or Electronics ministries. It is headed by a professional bureaucrat who has been in health, minorities welfare or some such other ministry before and potentially later. This needs to be flipped and a professional ( either from the industry or from the ranks ) should run it.
Finance as a catalyst and not a parasite
The access to risk capital determines the success of an entrepreneurial ecosystem. Since time immemorial, developed societies have a variety of instruments for finance. In India, lack of institutional access to cheap capital has led to finance become a parasite! ‘Sahukari” and the “middle men” dominate and thrive leaving the end consumer and the producer leading to profiteering.
On paper there exists a vibrant Venture Capital ecosystem in India. In reality these VCs are only slightly better than banks. They fund “me too” business models copied from the west with minor Indian tweaks to account for logistical challenges. No one focuses on the so called “deep-tech”
companies. This largely because they don’t believe
1. (like the bureaucrats) That we can build technology in India
2. Most importantly, make a viable business out of technology products
Our complicated tax laws and even complicated tax jurisprudence feeds the “parasitic” model. So, we have large number of accountants who know how to spot and go around loop holes. The IT officials assume that most business people are crooks. Our entire finance ecosystem is predicated and reduced to optimizing 19th century businesses. So, they understand land, factories and recognize the hard assets like machines and know how to capitalize them. They ignore the most important “soft resource”- the homo sapien!
In ICT companies, the valuations are not determined by factories and land, but by softer commodities like “IPR” and human capital.
For the finance ecosystem to go from a parasite to a catalyst, the following are imperative
1. Simplified taxation
2. Newer finance instruments like allowing IPR as collateral. Newer instruments to quantify human capital. For example, an engineer with a certain no of patents can be used for valuations.
3. Incubated markets specially for early stage telecom and electronics hardware companies
Belief in Entrepreneurs
The last but most important step is “belief”. The late Defense minister Shri. Manohar Parrikar in an open meeting said that the bureaucracy in the defense ministry needs to believe in Indian entrepreneurs to deliver on technology. Thoughts create reality. Any system is as good as the people that man it. Therefore, any policy without an insight and belief would just remain dry pieces of literature.
In conclusion we believe, with some reassessment, some restructuring and some radical action, the future could indeed bode well for India!