Indian startups raised a total of $9.3 billion in 2020. Some of the biggest gainers were a food delivery app and a hotel booking app. Amongst those that reached ‘unicorn’ status — billion-dollar valuation — was an online fashion retailer and an online baby products company.
Prima facie, this is cause for celebrating the startup ecosystem. But scratch the surface, what you find about India’s technology sector can be summarised in one sentence: too many apps (eventually foreign-owned) and not enough innovation. It is no surprise, then, that despite India’s engineering strength and the hype around its technology sector, the country ranks at 48 out of 131 in the global innovation index.
To add to this, the Indian government is still figuring out how to build a world-class semiconductor fabrication plant. The Ministry of Electronics & Information Technology (MEITY) has issued an expression of interest inviting global players, which is open until 31 March 2021.
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Technology and national interest
In December 2020, economist Ruchir Sharma called Taiwan “pound for pound…the most important place in the world”. Taiwan is a technology mecca, home to the world’s most important semiconductor work — silicon (and other material) chips that power everything from your phones, computers, and cars. Caught between the shadows of Communist China and the protection of the US, Taiwan continues to punch above its weight.
After all, it’s the technological and scientific strength and indigenous technology adaptation that makes a nation great and resilient. India’s future will be commensurate to its technology and its economic strength.
But then again, technologies come in various forms. There are cutting-edge self-driving cars and then there are service-driven tech selling used cars online.
India and cute technology
The Indian economy is a shade of what it could have been in terms of self-reliance in the product domain, with hardly any product enterprises. Why is that so? India, especially the private sector, is the land of cute technology.
Cute technology uses peripheral innovation to repackage an old idea and sell it in a new, digitally oriented way. The innovation is in the field of business instead of the product. For example, a cab aggregator or a milk-delivery app.
Even the much-heralded IT-segment is also the result of such business process innovations, Offering hordes of engineering graduates jobs and relying on hourly charges is neither sustainable nor a value add. Worse, their talent remains unappreciated.
The bigger problem with these models is that no utility is being built up. Even sectors like telecom owe their tremendous growth to the virtue of the company that owns the license and its deep pockets. Another example of the missing innovation gene is that everyone wants 5G services rolled out as soon as yesterday, but how many in India are building the core 5/6G technology stack that is needed?
We just do not have the expertise or the intent to gain the expertise and implement the gamut of deep technology.
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Market failure
There is a threefold market failure in India. First, the majority of young startups are focused on cute managed services. Second, the majority of large Indian businesses are happy playing system integrators treading from quarter to quarter. Moreover, they have thrived on crony capitalism enabling artificial State-sanctioned monopolies. Third, even when there is private capital, there is either no appetite or understanding of true technology and innovation.
Who is building or funding India’s Nvidia? Where is India’s Huawei, Bell Labs? No, just give us our next app, next valuation, and the next exit. Nation-building and genuine progress be damned.
Some venture capitalists in India have started flirting with the idea of ‘deep tech’, but it’s mostly lip service with very little being done on the ground.
A disproportionate amount of entrepreneurial energy and private capital in India gets placed into a pile of technology that is essentially glorified managed services. While these businesses create artificial wealth, and transfer value from old ways of doing things into the new way, there is hardly any long-term utility or value-add to the Indian economy or the skill development process.
If India is to play a relevant role in geopolitics, it has to build technologies that are fundamental in nature.
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Not cute but deep technology
Deep technology is an outcome of deep research and development (R&D). In the case of Information and Communication Technology (ICT), for instance, deep tech would entail semiconductor development, network architecture, and protocol development among others. It would also include base stations, consumer electronics, ASICs, routers and processors.
India needs to invest in R&D, in fundamental technology, and build products that actually find a place in the market and in people’s buying patterns. If we examine the success of the US or France, it is clear that the government must be the biggest consumer and the biggest financier of deep tech. After all, deep tech implies technological progress – the design of a mobile processor, the creation of telecom routers, or a passenger aircraft.
Economist Mariana Mazzucato has written extensively on governments being the investor, risk-taker and innovator is the ideal way forward for deep tech. This can be done through government labs, or with the help of private industry. But the government lab circuit is more or less a non-productive route in India. Even when products are developed, the delivery mechanism is flawed.
Public sector undertakings (PSUs) or non-exclusive commercial licenses are both not sought-after methods of delivery for deep tech.
Another problem is that government labs often change focus, which means supporting the product lifecycle is not possible. Private industry — professionally run non-family businesses — and more promisingly startups are comparatively better positioned to develop deep tech. They can hire (and fire) the right talent, have lesser issues of red-tape-ism, and small teams can be extremely goal-oriented.
However, the private industry needs funding. On the one hand, in India, venture capitalists love service-oriented companies, because of the perceived trends that exist. The government, on the other hand, creates many programmes for private party innovation, but these are so badly executed that they do not result in anything of essence.
For example, whereas a certain global company required $200 million to build a processor; our bureaucracy, in contrast, created a processor challenge with prize money of Rs 4.3 crore (around $500,000 to be shared between a few prospective winners). Meanwhile, an Indian fantasy sports app raised $225 million. The cruel joke is on all of us.
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Policy ideas for an innovative state
British businessman and politician David Sainsbury, former minister of science and innovation, writes in his book Windows of Opportunity and a government report, ‘The Race to the Top’, how countries can create a national system of innovation. The only way for a nation or a corporation to have global dominance is to invest and be a leader in genuine science and technology.
The government must have programmes with a razor-sharp focus – select 5-6 items that the private industry must build. Choose real experts, as opposed to administrators. Pay them enough money, and revise the budget as and when required. Once the product is ready, have a strategy in place to take it to the market. Give some basic guarantee for the product to be sold and consumed as part of the policy. And a fair legal framework that guarantees preferential market access must be in place.
Areas that India could focus on are LED smart TVs, medical monitoring devices, mobile processors, FPGA (programmable ASICs), network routers, and commercial planes, in that order. Except for the last one, at least two-three variants of each should be encouraged up to the prototype stage. The best should be given guaranteed market access of say 60 per cent of the pre-decided number of units to be procured, while the next best should be given the remaining access. The technology should be up for grabs on an exclusive license basis, to someone who commits to using the technology, and pays back the government in a bell-curve manner.
A measure of how effective a programme is can be estimated by how well the principle of creative-destruction is inculcated. A new technology player should be able to enter and establish herself in a market without worrying about the existing players. The regulator must, hence, make full efforts whereby a new entrant with superior technology/ideas can storm the market without being worried about an incumbent stifling the entrant.
Also read: Taiwan’s GDP growth outpaces China’s for first time in 30 years
Small is beautiful
It is a recurring pattern — the most dominant countries spend the highest on R&D. The US, for example, spends 2.7 per cent of its GDP on R&D. Japan 3.4 per cent, South Korea 4.1 per cent. Taiwan is the third highest spender at 3.36 per cent. China stands at 2 per cent, while India is at 0.7 per cent. Private sector spending is the largest contributor in the best performing countries, going north of 70 per cent of total R&D spend.
India’s best interest would be to emulate countries such as Taiwan, not China, which have built narrow focus and dominance on niche technologies.
Israel, like Taiwan, is another fantastic case study. The tiny nation spends close to 4.2 per cent of its GDP on R&D. Despite complicated geopolitics and a population of only nine million, Israel has been able to build global dominance in focused, niche high-tech sectors, and no one is able to ignore its relevance.
Technology plays a crucial role in State power. India’s destiny is not a given, it has to be shaped every day.
In his March 1978 speech at the National Science Conference, Deng Xiaoping had declared: “The crux of the Four Modernisations is the mastery of modern science and technology. Without the high-speed development of science and technology, it is impossible to develop the national economy at a high-speed.”
Technology is not a luxury, it is a matter of survival and global dominance. Jab jaago tab savera (it is morning when you wake up) goes the Indian saying.
With some discussions from a faculty member at IIT Bombay.
Vinayak Dalmia works in technology. He also frequently writes on national security and geopolitics. He tweets at @vinayakdalmia. Views are personal.