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TRANSITION REPORT
Special Edition

Number Four

The New Road-Map for the Asian Elephant
India's Emergence as a Global R&D Hub

2 interviews that can change your mind about the next R&D global powerhouse
R.A.Mashelkar, general director of CSIR of India and Ashish Arora, professor at Carnegie Melon (USA)

Interviews by Jorge Nascimento Rodrigues, editor of Gurusonline.tv, February 2005
Transition Report is a quarterly online journal edited by Gurusonline.tv


FIRST STORY
A view from an eminent scientist
R.A. Mashelkar
«We can predict that by 2020 India can become the number one knowledge production center of the world»
R.A. Mashelkar is General Director of the Council of Scientific and Industrial Research of India. He is known for his Road-Map for India in the third millennium

India opened its economy in July 1991 by announcing a new industrial policy and the government has become less and less interventionist. These winds brought in a "silent revolution". It was more than a decade later than China did its reforms, but the change was profound - in ten years, the emergence of India as global actor take the cover of the world magazines. The country is granted with the "off-shoring" award and a new generation of entrepreneurs arrived - like Infosys and Wipro in IT or Bicon in biotech. India, like China, is also designing a grand geo-strategy, profiting with the shift for multipolarity in different fields. India wants to be the global R&D powerhouse in 2020 and be recognized as a knowledge centered society. The hot buzzwords are: "global hub" or "global platform" in science. The goal: to transform India as an R&D destination. «Indian advantage is not just the cost - but the cost-cum-competence, considering the huge talent pool», explains Dr. Mashelkar in this interview with Gurusonline.tv. With this strategy India wants to reverse the brain drain that provides huge human capital to the US. Apparently the first faint signs of the reversal just appeared - data collected by NASSCOM (National Association of Software and Service Companies, of India) shows that over 25,000 professionals have returned over the past three years. Dr. Mashelkar's preferred motto is this one: India's future is in IT. But do not read IT as "information technology". Read "Indian talent".

Who is R.A. Mashelkar - "a son of the Indian knowledge dream"

Dr. Mashelkar, 62, is a native of Goa, the ancient Portuguese colony, that returned to India in 1961. He is a son of the true "Indian knowledge dream". His father died when he was six. His mother, who was uneducated, did menial work to bring him up. In the 1950's he was a little boy struggling to have two meals a day, who studied under the streetlights and went barefoot to the school until he was twelve years old. He was about to leave the studies in 1960 after passing his secondary school examination, despite of securing a position in the top twenty of the 135,000 students who appeared in the Maharashta State Board Examination. This was because his poor widowed mother could not support his education. He continues to study with a scholarship of 60 rupees (over a dollar, today) a month for six years granted by Tata Trust. He completed his Chemical Engineering degree in 1966 from Bombay University. He preferred to do his Ph.D. in India and then went for his post-doctoral research in the UK. He was professor in the UK and in the US but returned in 1976 at the age of 32 to join the National Chemical Laboratory. Today he is the director general of the most influential Council of Scientific and Industrial Research (CSIR), in New Delhi, and also the President of Indian National Science Academy.
Dr. Mashelkar can be contacted by email at dgcsir@csir.res.in
Site of CSIR: www.csir.res.in

FORECASTS ABOUT INDIA
FIRST IN POPULATION
India will be the first country in population in 2050: 1.5 billion, more than China (1.4)
FIRST IN SCIENCE PRODUCTION
India will be the number one knowledge production center of the world by 2020
A YOUNG GIANT
By 2015, over half of the Indian population will be less than 20 years old
LABOR PRODUCTIVITY
Working population will be growing over the next 3 decades, giving India a sustainable competitive advantage in labor productivity.
HIGH GROWTH RATES
Officials say that the target is a GDP growth rate of 8% per year until 2007. Some analysts believe that the GDP should even be approaching 10% growth rate, at least over several 3 to 5 years periods.
BPO AND OFF-SHORING HUB
India has been able to create a world-class environment for BPO due to the committed, qualified and competent youth who are IT savvy. As service institutions develop further in India, the off-shoring of many services to India, for example such as engineering design and medical based services, will develop in the near future.
THE DIASPORA ASSET
The Indian diaspora, the so-called "bollystan", is India brain bank.
FIRST IN MIDDLE CLASS
50% of India's population (around 600 million) will form the 'middle class' in another decade or so, a formidable market by any yardsticks, larger than the US or Europe
GEO-POLICY
India, Brazil and South Africa are already looking forward to forming a strategic golden triangle.

INTERVIEW

How India specialists see the forecast from Goldman Sachs about 2050 with India as the 4th (after China, US, European Union) economic power? The 21 century will be finally the Asian Century?

Goldman Sachs' long-term projections about the Indian economy are based on sound analysis and reasoned projections. India is now reaping benefits of the investments made in time and money in creating sustainable democratic institutions. India's other advantage is that the working population will be growing over the next 3 decades, giving India a sustainable competitive advantage in labour productivity. I believe that the probability of the projections being realized are very high. The annual GDP growth rate of over 7% is now a reality - I believe given the present tempo, we should even be approaching 10% growth rate, atleast over several 3 to 5 years periods.

How has this global recognition emerged?

The IT sector has helped India achieve global recognition and self-confidence. Quality manufacturing sector is also now beginning to emerge. In the last 3 years, Indian exports have increased tremendously not only because of the cost advantage but mainly due to quality aspects. But realizing the vision is not easy, we would need to put in efforts to: establish a dynamic quality educational system; create a world-class infrastructure; build high value industrial growth, which could pull labour from under employment in agriculture into high productivity jobs in industry; and modernize agriculture and related industries through innovative S&T inputs.

INDIA FIGURES
The Larger Democracy
India is the largest functioning democracy in the world with political consensus on the economy. 619 million voters.
A true Babel
18 major languages, 1600 minor languages and dialects, 6400 castes and sub-castes, 52 major tribes, 6 main ethnic groups.
Growth
The average annual GDP growth rate was over 5% in the last 10 years (1995-2004). In 2004 was 6,6%.
Number 8
As regards the quality of technical and management schools is concerned India is placed at number 8.
Human Capital
A stock of over 3 million scientifc and technical manpower
Brain Drain
100,000 Indian professionals leave India every year to take jobs in the US. The resource loss of this brain drain is up to 2 billion per year for India. 25% of Silicon Valley companies are founded or managed by Indians.
Middle Class
India today has a 'middle class' of over 300 - 350 million (with an average purchasing power of 3000 dollars per month) and with increasing number of youth entering the economic system the sector is growing at double digit figures. China, as a benchmark, at this time is about 125 to 170 million that can be considered middle-class.
R&D location
100 global companies set up their R&D centers in India during the last five years. GE's second largest R&D center in the world is in Bangalore
Financial market
23 stock exchanges with more than 9,000 companies listed
High Tech Exports
Indian IT exports are of the order of $12.5 billion. By 2008, will be around 30 billion.
58% share
From the 137 software houses certified by the SEI-CMM at level 5 in the world, 80 are from India.
Scientific productivity
The intellectual capital available per dollar in India is the highest in the world. India is the top world nation in SCI journal publications per GDP per capita per year, with 31.7 papers. China follows with 23.32 and then the US with 7. India is also the top world nation in citations per GDP per capita per year, with 77.40 citations, followed by China (69.06) and the US (67.27).
Hot clusters
IT, biotech, pharmaceutical (generics exporter), space, milk (1st world producer), diamonds (nine of every 10 finished diamond stones sold in the world pass through India), entertainment ("Bollywood").
Software
A McKinsey & Co. recent study concluded that China remains years behind India in software development; China's IT services revenues are rising, but are barely half of India's $12.7 billion;
Main clients
United States (21% of exports) and the Arabic Gulf Countries (11,4%)
Main suppliers
United States (6,6%), UK (4,7%), China (4,7%)
Foreign Direct Investment
The world's second preferred market destination for FDI after China (2004 A.T.Kearney Report); 14 special economic zones
A huge internal gap
24% of population leaves above the line of poverty. PIB per capital is of 3,200 dollars per year in purchasing power parity (less than 270 dollars/190 euros per month). More than 1/3 of population is illiterate.
Strategic interest
India and China together could become an economic juggernaut if they built closer technology ties.

What is the main strength of India in a benchmark with China, the other emergent global power?

India's basic strengths arise from the quality of its human resources. The top echelon of Indian technologists and management personnel are manning prestigious MNCs the world over. The global competitiveness report 2003-04 of the World Economic Forum has ranked India 37th out of 102 countries as against China's ranking of 46. The ranking, based on Business Competitiveness Index (BCI), considers a country's quality of business environment as well as the sophistication of the companies. As regards the quality of technical and management schools, India is placed at number 8. India thus has a formidable strength in its creative and innovative human resource base as demonstrated by the IT experience.

Is India the BPO hub of the world based in English language? Or the off-shoring trend is reversing or can be reversed in near future?

The outsourcing of manufacturing commenced around half a century ago and was followed by off-shoring of manufacturing about a quarter century ago. However, outsourcing of services, which is more value added, commenced only about a decade ago - propelled by the developments in ICT. I am sure the next step will be off-shoring of services, this is a natural evolutionary economic process and cannot be stopped by extraneous factors. From an economist's point of view, labour arbitrage in services is no different from labour arbitrage in manufacturing. Today India's pre-eminent position as the BPO hub of the world is derived from various advantages and admittedly our command on English language is one of these. India has been able to create a world-class environment for BPO due to the committed, qualified and competent youth who are IT savvy. As service institutions develop further in India, I do see the off-shoring of many services to India for example such as engineering design and medical based services in the near future. It was Jack Welch, the former GE CEO, that once said: "India is a developing country but it is a developed country as far as its intellectual infra-structure is concerned". One can venture to predict that if India plays its cards right, by 2020, it can become the number one knowledge production center of the world. Indian advantage is not just the cost - but the cost-cum-competence, considering the huge talent pool

Can the Indian diaspora - the so called "bollystan" ("Bolly-" connotes culture, like Bollywood and "-Stan" is Farsi for "land") - help the geo-economic strategy of India?

Yes, of course. I have always been advocating that the Indian diaspora is our brain bank. However, till very recently we had no specific policies in place to involve and systematically tap this latent resource. We have recently announced dual citizenship for our diaspora and put in place several other policy measures to tap this resource base. I am sure in time to come Indian diaspora will be able to contribute more significantly with their financial, technological and managerial inputs.

Can India develop a market of middle class so huge as China, or even larger, in a short-period of time?

India today has 'middle class' of over 300 million and with increasing number of youth entering the economic system the sector is growing at double digit figures. The opening up of trade in agricultural products under the WTO and with the initiatives to modernize agriculture, I see a burgeoning 'rural middle class' emerging too. Thus on the whole, I see atleast 50% of India's population (around 600 million) forming the 'middle class' in another decade or so, a formidable market by any yardsticks!

How is the process of globalization influencing Indian companies?

The Indian companies have responded very well to the phenomenon of globalization within a very short period of time. This has been possible primarily due to the facilitative and enabling policies put in place by the government. About two decades ago only some Indians would have been conversant with Information Technology; however today Indian exports from this sector are of the order of $10 billion.

What are the main reasons for foreign companies to invest and localize in India?

India is the largest functioning democracy in the world with political consensus on the economy. It has abundantly available qualified and competent human resource base, untapped natural resources, rich mineral base and agricultural surplus. The manufacturing capability is huge spanning almost all sectors. The consumer market is large and expanding exponentially. Special investment and tax incentives for infra-structural development prevail.

What are the more dynamic regions in India?

Generally in the recent times the Indian peninsular region has been more dynamic 'economically' - especially the metropolis of Bangalore, Hyderabad, Chennai & Mumbai-Pune. Some of the other peninsular towns such as Cochin, Goa, Ahmedabad, Surat, Indore etc. are also fast emerging as counter-hubs to these metropolis.

In what sense Europe could be an ally for India geo-political emergence?

Europe has been India's trading partner since ancient times. We have complementarity of resource endowments and synergism of objectives. While India has a large young working population, Europe has mature technological resources and markets. But let the EU firms not underestimate the huge buying power of the Indian middle class. Indian and EU companies can form win-win partnerships.
How do you see the relationship with Brazil and Portugal?
India, Brazil and South Africa are already looking forward to forming a strategic golden triangle. I visited Portugal a few years ago and found that we could do so much together in science & technology as well as trade.

EXAMPLES OF GLOBAL SUCCESS OF INDIAN MULTINATIONALS
  • Indian firms supply automobile components to about fifteen major companies around the world. In 2003-04 the exports of auto-components were $ 1.5 billion in comparison to $375 million in the previous year. Exports are expected to touch $15 billion within five years. The Bharat Forge has the world's largest single location forging facility of 1.2 lakh tonnes per annum. Its client list includes most of the well known auto manufacturers such as Toyota, Honda, Volvo, Cummins, Daimler Chrysler.
  • The pharmaceutical industry of India is recognized as much as its infotech industry. It is already worth $ 6.5 billion and it has been growing at 8-10 percent a year. It's the 4th largest globally in volumes and 13th in value terms. Its exports have crossed $2 billion, and all the top 10 Indian pharma companies have subsidiaries or associates in USA, Europe and other regulated markets.
  • Moserbaer - is the world's 3rd largest optical media manufacturer and the lowest cost producer of CD recorders. The firm exports data storage products to several of the world's top 10 CD-R producers. The company has acquired Capco, Luxembourg, Netherlands and has set up a subsidiary in United States.
  • The Essel Propack is the world's largest laminated tube manufacturer. The company has manufacturing plants in 11 countries. It commands a global manufacturing share of 25 percent. Among its major clients are P&G and Unilever to which it supplies 100% and 40% of their demand respectively.
  • In the domain of paints and coatings, the India's Asian Paints has put in place manufacturing facilities in 22 countries which are spread across five continents. The Berger International has been acquired by Asian Paints. It adds access to 11 countries additionally. The company has monopoly in 11 countries.
  • Specializing in inks, the Hindustan Inks has the world's largest single stream, fully integrated ink plant which has capacity of 1 lakh tonnes per annum. They have in US a manufacturing plant and 100 percent subsidiaries in Austria as well as US.
  • India is one of the world's largest diamond cutting and polishing centres. Nine of every 10 finished stones sold in the world pass through India.

  • SECOND STORY
    A view from the "bollystan"
    (the Indian diaspora)

    Ashish Arora
    «India will be a great place to locate some types of R&D operations»
    Ashish Arora is Professor of Economics and Public Policy at Heinz School, Carnegie Mellon University, USA

    Professor Arora's research centers around the areas of economics of technological change, management of technology, intellectual property rights, and technology licensing. He is currently the Research Director of the newly created Software Center at Carnegie Mellon, and specifically, is studying the development of the Indian software industry and its links to the US. He has a PhD in Economics by Stanford University, California. He just published the book "From Underdogs to Tigers: The Rise and Growth of the Software Industry in Brazil, China, India, Ireland, and Israel", edited by Oxford University Press. In 1980 the Indian software industry was practically non-existent. By the 1990s the industry was one of the largest employers in manufacturing. Similar patterns of growth can be found in other emerging economies - the book has chapters on big and small emergent countries. So given that the software industry is commonly viewed as a high-tech industry, how is it that such spectacular growth has occurred in countries where high-tech industries would not seem likely to develop? This book examines the reasons behind this phenomenon, and asks whether it suggests a new model of economic development.
    Order at Amazon.com here
    His website: www.heinz.cmu.edu/researchers/faculty/ashish.html
    Prof. Arora can be contacted by email at ashish@andrew.cmu.edu

    INDIA ADVANTAGES
  • The most positive sign are that there is a broad consensus in India on the direction of economic and legal reforms that will sustain economic growth in the future.
  • The biggest strength has been that it is a democracy, so changes have to be consenus based. This ipmlies that abrupt changes are less likely.
  • The success of the indian software firms shows that there is more to India than simply cheap programmers. Rather, we are seeing the rise of new capabilities to provide services on a global scale.
  • Our multinationals are also beginning the process of converting from indian firms sell in overseas to firms who are multinationals, drawing on talent and resources from all over the globe.
  • INTERVIEW

    How do you see the forecast from Goldman Sachs about 2050 with India as the 4th economic power?

    Brad de long's estimates indicate that since 1984, the indian GDP growth rate increased from about 3.5% to about 5.5% per year. Though not as impressive as the performance of the chinese economy, the extra 2% growth implies that india's GDP is 50% higher than it would have been. This growth has been accompanied by positive changes, again perhaps less rapid than in China, in physical infrastructure. However, the most positive sign are that there is a broad consensus in India on the direction of economic and legal reforms that will sustain economic growth in the future.

    What is the main strength of India as benchmarked with China?

    Indian legal and economic institutions are stronger and more transparent to both insiders and outsiders. The growing middle class is more confident in its own abilities and less defensive about indian weaknesses (and therefore more determined to rectify them). However, the biggest strength has been that it is a democracy so changes have to be consenus based. This implies that abrupt changes are less likely. It also means that as globalization and economic growth continue, and their fruits are shared, the political support for economic growth with justice will remain strong.

    And the weaknesses?

    There are a number of well known weaknesses, also related to the indian democratic structure. These include the slowness with which political and economic decisions are taken, tensions with Pakistan and the problem of Kashmir. as well, credible ways have to be found to ensure that the benefits of economic growth are broadly shared and are not confined to the urban middle and upper classes.

    Is India the ITO and BPO hub of the world based in english language? Or the off shoring trend is reversing or can be reversed in near future?

    It is based in english language but it is also based on the commercial and economic infrastructure. any firm can locate in India and hire indian call center operators. But the success of the indian software firms shows that there is more to India than simply cheap programmers. Rather, we are seeing the rise of new capabilities to provide services on a global scale. This is a facinating development that gets overlooked because of the attention paid to wage differentials.

    Can the Indian Diaspora - the so called bollystan - help the geo-economic strategy of India?

    Undoubtedly. they are sometimes a key export link between indian exporters and their overseas customers. in many cases, they have provided the entrepreneurial spark and the seed capital. They can provide technical expertise. However, a large country like India, with a billion people, will mostly depend on its own populaton.

    Can you give examples of global success of Indian multinationals?

    Indian companies are slowly learning to become multinationals. The leading it companies (TCS, Infosys, Wipro, Satyam, HCL) already have large operations in their major markets such as Europe. They are also beginning the process of converting from indian firms sell in overseas to firms who are multinationals, drawing on talent and resources from all over the globe. other companies are less known but are likely to follow in their footsteps, including firms in manufacturing, such as Bharat Forge or Tata Automobiles.

    What are the main reasons for foreign companies to invest and localize in India?

    Initially, it is to TAP into the cheap and talented work force. more recently, because India will be a great place to locate some types of R&D operations. But increasingly because India is going to be a large and important market.

    THE SHIFT IN 1991
    Following independence from the British rule in 1947, India embarked on a so-called socialist strategy of development, which envisaged a heavy role for the government and the public sector in shaping India's economy and industrialization. The strategy relied on import-substitution, emphasized the role of the government in providing infrastructure, as a regulator, and as a provider of goods and services. Throughout the 1960s and 1970s, the growth rate of GDP in India had been stagnant at 3?3.5 percent per annum (what came to be known as the Hindu rate of growth). Beginning in the early 1980s, there was some emergence of thinking about the need for a change in trade policy. During the late 1980s, the then government took the first steps towards reducing state control. These were not only on the external policy front but also related to domestic industrial policy. Steps were taken to ease industrial and import licensing, replace quantitative restrictions with tariff barriers, simplify the tariff structure, and importantly, this was the first instance of a three-year trade policy. There were conscious efforts to dismantle the import licensing regime via reductions in the number of products listed under banned/restricted category. The years 1989-91 were marked by difficulties, both on the economic and political fronts. As the new government took over the treasury benches in 1991, India was facing an impending external payments crisis with foreign currency assets less than US$1 billion, just enough to cover two weeks of imports. The Government of India requested a Stand-By-Arrangement from the IMF in August 1991 and entered into an IMF-supported program.
    In 1991, after decades of pursuing an import-substitution industrialization strategy, India initiated a drastic liberalization of its external sector. The average tariff in manufacturing declined from 117 percent in 1990-91 to 39 percent in 1999-2000. The reduction in tariffs was much more drastic in India than in the trade liberalization episodes in Latin American countries like Mexico, Colombia, and Brazil. In addition to tariffs, India also has reduced nontariff barriers (NTBs) since 1991. The average import coverage ratio (the share of imports subject to nontariff barriers) declined from 82 percent in 1990-91 to 17 percent in 1999-2000. In fact, the 1991 trade reform in India represented one of the most dramatic trade liberalizations ever attempted in a developing country. Second, the trade reforms in India were exogenous and came as a surprise. In response to a severe balance of payments crisis in 1991, India approached the International Monetary Fund for assistance.
    Source: "Trade Liberalization and Wage Inequality: Evidence From India", IMF Working Paper 05/20, Prachi Mishra and Utsav Kumar, January 2005
     
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