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Archive for January, 2015

Hail the Invisible Hand of the State

The current debate in India about how to trigger a quantum jump in industrial manufacturing activity and thus create large scale employment is largely centered on ways to reduce the role of the State- in allotting land, in environmental clearances, in firing workmen and so on. Yet, the case studies of two industries which came from origins even smaller than where manufacturing is today and have become international success stories, the Indian pharma industry and the Indian information technology services industry, proves the opposite point. Neither would have come to their current stellar role in the Indian economy without the active but largely invisible hand of the Indian State.

The Indian pharma industry has grown from minuscule revenues in the late 1960’s to a world player with an annual revenue of $ 40 billion (of which $ 15bn is in exports) and an activity base of 20,000+ manufacturing units employing over 29 million people. The case of the software services industry is even more striking; it employed just 8,500 people in 1990 and had a revenue of a mere $165m (tiny Ireland had a $185 million software industry at that time). Today its size is $118 billion with $100 billion as exports. The people directly employed in the industry is reported as exceeding 2 million with another 7 million employed indirectly. Both these industries have also created multiplier effects in sectors such as housing construction, transport services, and household goods as young chemists and programmers set up homes and bought cars and home appliances.

What was the magic? Unfortunately, finding the key to these success stories is like that old tale of the blind men of “Hindoostan,” who, when asked to describe an elephant, said that it was like a wall, snake, spear, tree, fan, or rope, depending upon which part of the elephant each touched.

Proponents of the “market economy” will say that the success of these two industries is an example of what energetic Indian entrepreneurs can achieve when the government of India steps aside. Reinforcing this view is India’s business press, which frequently features stories about software and pharma industry millionaires. Proponents of ‘“globalization,” such as New York Times columnist Thomas Friedman in his book The World Is Flat, credit globalization: increased world trade that spreads prosperity around the world. Proponents of “privatization” say that decades of public sector efforts in these industries (Electronics Corporation of India in the case of IT and Hindustan Antibiotics are often quoted as examples) came to nothing until the private sector was “allowed” to participate. To them, this is proof that the government needs to privatize many other industries as well. And of course there are those that say that the State’s only role should be to provide zero-income tax on export incomes, government-sponsored software parks and export zones.

But actual case studies of these two industries tell another story. The rise of the Indian software services industry can be traced back to two mega projects sponsored by the government of India: the computerization of public sector banks and Indian Railways. These two projects, apart from providing an impetus to the startup and growth of hundreds of software development companies, also had another dimension. Far sighted government policymakers like Dr Seshagiri of what was then called the Department of Electronics, the forerunner to the current Ministry of IT, insisted that these applications be built using such technologies as the Unix Operating System and Relational Database systems; the world was then getting ready for a paradigm change that would unleash an insatiable wave of demand for computer programmers well versed in these specific technologies as the world shifted from mainframe computers to client server computers. Thanks to the Banking and Railway projects, Indian companies had a ready stock of thousands of software programmers well-versed in these new technologies who could be immediately deployed on assignments abroad.

The rise of India’s pharmaceutical industry is based on similar visionary moves by the Indian State. In 1970, the government introduced a new Patents Act reforming the 1911, which excluded pharmaceuticals and agrochemical products from eligibility for patents. Patents on molecules, which are products of chemical reactions or on mere admixtures and the like were made non-patentable in India. Only the method of making the product was patentable. This resulted in the Indian pharmaceutical industry developing considerable expertise in reverse engineering of drugs that are patentable as products throughout the industrialized world but not patentable in India.

You need to peer really hard to detect this kind of invisible hand of the State. Professor Marianna Mazzucato, Professor of Science and Technology at the University of Sussex and the author of The Entrepreneurial State – Debunking Public vs. Private Sector Myths did just this and uncovered the role of the American State behind what is generally seen as the ultimate artifact of entrepreneurial vision, the Apple iPhone. “What actually makes the iPhone a smartphone, instead of a stupid phone?” she asks in a recent TED talk. And answers that it is the Internet, the Global Positioning System (GPS), which detects your geographic location, the touchscreen display which makes it also a really easy-to-use phone. She points out that “the very smart, revolutionary bits about the iPhone, are… all government-funded. ….the Internet was funded by the Defense Advanced Research Projects Agency (DARPA) of the United States. The GPS was funded by the [US] military’s Navstar program…the touchscreen display was funded by two public grants by the CIA and the US National Science Foundation”, and in the American pharmaceutical industry, “a full 75 percent of the new molecular entities with priority rating are actually funded in boring, Kafkian [US government] public sector labs”.

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