India needs to move from being world's back office to R&D ecosystem: TCA Ranganathan

Over time, our units became increasingly specialised and moved up the value chain. Now called “global capability centres” (GCCs), and based in India’s major cities, they support a variety of business processes, such as IT, finance, HR, professional and business consulting (including medical and legal services) and analytics.

The number of GCCs is more than 1,700, according to Nasscom. The revenues of Indian GCCs have touched nearly $65 billion for FY24, growing at a CAGR of close to 10 percent from FY19 to FY24. The sector has reported an employee headcount exceeding 1.9 million.

The challenge now is to both protect and foster our growth story in changing times. Global growth has slowed in advanced countries. In more accelerated terms recently, the spirit of globalisation has started giving way to a more inward-looking environment. Climate change worries too have crept into global consciousness. Emigrant inflows in the absence of job creation are known to result in social tensions.

Trade wars are becoming common. Their catalyst was the trade surpluses generated by China, but now they ripple onto other countries as well. Illustrative are the ‘MAGA’ movement’s ‘America First’ discourse in USA that propelled Donald Trump to a second term, and the legal barriers being raised in EU to prevent lower-cost shortcuts of emerging markets from disturbing climate preservation measures and internal markets.

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Though manufacturing is the initial target, attention towards services jobs may well follow. We often tend to forget that terms like ‘worker mobility’ resonate differently in different households, sectors and geographic regions. This could be because the earlier erosion of manufacturing jobs was witnessed in the advanced economies.

We, in the emerging markets, had then celebrated the compensatory job creation that had happened in our lower cost centres, via creation of third country production, price efficient supply chains and ‘online back-offices’, ‘capability centres’ and ‘call centres’. However, while technological advances of yesteryears had eliminated manufacturing jobs, presently, generative AI-based chatbots, robotic surgeries, driverless delivery vehicles and their variants have already started creating redundancies in services jobs.

Compensatory job creation may happen yet again, but this time the beneficiary geographies are likely to be the high knowledge centres, compelling us to study countries and geographies from this altered perspective.

The Indian ecosystem needs to be viewed from this lens. An interesting aspect of our growth story so far is that our spend on R&D as a percentage of GDP is quite low, less than a third of the global average of 2 percent of GDP. Resultantly, we rank at a lowly 39 of the 133 countries in the Global Innovation Index 2024. Our growth story drew from innovations in other countries. This is despite the fact that our scientific prowess and research institutions are internationally well regarded.

We figure in the top five countries of the ‘Critical Technology Tracker’ maintained by the Australian Foreign Policy Institute. The ‘Tracker’ is a large data-driven project, covering 64 critical technologies. It is a leading indicator of a country’s research performance, strategic intent and potential.

This dissonance between our research institutions and industrial establishments could be an unintended side effect of our belief that promoting labour-intensive manufacturing was the only practical solution for creating adequate jobs and growth opportunities. However, these jobs do not carry much appeal for the youth.

The lackadaisical growth of labour-intensive manufacturing versus the sudden spurt of start-ups and unicorns in response to the Startup India Scheme provides an indicator of the potential available if a full-blown push is given to promote research-intensive technology manufacturing in dedicated centres.

We also need to strengthen our services exports. Though top ranked in internet services, we rank sixth globally for all services. We could start by reviewing our approach to our health and educational systems. These actually are as good as the global best, but so far have been looked at more as a cost centre than a growth opportunity and thus subjected to ‘massification’ to reduce fiscal draft, while catering to an ever-increasing population.

The share of these two sectors in our total employment is about 5 percent. The global average is 9.5 percent and closer to 20 percent in the advanced world. Resultantly, in our universities, class sizes now run into triple digits, diluting quality standards, while fewer academic jobs are on offer. Laboratories and other educational resources to student ratios have also similarly worsened.

The dip in quality and standards has impelled a large number of our students to seek education abroad. Currently, over 1.33 million Indian students are studying abroad, up from 907,404 in 2022, indicating the quantum of opportunity losses, lost jobs, and consequently lost income streams that our economy has experienced.

A similar story exists in the health sector. The hospital bed to population ratios are much worse than our rival nations. The resultant overcrowding in our hospitals has prevented faster growth of inward medical tourism to its fullest potential.

Globally, the development of markets and economic growth are well correlated. We thus need to locate and build our own markets. Our growth story has so far been scripted through, at best, a few tens of cities while the USA, EU, and China have focused on establishing a much larger number of 300, 500, and 600 cities, respectively.

Our principal cities have become excessively congested and polluted and may now soon lack the bandwidth to expand further. We thus perhaps need to re-distribute ourselves by expanding our list of attractive cities to some correspondingly higher number.

An advanced economy differs from an emerging economy in having a larger number of attractive cities, classrooms and hospital beds. We now need to evolve from being a simple back-office to the world, to creating an ecosystem that provides win-win solutions for all.

(The writer is The Former Chairman and MD of Exim Bank of India)