In 2019, the World Economic Forum ranked India mid-table – 68th out of 141 – in terms of competitiveness, based on its Global Competitiveness Index. This ranking was partly due to a major innovation deficit. Although from an innovation point of view, India ranks 35th, this is largely due to the performance of the services sector.
In its 2022 report on India’s manufacturing sector, Mumbai’s National Institute of Industrial Engineering attributed Indian industry’s difficulties to five main factors, all having to do with the limits of innovation: “lack of research and development (R&D)”, “low productivity”, “less digitalisation” as well as “technology adoption” and “poor quality products”.
Illustration: Pariplab Chakraborty.
The lack of competitiveness of the Indian industry can be partly explained by the weakness of its R&D efforts. Not only do the country’s companies fail to innovate sufficiently, but they also neglect entire sectors of the economy that Chinese firms have been able to penetrate.
The Indian business world has been suffering from serious weaknesses in terms of innovation for many years because, primarily, of the protectionism under which it has long operated: until the liberalisation of the 1990s, Indian companies had a captive national market due to the customs barriers the country had built up (average customs rates were 80% at the time). In addition to this legacy, the Indian capitalist milieu was often quicker to seek rents than to innovate, partly because it was largely drawn from merchant castes who did not necessarily have an industrial culture, nor the taste for risk that was supposed to go with it. These historical and sociological characteristics often led Indian industrialists to buy the technologies they needed rather than inventing them themselves. Today, the culture of rent-seeking is perpetuated – despite the relative openness to the world inherited from the reforms of the 1990s – by the influence of industrialists close to the government, known as oligarchs or “cronies”, who succeed in obtaining or having the governments they finance raise customs barriers (often non-tariff barriers) that hinder the entry of foreign competitors into the Indian market.
Indian R&D figures reflect this culture and these processes. Spending in this area has fallen from an already modest 0.83% of GDP in 2009-10 to 0.64% in 2020-21, following a linear erosion trend, according to 2022-23 research and development statistics figures of the Ministry of Science and Technology. Among emerging countries, only Mexico is doing worse by a small margin, with South Africa slightly ahead. Unsurprisingly, India’s R&D expenditure per capita (calculated in purchasing power parity) paints an even bleaker picture: it stood at $47.2 in 2017 (compared with $351.2 for China, $287.7 for Russia, $197.9 for Brazil, $108.5 for South Africa and $91.3 for Mexico).
These figures explain why India accounted for no more than 2.9% of the world’s R&D expenditure (the same as France), while China accounted for 22.8% (just behind the number one, the USA, which accounted for 24.8% of the total). India’s limited R&D effort must also be put into perspective by the role of foreigners: in 2021-22, 66% of patents filed were by non-residents (mainly Americans, 32.7%), Japanese (13.1%) and Chinese (10.5%). This fact partly explains that the increase in the number of patents filed in India – most of which are of foreign origin – remains remarkable, as the country ranked 7th worldwide in 2018, ahead of Russia and Canada. Seven Indian states accounted for 75% of patents filed in 2017-18: Maharashtra, Tamil Nadu, Karnataka, Delhi, Telangana, Uttar Pradesh and Gujarat.
The shortage described above is linked to the meagre efforts of the private sector in this area: in 2020-21, the private sector accounted for only 36.4% of the country’s R&D expenditure, compared with 43.7% from the central government, 6.7% from the states of the Indian Union and 4.4% from state-owned companies (the balance of 100 being provided by higher education, which is largely public). The share of the private sector has declined from 45.2% in 2012-13 to 40.8% in 2020-21, while that of the state has increased from 54.8% to 59.2%.
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India is the only emerging country where the public sector accounts for more than 50% of R&D. The next highest ranking country is none other than Russia, where public R&D accounts for (only) a third of the total. Among the public agencies reporting to the New Delhi government, the Defence Research & Development Organisation, with 30.7% of the total, comes well ahead of the Department of Space (18.4%), the Indian Council of Agricultural Research (12.4%) and the Department of Atomic Energy (11.4%).
Illustration: Pariplab Chakraborty
Excluding defence and space, industry and services accounted for 41.4% of total R&D spending in 2017-18. The private sector accounted for 36.8% of this total, while the public sector accounted for just 4.6%. But if the private sector seems to be playing the innovation game here, we need to relate this 41.4% to GDP to measure the reality of this effort. In fact, R&D spending in industry and services (where the private sector plays a dominant role) represented just 0.28% of GDP. Another revealing figure: R&D spending accounted for less than 1% (0.98%) of sales turnover in industry and services, i.e. less than twice as much as advertising expenditure.
The sectors in which private companies make a significant R&D effort are, in order, pharmaceuticals (24.34% of R&D expenditure in industry and services), transport (16.41%), information technology (8.68%) and mechanical engineering industries (7.48%).
The lack of significant investment in R&D partly explains the mediocre competitiveness of Indian industry, which has resulted in low export capacity, two phenomena particularly significant vis-à-vis China.
In 2024, with $118 billion in merchandise trade, China once again became India’s leading trading partner, supplanting the USA, which had overtaken it for two fiscal years. At the same time, India’s trade deficit with China widened from $46 billion in 2019-20 to $85 billion in 2023-24. India’s exports – worth just under $17 billion, less than in 2018-19 – consist mainly of raw materials (including iron ore) and refined oil, while China’s exports to India, worth over $101 billion (up from $70.3 in 2019), consist mainly of manufactured goods, including machine tools, computers, organic chemicals, integrated circuits and plastics.
While Indian imports from China grew 2.3 times faster than Indian imports in general between 2005-06 (when India still had a trade surplus with China) and 2023-24, the share of industrial goods imported by India from China rose from 21% to 30% of total industrial goods imported by India over the period . This proportion is even higher in certain sectors such as textiles – 42% –, machine tools – 40% – and electronic or electrical products – 38.4% – and barely below average in such important sectors as chemicals and pharmaceuticals – 29.2% –, plastics – 25.8% – and automotive parts – 23.3%, while Indian exports remained at around $16 billion, representing a structural deficit amounting to $387 billion cumulatively over the last six years.
Interestingly, this deficit is not mainly due to the consumers goods – which account for just 6.8% of total industrial imports – but to intermediate and production goods, which account for 70.9% and 22.3% respectively of total industrial imports from China in 2023-24, compared with 64.8% and 24.3% respectively in 2020-2. Indian industry needs these Chinese goods to ensure its own production, whether it be electronic, electrical or automotive spare parts, active ingredients for drug and vaccine manufacturers, or computers (which are classified as production goods when used for professional purposes). These figures reflect the way in which India fits into the international division of labour as a country where goods are assembled, but where the components thus assembled come largely from abroad – and mainly from China. This situation explains why the more India exports, the more it also imports to obtain the components it needs to assemble the smartphones, cars and medicines it sells to the rest of the world – mainly the West. This configuration points to another reality: India’s main advantage in terms of industrial production lies in the low labour costs it continues to apply.
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To escape its industrial dependence on China, India has sought to protect companies likely to produce some of the components it imports from the Middle Kingdom, by increasing certain tariffs from an average of 15 to 18.3%. This upsurge in protectionism was intended both to make Indian companies more competitive and to attract investors wishing to circumvent these customs barriers by producing locally. Paradoxically, far from emancipating India from its dependence on China, this approach may actually be accentuating it. Indeed, the number of foreign investors willing to set up in India for the purpose of industrial production remains limited, and this is leading India to review the strategy it implemented vis-à-vis China at the beginning of the decade. In 2020, following the Galwan valley crisis that resulted in the death of 20 Indian soldiers in the Himalayas, India made all Chinese investment subject to authorisation procedures that made it virtually impossible.
Illustration: Pariplab Chakraborty.
Today, there are two schools of thought within India’s ruling class in that regard and in July 2024, the annual delivery of the Economic survey was the occasion for a very intense debate between these two schools. This survey argues that FDI inflows “from China can help in increasing India’s global supply chain participation along with a push to exports”. Second, it says that relying on Chinese FDI “seems more promising for boosting India’s exports to the US, similar to how East Asian economies did in the past”. Finally, the Survey opines that “as the US and Europe shift their immediate sourcing away from China, it is more effective to have Chinese companies invest in India and then export the products to these markets, rather than importing from China, adding minimal value, and then re-exporting them”. While the Modi government’s chief economist advisor, V. Anantha Nageswaran, was behind this turnaround, he recommended it with the finance minister’s agreement. This approach was based on an observation relayed by Alicia Garcia-Herrero, chief Asia Pacific economist at Natixis: “US and Europe are a little bit hesitant to invest in India’s manufacturing sector, most of the foreign investments have gone to the ICT [Information and Communication Technologies] sector, such as digital services”.
Harsh V. Pant, vice president for studies and foreign policy at New Delhi’s Observer Research Foundation, shared a similar stance, saying that India needs to be “plugged into Chinese supply chains” if it wants to meet its aspirations to become Asia’s manufacturing hub. For the time being, Union commerce minister Piyush Goyal has vetoed such an opening, but other officials in the Modi government are less categorical. The Minister of State for Information and IT, Rajeev Chandrashekhar, was open to Chinese investors as early as July 2023.
The Economic Survey of 2024 opened up a dual perspective that could circumvent the reservations of Goyal and BJP leaders who are nervous about an influx of Chinese investment: “To boost Indian manufacturing and plug India into the global supply chain, it is inevitable that India plugs itself into China’s supply chain. Whether we do so by relying solely on imports or partially through Chinese investments is a choice that India has to make“. The preferred route today seems to be through trade: by reducing customs duties on imports of lithium, nickel, cobalt and vanadium to zero, India seems to be inviting Chinese battery manufacturers – one of the areas in which India lags far behind – to forge links with Indian partners to produce them in the country. The reduction of customs duties on cell phone components from 20% to 15% has been interpreted in the same way.
In parallel, Chinese diplomats have changed their tone. China’s ambassador to India has been multiplying signs of openness since the summer of 2024. He has said he is in favour of increasing Indian investment in China and boosting scientific and technological cooperation between the two countries – while hoping that “the Indian side will be able to offer a healthy business environment for Chinese companies in India”. Lately, negotiations between the two armies about the border disputes in the Himalayas have been declared fruitful.
Last but not least, India’s dependence on China is greater than the statistics reveal, as Chinese companies have relocated part of their production to neighbouring countries such as Vietnam and Malaysia, to avoid the protectionist measures put in place by New Delhi (or Washington), from where exports of Chinese products now flow. Solar panels are a case in point. While India produces almost half of its electricity from coal, the country is relying heavily on solar energy to achieve its energy transition – but is far from producing enough panels to meet its needs. As a result, two-thirds of photovoltaic cells and 100% of wafers (essential components for these cells) are imported. Overall, China supplies India with between 57 and 100% of the components it needs for its solar panels. In the first half of fiscal year 2024, Indian imports of Chinese solar panels amounted to over $500 million, to which must be added $121 million in imports from Hong Kong and $455 million in imports from Vietnam, which are transit countries between China and India rather than original sources of supply. At the same time, China sold India 500 million photovoltaic cells for assembly – while Malaysia sold India 264 million and Thailand 138 million, two other countries that Chinese firms use to circumvent protectionist measures against them. Indian imports of solar panels (and the components to make them) from China have thus fallen artificially below the 80% mark, the red line for Indian surveillance measures. Although Indian companies are entering the market, they are not developing their own technology, but rather importing 70% of their equipment from China. The country is increasingly resorting to non-tariff barriers to limit Chinese exports, but these are likely to be in vain if Indian manufacturers do not acquire the appropriate technologies.
Indeed, there is no shortcut to industrial sovereignty: investments by India’s corporate sector are needed, in particular in R&D, especially after the Make in India scheme brought so little to India as I showed in my previous column.
Christophe Jaffrelot is research director at CERI-Sciences Po/CNRS, Professor of Politics and Sociology at King’s College London and Non Resident Fellow at the Carnegie Endowment for International Peace. His publications include Modi’s India: Hindu Nationalism and the Rise of Ethnic Democracy, Princeton University Press, 2021, and Gujarat under Modi: Laboratory of today’s India, Hurst, 2024, both of which are published in India by Westland.
