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India in Transition

Does India Need a High Technology Industry?

Arogyaswami J. Paulraj
November 19, 2012

Despite some recent stumbles, most economic and demographic metrics favor India’s growth for several more years. India’s economic expansion is typical; it comes from its current low levels of physical, technological, and human capital deployed and its absorptive power for additional such capital. Although the Indian economy is fairly broad based, it does suffer from some imbalances: the export sector is small, manufacturing is underdeveloped, and there is little high technology industry.

What is a high tech industry? While there are several definitions, good examples of high technology are telecom and networking, computing and automation, modern pharmaceuticals, commercial jet aircraft, and advanced instrumentation like MRI machines. Emerging high tech areas include genetic engineering and nanotechnology. High technology industries have some common elements, as they: (a) need highly skilled scientific and engineering personnel, (b) require high recurring R&D investments, typically a tenth to a third of annual sales, (c) demand  large initial investments that are often orders of magnitude of the unit sale price, and (d) need very large global markets and are therefore often near monopolies. All of this makes breaking into high tech industry very difficult. Recent examples from China have shown that it can be done with strong support of the national government and some preferential access to the domestic market. Qualcomm in wireless chips, Intel in computing, and Airbus for commercial jets all generally fit this model.

Does India need a high tech industry? The answer is a clear yes. Consider national security which includes any resource critical to the nation’s well-being. For example, Information and Communications Technology (ICT) infrastructure is a good example as it is clearly crucial to banking, stock market, and air and rail networks. Protecting this infrastructure from cyber-attack is hard enough for countries like the U.S., which dominates in this technology. It is much harder for India which does not have an ICT capability.

What about economic value? Again, taking the telecom industry as an example, India imports many tens of billions of dollars of ICT equipment annually. A vibrant internal industry can serve much of India’s needs and also be a major exporter, creating thousands of high-end jobs. Another reason to develop a high tech industry is that about half of GDP growth in developed countries comes from the high technology sector and India too will have to soon seek its growth from this sector since the current growth engines will inevitably slow. A final argument for a high tech industry is that it promotes national unity and cohesiveness. High tech companies are global and demand highly educated work forces, all of which reinforce ownership and nationhood. Research from the Kaufmann Foundation in the U.S. has repeatedly found that locally owned industries have a strong effect on national stability. In India, the growth of Infosys and Wipro, albeit only technology service companies, has reinforced national identity and pride.

What is India’s record in high technology? India is a big consumer of high tech, from cell phones and laptops, to jet travel and CAT scans. However, India adds negligible value in these high technology areas. It has fallen way behind China, Taiwan, South Korea, and Singapore to name a few of its Asian neighbors. It does not have an EDAS or even an Embraer for passenger jets, no Huawei for telecom equipment, no Qualcomm for wireless semiconductors and no TMSC in semiconductor fabrication. India does add value in high tech through design services undertaken by Wipro, Infosys, and Tata Elxsi among others. I would estimate that about 3-4 percent of global ICT design gets done in India under contract services to the U.S., Europe, Japan, and now Chinese companies. Though Wipro and Infosys and others are very successful businesses and a source of very legitimate pride for India, their model does not offer India a path to ownership of high technology. While India has between 15 to 18 percent of the world’s semiconductor chip designers, most of them work within the offshore operations of MNCs. In high tech manufacturing, again MNCs like Nokia, Motorola and Samsung assemble phones in India, though the value addition is only about 5-7 percent. Despite a 900 million plus wireless subscriber market and a $15 billion annual equipment market, there has been no serious attempt to promote high value addition in telecom, let alone succeed at it.

India’s neighbor, China, offers a different picture. It has successfully leveraged a committed bureaucracy, the financial resources generated from low to medium tech manufacturing, and the power of its huge internal market to build its high tech industry. The state capitalism model has largely failed in India, but has been a success in China. Perhaps China’s leadership is technology savvy and its bureaucrats are held to a higher level of accountability with many incentives for delivering success. Huawei is a typical Chinese high tech success story. India uses a wide range of Huawei products, from optical transmission to wireless to switching. About a fourth of new equipment installed in India between 2008-09 came from Huawei.

How can India build an internal high tech industry? The country has many assets that can be harnessed to build such an industry, at least in sectors like ICT. India has strong core engineering skills in telecom design, thanks to years of learning through off-shoring and outsourcing to India. Private sector companies like Tata, Wipro, and Infosys have built global practice in engineering services. In some manufacturing sectors like automobiles and pharmaceuticals, India is beginning to have global presence. All of this has deepened India’s management skills. Knowledge of English has been a big advantage for operating globally and has helped India’s success in engineering services. The IITs and NITs graduate a sizable number of undergraduate students in science and engineering. By statistics alone, the top 1-2 percent of the engineering student cohort who enter these institutions are extremely talented. So the both human and organizational capital for a telecom industry is in place.

On the other hand, the right kind of investment capital – private capital – is hard to attract given the high levels of investment and very high risk. State capitalism – India’s initial route to high technology by creating state funded public sector companies – has proved to be very disappointing. The Indian Telephone Industries and Semiconductor Corporation Ltd. are examples of this disappointment. India needs to attract private capital to build this sector. This will be possible if the government offers an adequate policy support. A policy framework should reduce the risk for private capital by a variety of measures including preferential market access, soft debt financing, R&D investments, spectrum policy geared to promote telecom technology, and downside risk mitigation for venture capital.

India needs a high technology industrial capability to create high-value jobs, sustain growth, protect its national security and build a vibrant society. Building a world class and globally competitive high technology industry is, no doubt, a huge task, but India has most of the ingredients for success. It just needs to add some vision, imagination and commitment.

Arogyaswami J. Paulraj is Professor (Emeritus) in the Department of Electrical Engineering at Stanford University. He can be reached at .


India in Transition (IiT) is published by the Center for the Advanced Study of India (CASI) of the University of Pennsylvania and partially funded by the Nand and Jeet Khemka Foundation. All viewpoints, positions, and conclusions expressed in IiT are solely those of the author(s) and not specifically those of CASI and the Khemka Foundation.

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