The global turmoil precipitated by the pandemic and subsequently the military confrontation in Europe is not limited only to the macroeconomic domain—geoeconomic considerations and supply chain security have come to the fore. Attaining industrial and technological self-reliance and sustainability, especially for critical emerging technologies (CETs), is now a high priority for both established and emerging powers. The security challenges in our neighbourhood, coupled with the dual-use nature of CETs, make self-reliance in this domain a special priority for India.
The Chinese threat complicates the picture, given its status as the world’s manufacturing hub, contributing 28.7 percent of global manufacturing output in 2019
. Additionally, as Deng Xiaoping had observed with perspicacity in 1992, what Saudi Arabia is to oil, China is to the rare earth metals
, the elements that are indispensably important for the modern electronics and communications-filled world that economies rely on. When it comes to futuristic CETs, such as autonomous machines, unmanned aerial vehicles, new energy vehicles, and advanced materials, China’s control of rare earth materials and preponderance in manufacturing represents a significant challenge.
Attaining industrial and technological self-reliance and sustainability, especially for critical emerging technologies (CETs), is now a high priority for both established and emerging powers.
How can democracies compete with China?
The process-driven, rules-based, consultative approach of liberal democratic republics creates long-term resilience but exacts short-term costs when up against an authoritarian, single-party state. Even for non-hardware-oriented CET areas, such as artificial intelligence and biotechnology, the latter has more latitude to make mistakes and course correct than the former, where a safety-first approach can tend to hamstring policymakers.
Thus, competing effectively requires a two-pronged approach, harnessing both internal reform and external cooperation. This effort on two fronts will have to be impactful across the value chain – from sourcing input materials, making intermediates and components, and finally manufacturing end products. Succeeding demands shedding many shibboleths, so that CETs—which are essentially vanguard, sunrise sectors in manufacturing and services—can be both developed indigenously and regulated appropriately.
The road ahead for India
Much of the internal reform effort broadly necessary for India’s economic transformation to become a US $10 trillion+ GDP economy is especially crucial for achieving global leadership in CETs. India has always had high quality human capital and munificent natural resources to make a major global impact, but homegrown innovators were hamstrung by dearth of capital and a litany of red tape. While the latter has seen improvement, policymakers need to do a lot more to deepen equity capital markets in both the public and private spheres. The government has done well to financialise retail savings and incentivise investment in modern financial instruments
through a raft of measures over the last eight years, but a structural shift is necessary so that long-term domestic institutional capital, including in insurance and pensions, contributes its share to the risk capital pool. After all, one should not rely on foreign capital to step up to enhance Indian capacities in CETs, especially for those with dual use—that is, both commercial and military—applications. Alongside such equity capital market reforms, direct tax reforms and administrative reforms on the domestic front are the need of the hour. Finally, tapping expertise available outside of government officialdom, through lateral entry or other mechanisms, can be especially impactful when it comes to designing policies for CETs.
Additionally, the country’s scientific research establishment needs to be reoriented and rejuvenated. The National Research Foundation, announced in 2021 to oversee and coordinate research activities across disciplines, is yet to be established. In the context of the transformational industrial, economic and defence sector reforms that have been implemented, leaving the country’s higher education and scientific base relatively untouched is not an option. Bringing together teaching and research rather than keeping them separated in siloed institutions, injecting more competition in different industries by implementing the aforementioned set of broadly applicable reforms so that businesses invest more in R&D, and positioning India as a destination for global scientific talent would be some measures that would unlock potential.
While India has enormous potential in the mining and minerals sectors, it has not delivered on its potential due to several constraining factors, the most obvious one of which has been disruption of mining businesses by environmental activists.
In the external cooperation domain, India needs to work with trusted partners that can help bridge gaps in the value chain. This would entail, for example, a closer partnership with resource-rich Australia, which is also seeking new export avenues for its mining industries now that relations with China are strained. While India has enormous potential in the mining and minerals sectors, it has not delivered on its potential due to several constraining factors, the most obvious one of which has been disruption of mining businesses by environmental activists. Through a combination of internal reforms and international partnerships, whether through bilateral initiatives or multilateral forums like the Quad, the materials deficit must be bridged.
The second aspect of external cooperation is in trade policy. By adopting a regime of tariff protections—much to the consternation of free trade ideologues—and boosting domestic manufacturing through targeted production-linked incentive programs, India has shown it will not be hidebound by received economic wisdom which may not be as universally applicable as the ideologues claim. Some promising results have already been achieved, with electronics assembly gaining significant traction and companies now integrating backwards in the value chain, and manufacturing intermediates and components. The same playbook is likely to deliver results in sectors such as pharmaceuticals, specialty chemicals, and advanced materials. But while trade defense instruments, as some European think tanks like to call tariffs, are gaining acceptability with more countries taking cognizance of the Chinese mercantilist model, it remains imperative for India to close bilateral trade agreements with friendly countries, thus linking trade policy to foreign policy.
Through a combination of domestic and external-focused policy interventions targeted across elements of the materials, intermediate and product segments of the value chain, India will create space for its globally sought-after engineering talent to excel at home and build up high-value export industries and national capabilities in CETs. There are clear economic and strategic payoffs to investing in CET development, and without the right enabling measures, both sustained economic growth and national security would be under a cloud.
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