Can India catch up with globally competitive manufacturers around the world? Foreign manufacturers are sitting some production in India, if only to access the growing domestic market. For instance, the Danish wind turbine manufacturer Vestas now assembles parts in Sriperumbudur in south India. It was attracted to that place, in part, by the heady projection that India will soon be the second-largest market for turbines made by Vestas. Some heavy manufacturing – such as the composite 260-footlong wind turbine blades made by American contract manufacturer TPI Composites – is also coming readily to India because the costs of transporting from elsewhere to the Indian market warrant it.
Today, most goods are produced by global supply chains, criss-crossing through many countries. The supply chains have exploited labour arbitrage so that little is produced by expensive workers in industrial countries unless they are aided by significant automation. Instead, Indian labour will be competing with labour from Vietnam or China, which has still not fully exhausted its supply of cheap labour, especially in its less-developed Western provinces. Unlike the situation for early developers decades ago, Indian workers, adjusted for quality, will not be much cheaper than their competitors. Therefore, the gains from labour arbitrage will not pay for other deficiencies
And India has important deficiencies. For a product such as a fan motor to even be assembled competitively in India, border tariffs have to be lowered to rock bottom. Importantly, they have to be lowered not just on the imports into India of intermediate inputs, such as motor parts, but also on Indian fan motor exports to other nearby countries through which the supply chain snakes. Moreover, non-tariff impediments, such as differential safety standards and border inspections, have also to be addressed to make exports seamless. But that requires India to be a part of regional trade agreements. Unfortunately, India has been resistant to signing those.
Indeed, without accounting for tariffs, a report by the Swiss bank UBS finds little difference in costs between India, China and Vietnam in the low-skill task of assembling and shipping a fan. However, Vietnam is a signatory to many more regional trade agreements and can import or export its products virtually duty-free. No wonder global supply chains go through Vietnam, and much less so through India. In fact, the share of global value chain-related manufacturing output for India rose only slightly from 14 per cent to 16 per cent between 2007 and 2021, whereas for Vietnam this same share grew from 35 per cent to over 56 per cent in the same time period.
Consider the very successful Indian generic pharmaceuticals industry, which exported around $25 billion in 2022-23. One of the most prominent figures in this industry is Dr Yusuf Hamied of Cipla.
Hamied’s family owned a small pharmaceutical company, which got underway producing medicines for India during the Second World War when imports were difficult. But after the war, multinational firms again resumed their dominance in India because their drug patents prevented anyone else from making drugs without an expensive licence – India followed the strict British Patent Act of 1911.
Hamied worked on a PhD in chemistry at the University of Cambridge in the late 1950s, studying under Professor Alexander Todd, who would later receive the Nobel Prize in chemistry. After his return to India to join the family company on completing his PhD, Hamied started campaigning against the patent act, arguing that India needed more freedom to produce drugs
The campaign succeeded in 1972 under interesting circumstances. Cipla introduced a generic version of a drug, Propranolol, in India. The multinational ICI, which owned the patent, sued. Hamied sent a message to the then-prime minister, Indira Gandhi, making the case that the generic drug would save millions of lives and should not be denied to Indians. In response, the Indian government changed the patent law so that the end product, the drug, could not be patented, but the process by which it was made could. So if an Indian company found another way to make the final drug, it could do it legally. Cipla had freed itself from the patent law!
Many multinational firms left India at this time, seeing little profit in competing with generic manufacturers like Cipla and Ranbaxy. This then opened the door for the Indian generic pharmaceutical industry, which started manufacturing the active pharmaceutical ingredients (APIs) that go into drugs and the drugs themselves
The new patent law played to the strengths of Indian pharmaceutical companies. Finding new processes to make drugs is a form of incremental innovation, which Indian scientists did very well – much as Indian engineers incrementally improve productivity. Indeed, Hamied argues that even large multinationals do very little fundamental or concept innovation in pharmaceuticals. Much of that is done by the US government-funded research in universities, and then the patent rights are acquired by the multinationals which do the incremental research to enable production and commercialization. So, in a sense, India’s new patent law only made the fruits of US government-funded research more widely available in a country that did not have such a well-endowed government!
There is a broader point here. Domestic firms in developing countries primarily consume intellectual property as they try to catch up, and their ability to do so, as well as to innovate incrementally, would benefit from fewer protections for intellectual property. Josh Lerner from Harvard University has found, after examining the patent policy of sixty countries ranging over 150 years, that an enhancement in patent protection in a country is associated with more patent filing by foreign firms while reducing filings by domestic firms. This phenomenon is particularly pronounced in developing countries
Excerpted with permission from Breaking the Mould: Reimagining India’s Economic Future, Raghuram G Rajan and Rohit Lamba, Penguin India.