Innovation and economic growth 2018

growth innovation scaling and the pace of life in cities and innovation and growth how business contributes to society
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Dr.ThorasRyder,Hong Kong,Researcher
Published Date:07-07-2017
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Contents P6 P10 Imperatives for the Indian economy / Need for innovation-driven solutions / P14 Impact of innovation on economic growth / Key stakeholders in the P18 innovation ecosystem Innovation-driven growth in India from ASSOCHAM Innovation is a critical component in improving individual and institutional performance. Real innovation is not easy to come by. Innovation is more radical and transformational than an improvement. Innovation is content-oriented, whereas improvement is process-oriented. Every now and then, organisations confront situations that warrant radical changes, which call for out-of-the-box thinking. It is only through innovation that we can bring about such avant-garde transformation. Inspiration for innovation usually stems from a combination of three factors: an urgent and pressing need to bring about a change; how people perceive and pursue that change till the end; and a congenial environment to accomplish that change. Innovation is always driven by self-induced passion, pressure of compelling circumstances and undying perseverance for achievement. The assiduous application of technological improvement in transport and communication worldwide has created an unprecedented growth in global connectivity and transmission of information. Globalisation itself is a product of innovation. The pace of economic and industrial progress is directly proportional to the efforts made towards research and development (R&D), which acts as a reliable measure of innovative capacity. R&D spend in India has grown to 0.9% of the country’s GDP. More needs to be done to match the government’s target of achieving R&D expenditure of 2% of GDP, as this will also help the nation in increasing the manufacturing base under the Make in India program. As 11 May was declared as National Technology Day by the government of India, ASSOCHAM—India’s Apex Chamber for Commerce & Industry—has decided to organise on 11 May 2015, the Third Innovation Summit cum Excellence Awards with the theme Innovative India 2020. I take this opportunity to thank the Department of Scientic & I fi ndustrial Research, Ministry of Science & Technology, Government of India, for supporting the ASSOCHAM Third Innovation Summit cum Excellence Awards. I also express by gratitude and thank the jury members, our knowledge partner PwC and the ASSOCHAM team for their invaluable efforts and contribution. With best regards, D. S. Rawat Secretary General ASSOCHAM 2 PwCOn the occasion of the National Technology Day, ASSOCHAM is organising the Third Innovation Summit cum Excellence Awards 2015 with the theme ‘Innovative India 2020’. On this occasion, ASSOCHAM is releasing the background paper prepared by the knowledge partner PwC titled ‘Innovation-driven growth in India’. I hope this conference and the background paper will further encourage and promote R&D and innovation in the Indian industry. I wish the event all the success. Dr BK RAO Chairman ASSOCHAM National Council on Innovation Innovation-driven growth in India 3Preface Innovation: a key driver for growth Innovation has been the change driver around the world–intervening to provide accessible and affordable solutions to meet ever-shifting consumer needs. Exemplars from around the world clearly depict the role played by innovative solutions in increasing national economic growth and improving standards of living. China, for example, has recorded signic fi ant growth in gross domestic product (GDP) over the past few decades. South Korea has also vastly improved its economic status since the 1980s, by promoting the inward transfer of foreign technology and by developing its domestic capacity to digest and improve through reverse engineering and foreign licensing–followed by signic fi ant investments in R&D. This paper highlights the need for a similar innovation-driven path for India to achieve non-linear growth over the next two decades, a path that maintains a balance between economic development and social well-being. There is also a strong correlation between innovation and revenue growth at the enterprise level. Global research conducted by PwC clearly highlights this relationship. PwC studied more than 1,700 businesses across 25 countries and 30 sectors in 2013 and segmented these on their ‘innovation potential’ based on a range of parameters including spend on innovation, new product launches, co-development work undertaken with partners, etc. Analysing the financial performance of these firms brought out a clear distinction between the top and bottom-most performers, with the leading 20% firms growing 16% faster than the least innovative. This was equivalent to each of the top firms generating 1 0.25 billion USD of additional revenue over 2010-2013, as compared with the least innovative. 2 Over the last two decades, India’s GDP has risen by over 1 trillion USD, in the process bringing millions of citizens into a new cluster we term as the ‘emerging middle’ class. Our research indicates that a path driven by R&D and innovation capital will be essential for India to manage its inherent challenges and to grow its GDP by 9% per annum to become a 10 3 trillion USD economy over the next two decades. As of 2014, India’s spend on R&D (0.8% of GDP) signic fi antly lagged 4 global counterparts such as China (1.9%), Korea (3.8%) and the US (2.7%). We estimate the need for India to increase its R&D spend to 2.4% of GDP by 2034, and focus on innovation-driven solutions to attain the growth targets mentioned above. These innovations are restricted to not only new technologies and products, but will also include designing innovative processes and business models that challenge the status quo and help achieve inclusive growth. As per our recently published thought leadership titled ‘Future of India - The Winning Leap’, such new solutions could account for almost 40% of the 10-trillion-USD economy envisaged by 2034. Case for non-linear growth in India For India to reach its goals, it will have to blaze a new path. Fortunately, many Indian companies have already ventured into adopting such an approach. The challenge now is to expand this mind-set across key sectors of the Indian economy. The Indian telecom industry, for example, has leapfrogged to mobile telephony, skipping fixed-line technology. 4 PwC5 Within a space of 20 years (1995-2014), the sector recorded 910 million mobile-phone subscriptions—18 times the number of 6 landline connections in 2006 (50 million), the year when landline subscriptions reached their peak. In the future, growth in smartphone use is expected to further drive innovation through digital means. Other sectors within India have witnessed sporadic examples of innovation as well. These innovations could be classie fi d as follows: • Technology-driven innovation, which involves the development of new advanced technology systems, such as the Aadhaar platform, Bajaj Auto’s DTS-i technology or Vortex Engineering’s solar powered ATMs. • Market-driven innovation, which includes often disruptive products that create tailored value propositions for new customer segments. Examples include Tata Ace commercial vehicles and GE India’s low-cost ECG machines. • Operations-driven innovation, which includes innovations in processes achieved by adopting cost-efc fi ient practices or by creating new supply and distribution channels, etc. Examples include companies such as the Narayana Health Group and Aravind Eye Hospital that have lowered the cost of heart and eye surgeries through operational excellence achieved from volume-driven business models. Globally, the paradigm for innovation is fast moving towards more consumer-centric solutions, delivered through the adoption of technology and asset-light business models—a trend expected to have wide-reaching implications for emerging markets such as India. Given the complexity and scale of the challenges facing India, the resources required and the urgency of demands for change from Indian citizens, market players in India will need to develop similar quality-focussed and innovation-driven mind-sets to become competitive in today’s globalised environment. To achieve rapid growth, India needs to view its many economic and social challenges as opportunities for growth and renewal. Companies need to challenge the convention, invest in innovation and R&D and unlock any vested interests—embodied in the antiquated infrastructure that continues to hamper India’s growth. This paper aims to conr fi m for market players in India, the possibility of achieving unprecedented growth by 2034 and the impact of innovation in driving this change. Alok Verma Director Strategy Consulting, PwC Innovation-driven growth in India 5Imperatives for the Indian economy difference. Members of a burgeoning middle class are looking Country-level imperatives for new customised solutions to address unmet needs. Citizen India today could be described as a restless nation, with organisations are pushing to ensure that economic growth calls for change coming from almost every segment and is accompanied by improvements in human development. region. Everybody recognises that given the scale of the Last year’s electoral mandate for development could also be problems facing this vast nation, slow reform may not be an considered a more immediate signal for a desire for growth, option. India’s youth wants to make an economic and social while spreading its benet fi s to all levels of Indian society. 6 PwC1. Young country with rising expectations Working age 65% of India’s Employment challenge – population population is Need 12 million (between 15 and 64 below the age new jobs a year to years) to touch 1 absorb growing working of 35 Billion, surpassing population China by 2030. Employability challenge – 50 million people need to be skilled each year, current capacity only 3 million 2. Growing middle class seeks new value propositions India’s population distribution (millions) 1.19 bn 1.36 bn Household income/ /day per capita 2010 CAGR (%) 2021 (projection) (%) year (INR) 8,50,000 Upper middle + 10 USD 9.7% 14% 80 190 3,00,000 – 8,50,000 Middle 5-10 USD 6.3% 23% 170 300 1,50,000 – 3,00,000 Emerging middle 1.7-5 USD 470 1.9% 42% 570 460 290 1,50,000 Low 1.7 USD -4.6% 21% Sources: Profitable growth for the globally emerging middle, PwC 2012 The emerging-middle income bracket, PPP adjusted is 5 to 15 USD per capita per day. Alternately, 1,850 to 5,550 USD per capita per year. All figures are reported at 2010 constant prices. By 2021, India will have about 900 To win in this market, companies will need to million people constituting the ‘emerging deploy a shift in mindset to achieve new value middle and middle class’ segment, which propositions delivered through innovative will provide new opportunities. business models. 3. Need for balanced economic and human development 1.00 India’s HDI is closer to Sub- US Saharan Africa than to S. Korea 0.75 countries such as China, Brazil World Brazil and USA India China 0.50 India lagged global HDI on all index parameters Sub-Saharan Africa –health, education and 0.25 1980 1990 2000 2005 2008 2010 2011 2012 2013 income, in 2013 Source: Oxford Economics; World Bank Innovation-driven growth in India 7 Human Development Index (HDI)Sector-level imperatives Countering key challenges to growth Even at the sector level, India’s performance across key measurable parameters has been below other emerging markets such as Brazil and China, with a signic fi antly wide gap between India and developed markets such as the US or Korea. We chose 10 such sectors (or growth vectors, as defined in Chapter 2) that constitute over 70% of India’s GDP, to understand the extent of challenges being faced in the country today. Each of these sectors will have to improve in a resource constrained manner to achieve balanced growth. This will require a new inventive approach. The table below details the sectoral ` level imperative where India signic fi antly lags behind countries (Brazil, Korea, China, US) in 9 out of 10 key indicators covered. This task itself suggests that current solutions do not seem to be working and also are not geared to address the huge gap that exists between India and other competing economies. Vector 1993 2013 2013 India India Brazil China Korea US 1 Life expectancy at birth (years) 59 66 74 75 81 79 2 Average years of schooling 5 7 8 9 12 11 3 Agricultural yield (tonnes/hectare) 3.1 4 5.3 7.4 7.7 9.2 4 Access to banking services - 35% 56% 64% 93% 98% 5 Share of organised retail 4% 8% 35% 20% 15% 85% 6 Value added manufacturing 15% 12% 13% 32% 31% 13% 7 Access to power (Per capita kWh) 318 684 2,438 3,298 10,161 13,246 400 mn 8 Manage growth of urbanisation (population) 250 mn +28 mn + 250 mn +4 mn + 52mn (+250 mn) 9 Improve digital connectivity (internet penetration) - 15% 52% 46% 85% 84% 10 Improve physical connectivity (logistics costs % of GDP) - 13% 12% 18% 9% 8% Note: + xx mn indicates projected growth in urban population over 2013-2034 8 PwCpeople. Lack of growth finance results in limited technology Enterprise-level imperatives adoption within these firms, leading to system inefc fi iencies 18 that lower national productivity. The German Mittelstand Need for a breakout growth strategy across the (GM), comprising small and medium-sized enterprises enterprise ecosystem (SMEs) is an example that highlights the potential within A major factor behind the lag in India’s country-level this segment to contribute to national growth. GM firms performance over global counterparts has been the account for almost 60% of the employment within Germany lacklustre performance of its enterprises, be it government and contribute more than 50% to the national economic bodies, the corporate sector, SMEs or educational institutes. output. Buoyed by adequate policy support, these companies For instance, India has only five companies among the have largely achieved success through investments in 14 leading 500 brands worldwide, while China has 32. In innovation and through product specialisation in niche areas terms of creating global businesses, only three Indian firms 19 within electrical engineering and industrial products. were listed on the NYSE International 100 Index as of 2013, 15 New ventures also need talent, a steady supply of which as compared to 22 Canadian firms and 16 from the UK. could lead to the creation of industry leapfrogs such as Meanwhile, only three Indian nationals won the Nobel Prize the one witnessed in India’s IT sector, in centres such as during 1995-2015, while the UK had 20 Nobel Laureates 16 Hyderabad and Bangalore. These examples demonstrate during the same period. On the sports front, Indian athletes how educational institutions provide crucial support for won only six medals in the London 2012 Olympics, while the 17 the development of the entrepreneurial ecosystem. The US secured 104. presence of a large number of engineering colleges in the The state of India’s SME sector also requires a special state of Karnataka has provided a steady flow of skilled mention. Although SMEs employ 40% of India’s overall workers for IT firms in the state’s capital, Bangalore. The workforce, they contribute only 17% to the nation’s GDP. This city is also growing as a hub for R&D, boasting of a number is mainly due to an unfavourable regulatory environment of institutes catering to industry needs, such as the National marked by the need for multiple procedures and high paid- Centre for Biological Science, the Jawaharlal Nehru Centre in capital to start a new business. As a result, 94% of SMEs for Advanced Scientic R fi esearch, and the Indian Institute are currently unregistered, which leaves them struggling 20 of Science. Public and private educational institutions with issues such as shortage of skilled workers, limited will therefore need to play a leading role in supporting market exposure, and restricted access to capital. Such an education and training for India’s talent, with the corporate unfavourable regulatory environment discourages Indian sector contributing in areas such content generation and in SMEs from growing. Of the total number of SMEs, only 0.2% designing new delivery mechanisms such as on-site learning, are medium-sized firms, employing between 100 and 1,000 online solutions, etc. Innovation-driven growth in India 9Need for innovation-driven solutions As per our analysis, India could boost its current GDP of Target economic transformation with 1.9 trillion to 10.4 trillion USD by 2034 (and elevate per human development capita GDP from 1,490 to 6,800 USD) by achieving a GDP 21 CAGR of 9% over the next two decades. Reaching this Consider China, which had a somewhat weak economy level of growth will require transformation—a difc fi ult back in the 1970s, and is today the second-largest one in task, given that India has battled structural dec fi iencies the world. GDP growth rates in China have averaged 10% 22 such as underinvestment in infrastructure, an unproductive over the last 30 years, proving that it is possible for large, business environment, poor education and low-quality populous countries to sustain periods of high growth. health outcomes over the past few decades. However, our If India could replicate this trajectory, it would achieve research indicates that such a transformation is possible upper-middle-income status by 2034. and will be steered by innovation. India’s economic leap China’s progress India’s economic leap (8.0 trillion (10.4 trillion USD) USD) 1,490 USD 5,788 USD 1,490 USD 467 USD 1984 (30 years) 2014 2014 (20 years) 2034 Figures in brackets indicate overall GDP figures GDP figures: Real GDP, USD (2010 prices, MER) Source: Oxford Economics CAGR - 8.8% CAGR - 8% GDP/capita (Real, 2010 USD at MER)To improve its HDI, India could learn from exemplars such as South Korea. Up until the 1960s, South Korea’s economy was based on subsistence agriculture. It was a developing country with poor resources and production bases and had only two science and technology institutes. Over the next few decades, Korea invested heavily in machinery, turnkey projects, human resources and R&D institutes and went on to become a high-income advanced economy. India’s human development leap India’s human development leap South Korea’s HDI progress Ambition (World: 0.70) 0.85 0.89 (World HDI: 0.56) (World HDI: 0.70) 0.63 0. 59 2013 1980 (30 years) 2013 2034 (20 years) Source: UN Development Programme While smaller than China, South Korea’s economic and human Focus on growth constraints across key development achievements distinguish the country. The nation sectors ranks high in education, quality of healthcare, rule of law, ease of doing business, government transparency, job security and Speed, inclusion and sustainability will be key elements to n fi ancial inclusion. As of 2014, South Korea was the world's achieve our national growth targets, ensuring that change seventh-largest exporter, its success driven by high-tech occurs across multiple sectors and population segments. multinationals such as Samsung, Hyundai-Kia, and LG—each We have identie fi d 10 such areas of change, termed as of which built its capabilities during the country’s growth spurt. ‘vectors’ on which India must excel to achieve its growth Its balanced focus on both economic growth and inclusion ambition. These vectors could be grouped into three has resulted in major improvements in universal healthcare, classic fi ations: (i) Human development (life expectancy at education, and other safety-net benet fi s for its population. In birth, average years of schooling, agricultural yield, and the 1980s, South Korea’s HDI reached 0.63, slightly higher than access to banking services), (ii) Institutional development India’s today (0.59). Over the next 30 years, South Korea’s HDI (share of organised retail, value-added manufacturing, 23 leapt by 26 points. To make a similar improvement in its HDI access to power, and managed growth of urbanisation) by 2034, India needs to follow the innovation-led South Korean and (iii) Enabling vectors (improving digital connectivity model. If it succeeds, its HDI will reach 0.85, and its per capita and improving physical connectivity). These vectors were GDP could jump from 1,490 to 6,841 USD within the next two arrived at by looking at countries at a similar stage of decades. But these achievements will be possible only if India growth as India, and through consultations with sector invests in sectors that build the social chassis on which an experts. Performance targets by 2034 across vectors have economic engine can be mounted. been ascertained by benchmarking against countries that have made signic fi ant progress on a particular challenge over the last 10 to 20 years. Growth: 26 points Growth: 26 points HDI IndexThese solutions are mostly exemplars that have Ten vectors of growth successfully countered similar challenges across the Vector 2013 2034 targets world. These will be required to cover the distance with 1 Life expectancy at birth 66 years 80 years relatively lower risks, learning from successful approaches adopted worldwide. 2 Average years of schooling 7 years 10 years • Leapfrog represents a radically different approach—a paradigm shift—that entails applying a new and 3 Agricultural yield 4 tonnes/ 7.4 tonnes/ potentially disruptive business model. It includes hectare hectare creating the environment to test and adopt emerging 4 Access to banking services 35% 90% solutions that have the potential to disrupt existing mind-sets and approaches to solving these challenges. 5 Share of organised retail 8% 50% These are required to maximise the impact, to cover the 6 Value added manufacturing 12% of 25% of GDP final lap without which the end targets cannot be met. GDP Each sector of the Indian economy will need to execute solutions 7 Access to power 75% 100% access, 3 access x consumption drawn from all three categories. With the right mix in place, India could achieve its 9% annual GDP growth target. 8 Manage growth of urbanisation 400 mn 650 mn 9 Improve digital connectivity 15% 80% Enabling enterprise innovation 10 Improve physical connectivity 13% 8% (Reduce logistics cost) Innovation is often the result of a continuous step-wise approach towards product or process improvement. In 1 Increase life expectancy at birth 66 to 80 years, reduce MMR from 190 to today’s globally competitive world, companies need to 27 & IMR from 44 to 12, 2 Increase average years of schooling from 7 to 10 adopt a somewhat low-risk approach towards bringing years, 3 Land productivity in tonnes per hectare to increase from 4 to 7.4 (for rice), 4 Expand access to financial methods among adults from 35% to 90% , innovation or new solutions in the market—which as 5 Shift organised retail from 8 to 50%, 6 Increase value added manufacturing described by PwC’s ‘Winning Leap’ approach is about from 12 to 25% of GDP, 7 100% power access connect 300 million more citizens and per capita consumption from 672 to 1800kWh, 8 Manage housing finding the right mix between ‘signic fi ant leap’ and shortages and public transport for growth in urban population from 400 mn in ‘leapfrog’ solutions—even at the enterprise level. Taking a 2013 to 650 mn, 9 Increase internet penetration from 15 to 80%, 10 Reduce ‘signic fi ant leap’ at a corporate level involves identifying overall logistics cost from 13 to 8% of GDP. markets adjacent to one’s business and building the capabilities required to successfully cater to market needs. Businesses in India have a major opportunity to help improve These adjacent areas may be defined in terms of products performance on each vector. Players who can craft solutions or services, customer groups, value chain positions, or to support such performance improvement can reap benet fi s geographic markets. However, companies need to including entry into new markets, increased revenues and a prioritise options that could enable an economic or much stronger market position than competitors. competitive advantage by exploiting existing areas of strength such as customer base, technology or network New solutions to achieve unprecedented resources and business relationships, along with new sets results of easily acquirable capabilities required for market success. By entering into these adjacent growth markets Market players cannot rely on traditional solutions to from time to time and building upon the required surmount challenges across the 10 listed vectors. Achieving capabilities, companies will be able to equip themselves for desired results using traditional approaches alone will either a potential ‘leapfrog’ in the long run. This will often be the take too long or will be too expensive to implement. New result of a combination of new capabilities acquired over solutions therefore will be required. Our research suggests time, such as enhanced customer intelligence, cross-sector that designing a successful approach to change will require a and international business relationships, knowledge of 2 combination of the following elements: more flexible and adaptive operating models, and • Fierce catch-up, entails following traditional improved human capital and intellectual property, which approaches or technologies to surmount challenges, could be exploited to design new non-traditional solutions. but at an accelerated pace. It focusses on removing The example of Disney highlights the step-wise approach roadblocks and improving the efc fi iency of working taken by the company for market success. Home-grown with existing solutions. Using traditional solutions to examples also demonstrate the continuous step-wise approach maximum capacity, this element creates the right to innovate on product and services which over a period of momentum for the next two to take place. time will reden fi e the company’s core proposition. External • Significant leap , involves adopting new or different market factors could also enable certain opportunity areas, approaches or technologies, which may have been such as entering the aerospace and defence or the electronics developed elsewhere but would also work in India. sector, which are increasingly getting a lot of focus from a ‘Make in India’ perspective. 2 Termed as the ‘Winning Leap’ approach as per PwC’s recent publication titled the ‘Future of India: The Winning Leap’ 12 PwCA partial history of Disney’s expansion Market leverage Walt Disney Hollywood Radio Disney Music Records Functional expertise Brand/character leverage (music) Pinocchio in NY Beauty and the The Lion King Aida Theater Beast Market leverage Buena Vista Disney Feature Touchstone Hollywood Distribution Film shorts Miramax Films Pictures Pictures Functional expertise Functional (programming) expertise TV specials TV series Disney Channel Cap Cities/ABC ABC Family Market leverage Disney Stores Franchise leverage Walt Disney Tokyo Disneyland Disneyland World Disneyland Paris Functional expertise (site mgmt) Resorts and Cruises hotels Innovation-driven growth in India 13Impact of innovation on economic growth The solutions suggested for each of the growth vectors could transform markets in India by expanding the market size, enabling growth, triggering innovative products and services, recong fi uring competitive dynamics, and creating new businesses. According to our estimates, new solutions across the 10 vectors have the potential (both signic fi ant leap and leapfrog) to account for almost 30-40% of the Indian economy 24 by 2034. How new approaches will contribute to India’s economy 10.4 trillion USD New solutions Unblocking Leapfrog and executing ≈ 40% Significant leap 1.9 trillion USD Fierce GDP catch-up GDP 2034 2014 Source: Future of India- The Winning Leap, PwC 2014. All three solutions combined would cost much less to deliver and distribution. As for education, this new approach has the than the traditional approach being followed today; thus they potential to save 170 billion USD over the next two decades, will not require as much investment. As per our estimates, owing to lower upfront capital costs as compared to traditional enabling universal access to healthcare through this approach approaches. Similarly, the adoption of branchless banking could help save 90 billion USD in capital costs in healthcare channels and cross-sector partnership models could help banks 25 delivery infrastructure, while up to 250 billion USD could be in reducing their infrastructure investments by almost 40%. saved in capital outlays across power generation, transmission 14 PwC3 Outlining non-linear solutions across sectors I. Fierce catch-up II. Significant leap III. Leapfrog (Traditional solutions) (New innovation-led solutions) (New innovation-led solutions) Healthcare • Develop healthcare infrastructure • Shift the point of care from • Shift the point of care from Raise life expectancy through public-private partnership hospitals to home. hospitals to home. models. • Government should be the • Government should be the • Standardise operations and para- principal payer (and not the principal payer (and not the skilling. provider) of healthcare provider) of healthcare Education • Fast-track expansion through • Introduce online courses • Allow for-profit models in formal Increase average years traditional brick and mortar (MOOCs) for vocational education. of schooling channels. education. • Enable internet, satellite and • Adopt public-private partnerships • Allow interoperability of credits mobile based distance learning to for school education. between vocational and increase reach. mainstream education. Agriculture • Increase mechanisation to improve • Forge partnerships between • Invest in research capabilities, e.g. Improve productivity farming efficiency. complementary input players for biotechnology. market access. • Scale ICT-based farmer education • Develop an integrated digital for informed decision-making.• Shift towards data analytics- platform with pre and post-harvest driven precision farming. modules. Financial services • Regulatory intervention to ease • Expand reach of banking • Deploy alternative channels Improve access to barriers such as KYC checks. infrastructure through non- (mobile or online) to expand last- banking services traditional partnerships (public- mile reach at lower costs. • Expansion through branchless private, cross-sector) channels such as ATMs.• Explore emerging infrastructure ` • Implement national ID platforms solutions such as solar ATMs. such as Aadhaar. Retail • Co-opt rather than compete with • Adopt digital channels for hyper • There are no additional leapfrog Increase the share of unorganised players to increase expansion. solutions envisaged in the organised retail reach. sector as it is already witnessing • Use technology to improve significant technology and • Use data analytics-driven CRM to customer engagement (virtual business model innovation differentiate. shopping, social media, worldwide. gamification, etc.). Manufacturing • Remove regulatory hurdles to • Increase value-added output via • Shift from low-tech industries to Increase value-added improve ease of doing business. rapid technology transfers. high-tech industries. manufacturing • Focus on efforts for national skill • Create a level playing field for • Increase competitiveness through development. foreign and domestic firms. advanced technologies (materials, analytics and automation). Power • Expand generation capacity • Allow private participation in • Invest in new technologies such as Expand access to power towards non-coal options. power retail. distributed power. • Increase distribution capacity for • Adopt components of smart-grid • Focus on advanced storage and greater access. solutions to lower transmission transmission technologies. and distribution losses. Urbanisation • Expand affordable housing through • Explore pre-fab construction • Housing: Shift focus from Manage growth in peri-urban construction models. models in housing for scale- ownership to rental-based models urban population based cost advantages. for affordable housing. • Make policy interventions such as restricted road access, congestion • Adopt ICT solutions in transport • Transport: Create an ‘Integrated pricing, low-cost housing loans etc. to optimise traffic movement. Public Transportation Network’. Digital connectivity • Make regulatory changes to ease • Expand wireline broadband • Explore low-cost alternatives such Broaden access to right-of-way barriers. infrastructure (back-haul & as cable TV networks, white space internet networks access). Wi-Fi and satellite broadband. • Improve digital literacy, esp. in rural areas. Create multi-lingual • Develop low-cost access devices • Create infrastructure to host data content to address India’s diverse (smartphones and tablets) that content within India. landscape. support broadband services. Physical connectivity • Expand national and state highway • Improve freight-handling capacity • Shift towards third party logistics Reduce logistics cost connectivity. of rail, water and air to reduce (3PL) systems. stress on road traffic. • Systemic changes to lower cost • Adopt technology-enabled or time implications of institutional solutions to improve safety checks. standards. 3 These solutions were shortlisted through detailed sector analysis to understand the need, applicability and implications of innovation-driven solutions to the Indian economy, validated through interviews with about 80 corporate leaders in India and abroad, workshops with sector experts and insights from academic and economic specialists. Please refer to PwC’s The Winning Leap report for details. Innovation-driven growth in India 15Growth scenarios for the Indian economy To see how these different potential solutions could affect India’s ability to achieve its national growth targets, we looked at recent history to develop a base-case scenario. This scenario envisions moderate gains based on the current business environment and existing growth constraints. In addition to the base-case scenario, we den fi ed three scenarios reecting an accelerated path to growth and development for India. The scenarios emphasise different focus areas for investments and, therefore, result in different outcomes in terms of GDP growth. Impact of growth scenarios on India’s GDP Real GDP projections (USD, 2010 prices) 10.4 tn USD Baseline Scenario I Scenario II Scenario III 7.4 tn USD 6.8 tn USD 5.6 tn USD 1.9 tn USD 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 GDP per capita (USD) 1,490 6,841 4,458 2.5 X 3.3 X 2014 (X) 3.0 X 4.6 X 3,665 4,862 Real GDP ( tn USD) 3.0 0.6 1.2 10.4 7.4 6.8 5.6 3.7 1.9 2014 2034 2034 2034 2034 Baseline Scenario I Scenario II Scenario III: Innovation capital Source: Oxford Economics, Future of India- The Winning Leap, PwC 2014. 16 PwC flBaseline scenario plots India’s growth based on historical Scenario 3 trends and current growth constraints being witnessed in the Scenario 3 includes investment in economy. It forecasts the Indian economy to grow by around both human and physical capital as 5.5% annually between 2014 and 2034. This is fast growth in per the previous two scenarios but absolute terms, but it is slow considering India’s demographic also focuses on investments in R&D boom and weak starting position in terms of per capita GDP, and innovation, a key requirement to 1 which was about 1,500 USD in 2014 (real, 2010 USD at MER ) attain 9% CAGR for GDP by 2034. 26 versus 5,800 USD in China and 51,000 USD in the US in 2014. Growth is pushed by enhanced labour productivity, which emerges from domestic reforms fostering innovation and an opening up of the economy to foreign participation, which encourages technological spill-over Scenario 1 from international markets to India. Scenario 1 focuses on investment in As the economy is opened up, foreign companies bring their education, health and other production techniques into India and adapt them to the Indian dimensions related to development of business environment. The impact on total employment is human capital. Our analysis suggests broadly similar across all three alternative scenarios, with an that in this scenario, India’s GDP could additional 86 million jobs created relative to the base case over see a 6.6% compound annual growth 20 years in scenario 3. This scenario forecasts the most 27 rate (CAGR) between 2014 and 2034. aggressive growth and is the only scenario which will generate 240 million new jobs over next 20 years, required to meet India’s 29 demographic needs. Speed of technological progress and need for innovation is the key differentiator between this scenario and the previous two. It assumes that productivity increases are pushed by additional investments in digital technology, technological know-how from abroad, indigenous innovation, improvements in human capital and financial sector reforms encouraging more active use of Scenario 2 bank accounts by consumers and more efc fi ient allocation of Scenario 2 outlines the impact of n fi ancial capital. The scenario expects spending on research and rapid and signic fi ant investment in development (R&D) to grow signic fi antly to attain the 9% GDP physical infrastructure, particularly growth target, as market players seek to investigate new in transportation, communication and production methods and implement successful innovations to the power sector, and envisions a 7% remain competitive. 28 CAGR for GDP leading up to 2034. As per our estimates, the Indian economy would need to Agricultural productivity also collectively ramp up its R&D spending from mere 0.8% of GDP improves with expansion in irrigation in 2013 to 2.4% by 2034, similar to developed markets such coverage. In this scenario, growth is 30 as the US (2.7% in 2014). The figure shown on the previous page also depicts the impact achieved through a growth path focussed on innovation. An innovation-driven approach will generated through rapid accumulation of physical capital, partly allow India’s GDP to touch almost twice the figures achievable enabled by improvements in human capital, as in scenario 1. through baseline growth, i.e. 10.4 trillion USD as compared to This scenario envisions India signic fi antly accelerating only 5.6 trillion USD by 2034 as per baseline. It further shows investments to spur growth, though without major the necessity to invest in new solutions and R&D to attain an technological transformations. incremental impact of more than US3tr over other interventions in the Indian economy, focussed purely on alternative levers of growth, i.e. human capital and physical infrastructure (scenarios 1 and 2). Innovation-driven growth in India 17 1 Market Exchange RatesKey stakeholders in the innovation ecosystem Designing the innovation ecosystem in India would require models and to leverage new technologies. Given their experience participation of three key stakeholders: the corporate sector, the with globalisation, private sector companies are well-positioned entrepreneurial sector and the government. Each of these will to learn and experiment with best practices developed by their need to play critical roles in developing and deploying global counterparts. International companies looking to innovation-driven solutions in India in the coming years. participate in high-growth markets are also well-equipped to develop relevant solutions for the Indian market. Corporates would also need to support the entrepreneurial ecosystem in the Role of the corporate sector: Lead and country, making them partners on this growth path. The implement change corporate sector could help small and medium-sized enterprises (SMEs) by engaging them as providers. By bringing them into India’s private sector—including both established corporates and their supply chain, the corporate sector could connect new entrepreneurial companies—is more agile than the government ventures to markets. Private sector players could enable and the social sector in terms of its ability to design new business innovative solutions to develop and prosper in various ways: 2 3 Product development New ideas would need funding to develop into prototypes and products for the market. New ventures need Establish scale or reach financial support to sustain operations Corporates could use their brand strength during product refinement, and the and market trust to establish key expertise to customise the product for the partnerships to penetrate markets and share needs of the target segment. Established market development costs. Introducing private sector players also enjoy the new radical solutions may require educating customer’s trust, a key requirement customers or undertaking high costs of for new non-traditional solutions infrastructure development and creating new to be adopted. delivery mechanisms, which could be beyond 1 the capacity of SMEs. Corporates also have the institutional know-how to overcome Idea selection barriers to accessing markets across India’s Private sector companies states, such as cross-border taxes and through their market different legal and regulatory experience and proximity to requirements. the consumer could play a role in identifying and incubating solutions that are scalable to a level that could create meaningful impact. 4 Price effectively Existing companies will be better placed to use economies of scale or scope, use learnings from market experience, cross-subsidise costs or influence suppliers etc. to price solutions at an affordable level for the consumer. Entrepreneurs by themselves may not have the capacity to price products at levels required to make profits and remain competitive, especially for new solutions. 18 PwCThe Tata Consultancy Services (TCS) Co-Innovation Network across different successful financial inclusion models (COIN) is an example highlighting the role of the corporate worldwide. Regulations in Kenya allowed mobile money sector in fostering innovation. The network comprises transactions to be conducted without linking them to bank customers, alliance partners, venture capitalists, start-ups, accounts, thus enabling Safaricom to offer an e-wallet academic institutions and industry groups organised to create a solution at low registration costs that widened its reach to the research and innovation ecosystem. Through COIN, TCS unbanked population. Similarly, the regulator in China identie fi s new products, and disruptive innovations, and then allowed the entry of non-traditional players such as supports the entrepreneurs in developing client solutions, technology companies to extend financial services. through its own capabilities and with the help of other COIN AliFinance, a subsidiary of Alibaba, extends credit benet fi s to partners. COIN has also established alliances with entrepreneurs micro-entrepreneurs. Its Taobao platform has 16 million in the US, Europe, and Asia focusing on emerging areas such as vendors, with 90% being small microenterprises that face data-centre optimisation, on-demand distributed software issues around access to finance. AliFinance extends credit to 31 development, and compliance-cost-reduction solutions. Other these vendors based on a scoring model developed using such initiatives include Mahindra Rise and Google Launchpad, online trading data, analysing criteria such as revenue which are focusing on funding innovation and mentoring growth, transaction data, user ratings, usage levels and start-up firms. repeat buyers, among others. Such solutions need signic fi ant support from policymakers to be designed and implemented at a scale that creates positive change. Role of the entrepreneurial sector: Generate ideas for change A call to arms Like established corporations, entrepreneurial companies in The likelihood of any vision becoming realised depends upon India will play a critical role in developing and deploying new the efforts and commitment of all stakeholders. No one can solutions. Indeed, the large Indian companies of tomorrow will guarantee that India’s growth vision will come true in the future. emerge from the entrepreneurial sector of today. On its own, However, owing to various factors described at the start of this India’s corporate sector lacks the capacity to generate the 12mn paper, India does seem to have the opportunity to record jobs needed each year to absorb new entrants into India’s unprecedented growth and create global corporate powerhouses working population. The entrepreneurial sector possesses of tomorrow. To foster the emergence of such world-class Indian various qualities critical for developing innovative solutions: players, the private sector will have to invest signic fi antly in nimbleness in operations, depth in ideas, willingness to take R&D, particularly for solutions to challenges facing similar risks, an aptitude for fast decision-making and bold leadership. emerging markets, where India has already established a India therefore needs to cultivate entrepreneurs on a scale leadership position. It will have to develop a mind-set of value unprecedented in its business history. A groundswell of growth—one that is committed to multiplying value in every entrepreneurial energy in India has sparked recent, well- way possible. Such a mind-set promotes experimental thinking publicised successes in the e-commerce sector alone, and our and is oriented to solving customer problems in new ways. research suggests the potential for similar entrepreneurial growth in virtually all of India’s sectors. A key action item for the government is enabling intellectual property rights (IPR) protection. India was ranked second from Role of the government: Facilitate and bottom among 30 countries examined for IPR protection, as per 32 the 2015 GIPC Index of the US Chamber of Commerce. Weak direct change IPR laws and enforcement continue to limit the ability of This growth journey will require a public-private partnership businesses to invest in R&D. Inadequate IPR protection could at the broadest level. The government will be required to further discourage multinationals from setting up operations in 33 continue to build national platforms such as improved India or in bringing their technology into the country. To foster physical connectivity as well as better digital infrastructure, innovation, both home-grown and imported, and to attract which will enable a number of other sectors to progress. In international partners who bring technology and global best addition, a key role of policymakers is to create an practices, a country must have in place robust institutional and environment conducive to business formation: making it legal mechanisms to protect IPR. This needs to be prioritised by easy to launch and operate a business, establishing a the Indian government as part of its national growth agenda. regulatory environment that enables competitive markets to Overall, as per our analysis, if India can achieve a 9% per flourish, while protecting consumer interests. It will have to annum GDP growth trajectory, its economy would become play the role of a facilitator, providing incentives and policy the world’s third-largest by 2034, after the US and China. By support to new technologies and businesses. achieving such a feat, through adoption of technological and Government stakeholders have the responsibility to business model innovations, India could provide the world understand national priorities and set milestones for socio- with a new sustainable model for development—one that economic development. Accordingly, they need to create counters development challenges within populous, incentives for solutions to be devised in a particular democratic nations with rising aspirations of its indigenous direction, while fostering development of industry standards talent and the purposeful leadership within its corporate for new solutions to be designed. For example, regulatory sector and the government. alignment with market dynamics has been a key enabler Innovation-driven growth in India 19References 1. Breakthrough innovation and growth, PwC, 2013. Available at: 2. World Bank data 3. Future of India: The Winning Leap, PwC, 2014. Available at: 4. Global Economic Model, Oxford Economics; PwC Analysis 5. Telecom Regulatory Authority of India (TRAI), 2014. Available at: PR-TSD-May,%2014.pdf 6. Telecom Sector in India: A Decadal Prol fi e, TRAI, 2014. Available at: ment/201304121052403536675NCAERReport08june12.pdf 7. PwC analysis 8. United Nations Development Programme 9. United Nations Development Programme India’s Economy Leaves Job Growth in the Dust - Bloomberg View, 2014. Available at: articles/2013-03-14/india-s-economy-leaves-job-growth-in-the-dust 10. Prot fi able growth strategies for the global emerging middle, PwC, 2012. Available at: emerging-middle/index.jhtml 11. United Nations Development Programme - Human Development Reports 12. World Population Prospects: The 2012 Revision, United Nations Department of Economic and Social Affairs. Available at: http:// 13. World Bank data, PwC analysis 14. Global 500 2014 – The World’s Most Valuable Brands, Brand Finance, 2014. Available at: tables/table/global-500-2014 15. NYSE International 100 Index. Available at: 16. Available at 17. BBC Sport. Available at

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