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Rotman Insights Hub | University of Toronto - Rotman School of Management

The state of innovation in India

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Partha Mohanram

The innovation landscape in India covers every industry — from technology to manufacturing and services to government. Which area has seen the most progress?

Some really exciting things are happening. India has some advantages in this area from being a late mover, which has enabled it to leapfrog the competition in many cases. Smartphone plans are a great example. It is a matter of frustration for many Canadians to have to haggle with Rogers and Bell for an extra gigabyte of data. People were thrilled recently when Rogers unveiled its new unlimited plan. But it’s not really unlimited at all, because after 10 gigs, they slow down your speed. I visit India twice per year, and whenever I’m there I swap my SIM card for an Indian SIM card. This provides me with one GB of data per day for the month that I’m there, and it only costs 200 rupees, which is four Canadian dollars. I’m getting one gig per day for 30 days for four dollars. Of course, the sheer scale of the country contributes to cheaper prices, but I think Indians have really leapfrogged in terms of networks and the ability to deploy technology effectively to a vast number of people.

In terms of world-class manufacturing, India still lags behind. Anyone who has been there will see that the physical infrastructure is not up to par — particularly in the cities. There has been a huge urban flight as people move from rural areas into the urban areas in search of jobs, and the infrastructure just can’t keep up. Things like ports, roads and highways are nowhere near where they need to be to support world-class manufacturing.

Even though the current government has an initiative (called Make in India) in place to encourage companies to manufacture their products there, it hasn’t had any major victories in terms of attracting big players. I actually think this is a missed opportunity for western companies — especially given the tensions between the U.S. and China, and the fact that China is still where most American companies get their manufacturing done. If India could get its act together, it could attract many of those companies because it has some key advantages over China: lower wages and an open, democratic government and rule of law. The Indian courts aren’t very efficient, but they do respect contracts, and my guess is that respect for intellectual property is much better than it is in China.

Another key advantage India has over China is human rights. If you’re in China and you get approval to build a new road, you can just evict local farmers to make room for your factory, and it gets done quickly because people on the other end don’t have any right to protest. In India people will say, No, the compensation you are offering isn’t enough. I am not going to move. While that’s a good thing, it can slow things down.

I do believe that in the long run, the Indian model is more sustainable, simply because you can’t just deliver economic progress without any consideration for citizens well-being. We’re seeing evidence of that with the protests in Hong Kong. China’s worst fear is that the demand for human rights and democracy might spread inside its borders. India already has the democracy aspect in place; it’s the infrastructure aspect it needs to work on.

Among leading economies, India is the only country to maintain consistent growth rates in excess of seven per cent. How is it achieving this?

While India’s growth rate has definitely been better than other countries, there is controversy around that seven per cent figure. People are saying that the numbers are being fudged. I’m not a macro economist, so I don’t know all the details, but I think the numbers are actually a bit lower. But even so, India’s growth is still better than other countries, and there are good reasons for that.

First, its economy is growing from a smaller base, and when that happens, opportunities for growth are naturally much greater. If you look back at India and China in 1979 — around the time China opened up — the per capita GDP for both countries was quite similar. Today, China’s is more than twice and maybe three times that of India, simply because India opened up its economy 20 years later, in the late 90s. India lost a lot because of that. It could have had decades of growing at 10 or 12 per cent, like China did. However, I believe it can still reach those levels.

How did companies like Infosys and Tata Consultancy Services manage to grow so quickly in a nascent market?

Y2K was a major boon for the Indian IT industry — and an example of how being backward helped the country. If you think back to Y2K, many of the predicted problems were in old legacy mainframes where people needed to know languages like COBOL, which nobody knew anymore. The only place where people still knew it was India, and Infosys and TCS used that to leapfrog ahead of the western IT companies. This helped them obtain to some very large clients — multinationals in the U.S. and elsewhere.

Essentially, the outsourcing boom followed, because people realized that they could have labour-intensive processes done remotely in India. And it could be done off-hours, as well. This led to a huge boom in India and has been its biggest engine of growth.

If you look at why India took off in services more than China did, it did have some key advantages. First, the level of English spoken in India is much higher than it is in China. That’s one of the few positive legacies of being a British Colony — the fact that a significant portion of the Indian middle class speaks good English. That meant there was a large number of people who could work in the IT sector.

India is also a young country. While population growth is under control, it is still growing at two per cent per year in population. Its bigger problem is job creation. As we saw with the Arab Spring, what you don’t want is a young country with lots of unemployed people — especially young men. That is a recipe for economic and social disaster. So, while the world needs India to be an engine of growth — especially as growth is slowing down elsewhere — India needs growth for its own sake, as well.

Talk a bit about how AI is being embraced in India, and how you see it unfolding in the future. Many Indian companies are adopting AI and predictive analytics in a really big way. There’s a new company called Oyo Rooms that was started by a young entrepreneur who is just 25. It’s an aggregator for no-name hotels, and he started it when he was 18. He’s brought several non-chain, one-off hotels under his brand umbrella and has taken over their management, ensuring a certain degree of standards. Apparently he’s moving to the U.S. to do the same thing. Companies like his are using predictive analytics and AI to figure out pricing.

India also has companies like Paytm in the payment space, and there’s a lot of interest in AI from the Indian research institutes. But India is still behind China, which is at the forefront of artificial intelligence right now. This is a serious concern for the west. There are tremendous opportunities for cross pollination and collaboration between India and Canada, because Toronto has made a name for itself as a hub for AI-led innovation. For example, Paytm could have set up its R&D facility anywhere in the world — but it chose Toronto.

How would you describe Canada’s current relationship with India? And what would you change about it?

The relationship is a fraction of what it could and should be, particularly if you look at the size of the Indian diaspora: More than 10 per cent of the population of the GTA comes from India, and almost 20 per cent of it comes from the Indian subcontinent. The main difference between the diaspora in the U.S. and Canada is that in Canada, it is much more integrated into mainstream society.

Given the size of the diaspora here, the extent to which Indian companies have invested in Canada and vice versa is unimpressive, and I think there are a couple of reasons for that. I’m over-simplifying, but Canadians are quite risk-averse, and they view India as a risky place. One of our panelists a couple of years ago noted that the same Canadian investor will be willing to invest in a risky oil sands project, but will shy away from a less risky investment in India, simply because of distance and lack of knowledge. The oil sands are a risk the Canadian investor understands; even though it’s actually riskier than Indian ventures, this is leading to lots of missed opportunities.

On India’s side, I think Canada is mostly viewed as an appendage of the U.S., as a nice, polite, cold country. When Canadians think of Asia, they think of China, and when Indians think of North America, they think of the U.S. I am always trying to move the attention of Indians northwards, and the attention of the Canadians a bit southwards. However, there are some exceptions to this rule. Both the Ontario Teachers Pension Plan and the Canadian Pension Plan have a lot of principal investments in India. They own malls and highways, and they have also made direct investments in India’s capital markets. So, in general, Canadian investors are opening up to India.

You have said that India can learn a lot from the west, but that the west can also learn plenty from India. What lessons can India teach us?

Frugal innovation is a term that is overused, but it’s essentially about doing more with less, and every organization can learn from that. I’ll give you a simple example: I live in Markham, Ontario, where they’re building a bus track for transit along Highway 7. Literally, Highway 7 has been a mess for the last seven years. All they are doing is building bus stops and separating out a section of the road, and in seven years, they’ve only completed 10 or 15 kilometers.

The city of Ahmedabad, India’s sixth largest city, set up a bus route for its transit system, and it’s a very frugal system. The bus stops don’t look as nice they do here, but the fact is, they get the job done. If you go to Delhi or Bangalore right now, they are in a total mess because infrastructure is being built. But it is being built efficiently and very quickly — at least when compared to Toronto!

In general, I think the west can learn a lot about how to deliver services to its citizens in a more cost effective manner. A few years ago, I had a back issue and I needed to get an MRI. It was going to take three or four months to get an appointment, so I went to India, paid out of pocket, and got an MRI done the next day. The modern machine was the same, but the appointments were only 15 or 20 minutes long. The machine was being utilized so much more efficiently: It was essentially running non-stop from 6:00 a.m. to 10:00 p.m. Here, appointments are an hour long, and things move extremely slowly.

I’m not saying India is a paragon of efficiency at all, but it certainly has learned how to manage with less, and that is something the west can learn from. There is also something very important that unites India and Canada, and that is tolerance of diversity and an ability for people of all different backgrounds to work and live together. That, in and of itself, can be the basis for a very strong relationship.

Partha Mohanram is the John H. Watson chair in value investing and director of the India Innovation Institute at the Rotman School of Management. The Institute is a hub for researchers across the University of Toronto and around the world that aims to bring together faculty and students who are interested in how India is using innovation to transform itself across a variety of spheres.