Report No. 31267-IN India India and the Knowledge Economy Leveraging Strengths and Opportunities April 2005 World Bank Finance and Private Sector Development Unit South Asia Region and the World Bank Institute Document of the World Bank KAM Knowledge Assessment Methodology KE knowledge economy KEI Knowledge Economy Index MDG MillenniumDevelopment Goal M N C multinationalcorporation NASSCOM National Association of Software and Services Companies NIIT National Institutes of Information Technology NGO nongovernmental organization NITS National Institutes of Technology NRI NetworkedReadinessIndex OECD Organisation for Economic Cooperation and Development PC personal computer PPP purchasing power parity R&D research and development REC regional engineering college RSE research scientists and engineers S&T scienceand technology SA South Asia Region S M E small and mediumenterprise TFP total factor productivity TNC transnational company TRAI Telecoms Regulatory Authority of India UGC University Grants Commission UNDP UnitedNations Development Programme USPTO UnitedStates Patent and Trademark Office VSNL Videsh SancharNigamLimited WEF World Economic Forum WTO World Trade Organization Country Director: Michael F.Carter Sector Director: JosephDel Mar Pemia Sector Manager: Simon C. Bell 11 Table of Contents ACKNOWLEDGMENTS ........................................................................................................................................ vii EXECUTIVESUMMARY ...................................................................................................................................... viii 1. INDIA AND THE KNOWLEDGE ECONOMY: OPPORTUNITIESAND CHALLENGES .................... 1 The Current Economic Context....... ..................................................................... .........1 Knowledge is Key inan Increasingly Dynamic and Competitive Global Environment ...................................... 7 Assessing India's Opportunities and Challenges inthe Knowledge Economy ................ Other Global Comparisons with India................... .................................. RoadMap for the Report: Strengthening the Four nowledge Economy .. 2. ECONOMICAND INSTITUTIONALREGIME, INCLUDINGGOVERNANCE .................................. 18 Benchmarking the Economic and InstitutionalRegime . ............................................................................. 18 Benchmarking Governance.......................................................... ............ .................................. 20 IssuesandRecent Developments in the Economic and Institutio egime .................................. Measures to Strengthen the Economic and Institutional Regime............................. ............................. 32 Summary of Issues and Recommendations.............................................................. ............................. 40 3. EDUCATION AND HUMANRESOURCES ................................................................................................ 42 Benchmarking Education ................................................................................................................................... 42 Issuesand Recent Developments inEducation and Human Resource Development.. ...................................... .44 Measures to Strengthen Education and Human Resources ................................................................................ 57 Summary of Issues and Recommendations ........................................................................................................ 66 4. INNOVATIONSYSTEM ................................................................................................................................ 68 Benchmarking Innovation. ............................................................................................ ...................... 69 Issuesand Recent Developments in the Innovation System ........................................................... Measures to Strengthen the Innovation System ................................................................ Summary of Issues and Recommendations ............................................................................................... 82 5. INFORMATIONINFRASTRUCTURE ........................................................................................................ 93 Benchmarking InformationInfrastructure.. ......................................................................... India's Global Standing on InformationCommunications Technology .......................................... Issuesand Recent Developments in the Telecommunication and I T sectors ..................................... 101 Measures to Strengthen the InformationInfrastructure......................................................... Summary of Issues and Recommendations ................................ ....................................................... 117 6. MOVINGAHEAD WITH THE KNOWLEDGEECONOMY ININDIA ............................................... 118 IndianInitiatives on the Knowledge Economy ............................................................ ..................... 118 Looking Ahead ................................................... ................................................. Taking Action........................................................................................ .................................................. 123 Launching a Process......... .............................................................. A Final Note.................................................... .............................................. Annex I:India's Total Factor Productivity Construction: Theoretical Framework ............................................ 126 Annex 2: Knowledge AssessmentMethodology.................................................................................................... 127 Annex 3: Knowledge Economy Indexfor India and Comparator Countries, 1995and Most Recent Period....... 128 111 ... Annex 4: Overall Knowledge Economy Scorecardsfor Brazil, China, Korea, Poland, and Russia, Selected Variables, 1995 and Most Recent Period ..................................................................... .....129 Annex 5: Datafor the Scorecardsfor India, Brazil, and China, 1995 and Most Recent Period.......................... 130 Annex 6: Economic and Institutional Regime: Scorecardsfor Comparator Countries, Selected Variables, Most Recent Period ............................................................................................................................................... Annex 7: Governance Datafor India .............................................................................................................. 132 Annex 8: Various Costs of Doing Business in India, 2004.. ............................................. 133 Annex 9: Education: Scorecardsfor Comparator Countries, Selected Variables, Most Recent Period ..............136 Annex 10: Innovation: Scorecardsfor Comparator Countries, Selected Variables, Scaled by Population, Most Recent Period ........................ ..................................... ...... ................................................... 137 Annex 11: Information Infrastructure: Scorecardsfor Comparator Countries, Selected Variables, Most Recent Period........................................................................................................................................................... Annex 12: ICT Indicatorsfor India and China, Various Years............................................................................ 139 References.. ...................................................................................................................... ................................ 140 iv Figures Figure A: India: Real Gross Domestic Product Per Worker, Alternative Projections, 1995-2020 ............................ viii FigureB: India: Percentage Share o f Global Gross Domestic Product, Years 0-1998 ..............xx Figure 1-1: India: Real Gross Domestic Product Per Worker, Alternative Projections, 1995-2020 ............................ Figure 1-2: Gross Domestic Product Per Capita (Purchasing Power Parity), India and Comparators, 1990-2003 ......3 6 Figure 1-3: Growth inPer Capita Income for Korea and Ghana, 1960-2000 ............................... ........7 Figure 1-4: Knowledge Economy Index, India, Comparators, and the World, 1995 and Most RecentPeriod...........10 Figure 1-5: Cross-country Comparison on the Four Pillars of a Knowledge Economy, India and Comparators, 1995 and Most Recent Period......................................................................................... Figure 1-6: India's Knowledge Economy Scorecard on Selected Variables, 1995 and Most R Figure 1-7: Progress on the HumanDevelopment Index, India and Comparators, 1975-2002 Figure 1-8: Knowledge Economy Scorecards on Selected Variables for Brazil, China, and India, Most Recent Period.............. ............................................................................... 14 Figure 1-9: Gross State Domestic Pro r Indian States, 1999-2000 .................. 15 Figure 2-1: India and the World: Positions inthe Economic Incentive Regime, 1995 and Most Recent Period........ 19 Figure2-2: India's Scorecard on the Economic Incentive Regime, Selected Variables, Most Recent Period............ 19 Figure 2-3: Governance Comparisons: India (1998 and 2002), with South Asia (2002), and with Low-Income Countries (2002). ................. .............................................................................. 21 Figure 2-4: EliminatingBarriers for Faster Growth inIndia ............................. ............................. 23 Figure2-5: Share of World Merchandise Exports, India and Comparators, 199 Figure2-6: Merchandise and Service Exports, India and Comparators, 2002............................. Figure 2-7: Service Exports, India and China, 1982, 1995, and 2002................... ...................26 Figure 2-8: Gross Foreign Direct Investment as Percentage of Gross Domestic and the World, 1980-2002 ....................................................... Figure 3-1: Benchmarking Education: India, Comparators, and the Wo Figure 3-2: India's Scorecard on Education, Selected Variables, Most Recent Figure 3-3: Gross Primary Enrollment Rates, India and Comparators, 1990-2001 .................................................... 46 Figure 3-4: Gross Secondary Enrollment Rates, India and Comparators, 1990-2001 ................................................ 47 Figure 3-5: Gross Tertiary Enrollment Rates, India and Comparators, 1990-2000 .................................................... 52 Figure 4-1: Innovation by Population and Absolute Size, India and the World, 1995 and Most Recent Period ........ 70 Figure 4-2: India's Scorecard on Innovation, Selected Variables, Most Recent Period ..................................... Figure 4-3: Patents Granted by the United States Patent and Trademark Office to Brazil, China, and India, Figure 4-4: PatentsGranted to Indian Subsidiaries................... 1997-2003 .................................................................................................................................................... 73 .................................... Figure 5-1: Percentageof Total Teleph Service (Fixed and Mobile) Providedby Priv 2000-04 ............................... ....................................................................... Figure 5-2: Benchmarking Informatio Communications Technologies, India and the Wor Most Recent Period............................................................................... ...................95 Figure 5-3: India's Scorecard on Information and Communications Technologies, Selected Variables, Most Recent ............................................................................... ............................................. 96 es, Computers, and the Internet: India and Compa 002................... 96 Figure 5-5: Growth of Telephony inIndia: Numbers of Landline and Mobile Subscribers, 1996-2004 .................101 Figure 5-6: Teledensity inIndia, 1995-2004 ...................................................................... .......................... 102 Figure 5-7: Employment in the Indian InformationTechnology Sector, 2000-03 ......................................... Figure 5-8: India's Projected Information Technology Industry, Export and Domestic Markets, 2008..... Figure 5-9: Gains from Offshoring $1of Services from the United States (Source) to India (Host) .......... Figure 6-1: India: Percentage Share o f Global Gross Domestic Product, Years 0-1998............................. Tables Table 1-1: India's Gross Domestic Product by Sector, 1997-2 ........................................................ Table 2-1: Custom Duty Rates in India and Other Developing ies, Various Years Table 3-1: Enrollment by Educational Stages in India, 1990-91 and 2001-02 ........................................... Table 3-2: Percentageof Schools under Different Types of Management in India, Various Years ........................... 48 Table 3-3: Spending on Education, India and Comparators, 2001.................. ..................................... 50 V Table 3-4: Scientific and Technical Personnel from IndianUniversities by Level of Qualification, 1979, 1989, and 1995 ... ............................................................ ........................... 55 Table 3-5: Educ ttainment of the Total Population A g Table 3-6: Characteristics of Traditional and Lifelong Learning ............................................................ 63 Table 4-1: Selected Innovation Variables, India and Comparators, Various Years .......... .............72 99 Table 5-2: Internet Usage Pattern in India in2002 ........ Table 5-1:Digital Access Index, Various Countries, 2002......................................................................................... .......................................................... 108 Boxes Box 1-1:Assessing India's Progress on Millennium Development Goals inthe 1990s. ............... 2 Box 1-2: India Undergoes a Services Box 1-3: Four Pillars o f the Knowledge Economy ... Box 2-1: Foreign Direct Investment: A Tale of Two Box 2-2: Foreign Direct Investment Policies inIndia and China ............................................................ Box 2-3: Moving Up the Value Chain: India's Automobile Industry Box 2-4: Investment Climate Improvement: Lessons from China and India.................................................. Box 2-5: Role o f Investment Climate: Box 2-6: Tapping EntrepreneurialCa ........................ 37 Box 2-7: Building on Success: Attracting Foreign Investment inIndia...................................................................... 38 Box 3-1: Reducing Illiteracy: The Computer-Based Functional Literacy Program..................... ......................... 45 Box 3-2: Community-Government Partnership Helps Get Millions into School: The Case o f Madhya Pradesh ............... ................................................................................ 51 Box 3-3: IncreasingTransparency in IndianHigher Education............................................ ......................... 58 Box 3-4: Expanding Distance Education inIndia....................................................................................................... 59 Box 3-6: Reaping the Potential of Private Higher Education inIndia ......................................................... Box 3-5: General Electric Actively Promotes OrganizationalLearning, Including in India ...................................... .....62 65 Box 3-7: Transforming Established Systems: The Monterrey Institute of Technology.............................................. 66 Box 4-1: India inthe Context of Global Trends inResearch and Development Investment ...................................... 74 Box 4-2: Industrial Research and Development inIndia: Recent Trends ....................................... Box 4-3: How Well Does India Promote Innovation inthe Manufacturing Sector?................................................... 76 Box 4-4: China's "Jumping into the Sea" Strategy .................. .......................................................... 77 Box 4-5: Evolution of Bangalore as an Innovative Cluster........................................................... Box 4-6: Highlights of International Corporate Research and Development inIndia ......... Box 4-7: Globalization of Innovation: High-EndResearch and Development inIndia....... Box 4-8: Outsourcing Chemistry and Biology Research and Development inIndia........... Box 4-9: IndianPharmaceuticals: Responding to Changes in the New Patent Regime....... Box 4-10: IndianPharmaceuticals Have Global Ambitions ...................................................................... Box 4-11: The Evolving Innovation Landscape: Research and Development inthe Corporate World...................... 86 Box 4-12: Leveraging Traditional Knowledge with Modern Science and Exploiting Public-Private Partnerships for Drug Development in India ........................................................................ 87 Box 4-13: A Snapshot of the IndianDiaspora in the United States .................................................... 89 Box 5-1: Snapshot of the IndianInformationTechnology Box 5-2: InformationTechnology Training Initiatives in I .................................................................. 110 Box 5-3: Can China Compete in InformationTechnology Box 5-4: Bridging the Digital Divide: Village Internet Box 5-5: Three E-Government Initiatives Hold Promis Box 5-6: Information Communications Technology Efforts Expand inIndia.... ............................ 114 Box 5-7: Ushering inRural Development through Connectivity: The PURA an ................... Box 6-1: Indian Knowledge Society ............................... ................................................. 119 Box 6-2: Key Drivers for the Indian Know1 Society .............................................. Box 6-3: India's New Opportunity: 2020 ... ............................................................................................ Box 6-4: Implementing the Republic of KO Knowledge Strategy.... Box 6-5: India Inc.: Movingto Action................................................................... ...................124 vi ACKNOWLEDGMENTS This report was developed by Carl Dahlman and Anuja Utz of the Knowledge for Development Program, World Bank Institute (WBI). It was prepared at the request of the World Bank's India Country Department, which, along with WBI, cofinanced this work. The report was reviewed by the India Management Team on March 11,2004. World Bank peer reviewers included Priya Basu, KarenLashman, Peter Smith, and Krishna Challa, as well as RonaldF.Perkinson from the InternationalFinance Corporation. An earlier draft of this report was sharedwith the Government of India.We would like to thank Dr.Ranjit Bannerji and the team at the Department of Economic Affairs, Ministryof Finance, for their support and cooperation. The report was also discussed at a workshop inNew Delhi,India on November 9, 2004, which was cosponsoredby the Confederation of IndianIndustry (CII) and included high-level policy makers from the central and selectedstate governments; representativesof industry,academia, think tanks, and consulting firms; and staff of the World Bank. We gratefully acknowledge the comments and insights offered workshop participants. We thank the CII and, inparticular, Rajiv Kumar, Arun Maira, and Harsh Shrivastava for their intellectual as well as logistical contributions to the workshop. We are grateful to Michael Carter, World Bank`s Country Director for India, for his continued support, and to Priya Basu for her helpful inputs and advice. We would like to thank the following staff who provided information and comments for the report, including Robert Beschel, Geetanjali S. Chopra, Amit Dar, K.Migara 0.De Silva, Inderbir Singh Dhingra, John Didier,Mark Dutz, Lata Ganesh, Stephen Howes, Bala Bhaskar Naidu Kalimili, Varsha Marathe, Taye Alemu Mengistae, Deepak K.Mishra, Shashank Ojha, Deepa Sankar, RashmiSharma, Shashi Shrivastava, Peter Smith, Lynne Sunderland, ElizaWinters, and KinBingWu. Aimilios Chatzinikolaou and Derek Chen of WBI's Knowledge for Developmentprogramand ReubenAbraham of Columbia University provided valuable data and analysis. vii INDIA AND THE KNOWLEDGEECONOMY LEVERAGING STRENGTHSAND OPPORTUNITIES EXECUTIVE SUMMARY One of the world's largest economies, India has madetremendous strides inits economic and social development inthe past two decades and is poised to realize even faster growth inthe years to come. After growing at about 3.5 percent from the 1950sto the 1970s,India's economy expandedduringthe 1980sto reach an annual growth rate of about 5.5 percent at the end of the period. It increasedits rate of growth to 6.7 percent between 1992-93 and 1996-97, as a result of the far-reaching reforms embarked on in 1991and opening upof the economy to moreglobalcompetition. Its growth dropped to 5.5 percent from 1997-98 to 2001-02 and to 4.4 percent in 2002-03, due to the impact of poor rains on agricultural output. But, thanks to a lavish monsoon that led to a tumaround inthe agriculture sector, India's economy surged aheadto reach a growthrate of 8.2 percent in2003-04. This i s very muchinline with growth projections cited inIndia's Tenth Five-Year Plan, which calls for increasing growth to an average of 8 percent between 2002-03 and 2006-07 (India, Planning Commission, 2002e). Such sustained acceleration i s neededto provide opportunities for India's growing population and its even faster-growing workforce. Embarking on a new growth path. India has a richchoice set indeterminingits future growth path. Figure A shows what India can achieveby the year 2020, basedon different assumptionsabout its ability to use knowledge, even without any increaseinthe investment rate. Here, total factor productivity (TFP) i s taken to be aproxy for a nation's learningcapability. FigureA: India:RealGrossDomestic ProductPer Worker,Alternative Projections,1995-2020 1995 US$ 3,090 -Actual +Projection 1: 2.09 YOTFP Growth (Actual) 2,500 +Projection 2: 1%TFP Growth (India 1961-70) +Projection 3: 3% TFP Growth (India 1981-90) 2,wo actual TFP growth rate for 1991-2000) I 1,500 1,wo 500 0 1995 2000 2005 Year 2010 2015 2020 Note: For all four projections, capital, labor, and human capital are assumed to grow at their 1991-2000 average annual growth rates for India, that is, 5.41, 2.23, and 0.58 percent, respectively. For the growth-TFP decomposition to be more precise, labor ... V l l l force figures rather than total populationare used as ameasureof the amount o f "labor" available for use as afactor o f production in the Indian economy.According to World Bank databases, in 2001 India's GDP (in 1995 U.S.dollars) was $495 billion and its population was 1.03 billion, of which only 461 million were inthe labor force. As such, India's GDP per capita in 2001 was approximately $480, whereas GDP per worker was around $1,070. Annex 1provides the theoretical framework for these TFP projections. Source: Knowledge for Development Program. Projections 1, 2, 3, and 4 plot real gross domestic product (GDP) per worker (1995 U.S. dollars) for India assuming different TFP growth rates from 2002 to 2020. Projection4 is an optimistic scenario which i s based on the actual TFP growth rate in Ireland in 1991-2000. Ireland i s an example o f a country that has been usingknowledge effectively to enhance its growth. All things being equal, the projected GDP per worker for India in scenario 4 in 2020 i s about 50 percent greater than in scenario 1. Knowledge can make a difference between poverty and wealth. Which growth path India embarks on inthe future will depend on how well the government, private sector, and civil society can work together to create a common understanding o f where the economy should be headed and what it needs to get there. India can no doubt reap tremendous economic gains by developing policies and strategies that focus on making more effective use o f knowledge to increase the overall productivity o f the economy and the welfare of its population. In so doing, India will be able to improve its international competitiveness andjoin the ranks o f countries that are making a successful transition to the knowledge economy. Embracing the knowledge economy: The time is very opportune for India to make its transition to the knowledge economy-an economy that creates, disseminates, and uses knowledge to enhance its growth and development. The knowledge economy is often taken to mean only high-technology industries or information and communication technologies (ICTs). It would be more appropriate, however, to use the concept more broadly to cover how any economy harnesses and uses new and existing knowledge to improve the productivity o f agriculture, industry, and services and increase overall welfare. InIndia, great potential exists for increasing productivity by shiftinglabor from low productivity and subsistence activities in agriculture, informal industry, and informal service activities to more productive modern sectors, as well as to new knowledge-based activities-and inso doing, to reduce poverty and touch every member o f society. India should continue to leverage its strengths to become a leader in knowledge creation and use. To get the greatest benefits from the knowledge revolution, the country needs to press on with the economic reform agenda that it put into motion more than a decade ago and continue to implement the various policy and institutional changes needed to accelerate growth. AdvantageIndia. India has many o fthe key ingredients for making this transition. It has a critical mass o f skilled, English-speaking knowledge workers, especially inthe sciences. It has a well-functioning democracy. Its domestic market i s one o fthe world's largest. It has a large and impressive Diaspora, creatingvaluable knowledge linkages and networks. The list goes on: macroeconomic stability, a dynamic private sector, institutions o f a free market economy, a well-developed financial sector, and a broad and diversified science and technology (S&T) infrastructure. Inaddition, the development o f the I C T sector in recent years has been remarkable. India has created profitable niches in information technology (IT) and is becoming a global provider o f software services. Building on these Strengths, India can harness the benefits o f the knowledge revolution to improve its economic performance and boost the welfare o f its people. This report provides a "big picture" assessment o f India's readiness to embrace the knowledge economy and highlightssome o f the key constraints and emerging possibilities confronting India on four critical pillars o f the knowledge economy: ix 0 Strengthening the economic and institutional regime 0 Developingeducated and skilled workers 0 Creating an efficient innovation system 0 Buildinga dynamic information infrastructure. The report highlights that to be competitive inthe global knowledgeeconomy of the twenty-first century, India should continue to focus its efforts on further reforming its overall economic and institutional environment and improve its overall trade and investment climate. Addressing issues inthis domain will be key, becauseit sets the overall incentiveframework neededto improve performance across the economy. The report further underlinesthat for India to leverage its strengths and opportunities on a global scale, it needsto undertake significantreforms and investments inbuilding education and skills, strengthening its innovation system, and further bolsteringits information infrastructure. To create and sustain an effective knowledgeeconomy, India must undertake systemic integrationof reforms inthe above four domains to strengthenits competitive advantage. The following are some of the key issues that Indianeeds to address ineachof the four pillars to spur growth and innovation and, in so doing, increase economic and social welfare. Strengthening the Economic and Institutional Regime Taking advantage of the knowledgerevolution's potentialhinges on effective economic incentives and institutions that promote and facilitate the redeployment of resourcesfrom less efficient to more efficient uses. This fundamental pillar of the knowledge economy provides the overall framework for directing the economy. Important elements of the economic and institutional regime include macroeconomic stability, competition, good regulatorypolicies, and legalrules and procedures conducive to entrepreneurship and risktaking. A key feature is the extent to which the legal systemsupports basic rules andproperty rights. India's economic and institutional regime has several strengths: flourishing entrepreneurship and free enterprise; a strong infrastructure for supporting private enterprise; capital markets that operate with greater efficiency and transparency than, for example, those inChina; an advancedlegal system; and an independentjudiciary. Property rights are fairly secure, and the protection of private ownership is strong. The rule of law generally prevails. Corporate governancehas also improveddramatically. India has other intrinsic advantages, such as macroeconomic stability, a large domestic market, and a large and relatively low-cost and skilled workforce. It also has a critical mass of well-educated workers in engineering and scienceand, unlike China, abundant raw materials. All this should allow the country to emerge as a major hub for manufacturing and service industries. Despite India's recent economic growth, a number of barriers exist, such as the multiplicity of regulations governingproduct markets, distortions inthe market for land, and widespread government ownership of businesses that have been inhibitingGDP growth, according to some estimates by about 4 percent a year. Removing these barriers and fostering a stronger investment climate would allow India's economy to grow as fast as China's-10 percent a year-and create some 75 million newjobs outside agriculture. India i s still arelatively closed economy compared with other Asian economies, inwhich exports account for a muchlarger share of GDP (33 percent in China and 38 percent inKorea, compared with only 15 percent in India in 2003). Although this means that India i s somewhat protected from global trends, the downside is that it does not benefit from stronger foreign competitive pressures to improve performance or from the ability to draw on more cost-effective foreign inputs, such as capital goods, components, products, or foreign investment, which embody more advanced knowledge. As a result, India i s losing market share to its major competitors, especially China, where reforms have moved aheadmuchmore X rapidly; therefore, to speed up trade reform and be able to export, Indianfirms need to be allowed to import the materials and technology they need. India also needs to boost foreign direct investment (FDI),which can be a facilitator of rapid and efficient transfer and cross-border adoption of new knowledgeand technology. FDIflows to Indiarose by 24 percent between 2002 and 2003, due to its strong growth and improved economic performance, continued liberalization, its market potential, and the growing competitiveness of Indian IT industries.Even so, in 2003, India received $4.26 billion inFDI,compared with $53.5 billion for China! But India's stock i s rapidly rising: the 2004 Foreign Direct Investment Confidence Index by A. T. Keamey (2004) shows that China and India dominate the top two positions inthe world for most positive investor outlook and likely first-time investments, and are also the most preferred offshore investment locations for businessprocess outsourcing (BPO) functions and IT services. Successful economic development i s a process of continual economic upgrading inwhich the business environment ina country evolves to support and encourage increasingly sophisticated ways of competing. A good investment climateprovides opportunities and incentives for firms-from microenterprises to multinationals-to investproductively, createjobs, and expand. As aresult of investment climate improvements inthe 1980sand 1990s, private investment as a share of GDP nearly doubled inChina and India. But, India needs to continue to foster a good investment climate that encouragesfirms to investby removing unjustified costs, risks, and barriers to competition. One reasonfor India's less competitive markets i s excessive regulationof the entry and exit of f m s , which face stiffer requirements for obtaining permits andtake muchlonger to get under way than do the firms inmany other countries. Restrictions on the hiring and fring of workers are also a major obstacle to doing business inIndia. In addition, enforcing contracts i s a major problem: for example, it takes more than a year to resolve a payment dispute. So, to strengthen its overall economic and institutionalregime, India should continue to address the following related to its product and factor markets and improving its overall infrastructure: e Speeding up trade reform by reducing tariff protectionand phasing out tariff exemptions. This will help Indian firms gain access to imports at world prices and would also helpto encourageexports further. e Encouraging FDIand increasing its contribution to economic growth by phasing out remaining FDI restrictions and increasing positive linkages with the rest of the economy. e Stimulating growth of manufactured and service exports. Inso doing, India could drive down global costs in services, just as China drove down global costs inmanufacturing. e Strengthening intellectual property rights (PRs) and their enforcement. India has passeda series of IPR laws inthe past few years, and their enforcement will be key to its success inthe knowledge economy. e Simplifying and expediting all procedures for the entry and exit of firms, for example, through "single window" clearances. e Reducinginefficienciesinfactor markets by easing restrictionson hiringand firing of workers. e Improving access to credit for small and mediumenterprises. e Addressing problems inthe use and transfer of land and updating bankruptcy procedures. e Ensuringaccess to reliablepower at reasonablecost by rationalizingpower tariffs and improving the financial and operational performance of state electricity boards. e Addressing capacity and quality constraints intransport by improving public sector performance and developing speedy, reliable door-to-door transport services (roads, rail, and ports) to enhance India's competitiveness. xi 0 Improving governance and the efficiency of government, and encouraging the use of ICTs to increase government's transparency and accountability. 0 UsingICTs for more effective delivery of social services, especially inhealthand education, empowering India's citizens to contribute to and benefit from faster economic growth. DevelopingEducatedandSkilledWorkers Educationi s the fundamental enabler of the knowledgeeconomy. Well-educated and skilled people are essential for creating, sharing, disseminating, and usingknowledge effectively. The knowledge economy of the twenty-first century demands a new set of new competencies, which includes not only ICT skills, but also such soft skills as problemsolving, analytical skills, group learning, working in ateam-based environment, and effective communication. Once required only of managers, these skills are now important for all workers. Fostering such skills requires an education systemthat i s flexible; basic education should provide the foundation for learning, and secondary and tertiary education should develop core skills that encourage creative and critical thinking. Inaddition, it i s necessaryto develop an effective lifelong learning systemto provide continuing education and skill upgradingto persons after they have left formal education inorder to provide the changing skills necessaryto be competitiveinthe new global economy. A strongbasic education systemis anecessarypreconditionto underpinning India's efforts to enhance furtherthe productivity andefficiency of its economy. China's experience inthis areais instructiveas its emphasis on secondary education has provided it with a firmbasis for expansion of manufacturing activities on a global scale. Investments inbasic education are thus fundamental for countries to improve the productivity and the quality of labor and deliver the manpower neededfor their development efforts. India has made substantial progress inincreasing literacy and increasing primary and secondary enrollments. But the country still accountsfor one-quarter of the world's 104 million children out of school. The participation of girls inthe 6- to 14-year-old age group inelementary education i s low. And considerable gaps exist inaccess to secondary education, particularly for girls. But, the Indianleadership i s very committed to increasing educational attainment. The national programfor universal elementary education, Sarva Shiksha Abhiyan or Educationfor All, was initiated in 2001, and the constitution was amended in2002 to make elementary education a fundamental right of every child. India also possessesa large pool of highly educated and vocationally qualified people who are making their mark, domestically andglobally, inscience, engineering, IT, andresearchand development (R&D). Butthey make uponly a smallfraction of the population. To create a sustainedcadre of "knowledge workers," India will need to develop amore relevant educational system and reorient classroom teaching and learning objectives, starting from primary school. The new system would focus on learning, rather than on schooling, and promote creativity. It would also improve the quality of tertiary education and provide opportunities for lifelong learning. Tertiary education is critical for the construction of knowledge economies. India currently produces a solid core of knowledge workers intertiary and scientific and technical education, althoughthe country needs to do more to create a larger cadre of educated and agile workers who can adapt and use knowledge. Efforts have been put into establishing a top-quality university systemthat includes many world-class institutions of higher learningthat are competitive and meritocratic, such as Indian Institutes of Technology [IITs], IndianInstitutes of Management, IndianInstitute of Science, and the Regional EngineeringColleges [RECs]). Despite these efforts, not all publicly funded universities or other educational institutions inIndia have been able to maintain high-quality standards or keep pace with developments in knowledge and technology. Major steps are thus neededto ensure that India's institutionsmeet high-quality national (and if such services are exported, international) standards. xii Measures are also needed to enhancethe quality and relevance of higher education so that the education system i s more demand driven, quality conscious, and forward looking, especially to retain highly qualified people and meet the new and emerging needs of the economy. Intheareaofscientific andtechnical education,eventhoughIndiaproducesalmost200,000 scientists, engineers, and technicians a year, it has not been obtaining the full economic benefit from this skill base, becauseof the mismatch between education and the labor market. The professional workforce that i s emerging from India's higher education systemoften cannot find suitable employment due to a growing gap between their knowledge and real practice and to limitedjob opportunities intheir fields, coupled with low salaries. Many professionals also leave the country insearchof better opportunities, which leads to brain drain. This calls for an urgent effort to promote policy and institutional reforms in scientific and technical education for both public and private institutionsto improve the quality and skills of India's current and future pool of technical manpower. Skills matter more than ever intoday's more competitive global market. Inlarge countries such as India and Brazil, where the vast majority of people are unskilled and uneducated, the capabilities of the majority of the population must be enhancedfor the economy to show substantial improvements. Firms and farmers alike must be able to learn and develop new skills. While not losing sight of the need for secondary and tertiary education, governments should improvethe skill and education levels of the mass of people through primary and vocational education. The success of countries such as China inachieving higher growth reveals the importance of a workforce with a basic education that can be trained. This leads to the issueof skills development and training. When technology i s changing, enterprisesmust invest in worker training to remain competitive. India too will also needto develop various job training programs to be globally competitive. These programs must be flexible, cost-effective, and able to adapt quickly to new skill demands generatedby changing markets and technologies. Inaddition, Indiashoulddevelop a systemof lifelong learning, which encompasses learningfromearly childhood through retirement and includes formal learning(schools, training institutions, and universities), nonformal learning (structured on-the-job training), and informal learning(skills learned from family membersor people inthe community). Inthe lifelong learning model, people are motivated to learn on a continuing basis, are equipped with the skills to engage in self-directed learning,given access to opportunities for learningthroughout their lives, and offered financial and cultural incentives to participate inlifelong learning. Some of the main issues instrengthening India's education system, therefore, include the following: Improving the efficiency inthe use of public resources inthe education system, and making the education system as a whole more responsive to market needs, as well as ensuringexpanded access to education that fosters critical thinking and learning skills for all, notjust the elites. Enhancing the quality of primary and secondary education, including tackling issues related to quality and relevance, with special emphasis on ameliorating teacher vacancies and absenteeism,reversing highdropout rates, and correctinginadequateteaching and learning materials and uneven levels of learningachievement. This i s especially important for Indiato meet the goal of providing eight years of schooling for all children by 2010. Ensuringconsistency betweenthe skills taught inprimary and secondary education andthe needs of the knowledgeeconomy, introducing materials and methods to teach students "how to learn," rather than stressingoccupation-specific knowledge. Reformingthe curriculumof tertiary education institutions to include skills and competencies for the knowledge economy (communication skills, problem-solving skills, creativity, and teamwork) that also meet the needs of the private sector. Xlll ... Raisingthe quality of all higher educational institutions, notjust afew world-class ones (such as the IITs). Improving the operating environment for education, especially higher education, which calls for a shift inthe role ofthe govemment frommanaging the administrative aspects of higher education institutions to becoming an architect of education standardsand regulations, including improving and monitoring the quality of academic programs, establishing accreditation standardsand procedures, ensuring equity, and coordinating a system with multipleplayers and multiple pathways to learning. Embracing the contribution of the private sector ineducation and training by relaxingbureaucratic hurdles and putting inplace better accreditation systems for privateproviders of education and training. Establishingpartnerships between Indian and foreign universities to attract and retainhigh-quality staff and provide opportunities for students to receive internationallyrecognized credentials. Increasing university-industrypartnerships to ensure consistency between researchand the needs of the economy. This will include reforming the university curriculum to includethe development of s k i l l s and competenciesthat better meet the needs of the private sector. Using ICTs to meet the double goals of expanding access and improving the quality of education. Investing inflexible, cost-effective job training programs that are able to adapt quickly to new skill demands generatedby changing markets and technologies, aligned with the needs of firms. Develop a framework for lifelong learning, including programs intended to meet the learningneeds of all, bothwithin and outside the school system. This will also require greater coordination across the different govemment bodies responsible for various components of the education and training system and development of procedures for recognition of what i s learned indifferent parts of the system. Makingeffective use of distance learning technologies to expand access and the quality of formal education and lifelongtraining. Creating an Efficient InnovationSystem The innovation systeminany country consists of institutions, rules, andprocedures that affect how it acquires, creates, disseminates, and uses knowledge. Innovation ina developing country concerns notjust the domestic development of frontier-based knowledge. It relates also to the application and use of new and existing knowledge inthe local context. Innovationrequires a climate favorable to entrepreneurs, one that is free from bureaucratic, regulatory, and other obstacles and fosters interactions between the local and outside business world and, with different sources of knowledge, including private f m s , universities, researchinstitutes, think tanks, consulting firms, and other sources. Tapping global knowledge i s another powerful way to facilitate technological change through channels such as FDI,technology transfer, trade, and technology licensing. InIndia, with its relatively small formal sector, a very important part of its innovationsystemrelates to how modem and more efficient practices can be diffused to the greatest number of users. This applies bothto domestic and foreign knowledge. India has done a remarkablejob of diffusingknowledge and technology, especially inagriculture. As a result of the "green revolution," India has transformed itself from a net importer to a net exporter of food grains. India's "white revolution" inthe productionof milk has helped it to achievethe twin goals of raising incomes of rural poor families and raising the nutrition status of the population. India should continue to buildon its innovative domestic strengths and undertake efforts to improve the productivity of agriculture, industry, and services even further. This includes strengthening technology diffusion institutions, such as those related to agricultural extension and industrial extension, productivity-enhancingorganizations, and technical information agencies. InIndia, where large disparity exists between the most and least efficient producers in any sector, considerable economic gains can also be hamessedfrom moving the average domestic practice to the best domestic practice, not to mentionbest internationalpractice. This will require a host of efforts, including improving xiv the systemfor technical norms and standards-such as product quality, work safety, and environmental protection-that can facilitate the proper diffusion of know-how. Efforts also needto be made to improve the dissemination of technology by strengthening competition so that the most efficient firms expand and improve performance, establishing and enforcing appropriate laws, encouraging more trade among Indian states, allowing for economies of scale and scope, and facilitating the diffusion of best products through price- and quality-based competition. India also needs to increaseits efforts to tap into the rapidly growing stock of global knowledgethrough channels such as FDI,technology licensing, importation of capital good that embody knowledge, as well as advancedproducts, components, and services. Compared with countries such as Brazil and China, India i s particularly weak at making effective use of these resources. These channels are important given the rapid expansion of the global knowledge. Even large advancedeconomies such as the UnitedStates are increasingly acquiring knowledge from beyondits borders. To its credit, India has beentaking bold steps to strengthenits R&D infrastructure, developing technological innovations and altering the mind set of its people toward better creation, acquisition and use of technology. It i s endowed with a critical mass of scientists, engineers, and technicians inR&D and i s home to dynamic hubs of innovation, such as Bangalore and Hyderabad. It also has vast and diversified publicly funded R&D institutions, as well as world-class institutions of higher learning, all of which provide critical human capital. India is also emerging as a major global R&Dplatform; about 100multinationalcompanies (MNCs) have already set up R&D centers inthe country, leadingto the deepening of technological and innovative capabilities among Indianfirms. Several Indiancompanies, such as Ranbaxy and Dr.Reddy's Laboratories have also started forming R&D alliances with global f m s . Such collaborationpresents severalbenefits for Indian industry,because the linkages among local firms, universities, and research institutes and the worldwide R&Dnetwork of multinationals further integrate India into global technology development. Such R&Dactivities have also been useful ininculcatinga commercial culture among scientists, helpingthem to apply knowledgefor productive ends. The outsourcing of high-end R&Dto India is yet another new trend that is evident from the large number of establishedR&D outsourcing centers inIndia, from IT and telecomto automotive and pharmaceuticals sectors. India i s also developing public-private partnerships to harness the potential of traditional knowledge to meet health and welfare needs and to reduce poverty. Despite these accomplishments, India spends only a small fraction of its GDP on R&D. It gets very little inworldwide royalty andlicense fee receipts. Regarding scientific andtechnicalarticles inmainstream journals (per millionpeople), India matches the performance of China, but the contributions of both countries are very low compared with developed countries. FDI, although increasing, i s also rather low by global standards. The majority of the R&D-related inward FDIinIndia materializedonly after the economy had been liberalized. This FDI, however small, has been creating a new competitive advantage for the country, especially inthe IT domain and inindustries, such as automotive. Availability of venture capital i s also rather limitedinIndia, but some signs of vibrancy are evident, and a notableventure capital investment market is emerging. Inaddition, India's share of globalpatenting is small; therefore, despite having a strong R&D infrastructure, India i s weak on turning its research into profitable applications. But, an increasing trendi s discernible in the number of patents granted to companies by the IndianPatent Office, indicating greater awareness of the importance of knowledge and the value of protecting it through patents. Among Indian patents, it is the drugs and electronics industry that has shown a sharp increase inpatentinginrecent years. Inaddition, several Indian firms have registered their innovations with the UnitedStates Patent and Trademark Office (USPTO). The number of U.S. patent grants to the Council for Scientific and Industrial xv Research(CSIR), for example, increasedfromjust six in 1990-91 to 196 in2003-04. This shows that the focus of research i s shifting to patentableinnovations, indicating better conceptualization of research.The recent amendments to the IndianPatentAct adopted ina move toward adhering to the intellectual property norms under Trade-Related Aspects of IntellectualProperty Rights (TRIPS) has also boosted confidence among internationalplayers. InIndia, some70percent of R&Dis performed by the central andstategovernments, anadditional 27 percent by enterprises (both public and private sector industries),and less than 3 percent by universities and other higher education institutions. Incontrast, inmost countries inthe Organisation for Economic Cooperation and Development(OECD), the private sector finances 50-60 percent of R&D, because it increasingly has the finance, knowledge, and personnel neededfor technological innovation. Firmsplay an even bigger role inR&D inIreland, Japan, Korea, and Sweden. Universities also undertake researchto a muchlarger extent in developed countries and have stronger linkages with the corporate world. India shouldthus take steps to improve its innovation system further, not only by taking advantage of new knowledge created at home, but also by tapping knowledgefrom abroad and disseminating it for greater economic and social development. It should also improve the efficiency of public R&D and increase private R&D, as well as encouragegreater university-industry linkages. Some of the key issues to address inthis domain include: Tapping into the growing stock of global knowledgemore effectively and providing incentives for internationaltechnology transfer through trade, FDI,licensing, and personnel movements, along with informal means through imitation, reverse engineering, and spillovers. Attracting FDImore effectively, given the importance of FDIinthe generation and dissemination of global knowledge and the role that they can have indomestic R&D. This should include removing regulations on foreign investment and encouraging FDIR&D into the country. Encouragingmembers of the Diaspora and renowned expatriates to contribute further to innovative activities by appointingthemto the managementboards of nationalresearchinstitutes, universities, and so on to facilitate the design of university programs that better suit corporate requirements. Motivating scientists and engineers from India working inthe UnitedStates and other developed countries to enter into alliances with multinational companies and establish firms or labs to undertake R&D on a contract basis inIndia. Auditing and monitoring S&T efforts and institutionalperformance to identify what works well and then redeploying resourcesto programs that have a proven track record of success. Usingthe savings to strengthenuniversity-industryprograms by means of matchinggrants and other initiatives, includingencouraging academicsto spend sabbaticals inrelevant industriesso that their researchmeets the needs of the productive sector. Finding alternative sources of funding for R&D, especially as the government reduces its budgetary support for researchprograms. In some countries such as China, academic institutions are launching commercial ventures of their own or incollaboration with the corporate sector. Allowing nationalresearch institutes to collaborate with domestic and foreign f m s to forge closer links with industry. One way of encouraging scientists to work closely with industry and inso doing improving linkages between technology development and applicationwould be to provide incentives suchas bonusesand a share of royalties from products createdthrough their research. Payingadequate salaries and creating a proper working environment for scientists and engineers that provides themwith access to capital equipment, instruments, and other infrastructure neededfor R&D. Failureto compensate researchersadequately and lack of a supportive environment will only exacerbate the problemof braindrain. xvi 0 Restructuringand modernizing universities and publicly funded R&D institutionsby giving them flexibility, freedom of operation, and financial autonomy. 0 Increasing the intake of students into science and engineering, given the competition for recruitment of trained personnel; this may require adding colleges and universities (such as IITs or others modeledafter them). 0 Developingentrepreneurial skills and managementtraining for S&T professionals to encourage them to undertake businessactivities. 0 Encouragingthe private sector to invest inR&D. 0 Strengthening R&Dby companies so that they can have a more demand-driven and market-oriented approach with closer collaborationamong researchers,partners, and customers indeveloping new products and services that can be speedily brought to the market. 0 Developing communication and other infrastructure for R&D, and creating an attractive environment to motivate R&D investments, includingfavorable tax, and other incentives. 0 Establishingscience and technology parks to encourage industry-university collaboration. Such parks might attract R&D work from both foreign and domestic firms if the parks are situated close to reputable academic institutions. 0 Encouraging venture capital, which can also be usedas an incentivefor commercializationof research. 0 Effectively enforcing and implementing PR to create confidence among domestic and foreign innovators on protectionof their innovations inthe country. e Promoting a nationalfund to support grassroots innovators, with the aim of buildinga national register of innovators, converting innovationsinto viable businessplans, and disseminating knowledge of indigenous innovations, especially for job creation. 0 Strengthening the emerging new model of reverse drug design to produce innovations ina more cost- effective way based on leveraging traditional knowledge with modem science and exploiting public- private partnerships. Building a Dynamic Information Infrastructure Rapid advancesinICTs are dramatically affecting economic and social activities, as well as the acquisition, creation, dissemination, and use of knowledge. The use of ICTs is reducing transaction costs and lowering the barriers of time and space, allowing the mass production of customized goods and services. With ICT use becoming all-pervasive and its impacts transformational, it has become an essential backbone of the knowledge economy. The information infrastructure ina country consists of telecommunications networks, strategic information systems, policy and legal frameworks affecting their deployment, and skilled human resourcesneededto develop and use it. India's telecommunications sector has registered rapid growth inrecent years, spurred by reforms to open markets, and introduced more competition. Many domestic and internationalprivate sector entrants are now providing consumers with high-quality services at low prices. As a result, some spectacular successes have resulted: more than 47 million people had mobile phones at the end of 2004! Fierce price competition has resulted inIndian mobile telephony becoming one of the cheapest in the world. This has been a boon, especially to people in India's 600,000 rural villages, which have hadno access to communicationthrough traditional means, suchas fixed lines. But now, from fishermen at sea and brokers ashoreinKerala to farmers inPunjab-people inindustry and farming are embracing wireless technology for economic activity and to do business and increase their profit margins. The Indian government, inkeeping pace with up-to-date technological advancements, announced its Broadband Policy in2004 to provide an impetus to broadband and Internet penetration inthe country. xvii India can also boast of remarkable and impressive global achievements inthe IT sector. According to the National Association of Software and Services Companies (NASSCOM), the Indian IT market has grown from $1.73 billion in 1994-95 to $19.9 billion in2003-04, accounting for about 3.82 percent of India's GDP in2003-04 and providing employment for almost a millionpeople. India's IT services are moving upthe value chain, and India is now undertaking new and innovative work, such as the managementfor clients of IT-relatedbusiness processes. It i s making an impact also inIT consulting, inwhich companies such as Wipro, Infosys, and Tata are managing IT networks inthe UnitedStates and re-engineering business processes. Infact, Infosys was ranked the ninthmost respectableIT company inthe world in 2004, behindHewlett Packard, IBM, Dell, Microsoft,' AP, Cisco, Intel, and Oracle. Inchip design, Intel and Texas Instruments are using India as an R&D hub for microprocessors and multimediachips. The success of the IT industryon the whole influencedcompetitiveness in other sectors as well by building confidence in Indian industry,enhancing the country's brand equity inthe world, and offering entrepreneurial opportunities on a global scale. Inthe future, it is expected that India will make inroads in areas such as financial analysis, industrialengineering, analytics, and drug research. Several factors have contributed to India's success inthe IT industry including the existence of ahighly skilled, English-speaking workforce corning out of India's engineering schools and earning lower wages than European and U.S. counterparts, low dependence of ITon physical infrastructure, the Indian Diaspora, and the introductionof current account convertibility and easing of controls and regulations in the early 1990s. Various forecasts have also beenmade on where the ITindustry i s heading. According to WEF's Global Information Technology Report 2002-03 (2003), India's IT industry i s expected to grow at a compounded annual rate of 38 percent to reach $77 billion by 2008-contributing to 20 percent of India's anticipated GDP growth inthis period and 30 percent of its foreign exchangeearnings. By that year, it is also expected to employ more than 2 million people and indirectly create another 2 millionjobs! But one of the key inputsto achieving sustainedgrowth and exports inthe IT sector will be the availability of high- quality professionals inadequatenumbers. India needs to maintainand enhance its competitive advantage of having abundant, high-quality, and cost-effective human resources.The country must ensurethe right mix of technical, business, and functional skills inthe workforce to meet the needs of individualbusiness segments and customer markets. This requires harmonizationof the demands of industry with the supply of trained manpower coming from Indian educational and training institutions. As a result of the IT explosion and impressive progressinthe telecommunications and ICT sector, it is no surprise that usage of ICTs has been growing inthe country. But explosive growth of ICTs has mainly been concentrated inurban areas. As the telecommunications sector moves to a more commercial and competitive environment, the government should implement practical policies to enhance the reach of IT to groups not well servedby the market. The real challenge i s to promote the effective application and use of ICTs throughout the economy to raise productivity and growth, notjust ina few pockets. Ensuringthat the benefits of ICTs are sharedby all requires an enabling environment for ICTs. Critical elements includeincreasing access to ICTs through widespread availability of telephones, increasingly including mobile phones, computers, and connectivity to the Internet; enhancing ICT literacy and skills among the population, more so inthe rural areas; and developing ICT applications that can provide much-needed social, economic, and government services to citizens. Some steps inenhancing India's information infrastructure inthe country include the following: 0 Enhancing regulatory certainty and efficiency to facilitate new services that will enable India to reap the benefits of the convergence of existing andnew technologies and enable the sector to contribute more to economic growth. xviii 0 BoostingICT penetration by resolving regulatory issues in communications and reducing and rationalizingtariff structures on hardware and software. 0 Increasing the use of ICTs as a competitive tool to improve the efficiency of production and marketing in areas suchas supply chain management, logistics, information sharing on what goods are selling inthe markets, responding to rapidly changing market needs, and so on. e Moving up the value chain inITby developing high-valueproducts through R&D, improving the quality of products and services, marketingproducts and building brand equity to positionthe "India" brand name further,includingby strengthening marketing channels with strategic global links, expanding the focus outside the UnitedStates to emerging markets inAsia, Pacific, Japan, and so on. 0 Providing suitable incentives to promote IT applications for the domestic economy, as the focus currently seems to be mainly on IT services exports. This includes developing local language content and applications. e Puttinginplace suitable humanresource development andtraining initiatives, starting at the primary school and moving on to the tertiary levels to meet the expected growth of IT and other productive sectors of the economy. e Updating syllabuses incomputer engineering, electronics, and IT invarious technical institutions to meet the demands of industry (curriculum inother branches of engineering should also bebroadly basedto include IT subjects) 0 Massively enhancing ICT literacy and skills among the population at large through conventionaland nonconventionalmeans, so that people can begin to use ICTs to derive benefits, both economically and socially. 0 Creating opportunities for local communities to benefit from ICTs by providing support (seed money for local innovation on low-cost and appropriate technologies), enhancing private investment inICT infrastructure, and promoting national and internationalsupport for rural community-based access. 0 Strengthening partnerships among government agencies, research and academic institutions, private companies, and nongovernmental organizations (NGOs) to ramp up the ICT infrastructure and achieve faster penetration of ICTs. e Further developing and scaling up (injoint public-private initiatives where feasible) ICT applications, such as community radio, fixedmobile phones, smart cards, Internet, and satellite television, to bring the benefits of connectivity to rural communities all across the country and improve the delivery of services to rural populations. e Sharing successful applications of ICT, for example, ine-government among different Indian states. This also requires scaling up successfulICT initiativesto bringthe benefits of connectivity to rural communities all across the country. e Creating a suitable environment for the effective use of ICTs to permeatethe entire economy and lead to flourishing competition and business growth. This calls for the government to continue with the economic reform agendaput inplace inthe past decade. LookingAhead The notion of a knowledgeeconomy i s not new or foreign to India. India's past achievements inscience, philosophy, mathematics, and astronomy reinforce the notion that the country has for millennia been a leading "knowledge society." Ineconomic terms, India was the world's largest economy inthe first millennium,producingathirdof global GDP (see FigureB).By 1500its share haddeclinedto 25 percent, as China overtook it and Western Europe's share began to expand rapidly. India's share continued to fall after 1700due to the collapse of the MoghulEmpire, the costs of adjusting to British governance, and the rapid increaseinthe share of Western Europe, followed by the spectacular rise of the United States. India was a latecomer to the industrialrevolution. It cannot afford to miss the knowledge revolution! xix Figure B: India: Percentage Share of Global Gross Domestic Product, Years 0-1998 (percent) 40 35 30 -eWesternEurope 25 -a- United States 20 -A- Japan 15 +China -m-India 10 5 0 Source: Maddison (2001). Today, Indianpolicy makers are keenly aware of the challenges and opportunities that India faces in different sectors and are already startingto implement some of the key actions that are necessary to bolster India's effective transformation to the knowledgeeconomy. Various reports, includingthe Indian Planning Commission's reports on India as KnowledgeSuperpower: Strategyfor Transformation (2001a) and Zndia Vision 2020(2002a); the President's (Dr.A. P.J. Abdul Kalam's) 2002 strategy India 2020: A Visionfor the New Millennium (Kalam and Rajan 2002); andthe High-Level Strategic Group's India's New Opportunity, 2020 (AIMA 2003) underlineways to address India's transition to the knowledge economy. India, thus, has already developed a vision and strategiesto address its transition to the knowledge economy. Inthe main, its initiatives have, however, largely beendeveloped around the three functional pillars of the knowledge economy (education, innovation, and ICTs). Butto get the maximumbenefits from investments inthese areas, these initiatives must be part of a broader reformagenda, because some elements of India's current economic and institutionalregime are constraining full realization of India's potential. India will, for example, not reap the full benefits of its investments inincreasingeducation, ramping up ICTs, or even doing more R&D,unless its broader institutionaland incentive regime stimulates the most effective use of resourcesinthese areas, permits their deployment to the most productive uses, and allows entrepreneurial activity to flourish to contribute better to India's growth and overall development. It i s hopedthat this report will help stimulate, through a consultative process, a greater sense of the importance of the emerging policy agenda on the knowledge economy in India. India's effective transformation to aknowledgeeconomy calls for it to act inmany different policy domains, deepening, complementing, or reorienting ongoing reforms to use knowledge efficiently and sustaining development inthe longtermto achieveinclusive growth. Indianeeds to recognize that many policy reforms leadingto a knowledge-based economy will not yieldresults overnight. It will thus need to make some tough choices inthe short term; yet, other reforms will be of a medium-to long-termnature. xx It is clear, however, that going aheadwith suchan ambitious agendainIndia first and foremost requires raising massive awareness and consultation among all interested stakeholdersin government, the private sector, and civil society on the need and plans for such a transformation. Creating a sharedvision among all parties on ways to accelerateIndia's progresstoward the knowledgeeconomy i s thus important, as well as commitment on the part of all stakeholders to stay the course inorder to manage such a transition effectively. Effective leadership will be key to articulatingthis vision, through the involvement of all stakeholders. It also requires that the country develop a "virtuous" cycle between growth and the reform process. Moving to a knowledge economy, however, i s not only about stimulating such a reform agenda from the top. What will be needed is trial-and-error experimentation on what works ina bottom-up fashion and what does not work inthe Indian context as well as scaling up successful bottom-up initiatives. The processrequires that India constantly monitor its achievements and adjust its strategy in light of changing conditions. Launching a Process To make this agenda even more action oriented, an important signalneeds to be given, as i s amply demonstratedby the experience of other countries highlightedabove. A concrete way to begin this process would be to designate a national "knowledge" champion to advance the knowledge economy agenda inIndia by integratingthe economic reform agenda with initiatives already taking place inmore functional areas. A very appropriate nationalchampion to coordinate and orchestratethe necessaryknowledge-related actions across the various domains would be the PrimeMinister's office. Infact, recently, the Prime Ministerhas proposedthe settingup of a Knowledge Commissionto leverage various knowledge networks to make India a knowledgeengine of the world. This function could, for example, organize a KnowledgeEconomy Task Force, headedby the Prime Ministerand comprising stakeholders from government, the private sector, academia, think tanks, researchorganizations, and NGOs. The main objective of the task force would be to determine ways of coordinating action involving diverse stakeholdersto tackle key reforms inthe four pillars of the knowledge economy and sequence the investments necessary to move India successfully into the knowledge economy of the twenty-first century. Some examples of cross-cutting knowledgeeconomy issues that the task force could address include: Inthe past decade, Indiahas undertaken major economic reforms; as aresult, its growth rate has increasedfrom 3.5 percent inthe 1950sto 1970sto approximately 6 percent between the 1980s and 2002. Duringmuch of this period, however, China has been growing at about 10percent. What are the fundamental reforms neededto unleash India's tremendous entrepreneurial potential and benefit from more active participation inthe global knowledge economy to achieve this higher rate of growth sustainably? What actions are necessaryto bringina much larger proportion of the population into the modem sector?What special initiatives have to be undertaken to marshal1knowledge to improve the livelihoods of the poor? India has the advantage of a highly skilled human resource base, which has gained world renown. It also has world-class institutions that train this world-class manpower, but on a limited scale. What would it take to ramp up such institutions even further so that Indiacan become a leader ineducation and training, not only inIT and software, but also more generally inhigh-skill areas that can provide greater outsourcing services to the world? An increasing number of multinationalcorporations are currently working with Indianf i i s to contract and subcontract high-endR&D. How can India become a global leader ininnovation inits xxi own right,not only inIT-relatedareas inwhich it has carved out a global niche, but also in other knowledge-intensiveindustries, such as pharmaceuticals and biotechnology? e Indiai s a leading exporter of IT services and software, but has not yet fully harnessedthe potential of ICTs at home to reducetransaction costs and improve efficiency. As it has a large local market and many needs, what will it take for India to exploit this capability on a larger scale domestically and help the country leapfrog even more rapidly into the knowledgeeconomy of the twenty-first century? Dealing with the kinds of illustrative issues highlightedabove requires prioritization and working with many different interest groups, which is not an easy task; thus, some guiding principles for the Knowledge Economy Task Force would include the following: e Defining priorities and establishing budgets e Adopting systemic, integrated approachesfor the different policy planks at all levels of government e Mobilizing state governments, which are key to the Indianeconomy and its modernization e Multiplyingexperiments and publicizing concrete initiatives that clearly exemplify the move to a knowledge-based economy. The role of the PrimeMinister's office would be to put inplace a robust mechanismto facilitate, monitor, and scale up successful initiatives. Insum, Indiais well positioned to take advantageof the knowledgerevolutionto accelerategrowth and competitiveness and improve the welfare of its citizens and should continue to leverage its strengths to become a leader inknowledge creation and use. Inthe twenty-first century, India will bejudged by the extent to which it lays down the appropriate "rules of the game" that will enable it to marshal its human resources, strengthsininnovation, and global niches inIT to improve overall economic and social development and transform itself into a knowledge-driveneconomy. Sustained and integrated implementation of the various policy measures inthese domains would help to repositionIndia as a significant global economic power, so that it can rightfully take its place among the ranks of countries that are harnessing knowledge and technology for their overall economic development and social well-being. A Final Note This report presents an outside view of India's position on the global scale, recognizes India's achievements, but sees a tremendous potentialthat i s yet to be unleashed.What i s needed i s an India-led process of coordination and integration of the different reforms, combining those inthe economic and institutionalregime with the many initiatives that are actually being undertaken inmore functional areas, as covered inmany Indian strategy reports. Consolidatingand launching these can only be done through a domestic process of consultation, stakeholder awareness, and buy-into get backing for the necessary reforms to implement the various actions neededto leverage India's potential. It is hopedthat this perspective serves as an additional vote of confidence to help catalyze such an integrated and well- grounded process. xxii 1. INDIA AND THE KNOWLEDGEECONOMY: OPPORTUNITIES AND CHALLENGES One of the world's largest economies, India has madetremendous strides inits economic and social development inthe past two decades. After growing at about 3.5 percent from the 1950sto the 1970s,the country's economy expandedduringthe 1980sto reach an annual growth rate of about 5.5 percent by the end of the decade. In 1991India embarked on a new development strategy and introduced policies designedto improve its growth prospectsand increaseits integrationinto the global economy. Recognizingthat comparative advantage inthe new economy will shift to those who have the ability to create, adapt, and use knowledgeto spur growth and innovation, India went forward with a series of reforms inthe 1990s:opening up more sectors to private investment, encouraging foreign direct investment (FDI), significantly reducing red tape, further liberalizing trade policy and the exchange rate regime,and reforming capitalmarkets, leadingto an improvedinvestment climate. As central controls have receded, states have also acquired more freedom to maneuver, and some, such as Andhra Pradesh, Karnataka, and Maharashtra, have shown progress inencouraging private investment. India is now poisedto realize even faster growth. The time is, therefore, opportune for the country to make further progress toward a knowledge economy-one that create, disseminates, and uses knowledge to enhance its growth and development. To this end, it i s important for India's leaders and interested stakeholders to assess India's overall knowledge readiness. How well i s it addressingkey issues in making effective use of knowledge for development? How does India compare with the rest of the world on what can be called four pillars of the knowledgeeconomy: the economic and institutionalregime (including governance), education and human resources, the innovation system, and information infrastructure? This chapter reviews India's current economic context, the importance of knowledge inan increasingly dynamic and competitive global environment, and the opportunities and challenges India faces inbecoming even more knowledge based. The CurrentEconomicContext UnderIndia's revised development strategy, the country has continued to make good progress in increasing incomes and improving living standards.The poverty incidence decreasedfrom 44.5 percent in the 1980sto 26 percent in2000,' and the overall literacy rate increased from 44 percent to 65 percent in the same period. FDIinflows rose from virtually nothing inthe 1990sto $4.26 billion in2003, although they are still low compared with China, which attracted $53.5 billion inthe same year. Inthe 1990sIndia also madeprogress on the MillenniumDevelopment Goals (MDGs)~ of eradicating poverty and hunger, increasing primary enrollment, promotinggender equality, reducing child mortality, and improving access to water and sanitation (UNDP2003) (Box 1-1). 'T h i s i s based on an intemational poverty line of $1per day, with adjustments for purchasing power across countries. The Foverty incidence of 26 percent i s based on estimates of the Govemment of India (World Bank 2003d). The MDGs commit the intemational community to an expanded vision o f development and have been commonly accepted as a framework for measuring development progress. The goals are to (a)eradicate extreme poverty and hunger, (b) achieve universal primary education, (c) promote gender equality and empower women, (d)reduce child mortality, (e) improve matemal health, (fl combat HIV/AIDS, malaria, and other diseases, (g)ensure environmental sustainability, and (h) develop a global partnershipfor development. For more information, go to http://www.developmentgoals.org/. 1 Box 1-1: Assessing India's Progress on Millennium Development Goals in the 1990s Significant reduction inpoverty and improvementsinliteracy and school enrollmentswere achieved in India inthe 1990s.Poverty fell by 1.2percentagepoints ayear and the enrollment rate among primary-aged childrengrew by 1 percentagepoint a year. Forecastingthe likelihood of India achievingthe MDGs by their target dates is difficult, because the desired outcomes will require coordinatedinterventions across many sectors. Nevertheless, a comparison between actual progress inthe 1990s and needed progress to achieve MDGs i s useful.Targeted reductions inpoverty will be achievedifpoverty levels continueto fall by at least 0.7 percentage points a year. Progressinprimary school enrollment rates, however, must accelerate to 1.5 percentagepoints ayear to achievethe relevant MDGs. Comparedwith poverty and education,progress inhealth indicators was slower inthe 1990s; rapid accelerationi s necessary ifIndiai s to reachthe stated goals by 2015. Itis worth noting that all 15 ofthe largeststates (accountingfor morethan 90 percentofIndia's population), includingthe three large and poor states-Uttar Pradesh, Bihar, and Madhya Pradesh-showed progress inreducing poverty (including rural poverty) and by and large improvingsocial indicators.As better-performing states have made faster progress, however, poverty and illiteracy havebecome more concentratedinIndia's large and poor states. Although Uttar Pradesh, Bihar, and Madhya Pradeshaccountedfor 41 percent of India`s poor inthe early 199Os,this figure had risen to nearly 50 percentby the end ofthe 1990s. Indiacannot achieve the MDGs without widening economic opportunities and overcoming barriersto more rapidpoverty reduction and better human outcomes inthese poorer states. Source: World Bank (2004a). Embarking on a new growthpath. After significant economic expansion in the 1980s, India increased its rate o f growth to 6.7 percent between 1992-93 and 1996-97; this droppedto 5.5 percent from 1997-98 to 2001-02, and 4.4 percent in 2002-03, due to the impact o f poor rains on agricultural output. But, thanks to a lavish monsoonthat ledto a turnaround inthe agriculture sector, in 2003-04, India's economy surged ahead to a growth rate o f 8.2 percent. This rate i s very much in line with growth projections cited in India's Tenth Five-Year Plan (India, Planning Commission 2002e), which calls for increasing growth to an average o f 8 percent between 2002-03 and 2006-07.3 Such sustained acceleration will be neededto provide opportunities for India's growing population and its even faster-growing ~ o r k f o r c e . ~ India could experience continued high growth in the future. Figure 1-1 shows what India can achieve by the year 2020, based on different assumptions about its ability to use knowledge. Here, total factor productivity (TFP) i s taken to be a proxy for a nation's learning capability. India's Tenth Five-Year Plan is available at http://planningcommission.nic,in/plans/planrel/fiveyr/weIcome. html. The investment bank Goldman Sachs forecasts that, although growth in the next 50 years will slow sharply in the world`s six big, rich countries (United States, Japan, United Kingdom, Germany, France, and Italy) and inBrazil, Russia, and China, India will continue to have an average annual growth of more than 5 percentthroughout this period. By 2032 its GDP will be bigger than Japan's! By 2050 Indiahasthe potential of raising its national income per capita in dollar terms by 35 times the current level (Wilson and Purushothaman2003). Duringthe present decade, one estimate suggeststhat India's labor force will expand by 50 percent more than all o f East Asia`s (including China`s) taken together (The Economist 2004d). 2 Figure 1-1: India: Real Gross Domestic ProductPer Worker, Alternative Projections, 1995-2020 1995 US$ 3,000 .,... ,. ... . . " . . .,... .,.,,, , . , ^ . . . .. , ...,,. , . , 1-Actual I Proj 4 +Projection 1: 2.09 % TFP Growth (Actual) 2,500 4-Proiection 2: 1% TFP Growth (India 1961-70) I +Projection 3: 3% TFP Growth (India 1981-90) 2,000 +Projection actual TFP4: 4.25% TFP Growth (which is Ireland`s growth rate for 1991-2000) 1,500 1 $ 1,000 500 0 1995 2000 2005 Year 2010 2015 2020 fiote: For all four projections, capital, labor, and humancapital are assumedto grow at their 1991-2000 average annual growth rates for India, that is, 5.41, 2.23, and 0.58 percent, respectively. For the growth-TFP decomposition to be more precise. labor force figures rather than total population are used as a measureof the amount of ``labor'' available for use as a factor of production inthe Indian economy. According to World Bank databases, in 2001 India's GDP (in 1995 U.S. dollars) was $495 billion and its population was 1.03 billion, of which only 461 million were inthe labor force. As such, India`s GDP per capita in 2001 was approximately $480, whereas GDP per worker was around $1070. Annex 1provides the theoretical framework for these TFP projections. Source. Knowledge for Development Program. Projections 1,2, 3, and 4 plot real gross domestic product (GDP) per worker (1995 U.S. dollars) for India assuming different TFP growth rates from 2002 to 2020. Projection 4 i s an optimistic scenario which is based on the actual TFP growth rate inIreland in 1991-2000. Ireland i s an example o f a country that has been usingknowledge effectively to enhance its growth. Projection 1 assumes a TFP growth rate of 2.09 percent, which was the average TFP growth rate for India for 1991-2000. Inthis case, real GDP per worker increases by 79 percent, from $1,077 in 2001 to $1,930 in 2020. Projection 2 assumes a TFP growth rate o f 1 percent, which was the average TFP growth rate for India for 1961-70. In this case, real GDP per worker increases by 46 percent to $1,575 in 2020. Projection 3 assumes a TFP growth rate o f 3 percent, which was approximately the average TFP growth rate for India during 1981-90. Inthis case, real GDP per worker increases by 112 percent to $2,286 in2020. Projection 4 assumes a TFP growth rate of 4.25 percent, which was the average TFP growth rate for Ireland during 1991-2000. Ireland i s an example o f a country that has been usingknowledge effectively to enhance its growth. Inthis case, real GDP per worker in India increases by 167 percent to $2,875 in 2020. India has, therefore, a rich choice set in determining its future growth path. All things being equal, the projected GDP per worker inthe optimistic scenario 4 in2020 i s about 50 percent greater than in scenario 1. This illustrates the tremendous difference that can be made by developing strategies that focus on making more effective use o f knowledgeto increase the overall productivity o f the economy. Knowledge can make the difference between poverty and wealth. Modernizing the economy. Some interesting changes have occurred inthe broad structural composition o f the Indian economy inthe past six years. Table 1-1 shows that the share o f agriculture decreased from 26.5 percent to 22 percent of GDP in 1997-2003 and that o f manufacturingdecreased from 17.7 percent to 17.2 percent, whereas the share o f services increased from 45.8 percent to 50.8 percent inthe same period. Table 1-1: India's Gross Domestic Product by Sector, 1997-2003 (percentage share of total) 1997-98 1998-99 1999-2000 2000-01 2001-02 2002-03 Agriculture 26.5 26.4 25.0 23.8 23.9 22.0 Industry Mining 2.5 2.4 2.4 2.3 2.2 2.4 Construction 5.O 5.0 5.1 5.2 5.1 5.3 Electricity, gas, and water 2.5 2.5 2.5 2.5 2.5 2.4 Manufacturing 17.7 17.0 16.7 17.2 16.8 17.2 Services 45.8 46.6 48.3 48.9 49.5 50.8 Source: EIU (2004~). Comparedwith countries such as Brazil and China, where the share o f agriculture i s rather limited (accounting for 6 percent and 15 percent o f GDP, respectively, in 2002), India's economy still depends significantly on agriculture. Manufacturinghas a less prominent role in India, accounting for a little more than 17 percent o f GDP in2003, compared with more than 43 percent o f GDP for China. In addition, no significant increase in India's penetration o f world markets in industrial products has been observed in the past decade. As a result, growth inmanufacturingemployment has averaged only about 2 percent a year since the mid-l990s, most o f this inthe unorganized sector. The organized manufacturing sector provides only about 7 millionjobs today, and fewer than one million workers transition out o f agriculture every year. These trends will have to be reversed for India to accelerate growth to meet the targets set out inthe Tenth Five-Year Plan (World Bank 2003d). The emergence o f services, however, as the most dynamic sector inthe Indian economy has inmany ways been a revolution (Box 1-2). The most visible and well-known dimension of the takeoff inthe services sector has been in software, information technology-enabled services (ITES), including call centers, design, and business process outsourcing (BPO) services. Growth in services, however, has been much more broadly basedthan information technology (IT); inthe 1990s growth was the strongest in business services, telecommunications, financial and community services, and hotels and restaurants. Nevertheless, tremendous scope exists for future rapid growth inthe Indian service economy, provided that deregulation o f the services sector continues. Despite these achievements, it should be noted that employment growth in the Indian services sector has been quite modest, underscoring the importance of achieving rapid industrial and agricultural growth (Gordan and Gupta 2003 and World Bank 2004j). 4 Box 1-2: India Undergoes a Services Revolution India's exports of services grew by 17 percent a year throughout the 1990s-almost twice the 9 percent growth rate of the services sector as a whole, which itself accounted for nearly 60 percent of India's overall economic growth. It i s estimated that, if the growth trend in services from 1995-2000 persists,by 2009-10 India's exports of services would not only exceed exports of goods, but the country would export more services than China, South Korea, Brazil, and Singapore combined! A large part of the dynamism inthe services sector is due to factors such as the high income elasticity of demand for services, cost-reducing and variety-enhancing technological advances, and changes inthe method of organizing production favoring increased outsourcing. Access to a growing external market for services and the gradual, although partial, liberalization of the domestic economy has also played a significant role. Trade liberalization in services, both inIndia and internationally, has provided access to a growing external market for services for Indian firms, while also attracting FDIinservices to India. FDIinservices grew by 36 percent in2001, almost twice the rate of growth inIndia's nonservices FDI.IT-related services accounted for 34 percent of India's services exports in 2001-02, up from 19 percent in 1997-98. Going forward, securing the gains delivered by India's "services revolution" demands deeper reforms at home, combined with a more aggressively outward-looking negotiating stance ininternational trade talks. India must address on the external front the problem of actual and potential protectionism and domestically the persistence of restrictions on trade and investment and weaknessesinthe regulatory framework. Liberalized services such as I T and telecommunications have attracted significant investment and have grown faster and created morejobs than the protected services sectors. The current round of World Trade Organization (WTO) negotiations also offers India a remarkable opportunity to eliminate existing barriers to its services exports and prevent introduction of new ones. But, liberalization must also deliver benefits to the poor and weak sections of society to give them access to the improved opportunities offered by India's services revolution. One model is the universal service fund already set up inthe telecommunications sector, inwhich part of the revenue is set asideto finance service provision inmore remote areas without undermining overall efficiency. The following steps would help India sustain its services revolution and build a more competitive domestic economy, both o f which underpin the country's prospects for continued economic growth and poverty reduction: e Take a far more aggressive position ininternational negotiations on the General Agreement on Trade in Services (GATS), and seek to lock inthe current open international trade regime for cross-border trade in services. Seek liberal access for the strictly temporary movement of skilled professionals as employees of trans- border companies or to fulfil1services contracts. Creation of a service provider visa with streamlined and transparent procedures would facilitate movement for these provider classes. Open professional services, such as accountancy and legal services, and retail distribution to international competition, and eliminate restrictions on trade infinancial and telecommunications. Reduce discretion in issuing o f licenses and permits, and eliminate unnecessary red tape that inhibits efficient operation of firms, capital movement, and productivity. Reduce restrictions on the operation of domestic firms inroad transport, financial, accountancy, and construction services. e Improve regulation inhealth and education to protect the interests of Indian consumers and help Indian service providers secure access to foreign markets. Source: World Bank (2004j). Comparing Zndia globally. By global measures, India's economy is still relatively small: with 17 percent of the world's people, India accountsfor less than 2 percent of global GDP and 1percent of world trade. Impressive as its growth performance has been, it has lagged behindChina's, which had an average annual GDP growth rate of 9.8 percent in 1991-2003 (and 9.2 percent between 1980-1990). Figure 1-2 shows that India's GDPper capita has been increasing, albeit at a much lower rate than in China or Brazil. 5 Figure 1-2: GrossDomesticProduct Per Capita (PurchasingPower Parity), India and Comparators, 1990- 2003 (current international U.S.dollars) 0 4 4 1 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Source: World Bank staff analysis undertaken using World Bank internaldatabase. Even though growth has beennoteworthy and India has improved its performance on the Human Development Index (HDI)5-moving from 132ndplace in 1997 to 127thin2001-the country i s facing many new challenges. The new threat of HIV/AIDS i s spreading quickly (approximately 4.58 million Indians are currently infected with HIV and 600,000 have the disease (TheEconomist 2004g). Unemployment, although still low by internationalstandards (4.4 percent, compared with 9 percent in Brazil and 3 percent in China), is increasing, especially inrural areas. Progresshas also been uneven across different regions of the country. Evidence of divergence inper capita incomes exists across states; richer states are increasing incomes faster than poorer ones. As aresult, poverty i s present inthe rapidly growing cities as well as the vast rural areas, but increasingly concentrated inthe country's more slowly growing states: Bihar, Madhya Pradesh, Orissa, and Uttar Pradesh(World Bank 2003d). Chapter 1has so far highlightedrecent economic trends that impact India as it moves to become knowledge based. But, what progress has India made and how ready i s it to move forward inthe effective use of knowledgefor development?How does India now compare with the rest of the world in what can be calledthe "knowledge revolution"? To answer these questions, it is important first to review why the knowledge economy i s so important to development policy and the key elements of the knowledge revolution, includingthe four "pillars" that support the knowledge economy. The HDIi s a composite index developedby UNDP that measures the average achievements ina country inthree basic dimensions of humandevelopment: a long and healthy life, as measuredby life expectancy at birth;knowledge, as measuredby the adult literacy rate and combined gross enrollment ratio for primary, secondary, and tertiary schools; and a decent standardof living, as measured by GDP per capita in Purchasing power parity (PPP) US.dollars. For more information, see http://hdr.undp.org/statistics/indexes/about-hdi.cfm. 6 Knowledgeis Key inan Increasingly Dynamic and Competitive Global Environment Inthe global knowledge economy of the twenty-first century, India's development policy challengeswill require it to use knowledge more effectively to raise the productivity of agriculture, industry, and services and reduce poverty. This is because the application of knowledge, as manifested inareas suchas entrepreneurship and innovation, researchand development (R&D),and people's education and skill levels, i s now recognized as one of the key sources of growth and competitiveness inthe global economy. Although knowledge has always been at the core of any country's development process, increased speed inthe creation and dissemination of knowledge is makingit even more important indevelopment strategy. Figure 1-3 illustrates the importance of effective use of knowledge inGhana and Korea. Nearly 40 years ago their per capita incomes were almost the same; since then, Korea has increasedits per capita income by a factor of 8.9 inreal terms, due mainly to more effective use of policy and technical knowledge, whereas Ghanahas decreased its per capita income by almost a factor of 0.1. Figure1-3: GrowthinPer Capita Incomefor Koreaand Ghana, 1960-2000 (per capita income, in thousands) 14 12 10 I Difference attributedto 8 knowledge 1960 1965 1970 1975 1980 1985 1990 1995 2000 Source: World Bank (1999). Knowledge is more important today than ever, as the twin forces of globalizationand technological advances are spurringan ongoing knowledge revolution. This revolution manifests itself inmany ways: closer links between science and technology (S&T), greater importance of innovationfor economic growth and competitiveness, increased importance of education and lifelong learning, and more investment inintangibles (R&D, software, and education); the latter is even greater than investments in fixed capital. At the same time, of course, a revolution ininformation and communications technology (ICT) i s increasing worldwide interdependency and connectivity. These trends have ledto increased globalization and competition: although trade represented 38 percent of world GDP in 1990, this ratio had risen to 57 percent in 2001. This dynamic process is creating constant restructuringat the global, country, sector, and firmlevels, raising tremendous possibilities for enhancing growth and competitiveness, but also carrying the risk that countries or firms and organizations will fall behind ifthey cannot keep up with the pace of rapid change. Consequently, countries' competitiveness depends more than ever on their ability to access, adapt, utilize, and create knowledge. 7 The term "knowledge economy" has been coined to reflectthis increasedimportance of knowledge for economic development. Despite the hype that has surroundedthe concept, the idea of a knowledge economy i s not initself entirely new. Use of knowledge has always been a critical ingredient of economic success; however, its importance has increasedinrecent times to the point that knowledge has becomethe key driver of economic competitiveness and success. Improved knowledge has ledto increasing productivity, and the creation and application of new technologies has increasedthe range of products and services and brought revolutionary change to virtually all markets and sectors. The knowledgeeconomy is often taken to mean only high-technology industries or ICTs, but the more important question i s how economies are usingappropriate knowledge to improve productivity and increase welfare. Creation of new knowledge and use of existing knowledgecan be relevant in a variety of circumstances, manifestingnotjust as leading-edge scientific discoveries, but, more generally on how to do things better. For example, applicationof new techniquesto subsistence farming can significantly increase yields and use of information and logistical services can allow traditional craft sectors to serve much wider markets than before. Embracing the knowledge economy. In short, a knowledge economy i s one that creates, disseminates, and uses knowledgeto enhance its growth and competitiveness. Successful transition to a knowledge economy i s founded on four essential pillars (Box 1-3). Box 1-3: Four Pillarsof the Knowledge Economy 1. An economic and institutional regime that provides incentives for the efficient creation, dissemination, and use of existing knowledge 2. An educated and skilled population that can create and use knowledge 3. An eficient innovation system of firms, research centers, universities, consultants, and other organizations that can tap into the growing stock of global knowledge and assimilate and adapt it to local needs, as well as to create relevant new knowledge 4. Dynamic information infrastructure that can facilitate the effective communication, dissemination, and processing of information. Source: Knowledge for Development Program. Makingeffective use of knowledge inany country requires developing appropriate policies, institutions, and investments and coordination across these four pillars, because of the strong interdependencies that exist among them.The economic and institutional regime is ina sense the most critical pillar of the knowledgeeconomy, becauseit provides the context for the effectiveness of the other three functionally focused pillars (education, innovation, and ICTs). Advantage India. India can count on a number of strengths as it strives to transform itself into a knowledge-based economy: it has a good base of skilled human capital, especially inthe sciences; a democratic system; widespread use of English; macroeconomic stability; a dynamic private sector; institutions of a free market economy; a local market that i s one of the largest inthe world; a well- developed financial sector; and a broad and diversified S&T infrastructure. Inaddition, development of the ICT sector inrecent years has been remarkable. India has createdprofitable niches inIT and is becoming a global provider of software services. It i s a sought-after venue for services in global production chains, all the way from call centers, financial accounting, and database productionto international firms that are usingIndia inbanking, insurance, technology and telecoms, engineering, and business services. As a result, India's software and service exports totaled an impressive $12.5 billion in 2003-04 and the IT industry contributed an estimated 3.82 percent of India's GDP in2003-04. Interms of state-ledefforts, the state of Andhra Pradeshis developing Hyderabad into a "cybercity" and establishing an impressive "e-governance" infrastructure. 8 India i s also becoming a sought-after destination for R&D, and multinationalsare increasingly investing inIndianscience. Nearly 100multinationalcorporations (MNCs) haveR&D facilities inIndia. General Electric, for example, has 1,800 people in its R&D center inBangalore, a quarter of whom have Ph.D.s! Although China remains the top destination for FDIinthe world, a recent 2004 survey by A.T. Kearney has India inthird place, just behindthe UnitedStates at second. A new S&T policy has been formulated inIndiato spur innovation andR&D to meet nationalneeds inthe new eraof globalization. Indiaitself has great strengths inbiotechnology and pharmaceuticals; companies suchas Biocon, Ranbaxy, and Dr. Reddy's Laboratories are at the forefront of researchand drugdiscovery. Inaddition, a huge reservoir of creativity exists intraditional knowledge and local entrepreneurship, which is being encouragedby various measures (including a recently createdNational InnovationFoundation). A series of laws on intellectual property rights (IPRs) have been passedinthe past two years and on January 1,2005, India introduceda patent regime that makes it WTO compliant. India i s thus well placed to embrace the knowledge economy and enhanceits position on the global stage, as is amply demonstrated inthe following section. AssessingIndia's Opportunitiesand Challengesinthe KnowledgeEconomy To create and sustain an effective knowledge economy, countries must put inplace appropriate arrangementsto grow, become more competitive, and increase welfare. This process initially means understandingtheir relative strengths and weaknesses and then acting on themto develop appropriate policies and investments to give direction to their ambitions, as well as devising mechanismsto monitor progress against the goals set. Benchmarking India's overall knowledge readiness. The World Bank Institute's interactive web-based Knowledge Assessment Methodology (KAM)(http://www.worldbank.org/kam)i s a tool that helps to benchmark a country's positionrelative to others inthe global knowledge economy. The KAMincludes several quantitative and qualitative variables that compare an economy with its neighbors, competitors, or other countries that a country wishes to emulate on the four pillars of the knowledge economy: economic and institutional regime, education and human resources, innovation, and ICTs. The KAMhelps to identify problems and opportunities that a country faces inmaking the transition to a knowledge economy and where it may needto focus policy attention or future investments. The unique strength of the KAMi s i t s cross-sectoral approach, allowing users to take a holistic view of a wide range of relevant factors, rather than focusing onjust one pillar. The 2005 version of the KAMincludes80 quantitative and qualitative variables for a group of 128 countries, which includes most of the developed economies of the Organisation for Economic Cooperation and Development (OECD) and more than 90 developingcountries. Annex 2 provides more information on the KAM,including the normalization procedure usedto rank countries. This section benchmarks India with comparator countries and assesses the challenges and opportunities facing the country inthe four interrelated pillars of the knowledge economy. Usingthe KAM,the benchmarking exercise compares India with the South Asia Region (India, Sri Lanka, Bangladesh, Pakistan, and Nepal), as well as large global players and competitors (such as Brazil and China), and advancedand emerging economies (such as Korea, Poland, and Russia). Korea is an example of a country that in40 years transformed itself from a low-income country to a leading one basedon knowledge and innovation. Polandwas chosenbecauseit i s a large economy that i s successfully pursuinga transition from a socialist to knowledge-based, market-driveneconomy. India and Russia share some structural characteristics: not only are they bothlarge economies at advanced stages of the transition to market- oriented systems, but they also share important similarities on the various knowledge economy pillars. For example, ineducation, both have ahighly skilled workforce, especially inthe sciences and 9 engineering, but their economic and institutional environments suffer from certain weaknesses that prevent them from fully hamessing the benefits of knowledge for growth and development. The following charts paint apreliminary picture of India's knowledge preparednessfrom the mid-1990s to the early years of this decade (for the latest years that data are available). Figure 1-4highlights the Knowledge Economy Index (KEI), which i s the average of the performance scores of a country or region on the four pillars of the knowledgeeconomy. Three variables are chosenas proxies for each of the four pillars that constitute the KEI: Economic and institutional regime: tariff and nontariff barriers, regulatory quality, and rule of law 0 Education and human resources: adult literacy rate (percent age 15 and above), secondary enrollment, and tertiary enrollment 0 Innovation system: researchersinR&D, patent applications granted by the U.S. patent and Trademark Office (USPTO), and scientific and technical journal articles (all weighted per millionpeople) 0 Information infrastructure: telephonesper 1,000 persons, computers per 1,000 persons, and Internet users per 10,000 persons. Figure 1-4: KnowledgeEconomy Index, India, Comparators, and the World, 1995 andMostRecentPeriod 0 1 2 3 4 5 7 8 Q 1995 Note: Countries above the 45-degree line have improvedtheir positioninthe KEIfor the most recent period for which data are available relative to their position in 1995 (or closest available date in the mid-1990s) and vice versa for countries below the line. Source: World Bank, "Knowledge Assessment Methodology," http://www.worldbank.orgkam. Figure 1-4shows that India occupies the top of the bottom third of the distribution on the global knowledgeeconomy map, suggesting that more could be done to harness knowledge for its development. India leads the South Asia and Africa Regions interms of the K E I s between 1995 and the most recent period for which data are available. India has also slightly improved its relative position duringthis period, as have all other comparator countries albeit to different degrees. China, Brazil, and, to some 10 extent, Poland have improved their positions relative to 1995 by far greater margins than have Russia or Korea. Rating India's pe$ormance. Usingthe KAM, it i s also possible to see how India has performedon the four individual pillars of the knowledgeeconomy, usingthe KEIinrelation to chosencomparators. In Figure 1-5, the two bars representthe aggregateKEIscore for a selectedcountry for the most recent years for which data are available and for 1995, split into the four pillars (see legend at the bottom of Figure 1-5). Eachcoloredbandrepresentsthe contribution of aparticular pillar to a country's overall knowledge readiness.Annex 3 presents overall K E I s as well as those for eachpillar for India and comparators. Figure1-5: Cross-Country Comparisononthe FourPillarsof a KnowledgeEconomy,Indiaand Comparators, 1995 andMost RecentPeriod Korea 1995 Poland 1995 RLssia 1995 Brazil 1 1995 China 1995 India 1995 i i I I 0.0 2.0 4.0 6.0 8.0 1 .o 0 Econ Incentive Regime 0 Innovation EEducation Information Infrastructure 1 Source World Bank, "Knowledge Assessment Methodology," http//www worldbank orgkam Figure 1-5 shows the dramatic improvements madeby countries on their overall preparedness for the knowledge economy during this period. Korea leads the pack, which i s not surprising,as it i s one of the leadingcountries inthe world making progress inits transition to the knowledge economy, followed by Poland, Russia, Brazil, China, and India. All countries, except Korea and India, have improved their most recent performance since 1995. India has slightly worsened its most recent overall KEIscore compared with 1995 due to slightly declining performance inthe education pillar, but more so due to weak performance in the information infrastructure pillar. India contrasts strongly with China on the latter, as China has succeeded remarkably inimproving its information infrastructure inthe past half decade or so. The scorecardinFigure 1-6 i s yet another way to look at India's performance relative to the 128 countries included inthe KAh4between 1995 and the most recent period for which data are available. (See annex 4 for scorecards for Brazil, China, Korea, Poland, and Russia.) The scorecard includes three variables for each of the four pillars of the knowledge economy, as well as two variables relating to performance: GDP growth and the HDI. 11 When a country's performance seems to have declinedinthe most recent period-that is, the scorecard shows it falling behind, as the scorecard shows for some variables for India-this decline can happen for two reasons: 0 A country may have lost ground inabsoluteterms (which often occurs on education enrollment rates). 0 Even if the country has made a several-fold improvement, it could still fall behind, becausethe world may on average have improved much more significantly. This often happenswith information infrastructurepenetration ratios, because of the very fast rate of change globally inthis sector. Figure 1-6: India's Knowledge Economy Scorecard on SelectedVariables, 1995 and Most Recent Period GDP growth(%) (5.80) (174.86) Internet users per 10,000pew man Development Index (0.60) (7.20) Computers per 1,000people ariff S nontariff barriers (2.00) (71.OO) Telephones per 1,000 people w Regulatory Qualay (-0 34) (I Tertiary Enrollment 0.58) Ruleof Law (0.07) (48.47) Secondary Enrollment Researchers in RBD I million(98.85) (61.03) Adult literacy rate (% age 15 and above) Scientific andtechnical journal articles I mil pop. (9.23) - (0.33) Patent applicationsgranted by the USPTO /mil pop. most recent - --- 1995 Note: Each of the 80 variables inthe KAMis normalizedon a scale of 0 to 10for 128 countries. The fuller the scorecard, the better poised a country i s to embrace the knowledge economy. But an economy should not necessarily aimfor a perfect score o f 10on all variables. This i s becausethe scorecards may be shapedby the particular structural characteristics of an economy or by trade-offs that characterize different development strategies. Values inparentheses denote actual values for India for the most recent periodfor which data are available. Source: World Bank, "Knowledge Assessment Methodology," http://www.worldbank,org/kam. Figure 1-6rightly showcases India's strong GDP growth inthe past six to sevenyears. The country has also made steady progress on the HDIbetween 1995 and 2002. India's performance inthe HDIi s even more evident inthe data inFigure 1-7, although all the comparator countries have been improving their performance and are placed higher than India for the same period. 12 Figure 1-7: Progresson the HumanDevelopmentIndex, India and Comparators,1975-2002 Human Development Index 1, 0.2 - 1975 1980 1985 1990 1995 2001 2002 Source: World Bank intemaldatabase. The scorecard inFigure 1-6 and the underlyingdatapresentedinannex 5 for Brazil, China, and India show that India's overall development pattern does has not appear to have changed much interms of the knowledge economy duringthe past half decade. Lookingat the four pillars of the knowledge economy at two points intime-1995 and the most recent date for which data are availablereveals the following key points: InIndia'seconomicand institutional regime,thecountry hasnotdemonstratedsignificantchanges,as evidenced by the unchanged scores on tariff and nontariff barriers. The rule of law has improved slightly, butregulatory quality has witnessed a slight decline inthe past half decade or so. Ineducation, Indiahasimprovedits adult literacy, butslightly worseneditsmostrecentperformance insecondary enrollments dueto stagnation ofthese ratios inthisperiod, while many other countries, notably Brazil, more than doubled their secondary enrollments. India, however, has made noteworthy strides inincreasing its tertiary enrollment ratio. India led China interms of its gross enrollment ratio (GER) for tertiary education until 1999, after which China surpassed India. In2001 Indiahad a tertiary GER of 11.6 percent, compared with 12.7 percent for China. India's innovation system does not show great improvement; infact, India has seen a small deterioration interms of researchersinR&D per million people as well as scientific and technical journal articles per million people; however, interms of patent applications granted by USPTO per million people, India has seen a notable improvement. It must be noted, however, that the three variables shown in Figure 1-6 are all scaledby population, and India does have significant innovation competencies in terms of absolute size (see chapter 4 for more detail). Inthe knowledge economy, size does matter and large countries such as India do have a critical mass inresearch capacity that i s essential for spurring innovation. Regardinginformation infrastructure, India has made impressive advances inICTs due to considerable improvements intelephones (fixed plus mobile, in which India has experienced a boom inmobile telephony), computer penetration, and, most laudably, Internetusers. Yet, the scorecardin Figure 1-6 shows deteriorating performance for this pillar. Why?Even though India has made a 13 several-fold improvement inits information infrastructure penetration ratios inabsolute terms inthe past few years, it has fallen behindin relative terms, because the world on average has moved faster and improved much more significantly. The contrast i s even more strikmgby overlaying India's most recent performance with those of its two closest competitors, Brazil and China (Figure 1-8). Both Brazil and China have made much stronger leaps inenhancing their information infrastructures than India, as evidenced by the variables for telephones, computers, and the Internet; they have also improved on the other pillars. Figure1-8: KnowledgeEconomyScorecardson SelectedVariables for Brazil, China, and India, Most Recent Period GDP growth[%) (5.80) (174.86) Internetusers per 10,000 p n DevelopmentIndex (0.60) (7.20) Computers per 1,000peopl ariff 8 nontariff barriers (2.00) [TI .00) Telephones per 1,000 people Regulatory Quality (-0.34) (10.58)Tertiary Enrollment Rule of Law (0.07) (48.47) Secondary Enrollment esearchers in R8D Imillion(98.85) (61.03) Aduk literacy rate (% age 15 and abov ientific andtechnical journal articles Imil pop. (9.23) (0.33) Patent applicationsgranted by the USPTO I mil pop. Note: Values inparentheses denote actual values for Indiafor the most recent period for which data are available. Each of the 80 variables in the KAM i s normalized on a scale of 0 to 10.The fuller the scorecard, the better poised a country i s to embrace the knowledge economy. But an economy should not necessarily aim for a perfect score of 10on all variables. T h ~ iss because the scorecards may be shaped by the particular structural characteristics of an economy or by trade-offs that characterize different development strategies. Source: World Bank,"Knowledge Assessment Methodology," http://www.worldbank.org/kam. Acknowledging knowledge disparities among Indian states. So far, the chapter has focused on India's position as a whole on the global knowledge economy. But, India i s a country o f great diversity with many states leading the way inembracing the knowledge economy and others lagging behind. At this stage, disaggregated data related to overall knowledge readiness o f various Indian states are unfortunately not available. A rough idea o f the diversity that exists among states can be gleaned from Figure 1-9, which provides a snapshot o f the performance o f selected Indian states based on two proxy variables: gross state domestic product per capita and literacy rates. The figure shows that some states, such as Maharashtra and Punjab, have almost one and a half times the per capita income of India and others such as Kerala have very highliteracy rates, comparable to those in some middle-income countries. Yet others, such as Bihar have less than half the average per capita income o f India and very low literacy rates. Moreover, great diversity exists within states. 14 Figure 1-9: Gross State Domestic Product and Literacy Rates for Indian States, 1999-2000 Bihar I 1 I 100 zoo 300 400 500 600 GSDP Per Capita (US $) Note: Datafor Indiarepresentits GDP and adult literacyrates as a whole for 2000. Source: World Bank staff analysis undertakenusingWorld Bank internaldatabase. Other Global Comparisonswith India A variety of recentlydeveloped internationalbenchmarkingcomparisons attempt to rank countries' preparednessfor the knowledgeeconomy. Most of them suggest that India can do much more to strengthen its overall global competitiveness. Global competitivenessranking. The World Economic Forum(WEF) i s often cited: its Global CompetitivenessReport 2004-2005 (WEF2004a) assesses the comparative competitive strengths and weaknesses of 104 industrializedand emerging economies. The report includes two major competitiveness indexes-the Growth Competitiveness Index (GCI) and the Business Competitiveness Index (BC1)-which are designedto enhanceunderstanding of the key factors that determine economic growth and explain the greater success of some countries than others inraising income levels and opportunities for their respective populations and, in so doing, joining the upper ranks of international competitiveness. The Growth CompetitivenessIndex (GCI) i s intended to gauge the ability of the world's economies to achieve sustainedeconomic growth inthe mediumto long term. The GCIidentifies three important areas inthe evolution of growth inacountry: quality of the macroeconomic environment, state of public institutions, and level of technological readiness.In2004 Finland was the most competitive economy of 104countries, holding this position for the third time in the past four years. It is very well managed at the macroeconomic level, but also scores very high inmeasures assessingthe quality of its public institutions. Furthermore, the private sector shows a high proclivity for adopting new technologies and nurturing a culture of innovation. The UnitedStates ranked second: its overall technological supremacy was partly 15 offset by weaker performance in areas that capture the quality of its public institutions and the stability of its macroeconomic environment. Interms of other countries, in2004 Korea ranked 29th and China 46th. India came in at 55th, mainly because it has outperformed many countries interms of its strong economic growth inrecent years, followed by Brazil at 57th and Polandat 60th. India also ranked 55th (of 102 countries) in2003. Delvinginto the reasons for India's ranking shows that its macroeconomic environment and quality of public institutions (two of the three components measuredby the index), for which India i s ranked 52nd and 53rd, respectively, are slightly stronger than its averageranking. These overall ranks are boosted by several strong areas inthe macroeconomic environment, such as the facility of obtaining access to credit (for which Indiaranked 2nd) and low expectations of a recession (also ranked 2nd). Interms of the quality of public institutions, judicial independenceand property rights (where India ranked32nd and 34th, respectively) are also considered competitiveadvantagesfor India. Inthe technology component of the GCI, Indiaranked 63rd of 104countries. Although India faredwell in prevalence of foreign technology licensing (where it ranked 8th) and government prioritization of ICT (ranked 9th), it still helda comparatively lower positioninterms of ICT, for which it i s disadvantagedby the number of cellular telephones (ranked 94th) and Internet hosts (ranked 91st) (WEF2004b). Again, this fact underscoresthe point that, eventhoughIndia has beenmakingtremendous strides inimproving its information infrastructure, the world as a whole has moved ahead much faster, so that in relative terms, India has fallen behind. TheBusiness CompetitivenessIndex (BCI) emphasizes a range of company-specific factors that are conducive to improved efficiency and productivity at the micro level. The BCIcomplements the medium- term, macroeconomic approach of the GCIand evaluates the underlying microeconomic conditions defining the current sustainablelevel of productivity ineach of the countries covered. The underlying concept i s that, although macroeconomic and institutionalfactors are critical for national competitiveness, they are necessarybut not sufficient factors for creating wealth (which i s created at the micro level by companies). The BCIcomprises two subindexes: one focuses on company operations and strategy ranking and the other on the quality of the businessenvironment inwhich a nation's firms compete. India has greatly improved its performance on the BCI inthe latest WEF 2004-05 report. India ranked 30th in 2004, compared with 37th inboth2002 and 2003 and 36th in2001. Inthe 2004 rankings, India did better than Brazil (38th), China (47th), Poland (57th), and Russia (61st). Inthe subindexes, India ranked30th incompany operations and strategy and 32ndinthe quality of the national business environment; thus, despite markedimprovement inIndia's overall BCIranking, the subindexes show that India has more to do inbusiness environment and company sophistication, public administration effectiveness, and marketingto enhance its overall business competitiveness. Globalization ranking. Globalization also adds to the pressures for economies to strengthen their internationalcompetitiveness. Debate continues on whether countries should globalize and whether globalizationcan be a positive force for development. Whatever the stance, it seems that globalization i s here to stay. Many countries, includingChina, have decided that opening up their economies to trade in goods and services i s one way to lift their people out of poverty. These countries are now focusing their efforts on how to globalize inthe most stable and advantageousmanner; some prefer to go faster, and some more slowly. 16 The Globalization Index,' developed by A. T. Keamey and Foreign Policy magazine, uses several indicators spanning IT, finance, trade, personal communications, politics, and travel to determine a country's ranking. The 2004 Globalization Index ranked 62 countries for 14variables grouped infour baskets: 0 Economic integration: trade, foreign direct investment, portfolio capital flows, and investment income 0 Technological connectivity: Internet users, Internet hosts, and secure servers 0 Personal contact: international travel and tourism, internationaltelephone traffic, and remittances and personaltransfers (including worker remittances, compensation to employees, and other person-to- person and nongovernmental transfers) 0 Political engagement: memberships ininternationalorganizations, personnel and financial contributions to U.N.Security Council missions, internationaltreaties ratified, and governmental transfers. The 62 countries rankedaccount for 96 percent of the world's GDPand 84 percent of the world's population. Irelandrankedas the most global nation followed by Singapore inthe 2004 rankings. The 2003 index (among 62 countries) placed Zndia at 56thplace, behindChina at 51st, butjust ahead of Brazil at 57th, indicating that India was opting for arather gradual approach interms of its integration into the global economy. But the 2004 survey shows Zndia slippingfurther to 61stplace, behind Brazil at 53rd and China at 57th. Interms ofthefour subcategoriesthat comprise theGlobalizationIndex,Indiaranked51stinthe economic ranking, 53rd inthe personal ranking, 55th inthe technological ranking, and 57th inthe political ranking. Other comparator countries ranked as follows inthe 2004 GlobalizationIndex: Poland (31st), Korea (32nd), and Russia (44th). Road M a p for the Report: Strengthening the Four Pillarsof the Knowledge Economy This chapter has highlightedrecent economic trends that will impact India's economy, the importance of the knowledge economy indevelopment, and overall opportunities and challenges India faces as it moves toward becomingknowledgebased. The next four chapters (2-5) delve into specific challenges India faces in strengthening eachpillar of the knowledge economy, identifying relative strengths and weaknesses ineach and capturing factors that can contribute to India's effective transition to aknowledge economy. Each chapter includes a benchmarking assessment, comparing India's current position with those of relevant comparator countries, issues and recent developments relating to each pillar, measuresto strengthen that pillar, and a summary of issues and recommendations. Followingthis review of the four pillars, chapter 6 summarizes several Indian initiatives on the knowledgeeconomy and looks at ways of developing a consultative process to stimulate a greater sense of the importance of the emerging policy agenda on the knowledge economy inIndia to enhance its growth and competitiveness. The chapter highlightsthe need for coordination among government (both central and state), the private sector, and civil society for Indiato harnessknowledge and expertise for the benefit of all. The 2004 GlobalizationIndex i s available at http://www.foreignpolicy.com/story/files/story2493.php?PHPSESSID=Ol90al349088fbc190e4e2475333399d. 17 2. ECONOMIC AND INSTITUTIONAL REGIME, INCLUDING GOVERNANCE Taking advantage of the potential offered by the knowledge revolution hinges on having an effective economic incentive regime and institutionsthat promote and facilitate the redeployment of resources from less efficient to more efficient uses. The economic and institutional regime allows organizations, people, and institutionsto adjust to changing opportunities and demands inflexible and innovative ways. This i s the first and, in a sense, fundamental pillar of the knowledge economy, becauseinthe absence of a strong economic incentive and institutional regime that deploys resources to productive uses, it i s possible to have a strong educational base, highly developed R&D infrastructure, or global niches inIT, but miss out on the full benefits of these achievements. Key elements of the economic and institutional regime includemacroeconomic stability, competition, regulatorypolicies, and legalrules and procedures that are conducive to entrepreneurship and risktaking. A key feature is the quality of government, becauseits integrity and effectiveness determine the basic rules of a society. Another important element i s the extent to which the legal system supports basic rules and property rights. An effective economic and institutional regime includes having a competitive environment that stimulates improved economic performance, a financial system that mobilizes and allocates capital to its most productive uses, flexible labor markets includingsupport for improving the skills of the labor force, and effective safety nets to facilitate adjustment to constant restructuring. This chapter looks at key elements of the economic and institutional regime for India, includinggovernance issues. Benchmarkingthe EconomicandInstitutionalRegime Compared with the rest of the world, India has improved its relative position on this pillar (Figure2-1). India leads the South Asia and Africa Regions, as well as China on its economic and institutional regime between 1995 and the most recent period for which data are available. Huang and Khanna (2003) cite several strengths of India's economic and institutional regime compared with China: democracy; a tradition of entrepreneurship; a much stronger infrastructure supporting private enterprise; capital markets that operate with greater efficiency and transparency than inChina; a legal system, although not without substantial flaws, that i s considerably more advanced; flourishing entrepreneurship and free enterprise; and an independentjudiciary. Property rights are not fully secure, but the protection of private ownership i s certainly far stronger than in China; the rule of law, a legacy of Britishrule, generally prevails; and corporate governance has improved dramatically. 18 Figure 2-1: India and the World: Positions in the Economic Incentive Regime, 1995 and Most Recent Period 10 g- a- 7 - 6 - 2u 5- c 3 - 2 - Argentina 0 1 2 3 4 5 6 7 8 0 1995 Note: Countries above the 45-degree line have improved their position inthe economic incentive regime for the most recent periodfor which data are available relative to their position in 1995 (or closest available date in the mid-1990s) and vice versa for countries below the line. Source: World Bank, "Knowledge Assessment Methodology," http://www.worldbank,org/kam. Figure 2-2: India's Scorecard on the Economic Incentive Regime, Selected Variables, Most Recent Period Gross CapitalFormation(22.90). . (41 .On) Press freedo neral Gov't budget balance as % of GDP (-6.10) (32.00) Domesticcredit to private sector (% of Trade as % of GDP (30.82) GDP) (5.60) Localcompetition Tariff 8; nontariff barriers (2.00) (14.90) Exports of goods and services as % of G ellectualProperty is well protected (3.50) (4.70) Soundness of banks Note: Each of the 80 variables inthe KAM,including qualitative surveys on certain variables by the World Economic Forum, is normalized on a scale of 0 to 10for 128 countries. The fuller the scorecard, the better poised a country i s to embrace the knowledge economy. But an economy should not necessarily aim for a perfect score of 10on all variables. This i s because the scorecards may be shaped by the particular structural characteristics o f an economy or by trade-offs that characterize different development strategies. Values inparentheses denote actual values for India for the most recent period for which data are available. Source: World Bank, "Knowledge Assessment Methodology," http://www.worldbank.or&am. 19 Figure 2-2 shows several variables that are related to India's economic and institutionalregime as presented inthe KAM.Annex 6 provides the scorecards for other comparator countries for this pillar. Figure2-2 shows that India is characterizedby relatively low levels of investment-23 percent compared with Korea's 31percent and China's 39 percent-but its investment rates are comparable to those of Poland, Russia, and Brazil (all between 21 and 22 percent). Trade as apercentageof GDP i s not high (almost 31percent compared with 55 percent inChina, but better than about 29 percent inBrazil); its exports of goods and services at about 15 percent, although comparable to Brazilat 15.5 percent, are less than half those inChina (33 percent). India i s a relatively closed economy, as shown by its low ranking on tariff and nontariff barriers. Qualitative surveys on certain variables by the World Economic Forum includedinFigure 2-2 suggest that India has muchmore to do to strengthenits intellectual property rights regime. India also ranks rather low on the soundness of banks, but does muchbetter when it comes to the intensity of local competitioninthe country, inwhich it outshines all comparator countries. India does have a free and diverse press, publishedinHindi, English,and vernacular languages.In2001, for example, 5,638 daily newspapers operatedwith a combined circulation of 57.8 million copies and 45,974 periodicals with a total circulation of 56.9 million (EIU2003a). BenchmarkingGovernance Governance can be broadly definedas the set of traditions and institutions by which authority ina country i s exercised. This includesthe process by which governments are selected, monitored, and replaced; capacity of the government to formulate and implement sound policies effectively; and respect of citizens and the state for the institutionsthat govern economic and social interactions among them. Inrecent years, many measureshave beendeveloped to capture governance dimensions incountries. The World Bank Institute has developed succinct "snapshots" that trace six areas of governance for almost 200 countries from 1996 to the present (World Bank 2002b). These include the following: Regulatory quality measures the incidence of market-unfriendly policies, such as price controls or inadequatebank supervision, as well as perceptions of the burdens imposed by excessive regulation in areas such as foreign trade and business development. Rule oflaw measures the extent to which agents have confidence in and abide by the rules of society. These include perceptions of the incidence of both violent and nonviolent crime, effectiveness and predictability of thejudiciary, and enforceability of contracts. Government eflectiveness combines into one grouping perceptions of the quality of public service provision, quality of the bureaucracy, competence of civil servants, independence of the civil service from political pressures, and credibility of the government's commitment to policies. Voice and accountability relate to various aspects of the political process, civil liberties, and political rights, and measures the extent to which citizens of a country are able to participate in selection of governments. Also includedare indicators measuring the independenceof the media. Political stability measures perceptions of the likelihood that the government inpower will be destabilized or overthrownby possibly unconstitutionalmeans or violent means. Control of corruption corresponds to "graft" measures of corruption and i s measured by the frequency of "additional payments to get things done" and the effects of corruption on the business environment. Figure2-3 presents governancecharts for (a) India between 1998 and 2002, (b) Indiacompared with the South Asia Region (2002), and (c) India compared with countries at its level of income (2002) (annex 7 presentsthe underlying data). 20 These figures show a mixed picture of the various governanceindicators for India.7InFigure2-3a, between 1998and 2002 India maintained its rankmgs on only three of the six variables: government effectiveness, regulatory quality, and voice and accountability, but fell on the other three. Short-term determinants of changes between 1998and 2002 inpolitical stability may include escalating tension with Pakistan, especially after the terrorist attack on the IndianParliament inDecember 2001. Perceptions of a decline inthe rule of law could be fueled by civil unrestcausedby riots in Gujarat inFebruary 2002 (Freedom House 2003), fear of armed conflict with Pakistan, and rise inorganized crime and extortion, particularly inMumbai. The low ranking on control of corruption could result from frustration with the ability of government to sanction corrupt officials through formal channels.The Indianpress and public opinion have increasingly been particularly concerned about problems of corruption inpublic life. These are, of course, only tentative and possible explanations for these rankings and, therefore, deserve further analysis. Regarding regional and income-level comparisons, Figure2-3 (b)and (c) for 2002 show that India leads the SouthAsia Regionas well as the low-income countries on all governance dimensions, except for political stability. The reasons for this are hardto discern, but one possible explanation may be that the data for these variables were taken from a time inthe recent past when tensions with Palustan were escalating. Again, this aspect deserves further analysis. Figure2-3: Governance Comparisons:India (1998 and 2002), with SouthAsia (2002), and with Low-Income Countries (2002) (a) India: 1998 and 2002 Regulator) @lalit). Comparisonbetwen 2002 (inside black line) and 1998(outside gray line) The govemance indicators presented inFigure 2-3 (a, b, and c) reflect the statistical compilation of responses on the quality o f govemance given by a large number o f enterprise, citizen, and expert survey respondents in industrial and developing countries, as reported by a number of survey institutes, think tanks, NGOs, and international organizations. Countries' relative positions on these indicators are subject to margins of error that are clearly indicated; consequently, precise country rankings should not be inferred from these data. The 2002 confidence range at 90 percent i s depicted by the dotted lines (Kaufmann, Kraay, and Mastmzzi 2003). 21 (b) Indiaand South Asia, 2002 Voice and accountitbility Iill1 Regulal& quality Compariso~lo f India(outside black linc) with rcgionalaverage(South Asia. inside gray line) and country's pcrccnlilc rank (0-100) (c) India andLow-IncomeCountries,2002 Voice and accounta.bilit)i too Regulatot?; qualit? Compnrismiof India(outside black line) nith incomecategory average (low income, inside gray line) and country's perconrile rank (0-100) Source: Kaufmann, Kraay, and Mastruzzi (2003). IssuesandRecentDevelopmentsinthe Economicand InstitutionalRegime India has tremendous possibilities for increasedeconomic growth. The country is endowed with several intrinsic advantages:macroeconomic stability, a large domestic market, a large andrelatively low-cost and skilled workforce that should allow the country to emerge as a major hubfor manufacturingand service industries, a critical mass of well-educated workers inengineering and science, and abundant raw materials. India's growth, however, is hampered by several factors: declining productivity of the public sector, relatively low integration into the global economy, limited levels of FDI,an investment climate that needs strengthening, and weak infrastructure. Whether India can achieve the ambitious target of increasing its growth rate to an average of 8 percent between 2002 and 2007, as set out in its Tenth Five- 22 Year Plan (India, PlanningCommission 2002e), is crucially dependent on progress it can make ineach of these areas. Given the importance of the economic and institutional regime for the functioning of the economy as a whole, this section reviews issues and recent developments related to this pillar that are critical to India's progress toward becoming a knowledge economy. Dismantling barriers to growth. For the past decade, India's GDP has been growing at approximately 6 percent a year, compared with 10percent in China. Keeping this inmind, in2001 the McKinsey Global Institute examined India's economy to see what was holding it back and which policy changes would accelerateits growth to matchthat of China (DiLodovico and others 2001). The study found three main barriers to faster growth inIndia: multiplicity of regulations governing product markets, distortions inthe market for land, and widespread government ownership of businesses (Figure 2-4).8 Figure2-4: EliminatingBarriersfor Faster GrowthinIndia (percent) Currentgrowth rate 5.5 Regulations goveming product markets Distortions in landmarket 1 3 4 `1.3 ~ Govemmentownership of businesses 0.7 Other, incl.transportation, infrastructure,and labor laws POTENTIALGROWTH RATE 10.1 Source: Based on a chart inDiLodovico and others (2001) The authors contend that these three barriers have a depressingeffect, becausethey protect Indian companies from competition and thus from pressuresto raise productivity. The authors calculate that these three barriers together inhibitGDP growth by more than 4 percent a year. Removing them would free India's economy to grow as fast as China's, that is, at 10percent a year. Some 75 millionnew jobs would be createdoutside agriculture, enough not only to absorb the rapidly growing workforce, but also to reabsorb the majority of workers displaced by productivity improvements. Inaddition, if each Indian * For thestudy, the authors examined 13 sectors indetail: two in agriculture, five in manufacturing, and six in services, which taken together, accounted for 26 percent o f India's GDP and 24 percent of its employment. The study notes the following points: (a) Product market barriers include unfaimess and ambiguity o f policies; uneven enforcement; a number o f products that are reserved for small enterprises; restrictions on FDIin certain sectors of the economy such as retailing, which closes off fruitful sources of technology and skills; and licensingrequirements that stifle competition. These rules and policies goveming different sectors of the country's economy impede GDP growth by 2.3 percent a year. (b)Close to 1.3 percent o f lost growth a year results from distortions inthe landmarket, which include unclear ownership; counterproductive taxation; andinflexible zoning, rent, and tenancy laws. (c) Govemment ownership o f businesses i s yet another barrier, as govemment-controlledentities still account for around 43 percent of India's capital stock and 15 percent of employment outside agriculture. Their labor and capital productivity levels are well below those of their private competitors, because public-sector managers experience little performance pressure. India's electricity sector i s an example of inefficient govemment control. The study estimates that privatizing state electricity boards would save govemment subsidies amounting to almost 1.5 percent of GDP and oblige managers to improve their financial andthus operational performance (DiLodovico andothers 2001). 23 state could attain best practice inIndia interms of investment climate, the economy could grow about an estimated 2 percentage points faster. The McKinsey report outlines various policy changes that would help dismantle these critical barriers to higher productivity and growth. The report suggests eliminating the practice of reserving products for small-scale manufacturers, rationalizing taxes and excise duties, establishing effective and procompetitive regulation as well as powerful independent regulators, reducingimport duties, removing restrictions on foreign investment, reforming property and tenancy laws, and undertaking widespread privatization. Raising public sector productivity. Another major constraint to achieving higher rates of GDP growth in India i s the low level of productivity of the large Indian state sector. The state employs 70 percent of the 27 million workers in organized employment inIndia, which constitutes less than 7 percent of total employment. Most public-sector enterprises are overstaffed, debt ridden, and inefficient. A highlevel of unionization has also restricted labor reforms, which has deterred potential investors. Promises to implementthe "exit policy," which would permit owners of enterprises that employed up to 1,000 staff to shedworkers without government approval, as well as to allow contract employment, have not been fulfilled. The government, however, has made a modest, yet decisive, beginning inprivatizing public enterprises by selling some major companies inthe past two years. India's private sector companies have also responded positively to the reformprocess; mergers in several sectors have helpedto improve efficiency (EIU2003a). Deepening India's integration into the global economy. The 1990shas seen progressive integrationof the Indian economy into the global economy, albeit on a gradual scale. Inthe early 1990s, liberalization of investment, trade, and foreign exchangeregimes stimulated industrial and services growth and investment. The real depreciation of the rupee after the 1990-91 crisis promotedexports, and reduction of import barriers allowed more foreign goods into the country. But,as has beennoted, India is still arelatively closed economy compared with other Asian economies, where exports account for a much larger share of GDP (33 percent in China and 38 percent inKorea, compared with only 15 percent inIndia in2003). India is, therefore, somewhat protected from global trends; the downside i s that it does not benefit from stronger foreign competitive pressures to improve performance or from the ability to draw on more cost-effective foreign inputs, such as capital goods, components, products, or foreign investment, which embody more advanced knowledge. As a result, India is losing market share to its major competitors, especially China where reforms have moved ahead muchmore rapidly. Tariff protection inIndia i s still higher than inmost developing countries (Table 2-1).To speed up trade reform and be able to export, Indianfirms needto be allowed to import the materials and technology they need. Table 2-1: CustomDuty RatesinIndiaand Other DevelopingCountries,VariousYears All Goods Agriculture Manufacturing India 2001/02(CD only) 32.3 41.7 30.8 India 2002/03(CD only) 29 40.6 27.4 India 2002/03(CD+SAD: est.) 35 47.1 33.3 India 2003/04(CD+SAD: est.) 32.7 46.8 30.7 Brazil 2000 14.1 12.9 14.3 China 2000 16.3 16.5 16.2 SouthKorea 2000 12.7 47.9 6.6 105 developing countries (1996-2000) 13.4 17.4 12.7 Notes: Unweighted average rates. CD = customs duty, SAD = special additional duty. Source: World Bank (2003d). 24 Greater import liberalizationby reducingaverageimport tariffs and phasing out tariff exemptions so Indian firms can gain access to imports at world prices would also help further encourageexports. The government has many well-justified concems about the policies of other countries that createbarriers to imports from India. India is one of the most active developing countries inraisingthese concerns in internationalforums, such as the WTO. Although India has some bargaining leverage to gain concessions from other countries, it should also use the WTO processto advance domestic reforms and protect them from local pressure groups. Inparticular, the government should move aggressively to reduce import tariffs to a single rate (e.g., 10percent) inthe next few years and phaseout remainingtariff exemptions, specific tariffs, and antidumping duties (World Bank 2003d). Encouraging exports. As shown inFigure 2-5, India's share of world merchandise exports i s very modest: it increased from 0.5 percent in 1980to 0.73 percent in2003, compared with an increasefrom less than 1 percent to 5.86 percent for China duringthe same period. Figure 2-6 shows the distance that India needs to cover to match China's performance interms of merchandise exports. In2002 China's merchandise exports totaled a high$325.6 billion as opposedto $49.3 billion for India.Except for Poland, all other comparator countries do better than India. Figure2-5: Shareof WorldMerchandiseExports,India and Comparators, 1990-2003 (percent) % 6 5 - 3 1 .~~. . . . . .. .. -._.._... ...._.' . .. -..... .. _.- . ~ . - . . .. . . ....- -Korea O ! 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Source: World Bank staff analysis undertakenusingWorld Bank internal database. 25 Figure 2-6: Merchandise and Service Exports, India and Comparators, 2002 Billions of US$ 0Merchandise 250 200 India China Brazil Korea,Rep Mexico Poland Russian Federation Source World Bank SIMA Database. Interms of service exports, even though the gap exists, it is comparatively not as large betweenIndiaand China, as inthe case of merchandise exports. This i s borne out inFigure 2-7, which shows the evolution o f India's service exports among 1982, 1995, and 2002. India has been making rapid strides recently, especially inthe communications and computer sector, as amply evident from the 2002 data. China, on the other hand, has beenmaking rapid progress inrecent years inramping up its services exports, in particular, inthe travel services sector. Figure 2-7: Service Exports, India and China, 1982,1995, and 2002 351 Billions of US$ 40 - 1 ___ ~~ OCommunications,computer, etc .Insurance and financial services 1 I oTransport sewices OTravel sewices I - 30 25 ' l l 20 .... 15 4 10 + India 1982 India 1995 lndla 2002 China 1982 China 1995 China 2002 Source; World Bank SIMA Database. 26 Stimulatingforeign direct investment. FDIi s a proven facilitator o f rapid and efficient transfer and cross- border adoption o f new knowledge and technology. Their complementary and catalytic role ina world of increasedcompetition and rapid technological change can be valuable for spumng g r ~ w t hIf . ~size o f the market and growth potential are two important factors in attracting FDIinvestments into an economy, India's potential i s quite promising. But, even thoughFDIhas increased several times compared with before liberalization o f the economy, the numbers are still fairly small on a global scale. After reaching a highof 1percent of GDPin2001, gross FDIinIndia as a share of GDPfell to 0.7 percent in2002, much lower than inChina (4.7 percent) or Brazil (4.4 percent) (Figure 2-8). The recently released World Znvestment Report 2004 (UNCTAD 2004) indicates that FDIflows to India rose by 24 percent between 2002 and 2003, due to its strong growth and improved economic performance, continued liberalization, market potential, and growing competitiveness or Indian IT industries. In2003 India received $4.26 billion in FDI, compared with $53.5 billion for China." China's FDIflows are primarily capital intensive, whereas IndianFDIflows are smaller and skill intensive, concentrated inIT areas. UNCTADhas also developed an Inward FDZ Pe$onnance Index, which ranks countries by the FDIthey receive relative to their economic size, calculated as the ratio o f a country's share inglobal FDIinflows to its share in global GDP (UNCTAD 2004).l' Among the major developing countries, China i s ranked 37th-an improvement from its previous rank o f 50th, and India i s ranked 114th-a gradual improvement compared with 121stinthe previous year. Although it i s true that FDImay transfer production capabilities quickly and efficiently, it may not necessarilytransfer design or innovation capability, particularly when the parent company uses affiliates to exploit the local market inthe host country. It i s thus very important for acountry to notjust attract foreign investment, but develop policies that can encourage significant positive spillovers to the economy interms of training local personnel, developing backward and forward linkages, improving quality, and contributingto access to global technology, management, markets, and distribution systems. lo all For of Chna's success in attracting FDI,the way China's FDIi s measuredraises some concems. Many analysts have pointed to the possibility of "round tripping": muchof what i s counted as FDIinChina i s actually Chineseinvestment that goes to Hong Kong and Singaporeandcomes back as FDI,to take advantage of more preferential treatment given to foreign investments.According to arecent article in ?-he Economist (ZOOS), besides FDI, India attractsseveral billion dollars ayear in portfolio investment ($9billion in2004. It also draws inbillions of dollars indeposits from nonresident Indians ($33.3 billion in 2004). Adding t h s up, India i s notSO far behindChina-especially if one allows for Chinese domestic investors "round tripping," that is, using foreign vehicles to take advantage of tax breaks. These index rankings are, of course, quite different from those given by the values of FDIinflows. For instance, despitebeing the largestrecipient of FDI, the UnitedStateshas always rankedcomparatively low relativeto its GDP. In2003 it ranked112th, a sharp deterioration comparedwith the previous period when it ranked92nd. The decline reflects a sharp drop ininward mergers and acquisitions, whereas GDP remainedrelatively steady. 27 Figure 2-8: Gross ForeignDirectInvestment as Percentageof Gross DomesticProductfor India, Comparators, and the World, 1980-2002 % _ _ _ _ _ _ _ _ _ _ _ _ _ .---- ---- -I - - *-- ,----- 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 Note. The spike expenencedby the world in2000 was due to a peak inmergersandacquisitions inmany developedcountnes Source. World Bank SIMA Database The 2004 Foreign Direct Investment Conjdence Index by A. T. Keamey (see http://www.atkearney.com/shared~res/pdf/FDICIOct_2004_S.pdf) also highlights China's continued attractiveness for FDI.But India's stock is rapidly rising: it i s ranked third inthis most recent survey (up from sixth a year ago), just behindthe UnitedStates. According to the survey, China and Indiadominate the top two positions for most positive investor outlook, likely first-timeinvestments, and most preferred offshore investment locations for BPO functions and IT services. Compared with other large emerging markets, China and India are cited by chief executive officers (CEOs) as the most attractive FDI destinations inthe short term (next three years) and well into the future, beating markets such as Brazil, Mexico, and Polandfor medium-termattractiveness ten years out; however, according to the survey, global investors view these two destinations as distinctly different markets: China as the world's leading manufacturer and fastest growing consumer market and India as the world's business process and IT servicesprovider with longer-termmarket potential. Interms of the kinds of activities that will be moved offshore to China and India, investors indicatedthat China leads inmanufacturing, whereas India leads in IT, business processing, andR&D investments. Investors favor China over India for its market size, access to export markets, government incentives, favorable cost structure, infrastructure, and macroeconomic climate. These same investors, however, cite India's highly educated workforce, management talent, rule of law, transparency, cultural affinity, and regulatory environment as more favorable than China's. Several plausible reasonsexist for the FDIgap between China and India. China's total and per capita GDP are higher, making it more attractive for market-seeking FDI.Its higher literacy and education rates also suggest that its labor i s more skilled, making it more attractive to efficiency-seekinginvestors. It also has a large domestic market and an environment from which it i s easy to export. China also has an advantage interms of its infrastructure. Compared with India, China has ten times as much of expressway 28 (30,000 lulometers or 19,000 miles) and six times as many mobile and fixed-line telephonesper 1,000 people. The cost of power i s also about 39 percent lower inChina than inIndia (The Economist 2005). China's success inattracting FDIi s no doubt also partly attributable to the fact that it has a wealthy Diaspora. From 1985 to 1996, two-thirds of China's FDIcame from HongKong, Macau, and Taiwan. India also has an impressive Diaspora, which seems to be growing more important. Box 2-1 highlights this fact and notes that India's conducive economic and institutional regime should allow it to attract greater FDIby tapping the Diaspora inthe future. India also has an advantage intechnical manpower, particularly inIT. Its better English language skills serve as an attraction for FDI,and Indiahas a vibrant domestic enterprise sector. Inaddition, the Indian government i s planning to open some more industries for FDIand further relax the foreign equity ownership ceilings. Box 2-1: Foreign Direct Investment: A Tale of Two Countries [ndiahas not attracted anywhere near the amount of FDIthat China has. Huangand Khanna (2003) note that this iisparity reflects inpart the confidence international investors have inChina's prospects and their skepticism about [ndia's commitment to free market reforms. But the FDIgap i s also a tale of two Diasporas. China has a large and wealthy Diaspora that has long been eager to help; incontrast, the Indian Diaspora has been much less willing to invest back home. India, however, has managed to spawn a number of firms in the most cutting-edge, knowledge- based industries (in software, Infosys andWipro and, inpharmaceuticals and biotechnology, Ranbaxy and Dr. Reddy's Laboratories). In2002, the Forbes 200, an annual ranking of the world's best small companies, included 13 Indianfirms, butjust four from mainland China. China has been far bolder with external reforms, but has imposed substantial legal and regulatory constraints on indigenous, private firms, mainly to prevent private domestic businessesfrom challenging China's state-owned enterprises. India has developed much stronger infrastructure to support private enterprise. Its capital markets operate with greater efficiency and transparency than do China's. Its legal system, although not without substantial flaws, i s considerably more advanced. It i s true that privatization i s proceeding at a glacial pace, but the government has ceded its monopoly on long-distance phone service, some tariffs have been cut, bureaucracy has been trimmed a bit, and a number of industries have been opened to private investment, including investment from abroad. As a consequence, entrepreneurship and free enterprise are flourishing. Ina survey of leading Asian companies by the Far Eastern Economic Review, India registered a higher average score than any other country inthe region, including China. (The survey polled more than 2,500 executives and professionals ina dozen countries, who were asked to rate companies on a scale of one to seven for overall leadership performance.) Only two Chinese firms had scores high enough to match India's top ten list. All of the Indian firms were wholly private initiatives, whereas most of the Chinese companies had significant state involvement. According to the authors, democracy, a tradition of entrepreneurship, and a decent legal system have given India the underpinnings necessary for free enterprise to flourish. Although India's courts are notoriously inefficient, they at least comprise a functioning independent judiciary. Property rights are not fully secure, but the protection of private ownership is certainly far stronger than in China. The rule of law, a legacy of Britishrule, generally prevails. These traditions and institutions have proved an excellent springboard for the emergence and evolution o f India's capital markets. Intheir article, the authors refer to World Bank data that showed that only 52 percent o f the Indian firms surveyed reported problems inobtaining capital, compared with 80 percent of the Chinese companies polled. As a result, Indianfirms relied much less on internally generated finances: only 27 percent of funding came through operating profits, compared with 57 percent for the Chinese firms. Corporate governance has improved dramatically. Ina survey of 25 emerging market economies conducted in2000 by Credit Lyonnais Securities Asia, India ranked sixth in corporate governance and China 19th. The advent of an investor class, coupled with the fact that capital providers, such as development banks, are themselves increasingly subject to market forces, has bolstered the efficiency and credibility of India's markets. Apart from providing the regulatory framework, the Indian government has taken a back seat to the private sector in credit allocation. In China, incontrast, bureaucrats remain the gatekeepers, tightly controlling capital allocation and severely restricting the ability of private companies to obtain stock market listings and access the money they need to grow. These policies have produced enormous distortions, while preventing China's markets from gaining depth and maturity. 29 Compounding the problem are poor corporate governance and the absenceof an independent judiciary. The question remains: IfIndia has so clearly surpassedChina at the grassroots level, why i s India's superiority not reflected in the numbers?Part of the reason may be that India's economic reforms only began in earnest in 1991, more than a decade after China began liberalizing. India has had to make do with a national savings rate half that of China's and 90 percent less FDI.Moreover, India i s a sprawling, messy democracy; China, on the other hand, has enjoyed two decades of relative tranquility and has been able to focus almost exclusively on economic development. The real issue, of course, is not where China and India are today, but where they will be tomorrow. The answer will be determined in large measureby how well both countries utilize their resources. I Source: HuangandKhanna(2003). Although China has benefited from an FDI-led growth strategy, India has clearly placedits bets on buildingdomestic capacity. But, even so, despite the improvement inIndia's policy environment, multinational FDIinterest remains rather narrow, even in promising areas such as IT and communications technology. Various reasons exist for the continued caution o f foreign and Indian investors. Structural impediments to investment inIndia have been eased but not removed; they include restrictive labor laws that make it hard to shed staff. Despite improvements in some areas, the deficiencies inIndia's infrastructure-roads, electricity, and water supply-have not been fixed. Laws complicating land transactions and the labyrinthine intricacies and glacial pace of litigation are further deterrents, as i s a cumbersome and corrupt bureaucracy that adds time and cost to almost any commercial project. The Indian government has also had a rather cautious approach to opening the economy further inrecent years, as it wishes to avoid a repetition of the balance-of-payments crisis o f the early 1990s. Domestic vested interests, concerned about their ability to compete against foreign companies, are said to increasingly resist further trade liberalization. These interests must be balanced with India's ambitions to harvest the benefits o f increasedinternational trade and FDIto spur continued growth. Box 2-2 provides examples o f sectors inwhich FDIi s permitted inIndia and China. Box 2-2: Foreign Direct Investment Policies in India and China India limits foreign investment insome sectors of the Indian economy, such as insurance and the media, to a minority stake. Inothers, such as retail, it i s not allowed. The recent FDISurvey 2004 by the Federation of Indian Chambers of Commerce and Industry (FICCI) identified five areas inwhich a dedicated effort by the government would result instrong FDIinflows into India inthe near to medium term. These include I T and related services, chemical and chemical products, rubber and plastic products, electrical machinery and apparatus, and the services sector. InIndia, FDIi s not permitted in atomic energy and railway transport. Inthe power sector, FDIup to 100 percent i s allowed for all activities, except nuclear power. Ininfrastructure, such as roads and highways, FDIup to 100percent is permitted. Inthe areaof telecoms, in2000 national long-distance service was opened to competition; in2002 internationallong distance and Internettelephony opened to competition, and in2004 the government announced its broadband policy. The government also recently decided to raise FDIinthe telecoms sector from 49 percent to 74 percent. China's accessionto the WTO in2001 has led to the introduction of more favorable FDImeasures. With further liberalization inthe services sector, China's investment environment may be further enhanced. For instance, China will allow 100percent foreign equity ownership in such industries as leasing, storage and warehousing, and wholesale and retail trade by 2004; advertising and multimodal transport services by 2005; insurance brokerage by 2006; and transportation of goods (railroad) by 2007. Inretail trade, China has already opened and attracted FDI from nearly all the big-name department stores and supermarkets, such as Carrefour, Makro, Metro, 7-Eleven, and Wal-Mart). Inaddition to removing trade-related investment measures (TRIMS),China is also opening its service sectors, including financial. Sources: The Economist (2005); FDISurvey 2004, FICCI (http://www.ficci.codficci/surveys/fdi-survey.pdf); "India's InvestmentPoliciesandOutlook," apresentationby UmeshKumar, Joint Secretary,Ministry of Commerce andIndustry, Departmentof IndustrialPolicy andPromotionat the OECD-IndiaInvestment Roundtable, New Delhi, October 19,2004 (http://dipp.nic. idmd investment 191004.pps); Krishnadas(2005); UNCTAD (2003); andOECD (2003). 30 Harnessing the benefits of FDI.Research by the McKinsey Global Institute (Farrell and Zainulbhai 2004) indicates that the FDIinIndia has had a positive impact on the economy. The introduction of foreign competition inIT, business-process outsourcing, and the automotive industryhas prompted Indian companies to revamp their operations and boost productivity, leading some o f them to be globally competitive and, inthe process, contributing to job creation. The World Znvestment Report 2004 noted, for example, that GE Capital was saving $300 million annually by outsourcing services from India, while giving employment to 12,000 people. Consumers inIndiahave also benefited from lower prices, better quality, and a wider selection o f products and services, while domestic demand has increased inresponse to lower prices, for example, inthe automotive industry (Box 2-3). India needs to build on the momentum inthe automobileindustry andreplicatethis success across the economy. The challenge isto increase competition inthe economy, focus on creatingjobs that add higher value, and replacingless productive companies with lower-value-added activities with more productive ones. Box 2-3: Moving Up the Value Chain: India's AutomobileIndustry According to the McKinsey Global Institute, instead of spending tax money to offer financial incentives to foreign investors, governments should use funds to improve transportation networks, power grids, and telecommunications lines. Policy makers must boost competition in the broader economy so companies are compelled to improve their operations, adopt best practices, innovate, and move up the economic value chain. Too often, developing countries concentrate on special economic zones or preferred export industries, while competition languishes inthe remaining sectors.Price controls, tariffs, licensing requirements, and other product regulations limit market entry and reduce competition. As India's $5 billion auto industry demonstrates, the gains from removing these stifling regulations can be dramatic. Twenty years ago, two state-owned carmakers-Hindustan Motors and Premier Automobiles Limited (PAL)-dominated the market and offered few choices. In 1983 the government allowed Suzuki Motor to take a minority stake inajoint venture with the small state-owned automaker Maruti Udyog, and in 1992 nine more foreign automakers were allowed to invest inIndia. This infusiono f new capital and technology created serious competition for the two incumbents, eventually forcing PAL out. The industry, one of the fastest growing inthe world, now produces 13 times more cars than it did 20 years ago. Tata Motors hit a milestone in2004 by exporting 20,000 cars to the United Kingdom, to be sold under the MGRover brand. Meanwhile, prices for consumers in India have fallen by 8 to 10percent annually, unleashing a burst of demand and allowing steady employment despite rapidly rising productivity. Inview of the greater competitive intensity inthe market, India may be better positioned than China to become a low-cost auto-manufacturingbase. None of this would have beenpossible had India's carmakers remained isolated from the world. Source: Farrell,Puron, and Remes (2005) andFmell andZainulbhai(2004). Customizing market entry strategies. According Jain, Manson, and Sankhe (2005), multinational companies are often successful, precisely because they can replicate products and processes and even market-entry strategies across multiple markets. InIndia, however, the performance of the multinationals has been mixed. Many of the MNCs notable for their strong performance elsewhere have yet to achieve significant market positions (or even average industry profitability) in India, despite a significant investment of time and capital inits industries. The reason i s that the market entry strategies that have worked well for these companies elsewhere-bringing intried andtested products and business models from other countries, leveraging capabilities and slulls from core markets, and forming joint ventures to tap into local expertise and share start-up costs-are less successful in India. According to the authors, the most successful multinationals inIndia have been those that did not merely tailor their existing strategy to an intriguinglocal market, but instead customized their products and practices to the Indian market. Inshort, they have resisted the instinct to transplant to India the best o f what they do elsewhere, even going so far as to treat the country as a bottom-up development opportunity. With less of a focus on initial entry and with a long-termview of what a thriving Indianbusiness would 31 look like, the more successfulcompanieshave been investingtime and resources to understand local consumers and business conditions: (a)tailoring product offers to the entire market from high-endto middle and lower-end segments, (b)localizingproduct offerings to meet Indian consumer preferences,(c) reengineering supply chains, for example, by buying components from cheaper Indian suppliers, rather than importing more expensive ones from their usual suppliers elsewhere, (d) even skippingthejoint- venture route, becausemany times, the local partner has not been in a position to invest enough resources to enlarge the businessas quickly as desiredby the MNC, and (e) including an Indian CEO intheir local operations who i s capable of tailoring products, supply chains, and distribution systems to the local markets. These companies have also been flexible and participated inthe evolving regulatory process in India as, for example, has happenedseveral times to regulations governingthe mobile-telephony sector in India. Many companies have reapedrewards. Of the 50-plus multinationalcompanies with a significant presenceinIndia, the nine market leaders who have taken this customized approach, includingBritish- American Tobacco, Hyundai Motor, Suzuki Motor, and Unilever, have an average return on capital employed of around 48 percent. Even the next 26 have an averagereturn on capital employed of 36 percent. Measuresto Strengthen the Economic and Institutional Regime The above discussion has described anumber of strengths and weaknesses inIndia's evolving economic and institutional regime. Areas in which policy reform could address some of the barriers to faster economic growth are discussedbelow, including improvingthe efficiency of government, encouraging a more conducive investment climate; improving competitiveness by strengthening IPRs and their enforcement; raising access to venture capital; encouraging the private sector to invest, not only to promote growth, but also expand opportunities for the poor; attracting greater FDI; and tackling infrastructure i ssues. Improve the ej'iciency of government. As mentioned, the public sector inIndia i s quite large and rather unproductive. It is important to reduce the role of government inpublicly ownedproductive enterprises and to improve the efficiency of government inits core functions. The latter requires administrative and procedural reforms. One possibility is also to use ICTs more efficiently incarrying out government functions, including for the delivery of social services such as education and health (see Chapter 5). India currently stands at the threshold of a uniqueopportunity regarding governance and public managementreform.l2 It has recently approved a "National Action Planfor E-Governance (2003-07)," which addresses key governance issues at both central and state levels (see http://www.mit.gov.in/actionplan/about.asp). The plan lays the foundation and provides the impetus for long-term growth of e-governance in the country. It seeks to create the right governance and institutional mechanisms, set up the core policies and infrastructure, and implement a number of projects at the center and state levels to create a "citizen-centric'' and "business-centric'' environment for governance. Documents such as the Report of the Conference of Chief Ministers(1997), the Report o f the FifthCentral Pay Commission (1997), the Second Report of the Expenditure Reforms Commission on Optimizing Govemment Staff Strength; andthe Draft Approach Paper to the Tenth Five-Year Plan (2001) articulate a fairly integrated and coherent vision for change. Similar principles are endorsed by various state commissions, in such documents as Andhra Pradesh's "Vision 2020," the report of Karnataka's Administrative Reforms Commission and Govemance Strategy and Action Plan, and Uttar Pradesh's policy papers on governance and civil service reforms, as well as by Maharashtra's One-Man Committee on Good Govemance. Taken together, such documents envision change along several general themes, which are related and mutually reinforcing, including efforts to limit the size, scope, and orientation of government; streamlining organizational structures and decision-making processes; reforming humanresource management practices; improving transparency; enhancing responsiveness and accountability; promoting integrity; and improving service delivery. A n effective program of civil service reform also includes measures to improve citizens' access to information, strengthen accountability, and reduce political interference (Excerpted from Robert Beschel, unpublished manuscript). 32 Many Indian states are also tackling core governanceissues such as public expenditure management, civil service reform, anticorruption, transparency and right to information, and enhanced accountability. The government of Uttaranchal, for example, is beginningto implement an e-governanceprogram, which will involve business process reengineering of various departments and government services to ensure better delivery of development services to the people (State of Uttaranchal2003).Wholehearted implementation of these reforms, including sharing of successfulexperiences across states, could lead to a sea change in the performance of the Indianpublic service, making it more efficient and effective indelivering public servicesto citizens. Encourage a more conducive investment climate. A crucial ingredientfor economic growth is creation of productivejobs and new businesses that can generatewealth, while expanding opportunities for poor people. The discussion above has demonstratedthat companies must be able to adjust to new market conditions and seize opportunities for growth. Cumbersome regulations frequently take this flexibility away (as amply highlightedbelow on the costs of doing business inIndia). Productive businessesthrive where government focuses on the definition and protection of property rights, but when the government heavily regulates every aspect of business activity, businessesoperate inthe informal economy. Regulatory intervention is particularly damaging in countries where its enforcement i s subject to abuse and corruption. Successful economic development i s a process of successive economic upgrading inwhich the business environment ina country evolves to support and encourage increasingly sophisticated ways of competing. According to the World Bank (20041), a good investment climate provides opportunities and incentives for fms-from microenterprises to multinationals-to invest productively, createjobs, and expand and, thus, plays acentral role ingrowth andpoverty reduction. Suchan investment climate encourages firms to invest by removing unjustified costs, risks, and barriers to competition. Investment climate improvements inthe 1980sand 1990shelpedto nearly double private investment as a share of GDP inChina and India (BOX2-4). Box 2-4: InvestmentClimate Improvement:Lessonsfrom China andIndia China and India illustrate some simple lessons about strategies for making investment climate improvements and the importance of even modest initial reforms. China and India have both grown impressively inrecent years, greatly reducing poverty. China's growth i s officially reported at an average of 8 percent a year for the past 20 years, and the shareof its population living on less than $1 a day fell from 64 percent in 1981to less than 17 percent in 2001. India's growth has increased from an average of 2.9 percent a year inthe 1970s to 6.7 percent by the mid-l990s, and the share of its population living on less than $1 a day fell from 54 percent in 1980 to 26 percent in 2000. Yet neither country has an ideal investment climate. China only recently gave constitutional recognition to private property, and its banking sector i s plagued by nonperforming loans. And India has problems inits power sector. Both countries unleashed growth and reduced poverty through what appeared to be fairly modest initial reforms. China began with a rudimentary system of property rights that created new incentives for a substantial part of its economy. India began with early efforts to reduce trade barriers and other distortions that covered a significant part of its economy. Inboth cases the reforms addressed important constraints and were implemented in ways that gave firms confidence to invest. And the initial reforms have been followed by ongoing improvements that addressed constraints that were less binding initially and also reinforced confidence inthe future path of government policy. Source: Excerptedfrom World Bank (20041). The povertyincidenceof 26 percenti s basedon estimates of the Government of India.More details are available inWorld Bank (2003d). Private sector companies inIndia point to a variety of burdens that weigh more heavily on them than their competitors: the cost of power, which is two to three times higherthan elsewhere; the cost of borrowing; redtape and the corruption that goes with it; onerous sales and local taxes; slow and expensive transport; 33 and inflexible labor markets (The Economist 2000). Correctingthese weaknesses constitutes much of the government's reform program. Some progress has been made (especially intelecommunications infrastructure), but more needs to be done to make the environment more stable and attractive to, inturn, make companies more competitive. Efforts are neededto improve India's overall investment climate "writ large."I3 InIndiathe potential gains to growth from removing key investment climate bottlenecks range from an estimated 2 to 4 percent a year. Inaddition, as mentioned earlier, India's TenthFive-Year Plan (India, Planning Commission 2002e) has set ambitious targets for GDP growth (an average of 8 percent per year inthe next decade) and employment creation (100millionnew jobs) to reduce poverty substantially. This requires a step up in domestic investment, particularly inprivate investment, coupled with improvedproductivity. To sustain an 8 percent growth rate inthe long term, while reducingpoverty, India must raise its investment rate to about 30 percent from the current 23 percent. This rise would, inturn, require steep increases inthe ratio of private sector investment to GDP and particularly inthe industrial and service sectors, which have the greatest potential to provide high-wage employment for the labor force now working inagriculture. This will have much to do with the quality of India's investment climate at the national and subnational levels and will also be influencedby how investors rate India's investment climate with other investment destinations inAsia.14 Another recent report by the World Bank and InternationalFinance Corporation(IFC) Doing Business in 2005: Removing Obstaclesto Growth (2004b) looks at the regulationof businesses indepth and investigates the effect of regulationon economic outcomes. The analysis is done on starting a business, hiring and firing of workers, registering property, getting credit, protectinginvestors, enforcing contracts, and closing a business-all critical ingredients of an effective investment climate. These indicators are usedto analyze economic and social outcomes, such as productivity, investment, informality, corruption, unemployment, and poverty, and identify what reforms have worked, where, and why. The Doing Business in 2005 report and related databa~e'~show that inChina the average time taken to secure the necessaryclearances for a startup or complete a bankruptcy procedure i s much smaller than in India. InIndia, entrepreneurs go through 11steps to launch a business within 89 days on average, at a cost l3For India andother developing countries to do well, a host o f other institutional factors and policies classified under the broad heading "investment climate" must complement good macro and trade policies. The quantity and quality o f investment flowing into any country depends on investor expectations and uncertainties on retums.Three broad and interrelated components can shape these expectations: A set of macro or country-level issues concems economic andpolitical stability andnational policy on foreign trade and investment andrefers to macroeconomic, fiscal, monetary, and exchange rate policies as well as political stability. The issue o f efficacy of a country's regulatory framework, as far as firms are concemed, relates to the issues of entry or starting a business, labor relations and flexibility in labor use, efficiency and transparency of financing and taxation, and efficiency o f regulations conceming the environment, safety, health, and other legitimate public interests. The question i s not whether to regulate, but whether such regulations are designed in incentive-compatible ways, avoid adverse selection andmoralhazard, serve the public interest, are implementedexpeditiously without harassment andcorruption, andfacilitate efficient outcomes. The quality and quantity of available physical and financial infrastructure (such as power, transport, telecommunications, and banking) and finance. When one surveys entrepreneurs about their problems andbottlenecks, they will often cite infrastructure issues such as power reliability, transport time and cost, and access and efficiency o f finance as key determinants of competitiveness andprofitability (World Bank 2002~). l4The World Bank i s conducting investment climate surveys (ICSs) for various Indian states. In2003 ICSs were conducted in 12 states: Andhra Pradesh, Delhi, Gujarat, Haryana, Karnataka, Kerala, Maharashtra, Madhya Pradesh, Punjab, Tamil Nadu, Uttar Pradesh, and West Bengal. I t should be noted, however, that employment in the formal sector in India i s very small (as mentioned, there are 27 million workers in organized employment in India) and most business surveys are based on the responses of industries inthe formal sector, which constitute only the tip o f the iceberg. India i s still largely an agricultural economy with a large section of the population inrural areas: this important structural fact must be taken into account in designing these surveys. l5Data are available at http://nu.worldbank.org/DoingBusiness/. 34 equal to 49.5 percent of gross nationalincome (GNI) per capita. Starting a business inIndia requires about the same number of permits as inChina (12), but in China it takes less than half the time (41 days) on averageto take care of all procedures and at a muchlower cost (14.5 percent of GNIper capita). India also has one of the more regulated labor markets in the world, and restrictions on the hiring and firing of workers greatly impede doing business. India's overall Rigidity of Employment Index is 48, higher than inChina (30), butlower than inBrazil(72). InaWorldBank-Confederation of IndianIndustry (CII) survey (World Bank 2002c), the typical firmreported it had 17percent more workers than desired and could not adjust its workforce to a preferred level due mainly to labor laws and regulations. These regulations are a key reasonwhy firms are reluctant to take on new employees. Inaddition, inbothIndia and Brazil, it takes more than 10years to go through bankruptcy proceedings, incontrast to less than six months inIreland and Japan and 2.4 years inChina. Furthermore, Indianlabor laws allow firms far less latitude with their employees than labor code does inChina, Brazil, Mexico, or Russia. On the positive side, India's manufacturing firms face fewer tax and regulatory inspections than f m s inChina and Brazil, and it takes fewer days inIndia to clear customs. Annex 8 provides a detailed snapshot of the business climate inIndia by identifying specific regulations and policies that encourageor discourage investment, productivity, and growth. Various indicators of investment climate also show substantial improvement inIndia between 2000 and 2003. A comparison of key investment climate indicators (the investment climate survey [ICs] of 2000 with the ICs of 2003) shows the reported overstaffing rate inIndianfirms decreasedfrom 16.8 percent to 10.9 percent, indicating more flexible labor markets. Inspections per year declined from 11.7 in2000 to 7.4 in2003; inthe same period, senior managementtime spent on businessregulations and inspectors fell from 16to 14.2, reflecting fewer day-to-day bureaucratic hassles.The averagenumber of days to clear customs fell from 10.3 in2000 to 7.3 in2003. Critical infrastructure indicators have also shown notable improvements. For example, 69 percent of the firms surveyed in2000 reported usingtheir own generators, becausethey could not rely on power from the public grid. By 2003 this number had fallen to 61percent (World Bank 2004d). Box 2-5 delves into more detail on the views of the private sector in Brazil, China, and India on certain aspects of the investment climate that have an impact on productivity and growth.16 l6Basedoninvestmentclimate surveysjointly carriedout by the World Bank and the Confederationof Indian Industry (CII) duringMarchto July 2003, coveringarandomselection of 1860manufacturingestablishments sampledfrom 40 cities in 12 Indianstates, namely, AndhraPradesh, Delhi,Gujarat, Haryana, Kerala, Kamataka, MadhyaPradesh, Maharashtra, Punjab, Tamil Nadu, Uttar Pradesh, andWest Bengal.Basedon shares in aggregate sectoral output, the bulk of the sample was drawn mainly from eight industries:garments,textiles,leather, drugs andpharmaceutical, electronicgoods and equipment, electrical white goods, auto parts, food processing.The survey instrument was a written questionnaire, which shared key moduleswith ICs that the World Bank has sponsoredin other countries includingChinaandBrazil, the countriesusedas comparatorsto India in this report. For moreinformation,see World Bank (2004d). 35 Box 2-5: Role of Investment Climate: The Private Sector View inIndia, China, and Brazil Figure a Figureb 0 a, a m m im Note: The datafor Brazil and Indiaare for 2003. The dataon Chinaare for 2002. The World Bank recently undertook a study to see how the investment climate reform priorities of India's industrial business community compares with those of its counterparts in China and Brazil. Infigure a, these priorities are compared with those of respondents to the China ICs. The bars show the proportion of respondents who identified investment climate deficiencies as major or severe obstacles (the following scale was used: 0 = no obstacle, 1= minor obstacle, 2 = moderate obstacle, 3 = major obstacle and 4 = severe obstacle). The comparison shows that regulation and corruption draw complaints from the largest percentage of respondents inIndia and China, followed by infrastructure and tax and customs administration. One difference seems to be the significantly greater weight that Chinese respondents attach to macroeconomic instability and skill shortages. Infigure b, India's figures are compared with those from the ICs of Brazil. They show that, although India's private sector seems to have more or less the same reform priorities as China's, those priorities seemto diverge significantly from Brazil's, where macroeconomic instability and problems with finance and high tax rates are at the top of the list, even above regulation and corruption. Interms o f skills, one ineight businesses in the India ICs sample identifies skill shortages as a major obstacle to the expansion o f their businesses.A comparison of the number of days needed to fill a skilled-job vacancy in India and Brazil suggests that skill shortages are not as ubiquitous or biting a problem inIndianindustry as they appear to be inChina and Brazil. An Indianfirmreports filling a skilled vacancy within three days as opposed to six inBrazil. This does not necessarily mean that India has a larger pool of skilled workers than China or Brazil, only that there are more skill shortages inthe other two countries. This i s possibly due to the demand for skills inthose countries i s greater, which would also be consistent with their higher investment rates inmore skill-intensive industries. That India apparently faces fewer skill shortages than China i s not, therefore, necessarily a plus for the current investment climate inIndia. I Existing business survey data provide no evidence that Indian industry suffers from a greater burden of government regulation of routine industrial activities or industrial relations or bears a greater cost in tax and customs administration. The proportion of Indian businessesthat identify these as major problems is not larger than that o f Chinese or Brazilian businesses. As mentioned, objective indicators, such as the frequency o f official visits, the time that management spends dealing with regulations, delays in customs clearance, and so on are also not higher for India than they are for China. Yet, secondary sources also show that Indianbusinessesdo lose out more than their counterparts inChina or Brazil on account of the greater burden of entry and exit regulation they bear. Indianbusinessesalso lose out due to costly and unreliablepower supply that also ties up a significant part of their assets inrunning their own generators to minimize the cost of these outages. Significant evidence also exists, again from secondary sources, that Indian industry might be losing more inproductivity due to the absenceof a well-functioning market inurban land rights, which has made land use rights account for a higher proportion of business costs inIndia than inEast Asia. These deficiencies inIndia's investment climate are important, becausethey impact industrial productivity and thus need to be tackled so that the private sector can be an even greater engine o f growth. ISource: World Bank (2004d). 36 Improve competitivenessin other ways. The productivity dispersion of firms in India demonstrates the need to continue the process of regulatory reform, easing the ability of f m s to enter, expand, and exit as they adjust to a more competitive environment. As India moves from creating, acquiring, and adapting knowledge to becoming a generator and user of new knowledge and technologies, it needs to take care of some special issues that are becoming particularly important interms of the broader business environment: Strengthen intellectual property rights and their enforcement. This issue i s becoming increasingly important inknowledge-based economies and being driven by the mounting costs of R&D for new products or processes, shortening of product life cycle, rapid growth ininternationaltrade inhigh- techproducts, and internationalization of the researchprocess. India has passeda series of intellectual property rights laws inthe past two years, whose enforcement will be key. Inthe World CompetitivenessIndex 2004, produced annually by IMDInternational, India ranks 47th of 60 countries and regions interms of patent and copyright protection." Improve access to venture capital. Such access i s important to the success of knowledge-based businesses.India has a burgeoning venture capital industry: infact, inthe same World Competitiveness Index, India ranks 24th (again, of 60 countries and regions) interms of availability of venture capital for business development. Encourage theprivate sector to invest, createjobs, and improve productivity, not.only to promote growth, but also expand opportunitiesfor poor people. The private sector can be a real engine ofjobs and services for the poor. C. K.Prahalad (2004) argues that companies must revolutionize how they do business indeveloping countries suchas India if both sides of that economic equation are to prosper. H e offers insights on consumer needs inpoor societies and opportunities that exist for the private sector to serve important public purposes, while enhancing its bottom line (Box 2-6). Box 2-6: Tapping EntrepreneurialCapabilities and BuyingPower of the Poor C. K.Prahalad (2004) writes that the real source of market promise i s not the wealthy few inthe developing world or even the emerging middle-income consumers: it i s the billions of aspiring poor who arejoining the market economy for the first time. He exhorts large companies to use their resources, scale, and scope to cocreate solutions to problems that lie at the bottom of the pyramid (BOP)-those 4 billion people who live on less than $2 a day. This requires mobilizing the investment capacity of large firms, the knowledge and commitment of nongovernmental organizations (NGOs), and the communities that needhelp to cocreate unique solutions to help the BOP. To sustain energy, resource, and innovation, the BOP must become a key element of the central mission for large private-sector firms. The poor must also become active, informed, and involvedconsumers. Cocreating a market around the needs of the poor can help to reduce poverty. To do this, all players-NGOs, large domestic firms, MNCs, government agencies, and most important, the poor- mustcome together to solve problems. The focus should be on the active, underserved consumer community, as the four to five billion poor people become part of the system o f inclusive capitalism, an economic opportunity valued globally at $13 trillion a year. The process must start with respect for BOP consumers as individuals and assume that consumers are equally importantjoint problemsolvers. This sets the basis for a profitable win-win situation. In being served by big business, the poor "win" by being empowered to choose and are freed from paying the currently widespread "poverty penalty." Inshanty towns near Mumbai, for example, the poor pay a premium on everything from rice to credit, often five to 25 times what the rich pay for the same services. Prahalad provides 12 cases ina wide variety of businessesinwhich the BOP is becoming an active market, bringingbenefits to consumers. The cases represent a variety of industries: from retail inBrazil and health and financial services in India, to housing in Mexico. To be profitable, firms mustreengineer products to reflect the very different economics of the BOP: small unit l7 IMDIntemational's World Competitiveness Yearbook 2004 includes 51 countries andnine regional economies for a total of 60 countries and regions. 37 packages, low margin per unit, and high volume. Big businessesneed to swap their usual incremental approach for an entrepreneurial mindset, becauseBOP markets need to be built,not simply entered. Products must be available inaffordable units.Most sales of shampoo inIndia, for example, are of single sachets.Rethinking distribution networks may be necessary to, among others, involve entrepreneurs from among the poor. Despite skeptics, leading firms are now grappling with how to serve the BOP on abig enough scale and how to transfer what works from one part of the world to another. Source: Adapted from The Economist (2004f) and Prahalad(2005). Attract greater FDZ. A recent study by Farrell and Zainulbhai (2004) highlighted steps the Indian government could take to encourage foreign investment (Box 2-7). The Indian government should ideally try to attract those types of investments that can contribute strongly to the Indian economy. Box 2-7: Building on Success: Attracting Foreign Investment inIndia 4 McKinsey Global Institute (MGI) report by Farrell and Zainulbhai highlights that India's economy has made real xogress, but further liberalization will be neededto sustain its growth. The country now has 40 million people ooking for work, and an additional 35 million will join the labor force inthe next three years. Creatingjobs for :hese people will require more dynamic and competitive industries across the economy, as well as opening up to foreign competition; thus, to build on its successes, the Indiangovernment must lower trade and foreign investment Darriersstill further inthe following ways: Tariff levels should be cut to an average of 10percent, matching those of India's neighbors in the ASEAN. Although progress has been made on tariffs, the government still prohibits imports of many goods and protects inefficient companies from foreign competition. To provide incentives to companies to improve their operations, the government should first lower duties on capital goods and inputs,and then, inseveral years, reduce them on finished goods. Foreign-ownership restrictions should also be lifted throughout the economy as well, except instrategic areas, notably defense. At present, foreign ownership i s not only prohibited inindustries such as agriculture, real estate, and retailing, but also limited to minority stakes inmany others, such as banking, insurance, and telecommunications. India's government should reconsider the expensive but often ineffective incentives i t offers foreign companies to attract foreign investment. These resources would be put to better use improving the country's roads, telecom infrastructure, power supply, and logistics. MGI's research found that the government often gives away substantial sums of money for investments that would have been made anyway. For example, it has waived the 35 percent tax on corporate profits for foreign companies that move business-process operations to India, even though the country dominates the global industry. Moreover, state governments often conduct unproductive bidding wars with one another and give away an assortment of tax holidays, import duty exemptions, and subsidized land and power. MGI surveys show that foreign executives place relatively little value on these incentives and would rather that the government invest resources indeveloping infrastructure. Interviews with foreign executives showed that India's labor laws deter foreign investment in some industries. For example, software and business-outsourcing companies are exempt from many labor regulations, such as those regarding hours and overtime. Without these exemptions, it would be impossible to perform back-office operations inIndia. To attract foreign investment in labor intensive industries, the government should therefore consider making labor laws more flexible. Source: Excerptedfrom Farrelland Zainulbhai (2004). Tackle infrastructure issues. A critical part of the overall investment climate in any country relates to the state of its infrastructure. The poor condition of India's infrastructure has often been cited as a major hindrance to economic growth. 38 Transportation i s clearly an area inwhich India's infrastructure does not meet that of its regional neighbors. Only 56 percent of roads are paved inIndia, compared with an average of 88 percent inmost East Asian countries. The total container volume handled at all the Indian ports combined i s lower than that passing through Shanghai! A comparison of the freight traffic of Indian and Chinese railways shows India lagging way behind. Rail freight as a percent of traffic units is only 5 percent in India, compared with 79 percent in China. The transportation costs associatedwith shipping a container of textiles to the UnitedStates are more than 20 percent higher for India compared with Thailand and 35 percent higher compared with China. Variations inmaritime distances explain only a small part of the gap. Delays and inefficiencies inthe ports, inparticular, incustoms, account for a higher share of the difference inport productivity. These international comparisons demonstrate the clear need for India to focus on improving i t s physical infrastructure and port efficiency. Access to reliable power at reasonable cost i s another prime concern for most Indian businesses.Industry surveys have found that acute power shortfalls, unscheduledpower cuts, the erratic quality of power supply (low voltage coupled with fluctuations), delays, informal payments requiredto obtain new connections, and very high industrial energy costs seriously constrain Indian industry and have serious implications for overall industry performance and competitiveness. Across India, the shortfall in2001-02 was estimated at 7.5 percent for energy and 13 percent for peak demand with substantial variations across states inthe availability andreliability of supply. Not only does industry receive irregular and low-quality power, but must pay tariffs muchabove the cost of supply. Muchof this i s due to cross-subsidization of power tariffs by state governments and widespread power theft (commonly referred to as "transmission and distribution losses"). Industryends uppaying an average tariff of Rs. 3.81per kilowatt-hour, whereas the average cost of public power supply i s Rs. 3.50 per kilowatt-hour. Industrialtariffs for high-tension industriesare 8-9 cents per kilowatt-hour, among the highest inthe world, compared with 6 cents in Brazil and Thailand and 3 4 cents in China. Typical rates inWestern Europe range from 6 to 7 cents a kilowatt-hour. Inaddition, the 2003 ICs found that, on average, manufacturers inIndiaface nearly 17 significant power outages per month, compared with one per month inMalaysia and fewer than five inChina. About 9 percent of the total value of fmoutput is lost due to power breakdowns-compared with 2.6 percent in Malaysia and 2.0 percent inChina. The frequency and average duration of outages are such that generators are standardindustrial equipment inIndia, accounting for as much as 30 percent of a business's power consumption inmany cases. Moreover, India's combined real cost of power is 74 percent higher than Malaysia's and 39 percent higher than China's. The paucity, unreliability, and poor quality of power from the public grids has also forced a greater proportion of Indianfirms to operate their own (captive) generators, further increasing the cost of power bome by industry and reducingfm-level competitiveness. Some 69 percent of the manufacturing firms surveyed across India in2000 had their own power generator; even though this number had fallen to 61 percent by 2003, it was still higher than inMalaysia (20percent), China (27 percent), and Brazil (17 percent). Although large firms can bear suchcosts, small and mediumenterprises (SMEs) suffer severely. The typical Indian SMEhas its own generator, tying up one-sixth of its capital. This stunts the growth of the S M E sector. For all these reasons, power sector reformi s now widely accepted as fundamental to improvingbusiness performance inIndia. Urgent priorities include rationalizingpower tariffs, establishing statutory 39 regulatory authorities, and implementing a phased reduction incross-subsidies that operate against industrialconsumers.18 India has made considerable progress inthe telecommunications sector inthe past few years. Most business surveys report that Indian firms are reasonably satisfied with the state of the country's telecommunications infrastructure. As discussed in chapter 5, India's performance has been improving in this area, althoughIndia lags globally behindChina and other comparators on many ICT-type indicators. Summary of Issuesand Recommendations The above discussion has highlighted a host of policy reforms inIndia's economic and institutional regime so the country can embrace knowledge better to enhance growth and competitiveness. Key areas include improving the efficiency o f government by reducing its role inpublicly owned productive enterprises and usingICTs more efficiently for carrying out government functions, including for the delivery of social services such as education and health. Inaddition, three specific interrelated sets o f regulatory and institutional reforms are important in improving India's investment climate: 1. Removeproduct market distortions andfor the startup and exit offirms. Tariff protection inIndiais still substantially high.To create a level playing field for investment, both domestic and foreign, India needs to put in place trade policy reforms to enhance industrial sector performance. It should thus speed up trade reformby undertakingthe following: Reduce average import tariffs, and phase out tariff exemptions, specific tariffs, and antidumping duties Reformcustoms administration to reduce clearance times Reduce the role o f government ownership in the economy, and increase competition inproduct and service markets Eliminate preferential policies for small-scale players Implement a full anduniform value-added tax Reduce entry and exit barriers to manufacturingindustries Phase out remaining limits on FDI, including the ban on FDIinthe retail sector Streamline regulationo f business startups and bankruptcy procedures Improve overall protection and enforcement o f PRs. 2. Improvefactor markets. For firms to be able to innovate and take advantage of new opportunities, it is important that the smooth working o f factor markets complement entry and exit procedures. The movement o f labor and capital from less to more productive activities i s central to realizing the benefits o f greater competition and openness. Improving the efficiency o f factor markets includes the following: Ease restrictions on hiring and firing o f workers Reform labor regulations, for example, extending the flexibility to adjust labor use to firms in the 100-1,000 employee range Improve SME access to credit (large creditworthy borrowers have benefited from the recent decline in interest rates, but the lack o f access to adequate, timely credit on competitive terms continues to constrain SMEs development) For more information on issuesdiscussedinthis section, see World Bank (2002c and2004d) 40 0 Make finance more affordable by undertaking financial sector reforms to improve access and reduce the spreadbetween deposit and lending rates 0 Improve the venture capital market by reducingrestrictions on capital funds, and open up to full participation of foreign investors 0 Update the bankruptcy framework and procedures to improve the allocation of resources and access to credit 0 Easerestrictions and reduce taxes and extreme regulatory burdens on the use and transfer of land, because (as argued inthe McKinsey report) land market distortions account for approximately 1.3 percent of lost growth per year. 3. Alleviate key infrastructure bottlenecks, including the following: 0 Reformthe power sector, rationalize power tariffs, and implement a phasedreduction incross- subsidies that operate against industrial consumers 0 Introduce time-of-day tariffs for industrieswith peak and off-peak rates 0 Improve the financial and operational performance of power utilities by unbundling and commercializing state electricity boards, independent regulation, and improved sector governance 0 Address capacity and quality constraints inthe transport sector by improving public sector performance (for roads and rail), mobilizing private sector investment (including better cost recovery for roads), phasing out price distortions (for rail), and improving the efficiency of existing capacity (for ports). Insum,eventhoughIndiahasbeenreformingits overalleconomic andinstitutionalregimeinthepast decade, its growth inthe future will need to be more productivity basedby increasing the efficiency of investments inphysical capital and inknowledge. Although this chapter has mainly focused on the modem sector, a gigantic part of the Indian economy requires overall upgrading. Tremendous benefits can be achieved interms of overall growthif India canput inplace the appropriate mechanisms to use and diffuse modem and new technologies throughout the economy, while tappingglobal knowledge to raise the overall technological performance of the economy. Economic incentives and institutions are extremely critical, becausethey set the overall rules of the game for an economy to progress inresponseto the rapidly changing challenges and opportunities brought about by the knowledge economy. Further strengthening of this pillar of the knowledge economy inIndia will not only free the economy to take full advantage of the rapid advances inglobal knowledge and technology and continually redeploy resources to the most productive uses, but will also allow the country to obtain higher returnson the resources that are being invested ineducation, innovation, and the information infrastructure. Achieving these higher returns will depend on redefining the role of the Indian government and inconstantly reorientingits overall development strategy to meet the new challenges. 41 3. EDUCATIONAND HUMANRESOURCES Education is the fundamental enabler of the knowledgeeconomy. Well-educated and skilled people are key to creating, sharing, disseminating, and using knowledge effectively. The knowledge economy of the twenty-first century demands, inaddition to traditional "hard" skills such as literacy (the "3Rs") and, more recently, ICT competencies, anew set of skills that includes "soft" skills such as communication skills, problem-solving skills, creativity, and teamwork. Although soft skills were previously required of persons inmanagerial positions, they are increasingly important for all workers inthe emerging knowledge economy, This is because, although at the center of the knowledge economy are what Peter Drucker refers to as "knowledge workers"-people with considerable theoretical knowledge and learning, such as doctors, lawyers, teachers, accountants, and engineers-the most strikinggrowth will be in knowledge technologists. They include computer technicians, software designers, analysts inclinical labs, manufacturingtechnologists, and paralegals, who spend far more time working with their handsthan with their brains, butthis manual work is basedon a substantial amount of theoretical knowledge that only can be acquired through formal education, not apprenticeship. Just as unskilledmanualworkers in manufacturingwere the dominant social and political force inthe twentieth century, knowledge technologists are likely to become the dominant social and perhaps political force inthe next decades (Drucker 2001b). The development of a knowledge economy requires a flexible education system. Itbegins with basic education that provides the foundation for learning; continues with secondary and tertiary education that develops core, including technical, skills, and encouragescreative and critical thinkingthat is key to problem solving and innovation; and extends into a system of lifelong learning. A lifelonglearning system i s one that encompasses learningfrom early childhood to retirement and includes formal training (schools, training institutions, and universities) and nonformal learning(on-the-job training, and skills learned from family members or people inthe community). The basic elements of such a system are comprehensiveness, new basic skills (acting autonomously, usingtools interactively, and functioning in socially heterogeneousgroups), multiple pathways, and multipleproviders. A large pool of highly educatedandvocationally qualified people inIndia are making their mark at home and abroad in science, engineering, IT, and R&D, but they make up only a small fraction of India's population. To become a knowledge economy, Indianeeds to keep developing its human capital base and creating knowledge workers to contribute to its growth, development, and competitiveness inthe global economy. Holistic reforms will be necessary to reorient classroom teaching and learning objectives, startingas early as primary school and extending through secondary and tertiary education. Indiamust make its education systemmore attuned to the characteristics of the new global environment, by focusing on learningrather than schooling, and creating an enabling environment that promotes creativity, improves the quality of basic and tertiary education, and provides opportunities for lifelonglearning. BenchmarkingEducation Figure3-1 shows that Indiahas marginally improvedits positionrelative to other countries on the education pillar duringthe past half decade. It leads the SouthAsia and Africa Regions, but lags behind Brazil and China. India also significantly trails behindPoland, Russia, as well as Korea, which has a formidable record ineducation, especially tertiary, inwhich it outperforms many OECD countries. 42 Figure 3-1: BenchmarkingEducation: India, Comparators,and the World,1995 and Most Recent Period 0 1 2 3 4 5 6 7 8 Q 0 1995 Note: Countries above the 45-degree line have improved their position ineducation for the most recent periodfor which data are available relative to their position in 1995 (or closest available date in the mid-1990s) and vice versa for countries below the line. The detailed education scorecardfor IndiapresentedinFigure 3-2 (and for comparator countries inannex 9) shows a mixed picture: even though Indiahas made progress inincreasing literacy (age 15 and older), its average years of schooling at 5.06 years, although higher than inBrazil (4.88 years), are nonetheless lower than those of China (6.35 years), not to mention Poland(9.84 years), Russia (10.03 years), and Korea (10.84 years). The same i s true for secondary enrollments, for which India's performance lags behindall comparator countries. Here, Brazil, inparticularhas made laudable strides inrampingup secondary enrollments inthe past few years. Inaddition, India trails all comparators interms of tertiary enrollments. Qualitative rankings from WEF for India includedinFigure 3-2 and those presented in annex 9 for comparator countries, however, show that India has several advantages inrelation to education and humanresources:it ranks quite highly compared with China and Russia on Internet access in schools. India i s ahead of all comparator countries when it comes to the quality of math and science education as well as managementeducation, which i s available infirst-class business schools. Inaddition, India i s ahead of China, Russia, and Polandon its approachto humanresources interms of investment in staff training. This seemingly rosy picture, however, mustbe taken with a grain of salt, becausedespite perceived positives, its well-educated people do tendto emigrate abroad, more than all other comparator countries. 43 Figure 3-2: India's Scorecard on Education, Selected Variables, Most RecentPeriod AduC Meracy rate (% age 15 and above) (61 03) (2 83) Well educated people do not emigrde abro years of schooling (5 U6) (5 TO) Availabilrty of management education Secondary Enrollment (48 47) (3 80) Extent of Staff Training Tertiary Enrollment (10 58) (5 50) Qualrty af science and math educeti e expectancy at birth, years (63 201 (4 10) Public spending on education as % of access in schools (3.80) i\`ote; Each ofthe 80 variables in the KAMis normalized on a scale of 0 to 10 for 128 countries. The fuller the scorecard, the better poised a country is to embrace the knowledge economy. But an economy should not necessarilyaim for a perfect score of 10 on all variables. This is because the scorecards may be shapedby the particular structural characteristics of an economy or by trade-offs that characterize different developmentstrategies. Values in parentheses denote actual values for India for the most recentperiod for which data are available. Source: World Bank, "Knowledge Assessment Methodology," http://www.worldbank.org/kam. Issues and Recent Developments in Education and Human Resource Development India's transition to the knowledge economy will be determined by whether its people can create, share, and use knowledge effectively. Inmoving forward, India needs to combine educationalreforms oriented to raising participation, equity, and quality at the school and higher education levels with lifelong learning and training programs that can provide the labor force with the necessary skills to be fully engaged in the knowledge economy. This section reviews some important trends ineducation and human resource development in India and highlightssome important issues related to strengthening India's overall educational system. Enhancing literacy. Rates of literacy among the population (aged seven years and older) have risen considerably in India in the past ten years. The 2001 census recorded literacy rates o f 65.4 percent, up from 52.2 percent in 1991. The male literacy rate i s 75.9 percent (up from 56 percent in 1981), compared with 54.2 percent for women (30 percent in 1981). The gap between male and female rates has therefore narrowed from 28.8 percent in 1991 to 21.7 percent in2001. Considerable regional variations exist, however: Kerala has a literacy rate o f 91 percent, whereas Bihar's i s only 48 percent (EIU 2003a). The constraints inthe country's path to reducing adult illiteracy are many: the size and diversity of its population, the time it takes by conventional methods to teach a person to read and write, high dropout rates, lack o ftrained teachers, and inadequate infrastructure. Some innovative new ways exist, however, inwhich illiteracy is beingtackled inIndia at low cost usingICTs, as is illustratedby the computer-based functional literacy program initiated bythe Tata Group (Box 3-1). Initiatives such as these will need replication on a massive scale throughout Indiato contribute significantly to reducing illiteracy in the country. 44 Box 3-1: Reducing Illiteracy: The Computer-Based Functional Literacy Program The computer-based functional literacy (CBFL) program initiated by Tata Consultancy Services (TCS) of the Tata Group tries to overcome illiteracy through the innovative use of IT. It has the potential to help resolve India's adult illiteracy problem and to make 90 percent of India functionally literate in three to five years. The CBFLproject uses a mixture of methods-teaching software, multimedia presentations, and printed materials-to teach an uneducated person to read ina fraction of the time it takes to do this by conventional means. I t employs animated graphics and a voiceover to explain how individual alphabets combine to give structure and meaning to various words. The project focuses exclusively on reading and teachesa person to read within a span of 30 to 45 hours spread across 10to 12 weeks. The emphasis i s on words, rather than alphabets, and the process i s styled to suit the learner. Because the program i s multimedia driven, it does not need trained teachers. This also reduces the cost of eradicating illiteracy. The TCS course usespuppets as the motif in the teaching process and has been designed from material developed by the National Literacy Mission, established by the Indiangovernment in 1988 to help eradicate adult illiteracy and i s tailored to fit different languagesand even dialects. Interms of results, those coming through the program can acquire a 300-500 word vocabulary intheir ownlanguage and dialect. This i s enough for everyday requirements, such as reading destination signs on buses, straightforward documents, and even newspapers.The program sets people on the path to acquiring other literacy skills, including writing and arithmetic ability. Such infrastructure could also make similar material available, for example, concerning healthcare or agriculture. The program's potential in India can be gauged by its success in Andhra Pradesh, where it i s now operational in415 centers and has helped at least 8,500 people. Looking ahead, setting up a network to monitor the project and its growth and to share information and get feedback is important. The project should also expand throughout the country, becauseno one organizationcan solve India's illiteracy problem by itself. I t requires participation of multiple actors, including the government, private sector companies, and NGOs. Source: The Tata Group(2005). Raising school enrollments. A strong basic education system is anecessaryprecondition to underpin India's efforts to enhance further the productivity and efficiency of its economy. China's experience in this area is instructive: its emphasis on secondary education has provided afirmbasis for global expansion of the country's manufacturingactivities. Investments inbasic education are thus fundamental for countries to improve the productivity and quality of labor and deliver manpower needed for development. Table 3-1 shows the enrollment of students inprimary, secondary, and tertiary education and illustrates the large expansion instudent intake that has taken place at all levels inIndia. The rate of enrollment in primary schools inIndia has increasedinthe past decade, from 97 percent of the eligible age group in 1990 to 99 percent in2001 (Figure 3-3). The corresponding rate for secondary schools 45 Figure 3-4) rose from 44 percent in 1990to 50 percent in2001, but is still lower than other comparators, such as China (67 percent in 2001) and Brazil, which has made tremendous improvements inthe past decade and reached 107 percent of the eligible age group in 2001. Stages 1990-91 2001-02 Primary (grades 1-5) 91.4 113.9 UpperPrimary (grades 6-8) 34.0 44.8 Secondary (grades 9-12) 19.1 30.5 Tertiary d a 9.2" Figure 3-3: GrossPrimary EnrollmentRates, India and Comparators, 1990-2001 (percent) 160YO - I mBrazil --_-. China 150 -India Korea -Russia - Poland 140 130 120 110 100 90 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Note: Discontinuouslines are due to unavailability of datafor certain years. Source: World Bank intemaldatabases. 46 Figure 3-4: Gross Secondary Enrollment Rates, India and Comparators, 1990-2001 (percent) 70t 60 - 30 4 Note: Discontinuous lines are due to unavailability of data for certain years. Source: World Bank intemal databases. Despite the accomplishments, India still accounts for one-quarter of the world's 104 million out-of-school children.The quality of education-widespread teacher vacancies and teacher absenteeism,highdropout rates, inadequate teaching and learningmaterials, and uneven levels of learning achievement-is of great concern. It is important to note, for the education MDGs, girls inthe 6- to 14-year-old group still exhibit relatively low participation inelementary education. Beyond this age group, considerable gaps exist in provision and access to secondary education, again particularly for girls. But,the Indian government's leadership and commitment to increasing educational attainment has been strong. In2002 an amendment to the Indian Constitution made elementary education a fundamental right of every child. The national programfor universal elementary education, Sarva Shiksha Abhiyan (Education for All), began in 2001. This programi s intended to provide eight years of schooling for children inthe 6- to 14-year-old group by 2010 andpays special attention to gender and social equity and inclusive education. The program, which the government wholly owns, is designed for a large federal system, with a decentralized framework for service delivery and a built-inaccountability mechanism at the school and community levels. The emphasis on quality reinforces the drive to improve access, efficiency, and equity. Achieving the program's goals would not only realize the Indian government's development objectives, but also help to meet the global MDGfor education by enrolling one-quarter of the world's out-of-school children. 47 Expanding primary and secondary education. Four main school types for primary and secondary education exist inIndia: (a) schools runby the government (central, state, or local government), (b)those runby local bodies, (c)those runby private management, but with heavy government influence and funded largely by government grants-in-aid and known as "private-aided" or just "aided" schools, and (d) those under private management and runwithout state aid and known as "private unaided" schools. The latter runentirely on fee revenues and receive little government interference in matters such as teacher recruitment." Table 3-2 shows the distribution o f primary, upper primary, and secondary schools in India under these different types o f management and highlightsthe growing importance o f private education at all levels o f the education system. * Provisionaldata. Source: Education Statistics, Department of Education, Government of India (http://www.education.nic.in/htmlweb/edusta.htm). Inparticular, Table 3-2 shows that: 0 Forprimary schools, the share o f government plus local body-managed schools has been falling with time (from 93.35 percent in 1973-74 to 90.92 percent in2001-02). The contribution o f private schools (aided and unaided) has been small, but increasing over the years and was highest inthe year 2001-02 (9.08 percent). Ofthese, the percentage of primary aided schools has been slowly decreasing, while the percentage o f unaided schools has been increasing. B y 2001-02, the share of private unaided schools was about 6 percent. 0 For upper primary schools, the government again has continued to manage a majority of these- from almost 51percent in 1973-74 to 47 percent in2001-02. Government and local body schools l9More information on school types i s available in Dyson, Cassen, and Visaria (2004). 48 together account for about 77 percent of all upper primary schools in2001-02. The private sector (aided and unaided) schools also remained more or less stable from 22.42 percent in 1973-74 to 23.58 percent in2001-02; however, the share of private aided schools fell by almost half, whereas that of private unaided schools more than tripled to 15.77 percent between 1973-74 and 2001-02! 0 For secondary schools, during 1973-74 to 2001-02, the maximumnumber of these schools were under private management; however, adecliningtrend inprivate-aided schoolshasbeen observed, while the percentage of private unaided schools has been increasing. By 2001-02, they had increased their share by more than four times to reach 23.56 percent of secondary schools. It seems that acceleratededucational progress inthe 1990swas partly due to the contribution madeby the rapidly growing private school sector, which represents increasedprivate expenditure on education by households.Analysts suggestvarious reasons for why households increasingly bypass free public schools to sendtheir children to private fee-charging schools. Reasonsgiven rarely include the lack of a government-funded school inthe vicinity, but more frequently the perceived better quality of private schooling. Inaddition, unlike government primary schools, private schools provide active teaching: when investigators visit these schools, teachers are almost always inclass and teaching. If the fiscal squeeze in state budgets continues inthe future, parentswho can afford it will turn increasingly to private schools to educatetheir children. The private sector i s thus likely to continue to grow relative to the public education sector (for more information, see Dyson, Cassen, and Visaria 2004). To meet the challenge raised by private education providers, some state governments are trying to improve the relevance and quality of education provided ingovernment schools. For example, one promising experiment relating to provision of IT training inhighschools i s taking place inAndhra Pradesh:the government has contracted with the National Institutes of InformationTechnology (NIIT) to provide training incomputers to more than 300,000 high school students in663 government schools. This has involved setting up modemcomputer classroomsineach of these schools, for a total of more than 8,000 computers, and rolling out computer education classes. NIIT i s also working to enhance the skill base of people at large inAndhra Pradeshby usingthese schools to provide state-of-the-art computer education to local citizens after school hours. NIIT's computer training engagement has now spreadto more than 2,000 government schools covering more than 750,000 students inIndia, including371 schools inTamil Nadu, 700 schools inKamataka, and about 100schools eachinPunjab andWest Bengal (NIIT 2002). Spendingon education. Table 3-3 highlightsthat expenditure composition i s skewed toward the secondary level and to an even higher extent toward tertiary education inIndia and also in China. It i s important to note that unit costs rise progressively and significantly among primary, secondary, and tertiary education levels across all education systems. This variation reflects inlarge part higher salaries and more sophisticated infrastructure, that is, laboratories, technologies, and so on, requiredto deliver education at these levels. 49 Table 3-3: Spendingon Education, India and Com3arators,2001 Public expenditure per student (as uercent of GDP per capita) Country GDP per capita, U.S. dollars. 7.003 Primary Seconda q Tertiary India (2000) 563 13.71 23.01 85.76 Brazil (2001) 2,788 10.75 9.98 48.49 China (1998) 1,094 6.58 12.56 89.13 Korea (2000) 12,634 18.38 16.84 7.37 Poland(2000) 5,487 28.81 11.82 16.10 3,022 Russian Federation 2001 n.a. n.a. 9.60 Note: The abbreviation "n.a." means not available. Data for tertiary expenditure for Korea are for 2001. Source: World Bank internal database. Given a distinctive feature of India-where a sophisticated academic tradition coexists with mass poverty-it i s perhapsnot surprising that tertiary education i s expensive in terms of GDP. This does not mean, however, that tertiary education i s a highpriority use of public money. University fees have generally been on the low side, and universities should evaluate the extent to which they can hike fees, at the same time taking into account of the needs of poorer students. Private sources should be encouraged to contributeto a greater extent to higher education, and more public resources should be allotted for primary and secondary education. Some measures to improve use of public resourcesinprimary and secondary education include the following: Involve communities and parents to monitor and evaluate school performance to a much greater degree. Making schools more accountable i s critical, even to the extent of giving parents, through local school committees, the rightto hire and fire teachers. Box 3-2 highlights the experience of community-government partnershipfor education inMadhya Pradesh. Encourage competition in education. InKerala, for example, substantial subsidies are given for transportation for students. Parents can shop around for better schools, which fosters competition among schools for enrollments, providing critical revenue. Give more autonomy to schools to attract teachers and students. Higher levels of government can help by establishing more regular measurementof attendance, learningoutcomes, and other information neededto evaluate student progress. Use distance education technologies to improve and increase access to primary and secondary and vocational education. Given the paucity of adequately trained and qualified teaching staff in semi- urban and rural areas, these technologies could be a cost-effective mechanism to providing educational opportunities to more students (World Bank 2003d). 50 Box 3-2: Community-GovernmentPartnershipHelpsGetMillionsinto School: The Case of Madhya Pradesh Inthe past decade, Madhya Pradesh's EducationGuarantee Scheme(EGS) dramatically improved access to primary education, especially for children from very poor households and inscattered settlements. The program is built on community demand and participation and guarantees a fast-track approach to basic education by linking it with local self-government institutions. The EGS was designed specifically to addressthe issue of access. Between July 1997 and July 2000,26,571 EGS schools were created (42 percent of them intribal areas) catering to 1,233,052 children (47 percent girls and 44 percent tribal children), of which 91 percent were from "scheduled caste," "scheduled tribe," and other socially disadvantaged communities. As of June 2003 the program appointed a total of 31,815 Gurujis (teachers), who were identified by the community and trained by the education department of the government. The most significant impact of EGS has been a sharp reduction in the absolute numbers o f out-of-school children: from 1,315,000 (boys) and 1,604,000 (girls) in 1996 to 346,000 (boys) and 428,000 (girls) in2002-03. Female literacy increased by 20.93 percent inthe decade. This program was based on community demand and managed by local self-government institutions. The Government of Madhya Pradeshensured continuation of the program through a motivated team of officials for the decade starting in 1993-94. From its outset, the EGS was positioned as a large-scale program, notjust a small innovation. The Government of Madhya Pradesh allocated adequate financial resources on elementary education. Other innovative sources of funding included the "Fund a School" program in2000, inwhich anyone could log on to the Web site and adopt a school; funds were directly credited into the bank account of the school concerned. The EGScreated institutional structures for including poor rural childrenby providing aforum for articulation of demand for education through the Panchayat, a mechanism to forward that demand through local self-government structures, public commitment by the government to establish EGS primary schools, and mechanisms for continued participation of the community and the Panchayat inmanagement and supervision. Another innovation was the government's pledge to meet its obligation of providing an EGS school within 90 days and provide training and academic support to the teacher identified by the community. The EGS program demonstrates that when poor people are confident that their voice will be heard and they can exert a positive influence, their enthusiasm to participate in local governance goes up. ISource: Ramachandran(2004). Insum,ensuringconsistencybetweentheskillsbeingtaught inprimary andsecondaryeducation andthe needs of the knowledge economy will only help to strengthen India's human resource base further. This requires that materials and methods also be introducedto teach students "how to learn" instead of stressingoccupation-specific knowledge. India could do well to learnfrom the experiences of other countries, such as Brazil, that have made rapid progress inincreasing secondary enrollments and improvingthe quality of their secondary education systems. Boosting tertiary and technical education. Tertiary education i s critical for the constructionof knowledge economies. Tertiary education i s a broader notion than it usedto be, incorporating most forms and levels of education beyond secondary schooling and includingbothconventional university and nonuniversity types of institutions and programs. Tertiary education also means new kinds of institutions, work-based settings, distance learning, and other arrangements and now puts the focus as muchon demand as it does on supply. Inother words, it is more student led than inthe past and has new implications for stakeholders, institutions, and resource planning (Wagner 1998). A recent World Bank report states that "tertiary education is necessaryfor the effective creation, dissemination, and application of knowledge for building technical and professional capacity. Developing countries are at riskof beingfurther marginalizedina highly competitive world economy, becausetheir tertiary education systems are not adequately preparedto capitalize on the creation and use of knowledge" (World Bank 2002a). India currently produces a solid core of knowledge workers intertiary and technical education, although the country needs to do more to create a larger cadre of educated and agile workers who can adapt and use 51 knowledge. Figure 3-5 shows that until 1999 India led China interms of its gross enrollment ratio (GER) for tertiary education, after which China surpassed India. In 2001 India had a tertiary GER o f 11.4 percent compared with 12.7 percent for China. According to recent sources, China's gross enrollments were inthe range of 13-15 percent in2003,20and some estimates suggest that they have increased even further to about 20 percent by 2004. Whatever the estimates, it i s clear that, in the past few years, China has surpassed India inthis domain and i s continuing to make rapid progress. But even so, India and China are no match for Poland and Korea, which had impressive tertiary GERs o f 59 percent and 82 percent, respectively, in2001. Figure 3-5: Gross Tertiary Enrollment Rates, India and Comparators,1990-2000 (percent) % 90 I 1 e / c / e BredC- O ! I 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Note: Discontinuous lines are due to unavailability of data for certain years. Source: World Bank internal databases. *'According to China's National Statistics Bureau (2003), gross enrollment inChna's higher education system was 13 percent for 2002-03. In a recent paper, Levin and Xu (2003) indicate that increased govemment investment, diversified resources, and improvedefficiency have produced rapid expansion interms o f both teaching and research in the past several years. For a long time, the college entrance examination was the most ferocious battlefield for Chnese students and the GER was consistently below 7 percent. It was especially difficult to get into key national universities, where the ratio of admissions to acceptances i s even more selective. Within six years (1996-2002), however, this ratio has more than doubled. The authors cite the latest numbers from a January 2003 report from the Chinese Ministry of Education showing that the ratio reached more than 15 percent of the corresponding age group (18-22 years old) inthe past year. InIndia, according to India's Planning Commission (2001b), the university systeminIndiaprovides access to only 5.75 percent of the estimatedpopulation inthe 18-24 age group. In 1999-2000, of a total estimated population o f 134 million in the 18-24 age group, only 7.73 million were enrolled in colleges and universities. The nonformal system (distance and open learning) accounts for only a smallpercentage o f the total enrollment in hgher education. O f the 7.73 million students enrolled in colleges and universities, distance education and correspondence courses covered only about 1million students. 52 The numbers,however, belie some laudable achievements inthe field of tertiary education in India.The country has some 272 universities, 58 "deemed" universities, 12,600 colleges, and many world-class institutions of higher learningthat are competitive and meritocratic (such as IndianInstitutes of Technology [IITs], IndianInstitutes of Management, Indian Institute of Science, and the regional engineering colleges [RECSI).~~ Alleviating constraints in tertiary education. Despite the efforts put into establishing a top-quality university system, not all publicly funded universities or other educational institutions inIndia have been able to maintain high-quality standards or keep pace with developments inknowledge and technology. Even within tertiary institutions, such as the University of New Delhi, the quality varies significantly across its multiple colleges. Subsidies for tertiary education and a systemof positive discrimination have skewedthe education system; a great number of students are acceptedon the basis of caste or religion rather than ability. A key challenge i s addressingthe academic needs of students of much more mixed abilities than was the case inthe past when only the best prepared students (generally from the upper classes) had access. This has important internal efficiency implications. Poor prior academic preparation of many students contributes to often high repetition and dropout rates. This situation exacts a high cost on the system, not only raising average outlays per student graduating, but further circumscribing places available for other students who wish to pursue higher-level studies. One approach meriting consideration i s widening the choices of institutions available to meet tertiary education demands and needs. Of special note i s potentialdevelopment of a community college system, includingpossible conversion of some lower-quality, lower-performinguniversity-affiliated colleges. This approach holds substantial promise for helpingstudents from poorer academic backgrounds to get remedial support and build study skills to enable themto transfer into bona fide universities. Today, many tertiary education institutions inIndia are constrained by an explosion inenrollments, poor and inadequateacademic and physical infrastructure, limitedfinancial support from the government, the struggle between quality and quantity, and, most important, an overall bureaucratic regulatory and managementframework built on numerous controls. Over the years, the Indian education system as been heavily subjectedto government regulation. Government intervention has generateda range of regulations on provision of educational services, renderingthe systeminflexible inmeetingmarket needs. Inthetertiary educationsector,universitieslackautonomy inmanagementandacademicaffairs, student enrollments and admissions, fee levels, and so on. In addition, poor remuneration and infrastructure mean that most tertiary educational institutions are not able to attract or retain high-quality faculty members. Many tertiary-level institutions are faced with faculty shortages due to noncompetitivepay packages and mediocre faculty quality. Only halfthe faculty inprofessional institutions have a postgraduate degree, and few have a doctoral degree. Another major weakness of India's tertiary education system i s the existing tenure system, which "guarantees" lifetime employment opportunities and provides adverse incentives for those who would like to engage in innovative research. The current system also makes the existing talent pool in academia less mobile and competitive, which, in turn, affects the quality of education delivered, ability of these institutionsto attract high-quality students, and potential of students to attain the high learningoutcomes requiredin a knowledge economy. Inthe area of quality assurance and accreditation, major steps areneededto ensure that India's institutions meet high-quality national (and if such services are exported, international) standards. The heavy centralization of the accreditation process by the NationalAccreditation Board currently leads to long wait lists and a very bureaucratic process, with one chance to pass or fail. The best accreditation systems worldwide emphasizethe need for institutions to undertake continual self-evaluation and *'The number of universities (in 2000) is from http://www.Indiastat.com. The number of colleges (in 2002) is from the University Grants Commission (http://www.ugc.ac.in). 53 monitoring and view the process as ongoing; recommendations ensuing from various phases serve as valuable guides for institution strengthening. Private universities inIndia are also not accredited, a situation that needs remedying, because these institutions are increasingly becomingproviders of highly skilled personnel and knowledge workers. A stronger competitive environment for all universities thus needs to be cultivated, because this will help to create greater diversification and responsivenessto student needs, as well as meet the competitiveneeds of the economy. Steps to enhancethe quality and relevance of higher education also need to taken. This is especially important, becauseaccording to the University Grants Commission(UGC), some 9.3 million students in India are currently pursuing undergraduateand graduate degrees and 85 percent of these only receive a general degree, which is not enough to convert these students into effective knowledge workers; thus, to make education more attunedto the needs of the marketplace, recent plans have been announcedto have "clubbed education," inwhich studentswould not only get a general degree, but also utility-oriented education. The plan i s to increase the duration of undergraduate education from three to four years (3+1 structure), in which the last year would be spent in an allied professional subject, and a student would get two degrees at the end of four years." Another area that holds promise for attaining desired quality improvements is that of establishing partnerships among Indian universities to optimize available resourcesand between Indian universities and foreign ones. This holds potential not only for upgrading by pooling library and other resources and attracting and retaininghigh-quality faculty via interpartner exchangeprograms, but also affords the opportunity for students to receive widely sought internationally recognized credentials. The Indian School of Business inHyderabad, established and operatingjointly with two outstanding U.S. business schools-the Kellogg School of Management and Wharton School-and with the London Business Schoolinthe UnitedKingdom, is aprime example. The Indiangovernment is also quite concerned about the rapidly increasing establishment of real and virtual campusesof foreign universities inthe country. Many foreign universities are clearly widely perceived to offer (although not necessarily the case) a higher-quality education and-not unimportant- externally recognized credentials than Indian institutions. Such competitionmay serve as apowerful catalyst to effect neededquality-enhancing tertiary education reforms throughout India's own system. This trade also presents India with substantial, as yet not fully or well-exploited, opportunities to export its own tertiary education as well as attract many more foreign (well-paying) students into i t s system. Improving science and technology education. India has one of the world's largest systems of postsecondary technical science and engineering education. As a result, it has one of the largest stocks of scientists, engineers, and technicians inthe world. But a study by the World Bank (2000) detailed several major deficiencies inIndia's scientific and technical manpower development systemthat urgently needto be addressedif India i s to fulfill its huge potentialfor economic prosperity. These include overcentralization and lack of autonomy and accountability of institutions, as most have little authority on faculty appointments, student admissions, structure and contents of programs, student performance evaluation, and financial management.Interms of physical infrastructure, technology and infrastructure support is poor inmany tertiary education institutions, especially inlaboratories, communication lines, computer and IT, as well as inlibrary linkages. Inaddition, resource constraints prevent attracting the best to academic careers, the quality and relevance of the curriculumi s ingeneralpoor, and quality assurance mechanisms are weak. 22Fromapresentationmadeby Arun Nigavekar, chairman, University Grants Commission at the workshop on "India and the KnowledgeEconomy: Leveraging Strengths and Opportunities," November 9,2004, New Delhi (http://www.worldbank.org.in/WBSITE/EXTERNAWCOUNTRIES/SOUTHASIAEXT/INDIAEXTN/O,,contentMDK:20279055 -menuPK:295602-pagePK: 141137-piPK: 141127-theSitePK:295584,00.html). 54 Although the Indian systemincludes a few well-known and world-class institutions of international standing, such as IITs and the Indian Institute of Science, it thus has hundreds of newly established engineering colleges that are yet to meet quality norms and standards.At the apex of the technical education institutions inthe country are the IITs. India also has some front-ranking universities and institutions for engineering and applied sciences education, such as the Indian Institute of Science, University of Roorkee, Jadavpur University, and Anna University. The government has also established, inpartnership with states, 17RECswith aprimary focus onhigh-quality engineering practice. These colleges along with about 30 well-established state colleges and government-aided private colleges form the secondtier of leadingtechnical institutions.The RECs are followed by some 500 government/govemment-aidedand self-financingengineering colleges offering only degree programs and some 1,100 polytechnics offering diploma programs. Most of these institutions operate under strict control of the State Directorates of Technical Education and the affiliating universities or State Boards of Technical Education. Although I I T s and a few other first-tier institutions offer world-class education and training inengineering and technology incorporating "best practices," a large number of institutions offer rather outdated programs (prescribed by their affiliating universityhoard) with inflexible structures and content. Within each category of public,privately aided, and private unaided institutions, wide variation inquality exists. Quality assurance mechanismsareweak, andprograms inlessthan 15 percent of institutions are accredited by the NationalAccreditation Board. ITis not used significantly for teaching. No more than 6 percent of institutions have any noteworthy researchactivity. Institutions are essentially unconnected to the industriesand sectors inwhich their graduates find employment (World Bank 2000). Matching education with labor market needs. Eventhough India produces almost 200,000 scientists, engineers, and technicians a year (Table 3-4), it has not been obtaining the full economic benefit from this s k i l l basebecause of the mismatchbetween education and the labor market. The professional workforce emerging from India's higher education system often cannot find suitable employment due to a growing gap between knowledge and real practice and to limitedjob opportunities inprofessional fields, coupled with low salaries. Many of themalso leave the country in searchof better opportunities, which leads to brain drain. Table 3-4: Scientific and Technical Personnel from IndianUniversities by Level of Qualification, 1979, 1989, and 1995 Source: Research and Development Statistics 2000-01, Ministry of Science and Technology, Government of India Reversing brain drain. One of the indicators of internationalmobility i s the number of Indian students entering the United States. This number has increased considerably, from around 15,000 Indian students in 1990to almost 50,000 in2001. Almost 80percent of the Indianstudentswho enrolled intertiary education invarious OECD countries in2001 went to the UnitedStates. In 1999, 165,000 Indian residents inthe UnitedStates had scienceandengineering as their highest degree.They accounted for 13percent of the total number of foreign-born U.S. residents with science and engineering as their highest degrees, 55 more than any other country. India also accountedfor a high share of foreign-born residents residing in the UnitedStates in 1999 with a science and engineering doctorate: 16percent or 30,000 people, which i s second only to China. Moreover, Indians comprised almost 7 percent of people granted entry as permanent residents inthe United States in 2001(Khadria 2004a). So not only does Indiahave to deal with the problem of the high outflow of the tertiary educated workforce, but those who leave also tend to bethe best of their cohort. Vast outflows of highly skilled healthprofessionals are among the primeexamples: 49 percent of graduates of the All-India Institute for Medical Sciences, the country's best medical school, emigrated inthe 1990s.But there are some positive signs are evident of a reversebrain drain from the UnitedStates back to India. According to the U.S. National Science Foundation, after peaking inthe mid-l990s, the number of doctoral studentsfrom India, China, and Taiwan with plans to stay inthe UnitedStates has begun to fall (Broad 2004). It is important to differentiate between the "virtuous" and vicious cycles of human capital flows. Recent developments have shown that India has become a major internationalcenter for the recruitment of high- quality IT staff. Many IT workers leave, but many return, and both flows generally lead directly and indirectly to significant knowledge transfers and linkages across business entities that benefit Indian society as well as individuals. A recent OECD paper also describes the results of two specific surveys targeting highly skilled Indians: one of ITprofessionals inBangalore and the secondof health professionals (doctors andnurses) inNew Delhi on their motivations for emigrating, experiences abroad, reasonsfor corning back to India, and perception of their current situation. The findings of bothcase studies show that young IT professionals as well as medical professionals want to go abroad mainly to gain professional experience, which they think will be highly valued inIndia when they come back. In addition, they are encouragedby higher earnings, perks, and high quality of life inthe host country. Unlike the IT professionals as well as most doctors, however, the majority of prospective nurses want to settle down abroad permanently, because they do not perceive their career prospects to be bright inIndia. Only some of the doctors are prepared to settle abroadpermanently ifthey get a chance. The fact that none of the respondent professionals inBangalore gave priority to the idea of settling abroad highlightsa unique aspect of Bangalore becoming a "corridor" for migration (outward and inward) of Indian human resources inscience and technology, which i s not the case for healthprofessionals from New Delhi. IT professionals inBangalore believe they have growing opportunities for career growth inIndia ingeneral and Bangalore inparticular (Khadria 2004b). Withtime, the above developments have no doubt exactedcosts. Many of the highly skilled people who migrate from India have been educatedat publicly financed tertiary institutions. Their migration means public resources have subsidized high-level human capital formation for developed countries. The United Nations Development Programme's (UNDP's) Human Development Report 2001 estimates a loss of $2 billion a year inresources due to emigration of computer professionals to the United States alone. The report states that eachyear about 100,000 Indians are expected to emigrate to the UnitedStates, when India has invested between $15,000 and $20,000 ineducating each one of them; the Indian government's investments ineducation are thus subsidizing industrial country economies, particularly the United States! Many questions arise: how can India be compensatedfor this fiscal cost, and i s it possible to demand compensation from host country governments?According to the UNDPreport, the simplest administrative mechanismwould be to impose a flat tax-an exit fee paid by the employee or the firm at the time the visa is granted. The tax could be equivalent to the fees charged by headhunters, which generally runabout two months' salary. Assuming annual earnings of $60,000, this would amount to a flat exit tax of $10,000, or approximately $1billion annually. The report also cites several alternatives for taxing flows of human capital: e Requirementfor loan repayment. Each student intertiary education is given a loan (equivalent to the subsidy provided by the state), which must be repaid if the student leaves the country. 56 0 Aflat tax. Overseasnationals pay a small fraction of their income annually, for example, 1percent. 0 U.S.mode2. Individuals are taxed on the basis of nationality, not residence (this would require negotiatingbilateral tax treaties). 0 Cooperative model. A multilateral regime allows automatic intergovernmental transfers of payroll taxes or income taxes paidby nationals of other countries. As with all taxes, eachof the above involves trade-offs between administrative andpolitical feasibility, and the revenue potentialthat can be garnered as a result of these measures. Measuresto Strengthen Educationand Human Resources Although India has significant areas of strength inits educational systemand human resource development, the country must still address key areas of reform so education will support the new knowledge economy. These include enhancing basic education, overhauling tertiary education, remedying weaknesses in science and technology education, promoting policy and institutionalreforms for scientific R&D, strengthening skills development and training, encouraging lifelong learning, enhancing the role of government, and involving the private sector ineducation, training, and human resource development. Enhance basic education. Skills matter more than ever intoday's competitive global market. Inlarge countries such as India and Brazil, where the vast majority of people are unskilledand uneducated,the capabilities of the majority of the population must be enhancedfor the economy to show substantial improvements. Firmsand farmers alike must be able to learn and develop new skills. While not losing sight of the need for secondary and tertiary education, governments should improvethe skill and education levels of the mass of people through primary and vocational education. The success of countries such as China inachieving higher growth reveals the importance of a workforce that has a basic education and can be trained. Table 3-5 highlights the educational attainment of the populationin China and Indiain 1980-2000. Country Year Population Highest level attained Average over No Firstlevel Second Level Post-Secondary Years age 15 Schooling Total Complete Total Complete Total Complete of (1000s) (Percentage of the population aged 15 and over) School India 1980 423306 66.6 12.6 4.1 18.5 5.4 2.4 0.7 3.27 1990 542391 55.8 20.5 7.6 20.5 5.6 3.3 1.7 4.10 2000 680072 43.9 28.2 10.5 23.8 6.5 4.1 2.2 5.06 China 1980 642693 34.0 31.3 11.8 33.7 9.9 0.9 0.6 4.76 1990 837940 22.2 34.6 13.0 41.3 13.5 1.9 1.4 5.85 2000 958997 18.0 33.9 12.8 45.3 14.8 2.8 2.1 6.35 Source: Barro and Lee (2001) It shows that in 1980,China already had a higher share of population with schooling than India: 66.6 percent compared with 34 percent. So, it i s not surprising that China had a higheraverage educational attainment level in2000 of 6.35 years compared with 5.06 years inIndia. Inthe past 20 years, it i s impressive that India was able to more than double the share of population with completedprimary education from 4.7 percent to 10.5 percent. China, however, was able to increase the share of population with completed secondary education by 50 percent from 9.9 percent in 1980to 14.8percent in 2000, compared with an increasefrom 5.4 percent in 1980to 6.5 percent in 2000 inIndia. 57 India, therefore, faces a big challenge inextending secondary education and providing slulls to the population at large so they are able to contribute to the economy. Inaddition, as India's population continues to grow, to turn the potential o f this very young population into an asset, India needs to provide people not only with primary education, but increasingly secondary and even tertiary education, as well as requisite skills so they are able to participate effectively inthe knowledge economy. Overhaul tertiary education. The Indiantertiary education system needs to become more demand driven, quality conscious, and forward looking to retain highly qualified people and meet the new and emerging needs of the economy. Some actions that can help to develop a vibrant tertiary education sector inthe country include the following: Empower higher education institutions inacademic, administrative, financial, and managerial matters, and expand and develop more high-quality institutions (such as IITs) to satisfy the demand for postsecondary technical and engineering education. 0 Create a rating mechanism for tracking all higher education institutions, based on a transparent set o f parameters related to education delivered and infrastructure available. Such rating information would be useful in evaluating the performance and progress to date o f these institutions and should be freely available to any student desiring it (see Box 3-3 for a recent UGC initiative inthis area). Box 3-3: Increasing Transparency inIndianHigher Education The University Grants Commission began the Higher Education InformationSystems Project to develop a transparent and comprehensive information system on the following: Monitoring of grants Collection of relevant data from various institutions for statistical analysis consistent with international standards Recognition and management of institutions and programs based on their level of competence and performance Management of university and college admissions to bring transparency into the process Researchproject management Expertise and facilities databaseto improve the interface between academia and society. The UGC project will also, particularly with industry, monitor the relevance of various curricula offered by universities to industry and develop a Graduates Registration and InformationSystem (Gratis), a labor market information system. Gratis would assign a unique number to each student who enters the Indianhigher education system, link such numbers with subsequentqualifications acquired, and develop and establish a qualification-skill- competency card integrated with the multipurpose cards. Source: UniversityGrantsCommission(http:llwww.ugc.ac.in/new-initiativesfhisp.html), Reduce generic subsidies and introduce scholarships and aid schemes targeted to meritorious and economically weaker students. 0 Orient the curricula o f Indian universities (which remain academic and rather rigid) toward developing the "knowledge technicians" requiredby industry. Curricula should also emphasize development o f soft skills, such as teamwork, networking, language, and knowledge-sharingskills at higher education institutions. Provide Intranet and Internet connectivity to universities and colleges to enable free flow o f knowledge and information to help enhance access as well as the quality o f higher education. Inthis direction, India has developed an Educationand ResearchNetwork (ERNET)to connect and provide Internet service provider (ISP) services to educational institutions all across the country for academic and research purposes and create a backbone for the flow of teaching and learning support materials. The network architecture consists o f campuswide local area networks at universities, a terrestrial 58 backbone linkinguniversities, and a broadband satellite network. Inaddition, the UGC-INFONET has a communications backbone of 8 Mbps, which will be upgraded to 1 GbpsZ3 Varied bandwidth will be given to universities: from 528 Kbps to 2 Mbps. Campus local area networks (LANs) will be set upthat will provide free accessto students andteachers.24 Use distance learningtechnologies to expand access and quality of formal education and also of post- formal education and training (Box 3-4). Box 3-4: ExpandingDistanceEducationinIndia Duringthe NinthFive-YearPlan(1997-2002), the Indira GandhiNationalOpenUniversity(IGNOU) expandedits RegionalCentersand Study CentersNetwork, increasingenrollmentof distancelearnersinopen and distanceeducation.IGNOUhas 1.2millionstudents on its rolls and offers 72 programs. The emphasis in the Tenth Plan (2002-07) is onincreasingaccess to disadvantagedgroups and underdevelopedregions and setting up openuniversitiesinIndianstates that do notyet havethem. IGNOUoffers education, training, and extensionprograms and also acts as the nationalnodal agency for the maintenanceof standards indistance educationinthe country.It has establisheda DistanceEducationCouncilthat acts as nodal agency for the distanceeducation systemat the tertiarylevel.It has also adoptedan integratedmultimediainstructionstrategy consisting of print materials and audiovisualprograms, and supportedby counselingsessions at its study centersthroughout the country.InJanuary 2000 it launcheda 24-hour educationalTV channelcalledGyan Darshan, which telecasts educationalprograms from the primary school to the tertiary level. The TenthFive- Year Planproposedexpansionof the activitiesof GyanDarshan (TV channel) and GyanVani (radio broadcast) to include40 FMradiostations. Source: India,PlanningCommission (2001b). Harness ICTs for teacher training and content development at all levels. For example, the IBM KnowledgeFactory inBangalore and UGC are working on developingfive educational multimedia resource centers for content development. Intel and Microsoft are also working with UGC on teacher training and the development of electronic ~ontent.'~ Develop programs that are flexible and inline with the needs of the market and communities, includingthroughthe recent UGCinitiative to increaseundergraduate education fromthree to four years, inwhich the last year i s spent mastering professional subjects that meet the new needs of the economy. Encourage foreign investment inestablishing higher educational institutions.For instance, Motorola i s collaboratingwith the Pune Institute of Advanced Technologies and i s offering a postgraduate degree inadvancedtelecommunication engineering with a software focus. Such new colleges can helpto introduce specia.lizedsubjects as demandedby the market. Remedy weaknesses in science and technology education. A consensus is developing on the need for a major systemic education reformstrategy in India for science and technology. The strategy involves the following sequential interdependent elements: empowering institutions (with full accountability); utilizing resources optimally; mobilizing additional financial resources; establishing effective quality assurance mechanisms; networking of institutions to enhancecapacity, improve quality, and promote excellence; 23Mbpsstands for millions ofbitsper secondor megabitsper secondandis a measureofbandwidth(thetotal informationflow for a given time). Dependingon the mediumandthe transmission method,bandwidthis also sometimes measuredinthe Kbps (thousandsofbits or lulobits per second)rangeor the Gbps (billions ofbits or gigabitsper second) range. 24Fromapresentationby Arun Nigavekar,chairman, UniversityGrants Commission at a workshop on "India andthe Knowledge Economy:Leveraging StrengthsandOpportunities," November9, 2004, New Delhi. (http://www.worldbank.org.inlWBSITE/EXTERNAUCOUNTRIES/SOUTHASIAEXT/INDIAEXTN/O,,contentMDK:20279055 -menuPK:295602-pagePK:141137-piPK:141127-theSitePK:295584,OO.html). 25bid. Arun Nigavekar,November9, 2004, New Delhi. 59 establishing better and closer linkages with industry and community; and increasing access and reducing regional imbalances (for more information, see World Bank 2005a). Several reforms have been undertaken to date inthis direction. Inan effort to upgrade further the large number of science and engineering colleges in the country to quality standardscloser to those of India's world-class IITs, the government inits Tenth Five-Year Plan (India, PlanningCommission 2002e) decided, as part of ongoing restructuring of engineering education inIndia, that 17RECs with great potential will be expanded, modernized, given full academic and administrative autonomy, and converted to National Institutes of Technology (NITs),with a "deemed-to-be-university'' status inmost cases or as colleges with full academic autonomy, each with powers to award its own degrees.26Several State Colleges of Engineering have also been given greater autonomy, some also with "deemed-to-be- university" status. Still bolder steps can be taken. According to a recent article by Prof. M.A. Pai (2004), given the great demand for science, engineering, and technology studies, the number of four-year engineering colleges has grown since 1980from 158 to 1,208, partly as a consequenceof the demand for engineers invarious sectors of the economy includingIT,but also due to the limitedexpansion of the IIT system (India currently has seven IITs), and mushroomingof capitation fee (self-financing) colleges. The intake inthe four-year, engineering degree-granting institutions i s now 350,000 per year. Eachyear, of a pool of more than 150,000 applicants appearing for the Joint Entrance Examination, approximately 3,500 are typically absorbed into the seven IITs; thus, IITs barely account for 2.3 percent of the total applicants that apply through the Joint Entrance Examination. Those who do not get into the IIT systemparticipate inquite a few entranceexams inplaces all across the country to get into engineeringcolleges, the quality of which are rather poor compared with an IIT. So, given such pent-updemand and an immense pool of students with highaptitudes, expansion of high- caliber institutions, such as the I I T s i s warranted, so they can become the hubs of national education chains. For a start, severalNITs and front-ranking universities/institutions for engineering and applied scienceseducation such as the University of Roorkee, Jadavpur University, and Anna University can readily impart IIT-type education with minor adjustments to their curricula. Institutions such as the Birla Institute of Technology and Sciences, for example, have already accomplished this and are now considered on par with the IITs; therefore, many NITs can beelevated to IIT status by giving them full autonomy as well as financial resources. With involvement of IITs, the curricula of NITs must of course be brought inline with those of the I I T s as a mandatory step before giving them IIT status. This raises several issues for IITs. On the one hand, they could be concerned about dilutingtheir brand name. This need not be the case: the state of California, for example, has ten universities under the University of California banner; although all of themhave comparable undergraduateprograms in engineering, they are distinct interms of their researchand thus get calibrated and ranked. InMexico, the Tec de Monterrey (in MIT of Mexico) has expandedfrom one campus innorthernMexicoto 32 campuses around the country today, while maintainingvery high-quality standards throughout the system. The IITs themselves are making international forays to take advantage of interest from foreign universities looking to linkwith world-class Indianinstitutions.IIT-Bombay has linked with the National University of Singapore, which paves the way for the former to offer master's degrees intechnology-levelcourses to students in Singapore. Inthe same vein, the Indian Institute of Management-Bangalore has also made plans to set up an internationalcampus inSingapore (Iype 2005). The IITs thus have great potential to become important players inthe international higher education market. 26For more information, see the Higher and Technical Education Section of India's Tenth Five-Year Plan at http://planningco"ission.nic.in/plans/p1anrel/fiveyr/l Oth/volume2/v2-ch2-5 .pdf. 60 Promote policy and institutional reforms for scientific R&D. The above discussion i s also relevant to the ability of India's universities to produce enough high-quality scientists and technologists to meet the country's demand for scientific R&D. This calls for urgent efforts to promote policy and institutional reforms in scientific and technical education for both public and private institutions to improve the quality and skills of India's current and future pool of technical manpower. The reasonsto do this are especially compelling, becauseIndia has witnessed a spurt inopening of R&D establishments by MNCs inthe high- tech areas of IT, information sciences, software engineering, biotechnology, telecommunication, and power management.Inaddition, an increasing number of call centers that needto cater to international customer satisfaction have openedup, and large international business houses are establishing increasing numbers of manufacturingunits insuch areas as automotive industries, entertainment electronics, power control equipment, and so on. These developments rest on the assumption that high-level skilled manpower is either available or can be generated or trained to the requiredlevels at relatively low cost by the Indianeducational system. Although Indiadoes have suchmanpower, moreneeds to be done to foster the development of such skills. Inaneffort to meet this need, in2002, Indiainitiated aTechnicalandEngineeringEducationQuality ImprovementProgramwith World Bank assistance to support production of high-quality technical professionals through reforms inthe technicavengineering education system to raise productivity and competitiveness inthe Indianeconomy (for more details, see World Bank 2002d). The program's objective i s to implement severalreforms inthe existing education system focusing on governance and financing of institutions, promotion of excellence through competitive funding, networking of institutions for better utilization of resources, closer interaction with the local community and economy, and improved capacity of education system management. The programhas now gone into effect in 13 states, which have agreedto implement major systemic and institutional reforms. Only institutions that have agreedto implement reforms are eligible to compete for financial support, and a total of 130eligible institutions have been selectedto date on a competitive basis for such support. Strengthen skills development and training. When technology i s changing, enterprises must invest in worker training to remain competitive. They are more likely to do so when their workers are better educatedto start with, becausethat lowers the cost of acquiring new skills. Despite the demonstrated gains inproductivity from training, not all employers provide it. Training involves costs: inmaterials, time, andforegone production. Weak management, hightraining costs, inability to exploit scale economies intraining, poor information on benefits of training, market imperfections, and the absence of competitive pressuresare all reasonsthat firms provide too little training (UNDP 2001). India will also need to develop various job training programs to be globally competitive. These programs mustbe flexible, cost-effective, and quickly adaptableto new skill demands generatedby changing markets and technologies. India could learnfrom the experiences of some MNCs, such as GE, that have set up training programs for their large pool of talented scientific and technical talent inIndia. According to GE, investinginlearning and training enables it to hire and retaintalent and expertise, and the company invests nearly $1 billion each year worldwide incareer development of its employees (Box 3-5). 61 Box 3-5: General Electric Actively Promotes Organizational Learning, Including inIndia Intellectual capital is considered GE's most valuable asset. Investment incareer development is key for professionals to improve significantly their on-the-job performance, enhance their personal and professional development, and, inturn, acceleratethe growth of the company. Every year, GE invests worldwide nearly $1 billion-about the size of GE-India's gross revenues from domestic operations-in career development, both on thejob and through leadership programs. This is a three-step process that rests on infrastructure, systems and processes, and, most important, culture. Some highlights follow: In2002 faculty from Crotonville (GE's US.training center) and senior GE leadersdelivered more than 3,500 training man-days to more than 1,500 GE leadersinIndia. To meet other training needs, GE has a separatetraining delivery organization, which serves all the 25 GE business entities inIndia. Training focuses on specific competencies such as Six Sigma and communication skills among others. Added to this, individual businesseshost their own training functions, focused on developing competencies and enhancing skills specific to that business. GEhas also invested substantially indigitizingand leveraging the capabilities of the Internet to support its learning needs. Launched inSeptember 2002, the e-Learning initiative provides coursesin areas such as leadership, communication, customer relationships, and personal finance planning among others. More than 2,000 man-days of learning have been delivered every month to employees inIndia through e-Learning. "Inside GE," the corporate Intranet, i s used to access information, projects, tools, resources, and best practices instantly from any GEbusiness located in any part of the world. To share knowledge, learning, and global initiatives with Indianprofessionals inother organizations and to learn from them, GE India has launched an Internet portal (http://www.gecareersindia.com) that features best practices and an interactive forum for raising queries with experts inGE. Onthe systems and processesside, the company has set up councils, such as the finance, humanresources, sourcing, and IT councils, inwhich employees from different GE businessesmeet regularly and exchange ideas. Considering that GE India comprises 30 legal entities, representing 16 different businesses inIndia, across practically every segment of industry, these forums are the glue that bindsthe company together. GE also has a robust mechanism for cross-businessmoves of talented employees. Inthe past 12 months alone, more than 140 managers have moved across GE businessesinIndia. But at the heart of this diversified organization i s a culture that actively promotes and demands organizational learning, from other businesses, functions, and employees. Source: Zachariahs (2003). Encourage lifelong learning. The importance of knowledge and innovationineconomies i s increasing, as i s demand for new competencies. The formal and nonformal education and training systems need, therefore, to evolve into lifelong learning systems. People now need access to learning on an ongoing, continuous basis; this requires a stronger alignment of institutions and policies with the new demands of the economy to createahigh-performance, learner-drivensystem of education andto promote lifelong earning.^' According to a World Bank report (2003g), a lifelong learningframework encompasses learning throughout life, from early childhood through retirement. It includes formal learning (schools, training institutions, and universities), nonformal learning (structured on-the-job training), and informal learning (skills learned from family members or people inthe community). It allows people to access learning opportunities as they needthem. Inthis model, people are motivated to learn on a continuing basis, equipped with the skills to engage in self-directed learning, given access to opportunities for learning throughout their lives, and offered financial and cultural incentives to participate in lifelonglearning. The approach i s basedon the centrality of the learner, defined to include boththe individual and collective 27See http://www.congress-lifelonglearning.org/frameset.htm. 62 entities, suchas the enterprise, the economy, and society at large. Table 3-6 provides a summary of the differences between lifelong learning and traditional education systems. Table 3-6: Characteristics of Traditional and Lifelong LearningModels Traditional Learning Lifelong Learning ~The teacher i s the source of knowledge. Educators are guides to sources of knowledge. Learners receive knowledge from the teacher. People learn by doing. Learners work by themselves. People learn ingroups and from each other. Tests prevent progress until students have completely Assessment i s used to guide learning strategies and mastered a set of skills and to ration access to further identify pathways for future learning. learning. All learners do the same thing. Educators develop individualized learning plans. Teachers receive initial plus ad hoc in-service training. Educators are lifelong learners. Initial training and ongoing professional development are linked. "Good" learners are identified and permittedto continue People have access to learning opportunities throughout their education. their lives. Source: World Bank (2003g). Developingcountries such as India face specific challenges indeveloping such systems. These include expanding coverage to achieve universal access to basic education as well as increased access to secondary and tertiary provision; improving the linkages between formal and informal education systems and the labor market; raisingthe quality of learning; and expanding access to learning opportunities beyond initialformal schooling. Policies are neededto ensurethat education and training systems together respond to the needs of the knowledge economy and facilitate lifelong learning. InIndia, severalpolicy statementshave beenmade onthe needto createadult and lifelonglearning opportunities (UNESCO 2002), but not many concrete policy actions have beenundertaken. Inaddition, several ministries, such as the Ministries of Education, HumanResource Development, and Labor, are involved inproviding education, learning, and training opportunities, `leading to fragmentation of the system; thus, a coherent picture i s neededof the division of responsibilities to move the lifelong system forward ina systematic way. India should, thus, work to put inplace programs intendedto meet the learning needs of all, both within and outside the school system, in a variety of settings and using new technologies suchas ICTs, so that people have the means and incentives to learn throughout their lifetimes. China has already recognized the need to develop its lifelong learning system. It i s grappling with the challenges of providing massive training to its large labor force, which has relatively low educational attainment, and at the same time upgradingthe quality of its educational system to impart to students the necessary skills to compete inthe knowledge economy. India could do well to learn from China and the experiencesof other advancedcountries (such as the UnitedKingdom28)to develop an architecture and framework for lifelong learning. Enhance the role of the govemment. The above discussion highlights the key role of government inthe education system, not as a controller, but as the architect of systemwide education standards and regulations. The government should address equity issues for poor and needy students through the use of 28The UK'sNational Grid for Learning(http://www.ngfl.gov.uk/) provides educationalresourceson the Internet for all types of learners. 63 scholarships, vouchers, and low-interest loans for private education. It should be involved in improving the quality o f public education, develop accreditation mechanisms, and ensure overall coordination and evaluation of the multiple providers o f different levels of education and skills. It should also closely examine the efficiency o f the allocation of public resources to education, as well as the efficiency inthe use o f these resources. To promote quality and accountability, the government should make the system more transparent and increase availability o f educational policy information and statistics to the public. Involve theprivate sector. The private sector must also play an increasingly important role inimproving education quality, because government cannot by itself afford to finance increases in access and, at the same time, increase quality. It would be important inIndia to review the rationale for government funding of institutions at different levels and find a way get more private resources to meet the financing challenges of expanding the educational system. Inparticular, the private sector may be willing and students could afford to enter many parts of the higher education sector, especially with appropriate student loan schemes.29China, for example, has been quite successful inmobilizing private funds for education. One-quarter to one-third o f the costs o f public higher education are covered by tuition payments by households. InIndia,avariety ofprivatehighereducationalinstitutions havebeensetupinthecountry, manywithout government accreditation. Box 3-6 provides information on two leading private sector initiatives in education inIndia; the first one i s not accredited, incontrast to the second. 29 The extent to which certain partsof the higher education system should be privatized i s a matter o f considerable debate. The Bank's own thinking (most recently reflected inWorld Bank 2002a) underscores that tertiary education "confers important public goods that are essential to development and poverty reduction-goods that must be accessible to all strata, to all peoples, and to both men and women." It further recognizes its role in constructing knowledge economies and democratic societies as "more influential than ever." Tertiary education institutions are the maintraining grounds for teachers and health professionals, among others. They often serve as centers of research and development. Inthis context, strong arguments exist for some public financing of tertiary education, albeit the optimum share remains inquestion and i s often related to the adequacy of public financing to meet primary and secondary education needs. Nonetheless, most within the education community strongly advocate increased government attention to expanding access, quality, and relevance o f tertiary education, whether through direct financing or ensuring the enabling conditions and incentives are inplace to motivate and facilitate greater private investment in tertiary education. 64 Box 3-6: Reapingthe Potentialof Private Higher EducationinIndia rnternational Institute of Information Technology (I'IT}. This institution, located inPune was conceived as having a Zlobal perspective inbringingto the fore innovation and leadership in advanced IT education and research. The nstitution i s designed to foster innovation and an entrepreneurial way of thinking and attracts students not only from [ndia, but Korea, Russia, Indonesia, and Thailand. I'IT offers full-time master's degreeprograms inadvanced Information technology and management. Its courses have been designed and developed under the guidance of an internationally acclaimed panel of leaders and innovators leading the IT industry and advanced I T research and are jelivered by active practitioners of IT. I'IT has also embarked on worldwide collaborations with universities, researchlaboratories, and industries, including the Russian-IndianCentre for Advanced Computing Research in Moscow, Korea University and Sahmyook University inKorea, University of South Florida and Dominican University inthe United States, Groupe ESSCA inFrance and Hungary, University of Padjadjaran inIndonesia, and Mae FahLuang University in Thailand. kfanipal. Tucked away in the Malabar Coast of Southwest India, Manipal i s the nucleus o f 53 educational institutes, including two universities, 27 professional colleges, affiliated institutes, and numerous primary and high schools. Thousands of students also study inManipal institutions situated inIndia in Sikkim and Mangalore, as well as in Nepal, Malaysia, and Dubai. Manipal has graduated more than 20,000 students and has an ever-increasing enrollment number of more than 30,000 students.The Manipal Academy of Higher Education was born when its professional colleges were granted university status inJuly 1993. The academy was the first institute in the private sector to be recognized as a "deemed university" by the Government of India. Manipal's affiliation with other centers of learning across the globe has facilitated the exchange of knowledge and culture through student and faculty exchange programs. Students from more than 32 countries worldwide seek education at culturally diverse Manipal. Degrees from Manipal are recognized inmore than 40 countries. Twinning programs, inwhich a student completes the first two years of education at Manipal and then completes the course at a US.,Australian, or other university, which confers the degree, are also extremely popular. An example i s the Melaka-Manipal Medical College, set up inMalaysia. This was the first Indo-Malaysianjoint venture inprivate medical education. Ithas a five-year twinning program that leads to a medical degree. The first phase, lasting two and a half years is conducted at the Manipal campus inIndia. The second phase, of the same length, is conducted at Melaka. Since 2003, more than 200 Malaysian doctors have graduated from the college. Sources: "Intemational Institute of InformationTechnology," http://www.isquareit.ac.in; "Manipal Academy of Higher Education," http://www.manipal.eddindex.htm,andapresentationby J. S. Nagraentitled"Public PrivatePartnershp:Melaka- Manipal MedicalCollege" at the "Higher EducationSummit:Roadmapfor the Future," December 1-2,2004, New Delhi, http://www.ficci.comlficcilmedia-roomJspeeches-presentations/2004/dec~agra.ppt. India thus needs to have a more integrated and coordinated approach with the private sector, where appropriate. The government should encourageprivate financing of education and training and should helpto leverage India's strengths inprivateeducation. It shouldput inplace accreditation systems for private education and training providers and should develop an effective systemfor assessingand certifying vocational qualifications. The agendai s large, but some positive steps have been made inthis direction. For example, to diversify funding sources for higher education, the fee structure has been enhancedfor some professional disciplines(medicine, engineering, and so on), combined with subsidies for poorer students. Intechnical education, 50 percent of institutions are privately funded, a trendthat should be encouraged.Box 3-7 shows the experience of the Monterrey Institute of Technology, which i s partnering with the private sector inMexico to develop curricuIa that bettermeet the needs of the private sector and is also trying to reach students with low financial resources. 65 Box 3-7: Transforming Established Systems: The Monterrey Institute of Technology The Monterrey Institute of Technology (Tec de Monterrey) inMonterrey, Mexico, i s a premier private education organization comprising a network of 33 campuses all across the country. I t i s a franchise system of local campuses, each financed and governed by local private sector leaders. Its Virtual University i s a worldwide leader in distance learning, championing a continuing education agenda all across the Spanish- speaking world and making inroads into such giant markets as China. To reach students with limited financial resources, the institute launched a spin-off, Millennium University (Universidad TecMilenio), which was designed to combine the high quality associated with the Tec de Monterrey brand of education with dramatically lower costs. By May 2004 approximately 6,500 students were enrolled; per student costs are approximately three times lower than inthe parent organization. B y 2010 TecMilenio plans to enroll 100,000 students.What are the mainfactors that allowed the institution to reduce costs dramatically without compromising quality? The curriculum is designed and often delivered through the management of private sector firms. TecMilenio shares offices with some of these firms, so students and teachers often work, learn, and teach in the same location. Distance education i s highly utilizedto offer the best professors and courses. Pedagogy i s basedon problem-solving and conceptual tests; yet, testing is standardized and centralized. Remuneration for teaching depends on testing results of students. A small management structure draws on carefully selectedprofessors from Tec de Monterrey staff and translates industry needs into pragmatic curricula. Inthis way, vested interests of professors, who sometime use the same teaching materials for decades, are curbed: content is determined by industry needs. Source: Staffof World Bank's Knowledgefor DevelopmentProgramand UniversidadTecMilenio (http:l/www.tecmilenio.edu.mx/). Summary of IssuesandRecommendations India must keep on building a cadre of technicians, professionals, and knowledge workers who will be the backbone of the knowledge-based economy. Some actions to improve the quality and relevance of the education system, especially higher education, but also harness human resources at all levels include the following: 0 Improvethe efficiency inthe use of public resources inthe education system, and make the education systemas a whole more responsive to market needs, as well as ensure expanded access to education that fosters critical thinking and learning skills for all, notjust the elites. 0 Enhancethe quality of primary and secondary education, includingtackling issues relatedto quality andrelevance, with special emphasis on ameliorating teacher vacancies and absenteeism, reversing highdropout rates, and correcting inadequate teaching and learningmaterials and uneven levels of learning achievement. This i s especially important for India to meet the goal of providing eight years of schooling for all children by 2010. 0 Ensureconsistency between the skills taught inprimary and secondary education and the needs of the knowledge economy, introduce materials and methods to teach students "how to learn," rather than stressing occupation-specific knowledge. 0 Reformthe curriculumof tertiary education institutions to includeskills and competencies for the knowledge economy (communication skills, problem-solving skills, creativity, and teamwork) that also meet the needs of the private sector. 0 Raisethe quality of all higher educational institutions, notjust a few world-class ones (such as the IITs). 66 Improve the operating environment for education, especially higher education, which calls for a shift inthe role of the government from managing the administrative aspects of higher education institutionsto becoming an architect o f education standards and regulations, including improving and monitoring the quality o f academic programs, establishing accreditation standards and procedures, ensuring equity, and coordinating a systemwith multiple players and multiple pathways to learning. Embracethe contribution o f the private sector ineducation and training by relaxingbureaucratic hurdles and put inplace better accreditation systems for private providers of education and training. Establishpartnerships between Indian and foreign universities to attract and retain high-quality staff and provide opportunities for students to receive internationallyrecognized credentials. Increase university-industrypartnerships to ensure consistency between researchand the needs of the economy. This will include reforming the university curriculum to include the development of skills and competencies that better meet the needs of the private sector. Use ICTs to meet the double goals of expanding access and improving the quality of education. Invest inflexible, cost-effective job training programs that are able to adapt quickly to new skill demands generated by changing markets and technologies, aligned with the needs of firms. Develop a framework for lifelong learning, including programs intended to meet the learning needs o f all, both within and outside the school system. This will also require greater coordination across the different government bodies responsible for various components o f the education and training system and development o f procedures for recognition of what i s learned indifferent parts o f the system. Make effective use of distance learning technologies to expand access and the quality o f formal education and lifelong training. 67 4. INNOVATIONSYSTEM The innovation system plays an important role in acquiring, creating, adapting, and disseminating knowledge, which i s crucial for success inthe knowledge economy. The innovation systemin any country consists of the network of institutions, rules, and procedures that affect how the country acquires, creates, disseminates, and uses knowledge. Innovationin a developing country does notjust concern domestic development of knowledge on the global "frontier." It also concerns the applicationand use of existing knowledge to the local context. For countries such as India that are still far behind the global frontier in many sectors, tapping into and making effective use of existing global knowledge will have a greater economic impact than developing frontier knowledge. Itmerits attention that the concept of "innovation" encompasses not only "technological innovation," that is, diffusion of new products and services of a technological nature into the economy, but equally includes nontechnological forms of innovation, such as "organizational" innovations. The latter include the introductionof new managementor marketingtechniques, adoption of new supply or logistic arrangements, and improved approaches to internal and external communications and positioning. The concept of a national innovation systemrests on the premise that understanding the linkages among the various actors involved ininnovation are key to improving a country's technology performance. These actors include private enterprises, universities, research institutes, think tanks, consulting firms, and others. The innovative performance of a country depends to a large extent on how these actors relate to eachother as elements of a broader system. Linkages can take the form ofjoint research, personnel exchanges, cross-patenting, licensingof technology, purchase of equipment, and avariety of other channels. Inthecontext ofdeveloping countries, innovationshouldbeunderstoodas somethingnewtoalocal i context. Three major forms of innovation exist (Aubert 2005): 0 Localimprovements basedon adoption of technologies that are more or less available worldwide or locally ("technology adoption" from a global perspective) 0 Buildup of competitive activities with some adaptation to existing technologies ("technology adaptation") 0 Design and production of technologies of worldwide significance ("technology creation" from a global perspective). Inadeveloping country suchasIndia,wheretheformal sectorisrelativelysmall, animportantpartofits innovation systemconcerns the diffusion of modem and more efficient practices to the greatest number of users. This applies to both domestic and foreign knowledge. India has done a remarkablejob of diffusing knowledge and technology, especially inagriculture. As a result of the "green revolution," India has transformed itself from a net importer to net exporter of food grains. India's "white revolution" inthe production of milkhas helped it achieve the twin goals of raising incomes of ruralpoor families as well as the nutrition status of the population. India now needs to continue to undertake efforts to improve the productivity of agriculture, industry, and services even further. Suchefforts must include strengthening technology diffusion institutions, such as agricultural and industrial extension agencies, productivity- enhancing organizations, and technical information agencies, as well as expansion of more efficient firms, specialized suppliers of capital goods and inputs, and consulting and technology services. Inany sector indeveloping countries suchas India, alarge disparity usually exists betweenthe most and least efficient producers; therefore, considerable economic gains can be harnessedfrom moving the averagedomestic practice to the best domestic practice, not to mentionbest internationalpractice. A host of efforts would be required: 68 0 Improving the system for technical norms and standards-such as product quality, work safety, and environmental protection-to facilitate proper diffusion of know-how 0 Increasing dissemination of technology by strengthening competition so that the most efficient f i r m s expand and improve performance, and establishing and enforcing appropriate laws 0 Encouraging more trade among Indian states 0 Allowing for economies of scale and scope 0 Facilitating diffusion o f best products through price- and quality-based competition. This chapter focuses on the more formal R&D and innovation efforts inIndia, beginningwith benchmarkingo f India's innovation system. Benchmarking Innovation India generally has great strengths inR&D, scientists and engineers, and technical publications, but weaknesses in patents that can be spun off into commercialization; therefore, despite a strong R&D infrastructure, India i s weak on turning its researchinto profitable applications. Figure 4-la shows that, when scaled by population, India does better than the Africa, South Asia and the Latin America Regions, but lags behindBrazil, China, and other comparators inthe innovation area. Interms of absolute size, however, India i s placed ina far more advantageous position, because the country i s endowed with a large critical mass inits research and innovative capacity. Figure 4-lb thus shows that, interms o f absolute size, India's R&D personnel inputs not surprisingly are considerably higher than even those o f Western Europe. More broadly, India's stock o f scientific and technical personnel increasedby 59 percent from 4.8 million in 1991to 7.7 million in2000.30 30Basedon a presentationby Vijay Kelkarentitled"India: The Coming GoldenAge" at the World Bank on October 28,2003. 69 Figure 4-1: Innovation by Populationand Absolute Size, India and the World, 1995 and Most RecentPeriod a. Scaled by Population 0 2 3 4 5 a 7 a Q 0 1995 Note: Countries above the 45-degree line have improvedtheir position in innovation for the most recent period for which data are available relative to their position in 1995 (or closest available date inthe mid-1990s) and vice versa for countries below the line. Source: World Bank, "Knowledge Assessment Methodology," http://www,worldbank.org/kam. b. Absolute Size L- Kenya CI K Jordan e Nigeria E0 Middle East and N o i i h l 2 3 4I 5I BI ?I 8I QI 1995 A'ote: Countries above the 45-degree line have improved their position in innovation for the most recent period for which data are available relative to their position in 1995 (or closest available date in the mid-1990s) and vice versa for countries below the line. Source: World Bank, "Knowledge Assessment Methodology," http://www.worldbank,org/kam. 70 In2001UNDPdeveloped a TechnologyAchievementZndex that focuses onthree dimensions of innovation at the country level: creation of new products and processes through R&D; use of new technologies and old inproduction and consumption; and availability of skills for technological learning and inn~vation.~~Countries are ranked infour categoriesinthe index: leaders, potential leaders, dynamic adopters, and the marginalized. India i s home to Bangalore, one of the most dynamic global innovation hubs (rated 1lthamong 46 hubsby WiredMagazine). Yet, India ranks 63rd onthe Technology Achievement Index (of 72 countries) and i s placed within the lower end of dynamic technology adopters, mainly because of huge variations intechnological achievement among Indian states. Other reasonsalso exist. Even though the country has one of the world's largest pools of scientists and engineers, in2001, as mentioned inchapter 3, its average years of schooling were just more than five years and the adult literacy rate was about 35 percent. These indicators matter, becausethey impact the ability of a country to harnesstechnology and innovation for its development. To its credit, India has recently been making notable progress interms of strengthening R&D infrastructure, developing technological innovations, and altering the mindset of its people toward better technology absorption. Figure 4-2 presents the detailed innovation scorecardfor India, and annex 10presentsthe scorecardsfor the other comparator countries. It highlights that India has been weak intapping into the rapidly growing stock of global knowledge. Notice the low FDIinIndia: a mere 0.6percent of GDP in 1993-2002, as well as low payments for technology licensingas well low share of manufactured exports and imports in GDP.Availability of venture capital is also rather limited inIndia (Figure 4-2), but some signs of vibrancy are evident. A notable venture capital investment market i s emerging; venture capital increased from $3 million in 1995 to $342 million in2000 (UNDP 2001). Figure 4-2: India's Scorecard on Innovation, SelectedVariables, Most Recent Period Gross Foreign Direct Investmentas % of GDP [0.60) I3.50) Private sector spending on ky and license fees payments Imil. pop. (0.33) (5.00) High-Tech exports as % of manuf. expo yaky and license fees receipts Imil. pop. (0.01) (4.101State of cluster developme ce 8: engineering enrolment ratio [% of y level students) (25.00) (0.33) Patent applications granted by the USPTO Imil pop. esearchers in R8:D I million(98.85) (3.80) Availability of Venture Capita al expenditure for R8;D as % of GDP IO.78) (4.00) Admin. Burden for Start-up anuf .Trade as % of GDP [I 3.02) [9.23) Scientific and technicaljournal articles Imil sity-company researchcollaboration (3.20) (95.00) Cost to enforce a contract (96 of G r a business (% of GNI per capita) (49.80) Note: Each of the 80 variables inthe KAMi s normalized on a scale of 0 to 10for 128 countries. The fuller the scorecard, the better poised a country i s to embrace the knowledge economy. But an economy should not necessarily aimfor a perfect score of 10on all variables. This is because the scorecards may be shapedby the particular structural characteristics of an economy or by trade-offs that characterize different development strategies. Values inparentheses denote actual values for India for the most recent period for which data are available. Source: World Bank, "Knowledge Assessment Methodology," http://www.worldbank.org/kam. 31 For the Technology Achievement Index, technology creation includes patents granted to residents and receipts o f royalties and license fees; diffusionof recent innovations includes Intemet hosts and high and mediumtechnology exports; diffusion of old innovations includes telephones and electricity consumption; and human skills includes mean years of schooling and gross tertiary science enrollment ratio (UNDP 2001). 71 Inaddition, Table 4-1 presents dataon the following five innovationvariables interms of absolute size (these same five variables are scaledby population inFigure 4-2): royalty and license fee payments, royalty and license fee receipts, researchersinR&D, scientific and technical joumal articles, and patent applications granted by the USPTO, all for the most recent year for which data are available. Table 4-1 shows that India has notable strengths inits innovationcapacity, particularly when viewed interms of absolute size, as does China! Table 4-1: SelectedInnovationVariables, India and Comparators,Various Years Absolute size Scaled by Population(Per MillionPersons) India Brazil China Korea Poland Russia India Brazil China Korea Poland Russia Royaltiesand License fees Payments($ mil) (2002) 350 1,229 3,114 2,979 557 338 0.33 7.04 2.43 62.58 14.58 2.35 Royaltiesand License fees Receipts($ mil) (2002) 12 100 133 826 34 147 0.01 0.57 0.10 17.35 0.89 1.02 Researchersin R&D (2001) 95,428 55,103 742,700 136,337 56,919 505,778 98.85 323.94 583.88 2,882.39 1,474.59 3,492.94 Scientific and technicaljournal articles (1999) 9,217 5,144 11,675 6,675 4,523 15,654 9.23 30.61 9.31 143.19 117.00 106.99 IlJSPTO PatentsGranted(2003) 1 355 180 424 4,132 19 202 I 0.33 1.02 0.33 86.25 0.50 1.41 Note: Data for researchers inR&DinIndia are for the year 1997, whereas those for Brazil are for 2000. Source: Knowledge Assessment Methodology (KAM) (http://www.worldbank.org/kam). Comparing India'sperformance in R&D. Interms of inputs into the innovation system, India spends only a small fraction of its GDP on R&D: 0.78 percent of GDP in2001 (Figure 4-2), which i s more than Poland(0.67 percent of GDP), but less than Brazil (1.05 percent of GDP), China (1.09 percent of GDP), and Russia (1.16 percent of GDP) and much lower than Korea (2.96 percent of GDP) (annex lo), whose expenditures on R&D are on par with top OECD countries. India at 25 percent has the lowest science and engineering ratio interms of percentageof tertiary-level students among all comparator countries. It also has the lowest number of researchersinR&D (per million) among all countries chosen. Indiadoes, however, have a critical mass of scientists and engineers and technicians inR&Dinterms of absolute numbers (Table 4-1). Qualitative surveys by WEF show that the country stands inthe middle range relative to comparator countries on private sector spending on R&D. According to a UNESCO report (Westholm, Tchatchoua, and Tindemans 2003), spending on R&D inIndia by enterprises (both public and private) currently stands at about 27 percent of total R&D. Inmost OECD countries, the private sector finances 5@-60 percent of R&D, as it increasingly has the finance, knowledge, and personnel neededfor technologicalinnovation. Firmsplay an evenbigger role inR&D inIreland, Japan, Korea, and Sweden. Universities also undertake researchto a much larger extent indeveloped countries and have stronger linkages with the corporate world. India's performance inR&D outputs relative to comparator countries i s less than stellar. When scaled by population, India receives little interms of worldwide royalty and license fees (Figure 4-2). Not surprisingly, it does muchbetter interms of absolute size (Table 4-1). For scientific and technical articles inmainstreamjournals (per millionpeople), Indiamatchesthe performance of China, butthe contributions of both countries are very low compared with developed c~untries.~'OECD countries 32 It i s not surprising that Indiadoes not score well in terms of the number of technical and scientific joumal articles (per million people) appearing in mainstreamjoumals. I t could b e argued that a per capita index may not be the right one to use. A more 72 accounted for 85 percent of 437,900 scientific and technicaljoumal articles published worldwide in 1998 (UNDP2001). Lagging peformance on U.S.patents. Figure 4-2 shows that India i s on par with China interms of patent applications granted by the USPTO (per million people), but still has a way to go inthis regard. Although India (at 5 percent) surpasses Poland (at 3 percent) on high-tech exports as a percentage of manufactured exports, India again has some distance to cover to match the performance o f China (23 percent) or Korea (32 percent) inthis area. Figure 4-3 shows that, even though the number o f patents granted to India by the USPTO steadily increasedin 1997-2003-India even surpassed Brazil and China in 1998 and 1999-China surgedahead of India after 2000. The figure shows that, during 1997-2003, the United States granted a total of only 1,188 patents to India (while China gamered 1,495), which accounts for only 1percent of the total number of patents granted worldwide by the United States inthis period! Japan, Taiwan, and Korea now account for more than a quarter of all American industrialpatents (Broad and Glanz 2003). Figure4-3: Patents Grantedby the UnitedStatesPatent and Trademark Officeto Brazil, China,and India, 1997-2003 (number} 500 ~ L 400 n n 300 Brazil 0 China 200 India 100 n 1997 1998 1999 2000 2001 2002 2003 oBrazil 67 88 98 113 125 112 180 oChina 66 88 99 163 265 390 424 mlndia I 48 94 114 131 179 267 355 Source: US.Patent and Trademark Office (http://www.uspto.gov/web/offices/ac/ido/oeip/taf/cst_all.pdf). ButIndiahas recently made some progress inthis area. For example, the number of U.S. patent grants to the Council of Scientific and Industrial Research (CSIR) increasedfromjust six in 1990-91 to 196 in 2003-04.33 Several new Indian firms have registered their innovations with the USPTO. This shows that the focus o f research i s shifting to patentable innovations, indicating better conceptualization of research. Emerging global trends in scientific R&D. A recent study by UNESCO identifies some emerging global trends in scientific R&D (Westholm, Tchatchoua, and Tindemans 2003). The report finds that Asia today appropriateindex (if data were available) would measure the number of articles as apercentage of graduates with research degrees (master's andPh.D. degrees) in science andengineering. 33Presentationmadeby Dr.R. A. Mashelkar on `Seizing Opportunities to LeverageIndia's Potentialin Education and Innovation" at a workshop on "India and the Knowledge Economy," New Delhi,November 9, 2004 (http://www.worldbank.org.inlWBSITE/EXTERNAL/COUNTRIES/SOUTHASIAEXT/INDIAEXTN/O,,contentMDK:20279055 -menuPK:295602-pagePK: 141137-piPK: 141127-theSitePK:295584,OO.html). 73 Issues and Recent Developments in the InnovationSystem Inaworldinwhichtrade, investment, andproductionarebecomingincreasingly globalized, thecapacity of countries to develop, acquire, diffuse, and commercialize knowledge is becoming a major source of competitiveness and growth. As a result of the 1991 liberalization of the Indian economy, several changes have taken place inIndia's innovation landscape.This section reviews important trends ininnovationand R&D inIndia, highlighting issues related to strengthening India's overall innovation system. Increasing limited RBD expenditures. India's R&D spending increasedfrom $2.5 billion in 1994-95 to $3.15 billion in 1999-2000. The share of government expenditures increasedfrom $1.92 billion to $2.5 billion duringthe same period. Some estimates suggestthat the government now spends about $6 billion on research. But, even so, India's R&D budget is less than the amount spentby many individual multinational^.^^ The strategic sectors of defense, space, and atomic energy take up a significant chunk of government R&D expenditure (52 percent in 1999-2000) (Chandrashekharand Basvarajappa 2001). But, the government has beenincreasing its allocationto various scientific agencies duringthe past decade. The CSIR, for example, has starteda new initiative on emerging technologies through targeted consortia research. Box 4-2 presentstrends inindustrial R&D inIndia. Box 4-2: IndustrialResearchand Development inIndia: RecentTrends 4 recent study on innovation provides some interesting insights on industrialR&Dtrends inIndia, including the Tollowing highlights: Much o f the investment inindustrial R&D now comes from the Indianprivate sector. Only 15 percent of central government companies report R&Dinvestments, and this figure isjust 7 percent for state government commercial enterprises. To put this inperspective, in2002, R&D spending was Rs.4,426 million for central government enterprises and only Rs. 115.5 million for state government commercial enterprises. Indianprivate sector companies on the other hand increased their R&D spending from Rs. 198 million in 1991to Rs. 14,503 million in2002. Developing new products and exploiting new markets has become the focus of industrial R&D,especially for large firms. R&D expenditures of the top 20 firms inIndia included thirteen from the private sector. This i s a major change, becausebefore 1991, R&D was mostly a public sector activity. A majority of firms inthe top 20 are from the high-growth sectors such as automobiles, electronics, and pharmaceuticals. R&D intensity by these firms also reflects this trend. Petrochemicals, electrical machinery and software companies make up the rest. Firmssuch as BHEL, BEL, Dr.Reddy's Laboratories, Ranbaxy, Tata Motors, Wockhardt, and IOC are focusing on commercializing innovations. R&Dinvestments by the pharmaceutical, transport, and electronics industries were inthe top three in2002. Pharmaceuticals spent Rs. 5,770 million inR&D, and spending by transport and electronics was Rs. 3,942 million and Rs. 2,883 million, respectively, in 2002. This change is noticeably different from the priorities in 1991, when nonelectrical machinery, base metals, and transport equipment were inthe top three. Interms ofR&D intensity, in2002, the major automobile players spent around 1percent of their turnover on R&D.Tata Motors, and Mahindra and Mahindra are the leading firms inthis segment. The pharmaceuticals sector also registered an overall increase in R&D intensity from 0.74percent to 1.89 percent in this period. Top firms inthis sector such as Ranbaxy, Dr.Reddy's Laboratories, and Wockhardt invested more than 5 percent of their turnover on R&D in2002. Indiansoftware firms are also increasing their R&D: Hughes software systems registered a high of 28.64 percent of R&D intensity in2002. R&D spending on food and textiles, however, has registered a steady decline during the past decade. The Indian food processing industry i s planning a major export thrust, but current levels of R&D spending in the industry are insufficient to make it globally competitive, because this i s a highly competitive industry. Analysis of trends inR&D spending for the manufacturing and service sectors shows that firms in the service 34 For example, in2004, the actualR&D spendingby a single company such as Pfizerwas $7.7 billion. For more information, see http://www.pfizer.co"n_about-company.html. 75 represents 30.5 percent of world R&D expenditures, making it the only region inthe world to have increased its share between 1997 and 2000. M u c h o f the credit for this progress goes to China, which i s edging ahead of the newly industrialized economies inAsia interms of R&D expenditures. It increased its world share of R&D expenditure from 3.9 percent to 6.7 percent between 1997 and 2000, thanks to a combination o f strong economic growth and risingR&D expenditure. India, however, should ramp up its R&D investments if it is to take its place among countries that are rapidly harnessing science and technology for growth and development. B o x 4-1 presents additional details from the UNESCO study. Box 4-1: Indiainthe Contextof GlobalTrendsinResearchandDevelopmentInvestment In 1997 nearly 85 percent of all R&D performed around the world could be credited to OECD member countries. This share had dropped to about 80 percent by 2000, a decline explained by the retreating shares of North America, the European Union, and Japan. India's world share of gross expenditures on R&D (GERD) dropped between 1997 and 2000 from 2.0 percent to 1.6percent. National investment inR&D failed to keep pace with healthy growth in GDP during this period. But, the government has since augmented research spending and plans further increases. India has set itself a target that would place it among the nations of the world that devote the greatest share of GDP to R&D: it plans to hoist research spending to 2 percent of GDPby 2007, according to its 2003 S&T policy (see section below on India's new innovation policy). Indicative of India's commitment, GERD had already climbed to 1.08 percent of GDP by 2002. In2000, about 1.7percent of world GDP was devoted to R&D,compared with 1.6percent in 1997.Even though the all-OECD GERD/GDP ratio for 2000 was approximately 2.4 percent and that of the European Union approximately 1.9 percent, the great majority of countries inthe world still spend only a tiny fraction of GDP onR&D.For example, India's ratio was 0.5 percent and China's was 1percent. Although GERD as a percentageof GDP i s the better indicator for reflecting the shareof income invested inR&D, the GERD per capita indicator has the virtue of showing how far a country still has to go to rival the world's most prosperous states. For example, despite the fact that India has been making substantial investments inR&D, it will need to make a huge effort to narrow the gap with Brazil and China, not to mention advanced countries such as the United States. India spends just $PPPl2 (purchasing power parity) on R&D per capita, compared with $PPP40 per capita inChina, $PPP62 per capita inBrazil, and $PPP953 per capita in the United States. Interms of scientists and engineers, statistics show that nearly 5.3 millionfull-time-equivalent research scientists and engineers were engaged inR&D around the world in2000. North America and the EuropeanUnion contribute a larger share of world expenditure than they do world personnel. This situation i s reversed inthe case of China, which contributes 13.2 percent of all researchers, but only 6.7 percent of world GERD.Similarly, India represents 2.7 percent of all researchers, but only 1.6 percent of world GERD. Data on who performs and who finances R&D reflect the structure of the R&D system ina given country. Although differences exist among countries, almost all OECD countries, increasingly China, most of the Asian dragons, the Russian Federation, Brazil, and South Africa are moving toward a model in which the enterprise sector (private or public) both performs and finances more than 50 percent (and up to 75 percent) of R&D. In2000,70 percent o f all OECD R&D was performed by the enterprise sector (although the median value for member countries was closer to 60 percent), 10 percent of R&D was performed by the government sector, and 17 percent in the higher education sector. The remaining 3 percent was carried out by private nonprofit institutes. InIndia, on the other hand, only 27 percent of R&D was done by enterprises. Source: Westholm, Tchatchoua, ahd Tindemans (2003). 74 sector spendrelatively less on R&D.More than 14 percent of firms inthe manufacturing sector have R&D activities, compared with only 1.66 percent in services. IfIndia is to become a service hub, this resolve needs to be reflected inR&D efforts. Source: Bowonder, Kelkar, andSatish (2004). Finding innovative sources of R&Dfunding. Inmany developing countries, the govemment and/or university sectors play a dominant role in performing R&D and the financing for R&D mainly comes out of the public purse. For example, about one-third of Chinese and one-quarter of Russian R&D i s performed by the govemment sector. InIndia, some 70.5 percent o f R&D i s performedby the central and state governments, an additional 27 percent by enterprises (both public and private sector industries), and less than 3 percent by universities and other higher education institutions (Westholm, Tchatchoua, and Tindemans 2003 and India, Ministry of Science and Technology data).35Interms o f promoting innovation, the government has had mixed experience, for example, inthe manufacturingsector (Box 4-3). ~~ Box 4-3: How Well Does India Promote Innovation inthe Manufacturing Sector? Mani and Kumar (2001) analyzed the role of the Indian government inpromoting innovations inthe manufacturing sector, which accounted for 16.8 percent o f GDP in2001-02. The study revealed that the country's manufacturing sector i s dominated by the chemicals and pharmaceutical sector, which also accounts for the largest share inR&D investments and inthe number of patents granted. The authors found that the broad external environment within which innovative activities of firms are encouraged consists of a series of policies that lack specificity intargets, time dimension, and budgets. Four dimensions of the innovation system are considered: (a)policies with respect to the supply of technically trained humanresources for R&D, (b)physical technological infrastructure, (c) fiscal incentives for encouraging innovation, and (d)promotion of technology-based ventures through venture capital funds. The authors found that: India suffers from a chronic shortage of research scientists and engineers of the type required for R&D,caused basically by the quality of science and engineering education inthe country and the ever-increasing brain drain. A network of government research institutes, some of which have been undergoing major restructuringsince 1996, dominates the physical technological infrastructure. These institutes continue, however, to depend on government grants and projects for their sustenance, and their interaction with the domestic manufacturing sector is limited. India does not have any major research grant schemes; even the one it has i s directed largely at public sector enterprises. Most of the schemesare research loanschemes. Inother words, the extent of public subsidies for private sector R&D i s quite low inthe country. India has a variety of direct and indirect tax incentives for R&D; however, both a macro and micro exercise revealed that most enterprises do not perceive these incentives as important. Inmost cases, the level o f R&D performed would be the same, even inthe absence of direct tax incentives. Venture capital funds inoperation conform to the ideal model of by and large providing equity support to technology-based ventures intheir early stages. India would do well by learningfrom other countries' experiences, such as Brazil and China in finding innovative sources o f R&D financing. The Brazilian Agricultural Research Corporation's (EMBRAPA's) research system i s a successful case of usingpublic funding and a large network of partners to conduct 35Datafrom the Departmentof Science andTechnology, ResearchandDevelopment Statistics, 2000-2001, available at http:llwww.nstmis-dst.org/. 76 R&D a~tivitiesChina's "Jumping into the Sea" strategy is a unique management innovation to . ~ ~ strengthen linkages between R&D and the market (Box 4-4). Box 4-4: China's "Jumpingintothe Sea" Strategy The major deficiency o f the innovation system inChina was once the separation of R&D from production. True to the Soviet model, most public researchinstitutes (PRIs), including the research institutes of the Chinese Academy of Sciences, operated inisolation from production activities. Funded by an annual budget from the central or local governments, the PRIs conducted researchprojects guided by five-year national plans or other central or local plans. Industrial managers were rarely consulted about suchplans. Scientific and technological knowledge was perceived as a free public good, leaving little incentive for researchersinPRIs and universities to transfer their researchresults to commercial applications. As a result, transfers from PRIs and universities to industry were left mostly to serendipity. To respond to these problems and force research and development organizations to "jump into the sea," the government initiated major changes in funding and managingresearch organizations and in technology markets. For example, government appropriations as a share of PRIincome decreased by an average of 5 percent each year from 1986 to 1993. After more than a decade, the country's innovation system has indeed changed. B y 1993 only 28 percent of the income o f PRIs came from direct government appropriations, compared with 64 percent in 1986. PRIs were able to generate close to 60 percent of their income from nongovernmental sources-half from technical services rendered to industrial enterprises. Similar changes took place in universities. Source: DahlmanandAubert (2001). Innovative India. Despite the challenges, the overall Indian innovation system presents some remarkable and impressive features. India i s home to several dynamic hubs of innovation: Bangalore, with its 150,000-strongarmy of software engineers, has developed a strong innovation "cluster" inIT, characterized by corporate offices, venture capitalists, business startups, and university and research labs (BOX4-5). Box 4-5: Evolutionof Bangaloreas an InnovativeCluster An innovative cluster emerges due to three elements, namely, labor market pooling, presenceof specialist suppliers, and development of technological knowledge spillovers. One of the major clusters that has grown rapidly inIndia has been inBangalore. Some authors have even named it the "Silicon Valley of the South." Bangalore started as a local cluster focused on aeronautics. It slowly expanded into I T and then into biotechnology. B y the end of the 1990s, many multinational companies had established R&D centers inthe city. Bangalore has acquired many of the necessaryingredients to gain such status: good educational institutions, critical mass of innovative companies, an entrepreneurial culture, and the presenceof venture capital. As they evolve, the focus of clusters moves from production to innovation. This transformation occurs when a threshold number of innovative entrepreneurs exists. The continuous entry of new players makes a cluster dynamic and fast growing. Availability of venture capital has been a catalyst for this change. The growth of software exports from Bangalore is positively correlated with the growth of venture capital activity. As global competition increases, local clusters are becoming crucial for enhancing competitiveness. Clustering and dense interfirm networks provide advantages for firms of all sizes. Two elements are becoming the drivers of cluster development: the presence o f experienced entrepreneurs and specialized knowledge. Clusters represent a new way of thinking about national, state, and local economies, and they necessitate new roles for companies, government, and other institutions in enhancing competitiveness. The evolution of Bangalore indicates that public policy must focus on designing a set of enabling instruments that must be implemented at the 36 EMBRAPA's mission is to providefeasible solutions for the sustainabledevelopmentof Brazilian agribusiness through knowledgeandtechnology generationandtransfer. For more information, see http://www.embrapa.br/. 77 regional and local levels. Focus on policy initiatives that fall outside thejurisdiction o f traditional regulatory agencies has been increasing, which for clusters becomes important. Inthe early phasesof a cluster, the policy focus has to be on supplying manpower and improving infrastructure. Inthe growth phase, the focus must be on supporting entrepreneurship, networking, and innovation. Inlater phases, availability of venture capital i s crucial. Local institutions and government must play an increasing role in a cluster, if it is to become truly innovationbased. Bangalore i s now at a crossroads. Many factors are pushing the city forward in terms of S&T development: a relatively mild climate, a proactive government, a large number of quality educational institutions in and around the city, the need for large companies to develop products on a global scale, and so on. But several factors are pulling the city backward as well: poor infrastructure, corruption, rapidly increasing pollution, and competition from hubs elsewhere in the world. Inthe long run, the first set of factors i s likely to lead to positive outcomes, but in the short run,the negative factors could take the city through an unsteadyperiod. Source: Bowonder (2002) and ATIP (2003b). India also has vast and diversified publicly fundedR&D institutions: strategic, such as the Indian Space ResearchOrganization, and others, such as CSIR, Indian Council of Medical Research, IndianCouncil of Agricultural Research, and world-class higher education institutions (IITs and RECs), which provide it with the critical human capital neededto forge ahead inthe innovation area. Emerging global R&D platform. India has recently been very successful inattracting R&D investments. About 100MNCs have set up R&D centers inIndia, for example, GE, McDonald's, GeneralMotors, Delphi,EliLilly, Hewlett-Packard, Heinz, Honeywell, andDaimler Chrysler (Basu 2003). GE's R&D center inBangalore alone boasts a staff of 2,300 engineers, 60 percent of whom have master's or Ph.D. degrees! Since this center opened in2000, engineers inBangalore have filed for 95 patents inthe United States (Kripalani and Engardio 2003). Large companies are corning to India not only to take advantage of India's human resource potential-its high-quality engineers, scientists, and designers-but also to reap cost advantages, because the cost of doing R&D inIndia is a fraction of that inthe developed world. Not all M N C research labs inIndia, however, work at the cutting edge of technology. Most of them do developmental research, which develops or improves existing products. The mainmotivationfor India's emergenceas a preferred destination is the low cost of its technical workforce and a large pool of technically qualified people (Basu 2003). Although some have expressed concern that the trend to MNC R&D investments inIndia i s exploiting the country's most valuable human resources, it also has important benefits for Indianindustry. Linkages inR&D between, on the one hand, local universities, researchinstitutes, and firms and, on the other, the multinationals' worldwide R&Dnetwork helpto integrate India further into global technology development activities. Such R&D activities are also useful to inculcate a "commercial culture" among scientists, helpingthem to apply knowledgefor tangible and productive ends; many of themmay leave their jobs with foreign companies to start their own technology-based firms or to work with Indian firms. People working inforeign firms also acquire new insights and skills that they would not otherwise be able to, and new scientific knowledge is a powerful engine for the economy and technical innovation. According to Dr.R. A. Mashelkar, director-general, CSIR, "just as globalization of trade is growing at a rapid pace, there i s a globalizationof researchand technology too, which has brought a silent revolution inthe country. The challenge is how to continue to tap the incredible dynamism of global R&D so that Indian institutions and companies can assume leadership increating high-wagejobs and building new industries" (PTI2004a). Box 4-6 provides more information on intemational corporate R&D inIndia. 78 Box 4-6: Highlights of International Corporate Research and Development inIndia Several transnational companies (TNCs) have established strategic R&D units in India. Survey results from 32 R&Dunits-16 from companies dealing with conventional technologies (chemicals, pesticides, fertilizers, pharmaceuticals, engineering, hygiene, healthcare products, and branded consumer goods) and 16 in new technologies (electronics, including ICT and software; biotechnology; and solar energy)-show that: A primary factor behind location of R&DinIndiais access to R&D personnel, especially in sciencesand engineering. Other factors include a favorable climate for foreign investment and common use of English in education, government, and industry. Another primary factor has been the cost of carrying out R&D in India, which i s a fraction of that inthe industrialized world, mainly due to the lower wages of R&D personnel. For example, according to 1994 estimates, the annual net income of engineers and department managers in India (Mumbai) are $2,100 and $4,300 respectively, compared with $51,400 and $76,800 for Japan (Tokyo), $34,600 and $55,900 for the United States (Chicago), $20,100 and $23,600 for Korea (Seoul), and $11,600 and $16,000 for Brazil (So Paulo). B y establishing linkages between local innovation systems (mainly local universities and research institutes) and TNCs' worldwide R&D network, such R&D helps to integrate India into global technology development activities. TNCs' R&D activities are inculcating a "commercial culture" among scientists inhost countries. InIndia, one of the main reasons for not reaping the benefits of its scientific capacity has been the lack of application of its knowledge for tangible purposes. TNCs, through their R&D activities, are contributing to the diffusion of application skills to researchersand encouraging them to go beyondjust provingprinciples. Ingeneral, TNCs are able to recruit andretain the cream of available talent, due to higher salaries, advanced training, and other career growth opportunities. Domestic firms cannot match TNCs in these aspects, so they must make do with the talent available to them, which inturn, may affect the enhancement of technological cap- abilities in domestic firms. Other effects on innovation capability of the host country include diffusion of knowledge related to patents and other intellectual property rights. Indianfirms and scientists are realizing the importance of patenting and acquiring knowledge related to it with the collaboration of TNCs. With TNC R&D investments inthe country increasing, even academic institutions realize the importance of teaching the IPR aspect to students, for example, the IndianInstitute of Science has started a course on IPR. Source: Reddy (1997). Despite India's advantagesin attracting MNC R&D, however, some threats are looming: China, Russia, and Malaysia, which have at least one or both of India's strategic advantages-a cheaper workforce and talent pool-are making preemptive bidsto grab a slice of the MNCs' global R&D investments. Others such as Canadaand Singapore through govemment-initiatedprograms to invite foreign investment into R&D are also emerging as seriouscompetitors to India (Basu 2003). Increasirig outsourcing of high-end R&D to India. This new trend i s evident from the large number of establishedR&D outsourcing centers inIndia, from IT and telecom to automotive and pharmaceutical sectors (Box 4-7). According to a recent report by the Ireland-based leadingmarket research resource, Research& Markets, the R&D outsourcing market for IT itself in India i s expected to grow from $1.3 billion in2003 to more than $8 billion by 2010 (PTI 2004~).Outsourcinginnew areas by companies from developed countries i s gradually leadingto the development of many critical skills and technologies neededinthe country, thus helpingto raise India's technological capability with relatively modest investments. Box 4-8 highlights another example of India's potentialinbecoming the destination for outsourced R&D in such areas as chemistry and biology. 79 ~~ Box 4-7: Globalizationof Innovation:High-EndResearchandDevelopmentinIndia A great deal of high-endR&D is being outsourced to India. International firms are increasingly unwilling to keep expensive teams together between projects. Wipro provides such firms with an alternative to R&D by permanent in- house teams; this has become a big businessfor Wipro, accounting for one-third of its $1billion inannual revenues and employing 6,500 people. Wipro is probably the world's biggest R&D services firm. Its smallest commitment to any o f these clients i s 300 people. On the one hand, elaborate procedures protect the customer's intellectual property, including mandatory "cooling-off' periods for engineers between clients, and sometimes a right of veto on their redeployment. On the other hand, the breadth of Wipro's industry knowledge i s part of its sales pitch. The approach varies from micromanagement by the customer, who takes on Wipro engineers virtually as staff members, to "total product ownership," that is, handing a mature product and all its global development and maintenance requirements, such as adaptation for a particular market, to Wipro, allowing the customer to redeploy its own engineers to the next big project. This i s called "globalization of innovation," which continues the erosion of the old model of corporate R&D, which was dominated by big firms with big budgets able to erect big barriers to entry to their markets. This erosion i s part of a broader trend, promptedpartly by a rising number of entrepreneurial innovators and growing amounts of venture capital to finance them, toward a more "dispersed" model of R&D. The Internet has removed geographic barriers to using far-flung talent, and the popping o f the "dotcom bubble" has spreadinnovation "offshore." This dispersal i s becoming global, but it differs from the outsourcing of IT and other "back-office'' processes; I T business comes from cost centers, driven by price and efficiency. R&D clients, however, are looking for innovation and a shorter time to market; they hope to be profit centers. Many firms still see untapped potential in using the wealth of Indiantalent for R&D, notjust inIT-related areas but inother industries such as drugs and biotech. Source: Excerptedfrom The Economist (2004e). I Box 4-8: OutsourcingChemistryandBiology ResearchandDevelopmentinIndia Outsourced chemistry and biology R&D inIndia has not received as much attention inthe United States as IT outsourcing. The chemistry and biology outsourcing market i s small-pharmaceutical R&D outsourcing represents no more than $3-4 billion-but it i s growing rapidly. India has a large number of contract research companies in chemistry, biology, and the new field of drug discovery services. These companies are becoming part of the global pharmaceutical and chemical R&D network. The increase inR&D outsourcing inthe pharmaceutical and biotechnology sectors representsa significant development. Pharmaceutical and biotechnology companies are now convinced that networked R&D i s the way to reduce costs and increase productivity. The trend i s here to stay and i s spreading to other relatedbusinesses, including the chemical industry, agriculture, and environmental engineering. Outsourcing inchemistry and biology i s thus likely to grow rapidly. ISource: ATIP (2003a). Protecting knowledge throughpatents. Recent amendments to the IndianPatent Act adopted ina move toward adhering to the intellectualproperty norms under Trade-Related Aspects o f Intellectual Property Rights(TRIPS) has also boosted confidence among internationalplayers. This has resulted inthe clustering o f R&D centers innew cities such as Hyderabad, Lucknow, and Pune. An increasing trend i s also discernible in the number o f patents granted to companies by the Indian Patent Office. Among Indian patents, it i s the drugs and electronics industry that has shown a sharp increase inpatentinginrecent years (Bowonder, Kelkar, and Satish 2004). The number o f patents granted to residents and nonresidents in India has also been increasing over the years, although the patents granted to nonresidents have been about three to four times greater than those 80 - - - granted to Indians.37Another interesting side to patenting exists inIndia: patents earned by Indian - subsidiaries o f multinational firms. Here, India i s doing rather well; note the increasing number o f patents - by Indianentities o f foreign firms (Figure 4-4). Figure 4-4: Patents Granted to Indian Subsidiaries (number) Texas Instruments Intel Oracle cisco Systems GE IBM IC1 Whirlpool SAP 0 50 100 150 200 250 Source: Based on a chart in The Economist (2004e). Indians are acquiring a greater awareness of the importance o f knowledge and the value o f protecting it through patents. For example, in 1995 a U.S. patent on turmeric was awarded to the University of MississippiMedical Center inthe United States, specifically for the use o f turmeric inwound healing, which has been used medicinally inIndia for thousands o f years! India's CSlR filed a complaint in 1997, challenging the novelty o f the university's "discovery," arguing that the patent "stole" India's traditional knowledge. The patent was subsequently cancelled in 1997.India has since also successfully challenged patents on neem and basmati rice. Unveiling a new innovationpolicy. Keeping inmindthese new developments, in2003 India announced a new S&T policy. The policy recognizes that India has a sound innovation infrastructureincluding research laboratories, higher educational institutions, slulled humanresources, and basic research strengths in agriculture, healthcare, chemicals and pharmaceuticals, nuclear energy, astronomy and astrophysics, space technology and applications, defense research, biotechnology, electronics, IT, and oceanography. The aim of the policy i s to infuse the S&T system with new vitality so it can play a decisive and beneficialrole inadvancing the well-being of all sections of Indian society. India's new innovation policy report outlines a number o f policy objectives relating to S&T governance and investment, strengthening of infrastructure for science in academic institutions, finding new funding mechanisms for basic research, developinghuman resources, increasing industryand scientific R&D, encouraging indigenous resources and traditional knowledge, and strengthening generation and management o f intellectual property (India, Department o f Science and Technology 2003). The report does not, however, offer many specific details on implementation o f these objectives. For example, even 37Patent data are available at WIPO at: http://www.wipo.int/ipstats/en/statistics/patents/index.html. 81 thoughthe plan envisages, inpartnership with industry, raising investments in S&T to at least 2 percent of GDPby the end of the TenthFive-YearPlan, it does not provide any roadmap for doing so. Considering that more than 50 percent of the R&D allocationis accountedfor by atomic energy, space, and defense researchestablishments, the actual sumavailable for civilian R&D is rather low and thinly spread across a wide spectrum of areas. The report also does not specify the types of fiscal policies that can enhance the contributionof the private sector to the overall R&D effort. Inaddition, it does not say much about the coupling of S&T with the market and industry.38The report also does not elaborate on how human resourcesfor S&T can be strengthenedinthe country. Organizational and institutional mechanisms need to be developed to foster mobility of personnel among different segments of the national system of innovation. Little or no mobility currently exists, for example, between the CSIR and university system and between these two and industry. Measures to Strengthen the InnovationSystem India has been making steady progress inimproving its overall innovation system. Inmoving forward, India should further energize its innovation systemby increasing linkages with academiaand industry; strengthening intellectual property rights and the patent regime; enhancing venture capital; promoting R&Dby companies; encouraging new R&Dniches, as for example inpharmaceuticals; increasing innovation in agriculture; conducting R&D to promote welfare and encourage grassrootsinnovations; and tapping the Indian Diaspora, which i s so important increating knowledge linkages critical for catalyzing India's future growth. Increase linkages between academia and industry. Improving linkages between researchand industry i s an important aspect of good innovation practices worldwide and a goal of India's S&T policy. For educational institutions, effective labor market feedback mechanisms and regular consultations with employers and alumni are indispensable for adjusting curricula. InDenmark, for example, industry representatives, includingpresidents of large companies, regularly sit on the boards of academic departments at universities to advise them on training and researchpriorities. Industry representatives also s i t on the boards of Mexico's new technological institutions. Not muchprogress has been made to date, however, inthis area inIndia, where a gulf exists between the academic world and industry.Lackluster partnership arrangementsbetween industry and academia, even between high-caliber institutions suchas IITs and industry, are a major cause for concern. No well- developed mechanisms exist for systematic feedback from the private sector to indicate the kind of knowledge and skills that are neededby the economy. Becauseintegratingthe demands of the market into the education system will be important for India's transformation to a knowledge economy, special initiatives should be launched to increasethe flow of informationbetween the university and enterprise sectors. A notable example is the National S&T Entrepreneurial Development Board (NSTEDB) inIndia, which has recently developed an Entrepreneurship Development Cell to help inculcate an entrepreneurial culture and foster better linkages among academic institutions, industries, and R&D institutions. The goal i s to develop 40 knowledge- basedenterprisesthrough such cells incollege campuses in 2004-05. Strengthen intellectual property rights and the patent regime. The protection of IPRs i s becoming increasingly important in knowledge-based economies. This i s being driven by the mounting costs of '*Fora good discussionof how the interface among industry, R&D institutions, and academia can be strengthened, see India, Planning Commission (n.d.). 82 R&D for new products or processes, shortening of the product life cycle, rapid growth inintemational trade inhigh-tech products, and internationalization of the research process. To move ahead inthe global innovationrace, India too needs to have progressive patent laws and a robust IPRregime. Itpasseda new patent regime on January 1,2005, which made it compliant with the provisions of the WTO. Itnow needs to ensure rigorous enforcement o f IPRs inthe country, because this issue i s becoming key to attracting new investments into the country. The Swiss pharmaceutical company, Novartis, for example, i s looking closely at the issue o f IPR enforcement in deciding the location of its thirdresearch center. It is looking at India and China; inaddition to skilled people, government regulations and labor costs, patent protection i s key to increased investment by them inIndia. B o x 4-9 highlights some aspects of how the Indianpharmaceutical industryis gearing upto respond to the new patent regime inIndia.39 Interms of strengthening IPRs,the IndianMinisterfor Science and Technology also recently reiterated the need for manpower planning for IPRprotection and making PRs a compulsory subject incollege law courses and in universities. This calls for setting up a number of patent training institutes. China has some 5,000 patent training institutes, whereas India has none. (The Economic Times2004). Box 4-9: IndianPharmaceuticals:Respondingto Changesinthe New PatentRegime Indian pharmaceutical companies are among the best inthe world at producing generic drugs and exporting these drugs to about 200 countries. Their success i s due inpart because, in 1972, the IndianParliament granted patent rights to manufacturing processes,rather than to end products. Indian pharmaceutical firms were able to take new drugs developed abroad, "reverse-engineer'' the manufacturing process, and develop generic drugs. As a result, local firms control about 75 percent of the Indian market today, upfrom 30percent in 1972. On January 1,2005, however, India introduced a new patent regime and developed the necessary legislation to amend its IPRlaws, to be WTO compliant. Inanticipation of these changes, some of the larger Indian pharmaceutical companies are now pursuing alliances with global firms: they bring to the table expertise inlow-cost manufacturing, distribution networks, and low-wage labor and are looking for drug licenses and research partnerships. For example, Ranbaxy is working with GlaxoSmithKline to identify new drugs and perform clinical trials inIndia, and Glaxo will handle late-stage drug development. Dr.Reddy's Laboratories has developed partnerships with Denmark's Novo Nordisk and Novartis. Indian firms have also had some success inincreasing R&Dinanticipation of the patent changes.Wockhardt has developed two new potential antibacterial drugs, and Glenmark Pharma has licensed a potential asthma drug to Forest Labs inthe United States for $190 million, the biggest licensing deal ever for an Indian company. The prospect of better patent protection has attracted foreign drug firms in India, where they can take advantage of low research costs that are an estimated one-seventh of those inthe United States. Hoffman-LaRoche, Bayer, Aventis, and Chironhave announced plans to make India a regional base for supplies. This new investment may also help stem the flight of top talent from India in biotechnology. The transition to the new patent regime will be difficult for many of the 20,000 small- and medium-sized Indian pharmaceutical companies, which do not have abundant drugs in the pipeline; this may result inconsolidation and bankruptcies. Source: Adapted from Seema (2004) and TheEconomic Times (2004). Enhance venture capital. Ina market economy, one of the most admired economic instruments for spurringinnovation is venture capital. This form of support helps to reduce the "capital gap" faced by small entrepreneurs. The growth o f Silicon Valley as well as Taiwan and Israel derives from the intensive use o f venture funds. 39 Fink and Maskus(2005) discuss the effects of patent protectionon the behaviorof pharmaceuticaltransnationalcompanies and market structure inIndia. 83 Inrecent years, the venture capital industry has started creating innovative and entrepreneurial firms and inducing the growth of new and technology-based ventures inIndia. The IT industryhas also helped to catalyze venture capital growth. After Japan, India has become one o f the most preferred destinations o f offshore venture funds.Venture capital i s thus becoming a major mechanismfor stimulating innovation and entrepreneurial growth inIndia. Inthe past five years alone many new entrepreneurial firms have ventured into new product development and contract researchfor global firms. Avesthagen, Strand Genomics, Bharat Biotech, Shantha Biotechnics, Ittiam, Tejas Networks, Ishoni Networks, Mitoken, Impulsesoft, to name a few, are some o f the new venture-assisted firms that have innovatednew products or services. Some firms such as Impulsesoft, Tejas Networks, Reva, and Ittiamhave also become product developers for the global market. Mindtree and Kshema Technologies have grown rapidly by focusing on new high-technology business segments. The government-supported quasi-venture fund, the Technology Development Board has also been effective instimulating innovations inIndia (for more information, see http://www.tdbindia.org). The board's main aim i s to accelerate development and commercializationo f indigenous technology or adaptation o f importedtechnology for wider domestic application. The board provides financial assistance inthe form o f equity capital, soft loans, or grants to industrial concerns and R&D institutions. With a proactive stance, the boardthus helps to facilitate interactionamong industry,scientists, technocrats and specialists; fosters an innovationculture through contract and cooperative research between industry and institutions; provides an interface with financial institutions and commercial banks for leveraging funds; facilitates creation o f a new generation of entrepreneurs; assists partnerships with similar technology-financing bodies; provides opportunities for venturing into high-tech areas; and creates new job opportunities. Inthe past five years, Technology Development Board support for 103 entrepreneurial ventures has resulted ina variety of innovative products, including statins (by Biocon), electric cars (by Reva Electric Car), hepatitis-B vaccine (by Shantha Biotechnics), rotavirus vaccine (by Bharat Biotech), lithiumion batteries (by 21st Century Batteries), and high-strength alloys (by AV Alloys) (Bowonder, Kelkar, and Satish 2004). Encourage new R&D niches, such as in pharmaceuticals. Indian pharmaceutical companies such as Ranbaxy and Dr.Reddy's Laboratories are also increasingly investing inR&D and are making their mark on the global stage (Box 4-10). For example, in2004 Nicholas Piramal India inaugurated its research center inMumbai, at which 250 scientists will researcha wide range o f areas, such as cancer, diabetes, inflammation, and infectious diseases. Ina reverse brain drain, 30 scientists from the UnitedKingdom, United States, and Canada either from MNCs or academia have relocated to this center inIndia to work on novel drug development (Krishnan and Kamath 2004). Indianpharmaceutical companies are working on a variety o f new drugs with a variety o f partners, sometimes inresponse to specific new demands. For example, the World Bank, inpartnership with the Global Fundto Fight AIDS, Tuberculosis, and Malaria; UNICEF; and the Clinton Foundation, has announced agreements enabling developing countries to purchase high-quality AIDS medicines at the lowest available prices. Inmany cases the medicines and diagnostics would cost 50 percent less than their current prices. Cipla, Hetero Drugs Limited, Ranbaxy Laboratories, and Matrix Laboratories are four Indianpharmaceutical manufacturers tapped to provide the drugs inthese agreements (Altman 2003 and an internal World Bank document). 84 Box 4-10: Indian PharmaceuticalsHave Global Ambitions The success of Indian pharmaceuticals i s already drawing comparisons with its I T prowess. Ranbaxy derives nearly half of its business from the United States and is looking for acquisitions inFrance, Germany, and Italy. Ranbaxy and Dr.Reddy's Laboratoriesbothaspire to become "research-based" (Ranbaxy), "discovery-led" (Dr. Reddy's Laboratories) originators. Both firmsplan to boost spending onR&D to 10percent of revenues. Butthis needs to be put incontext: Pfizer, for example, has anR&D budget for 2003 of $7.1billion! So far, muchof Indianfirms' R&D has gone into the reverse engineering of existing drugs and the development of new tweaks on them: a new "delivery system," say, such as an inhaler. But bothRanbaxy and Dr. Reddy's Laboratories are also spending heavily on research into new drugs. Source: Excerptedfrom The Economist (2003e). Promote R&D for new product development. The above discussion points to the importance of promoting R&D incompanies to generatenew innovations and products and, inso doing, remain at the cuttingedge of innovation worldwide. New products are considered the competitive lifeblood of companies, and the marketplace-in the developed and, more and more, inthe developing world-is becoming increasingly unforgiving of delay and deficiencies inproduct development. Askedto identify the drivers of R&D activity, respondents in arecent global survey of senior executives ratedthe most significant forces as more demanding customers, market pressuresto keep up with competitors, development of new technologies, and shorter product life cycles (EIU2004b). With the stakes so high-traditional R&D budgets amount to 5-10 percent of companies' annual sales and market-organizations and companies throughout the world are working hardto get their choices of researchdirections right (see Box 4-11for more details on this survey). Increase innovation in agriculture. Given the importance of agriculture inIndia's economy, increased emphasis on innovations that can enhanceproductivity will be critical to raising agricultural growth. Such efforts includeconnecting India's farms to the world by diversifying into agricultural commodities in demand by consumers all around the world. For example, India produces about 14percent of the world's fruits and vegetables, but only 1percent i s exported due to lack of processing facilities. The government i s making concerted efforts to increase fruit and vegetable production in India and has set up a National Horticultural Board to promote production of these commodities. It has also identified horticultural crops as a way to diversify agriculture and make it more profitable and create skilled employment for rural people. These efforts have met with recent success. The grapes sector inIndia is now able to compete in the quality-conscious European Unionmarket and i s movinginto value-added products, such as wine. The Indiantelecoms company Bharti has recently moved into the global fruit and vegetable market ina joint venture with the UnitedKingdom's finance group Rothschild. A farm and researchfacility inthe northern state of Punjab will sourceproduce from all across the country, and cold storage, processing plants, and refrigerated transport facilities will be established. The plan i s to sell apples, mangoes, grapes, cherries, tomatoes, baby corn, okra, and iceberg lettuce to the European Union, SoutheastAsia, the Gulf states, and Central Asia (Ridding 2005 and WorldisGreen.Com 2004). India's public agricultural researchand extension system i s one of the largest inthe world, but its efficiency and effectiveness has been increasingly called into question. A more regionally differentiated R&D strategy is neededfor agriculture. The top-down, narrow, crop-focused approach to agricultural extension has also become outmoded and ineffective inmeeting the needs of farmers. Inthe future, the public extension systemmust become more demand driven, with stronger synergies between public and private extension efforts (World Bank 2003d). 85 Box 4-11: The EvolvingInnovationLandscape:ResearchandDevelopmentinthe Corporate World A recent global survey of almost 200 senior executives on the topic of R&D strategies yielded some interesting insights on development of new products, services, and business models. According to these executives, almost 50 percent of current corporate sales represent sales of products that are less than three years old. The survey also shows that R&D models have shifted away from the supply-side approach of big firms that fund ambitious projects creating large barriers to entry, making irrelevant the previous system in which researchers developed a prototype and then threw it "over the wall" to production, sales, and marketing. Instead, R&D is moving toward a demand-driven approach that focuses on speed and need, which i s driving closer collaboration among researchers, partners, and customers. Top R&D executives are still being asked to research innovations that create new markets several years out, but they are also being prodded to design round-the-clock global organizations that can innovate in swift and affordable responseto current market pressures.The survey results suggest three forces that will shape the world of R&D incoming years: Responsiveness to the market. Market pressures to keep up with competitors' innovations and satisfy more demanding customers are the two top drivers of R&D activity. Inthis environment, anything companies can do to reduce the odds of failure as they embark on new research projects i s critical. R&D planning and projects are increasingly being movedby companies closer to the market than has traditionally been the case. Although many companies retain a central R&D unit to take a long-term research perspective, R&D funds now tend to get distributed across a mix of business unit andbasic researchprograms. Globalization. Competition for talent, new technologies, and easier market access has accelerated the process of R&D globalization; countries such as India and China host significant volumes of R&D activity for multinationals. Cost also drives globalization, but its significance can be overplayed as far as R&D goes. Once infrastructure and coordination costs for managingdistributed R&D facilities are included, the total savings are not as huge as popular headlines suggest. Speedof development is a more important benefit of the global research economy. Customer collaboration. A more market-oriented approach to R&D i s driving R&D leaders to work more closely with customers as they develop new products and services. Although collaboration is key for creating demand-driven innovations, maintaining customer involvement i s one of the leading roadblocks to successful R&D projects. This evolving innovation landscape promises a more effective R&D process, one that sharpens the decision- making process as firms choose where to allocate their R&D spending and increasesthe chances o f launching commercially viable new products. Source: EIU (2004b). Agricultural higher education establishments inIndia have also acceptededucation, research, and extension activities as integralto their functioning. Although every effort has beenmade by these institutions to provide facilities for high-quality education, training, and research, rapidexpansion of education and training facilities coupled with reducedfinancial allocations have resulted in a loss of quality inthe educational and training process and an uneven standardof achievement by graduates and postgraduatesof various institutions. It is, therefore, important to improve the quality and relevance of agricultural higher education and in-service training and strengthen the capacity of Indian states in developing and managing agricultural human resources. Conduct RBD to improve welfare. According to Dr.R. A. Mashelkar, "India i s part of the IDCs, innovative developing countries (as opposed to the LDCs that the world knows of) that include Brazil and China, and has demonstratedits potential inthe area of not only high-end R&D, but is also using public- private partnerships to harnessthe potential of traditional knowledge to meet health and welfare needs and to reduce poverty."40More initiatives are needed ineducation (suchas the CBFL program of the Tata 40Presentationby Dr. R. A. Mashelkar on "Seizing Opportunitiesto LeverageIndia's PotentialinEducationandInnovation," at the workshop "India andthe KnowledgeEconomy," New Delhi, November9, 2004. 86 Group described in chapter 3), healthcare, and connectivity to meet the needs o f the poor. To move forward inthese areas, it i s important to use existing capacity inpublic institutions inlDCs inthe discovery and development o f new innovations and to move from "beaten paths" to alternative innovative paths for R&D. One example i s the triangulation o f traditional medicine with modem science and modem medicine inthe drug discovery and development process inIndia. To take a new drugto the market i s an expensive and time-consuming venture with numerous bottlenecks. It now takes an estimated $1.7 billion for a pharmaceutical company to place a molecule inthe market. Through "reverse pharmacology," however, India has shown how a drug can be taken to the market for a fraction of that cost (Box 4-12). For example, an Indian drug company took three years to develop a drug based on a traditional medicine for the treatment o f psoriasis at a cost of only $4 million, with a resultingcost o f treatment o f $50, compared with a reported cost of treatment (Amgen) of $20,000 inthe United States! This example shows that alternative paths to R&Dcan make a difference, and this process requires rethinking the discovery and development process. New global public-private partnerships are neededto make this a reality, especially so the poor of the world can purchase medicines at affordable prices. India's New Millennium IndianTechnology Leadership Initiative i s one example inthis vein. The initiative gives government funding to projects inwhich universities, government labs, and companies work together to make world-class products. The initiative has led to the development of two drugs in clinical trials, for psoriasis, as above, and tuberculosis, and a software package called Bio-Suite that can analyze DNA and manipulate molecules inthree dimensions. Several institutions, including the Indian Institute o f Science inBangalore and the Institute of Genomics inDelhi developed Bio-Suite, which Tata Consultancy Services launched inJune 2004 (Webb 2005). Box 4-12: Leveraging Traditional Knowledge with Modern Science and Exploiting Public-Private Partnerships for DrugDevelopment inIndia InIndia, anew drug against a chronic and incurable skindiseasecalledpsoriasis is now under development through an industry-research laboratory partnership. The new drug, a purified extract from the leaves of a plant long used in traditional medicine, i s now awaiting approval for clinical trials inpatients with psoriasis after successful completion of toxicity trials inhealthy volunteers. Lupin, a major drug company, and the CSIR are working to transform this herbal extract into a scientifically validated modern drug against psoriasis. I t i s estimated that the global market size for drugs against psoriasis i s about $3 billion. The candidate drug against psoriasis i s part of an effort to develop new drugs from traditional knowledge through "reverse pharmacology." The conventional approach in seeking out new drugs involves identifying new molecules, testing their efficacy on laboratory animals, and then moving to humans. "Drug discovery around the world has focused on moving drugs from molecules to mice to men. Inreverse pharmacology, we're going the other way- from mento mice to men," according to Dr.R. A. Mashelkar, director, CSIR. Traditional medicine has long used herbal extracts on patients. Reverse pharmacology is aimed at validating such extracts through rigorous science. The psoriasis initiative took off three years ago when Lupindecided to investigate a herbal extract used by a practitioner of traditional medicine against psoriasis. The company first conducted a proof-of-concept study ina hospital inMumbai where it evaluated the extract in a group of 21 patients. Twenty patients responded to the treatment-the severity of their psoriasis decreased and no serious side effects were observed in any of the patients. The encouraging results prompted Lupinto approach the CSIR for funding to carry the study forward. The first phaseof the project received Rs.60 million funding under the New Millennium Technology Leadership Initiative, a program managedby the CSIR aimed at nurturing industry-research partnerships to generate new technologies that are exDectedto have global imDacts. Over the Dast two vears, scientists at LuDin's R&D center and CSIR's Central http://www.worldbank.org.inlWBSITE/EXTERNAWCOUNTRIES/SOUTHASIAEXT/INDIAEXTN/O,,contentMDK:20279055 -menuPK:295602-pagePK: 141137-piPK:141127-theSitePK:295584,00.html). 87 Drug ResearchInstitute have studiedthe constituentsof the herbalextract in detail, identifiedthe "active molecule" that is believed to act on the psoriasis,and worked out standardizedtechniques to extract it from the plant. In September 2004, the drug went through phase Iclinicaltrials inhealthy volunteers designedto evaluate its side effects. The company has now sought phase I1clinical trials to formally test its efficacy through arigorous scientific trial. The CSIR will also fund a second phase ofthe project throughthe New Millennium Initiative. Ifall goes well, anew drug againstpsoriasis may be inthe market intwo years. Ifthat happens, the time to develop anew drug would have shrunk from 10 years to less than 5 years. Source: Excerpted from Mudur (2005). Encourage grassroots innovation. The above underlines the importance o f harnessing grassroots innovations for development. India has made some laudable efforts inthis area. The Society for Research and Initiatives for Sustainable Technologies and Institutions (SRISTI), for example, supports the Honey Bee network o f grassroots innovators engaged in developing sustainable alternatives for natural resource management (for more information, see http://www.sristi.org/honeybee.html).This society has documented innovations and traditional practices and collected outstanding examples o f contemporary knowledge to form a 10,000-item database. Such initiatives should continue to be encouraged, because grassroots innovations can be a positive source o fjob creation, especially inrural areas. The National Innovation Foundation, established to help India become an inventive and creative society and a global leader in sustainable technologies, also supports grassroots innovations in India (for more information, see http://www.nifindia.org/). It i s nonetheless important that intellectualproperty be protected inthese cases so that people can increase their earnings from their own innovation, knowledge, and creative skills.41 Tap the Indian Diaspora. India has a large and well-educated Diasporathat it should tap to enhance growth and competiti~eness.~~According to Huang and Khanna (2003): . . after decades ofkeepingthe IndianDiasporaat arm's length, the country is now embracing it. . . , , Untilnow, the IndianDiasporahas accountedfor less than 10percent ofthe foreign money flowingto India. With the welcome mat now laid out, direct investment from nonresidentIndians is likely to increase.The IndianDiasporahas famously distinguished itself inknowledge-basedindustries, nowhere more so than inSilicon Valley. Now, India's brightening prospects,as well as the changing attitude vis-a-vis those who have gone abroad, are luring many nonresidentIndianengineers and scientists home and are enticing many expatriate business people to open their wallets. With the help o f its Diaspora, China has won the race to be the world's factory. With the help of its Diaspora, India couldbecomethe world's technology lab. Ina major initiative, the Indiangovernment set up a high-levelcommittee on the Indian Diaspora in September 2000 to prepare a comprehensive report highlightingways to create a more conducive environment for leveragingthese invaluable human resources. The report includes a detailed examination and recommendations on major Diaspora issues inthe fields of consular and related matters, culture, economic development, investment, international trade, industry,tourism, education, health, media, science and technology, and philanthropy (India, Ministry o f External Affairs 2000). Box 4-13 showcases the achievements o fthe IndianDiasporainthe United States. 4' For more information, see Finger and Schuler (2004). 42 In addition to specific citations, information inthis section was also drawn from Panagariya(2001) and World Bank (2003f and 20040. 88 Box 4-13: A Snapshotof the IndianDiasporain the UnitedStates The world is increasingly becoming one globally integrated market, and highly educated and trained people are key elements of competitiveness. Each year 2-3 million people emigrate due to higher salaries and complementary aspects: research centers, access to finance, and the ease of setting up businesses.Weaknesses inhome countries include low salaries and weak complementary aspects: little funding for R&D; underequipped research centers; difficult access to capital, especially to start up new high-tech businesses; access to finance; and an overregulated business environment for starting and running new businesses. The majority of emigrants go to just four host countries: the United States, Germany, Canada, and Australia. Although this migration has several positive effects on host countries by increasing the stock of high-level personnel and stimulating innovative activity, the negative effects on home countries include loss of highly trained personnel and fiscal costs, becausemany receive education that is publicly financed. Offsetting effects to home countries include remittances, return of migrants with greater internationalexperience, and potential to use this Diaspora to access capital knowledge and markets. Remittances to developing countries have soared from $17.7 billion in 1980 to $30.6 billion in 1990to nearly $80 billion in 2000 (Kapur and McHale 2003). InIndia, between 1990 and 2000, remittances from abroad grew sixfold from $2.1 billionto $12.3 billion. The destination of these remittances shifted significantly from Kerala and Gujarat to Karnataka and Andhra Pradesh, which are becoming centers of IT. According to the US.Census of 2000, the Indian Diaspora inthe United States i s growing rapidly and very wealthy. The Indian-American community now boasts 1.68 millionpeople compared with 0.81million in 1990-a growth of 106 percent! Their averageper capita income i s $60,093 (compared with a U.S. average of $38,885 in the 2000 census). They have a high level of education: more than 87 percent of Indo-Americans have completed high school and 62 percent have some college education (compared with just more than 20 percent for the U.S. population). They are represented invirtually all professions, including agriculture, biotechnology, business, economics, finance, IT, journalism, management, medicine, and various sciences. In 1997-98,4,092 Indian professors were teaching inUS.universities. Inthe same year, 33,818 students born inIndia were registered in 2,579 US.universities. In 1997 Indian students obtained 3.2 percent of the total number of doctorates granted by US.universities. The Diasporais also very entrepreneurial, andIndianshavecome to enjoy adominant position in the US.IT industry: approximately 300,000 Indian-Americans work in Silicon Valley, account for more than 15 percent of startups inthe United States, and have an average annual income of about $200,000. The launch of economic reforms in India in 1991 opened up new business opportunities for the Indian community inthe United States.They have had an important role to play inhigh-techdevelopment inIndia, focused primarily on the software industry. Many I T professionals rely heavily on strengths back home-the huge pool of skilled computer experts and software professionals-to subcontract work to their country of origin, thus creating a "virtuous" cycle for the IndianIT sector and economy. As an example, in the software industry and IT-enabled services, investments of Diasporamembers are quite limited (about 3 percent of FDI), but their contribution i s mostly in the form of knowledge linkages, that is, with foreign markets, helping Indian firms to absorb technical and managerial knowledge. The initial impetus for outsourcing to India many times comes from employees o f Indianorigin. The success of the IndianDiaspora has also attracted the attention of major MNCs to India's potential inthe I T sector. India has attracted investment inmany R&D centers wholly funded and established by GE, Cisco, Sun Microsystems, Microsoft, IBM,and Hughes Software. Intel's R&D centers inDelhi, Bangalore, and Mumbai service its global operations. Oracle Corporation has two development centers inBangalore and Hyderabad. Phoenix Technologies, ABB Group, IBM, America Online, and J.P. Morgan Chase are inthe process of setting up new R&D centers, and Lucent Technologies is also making inroads into India. ISource: Author'sresearch. J Indianprofessionals abroadhave been able to create networks that are working for the benefit of the country, for example, Indians set up the IndusEntrepreneurs (TIE) (see http://www.tie.org/), a professional and social network in Silicon Valley, which now has 42 chapters innine countries (Kripalani and Engardio 2003). These networks have mostly contributedknowledge linkages among countries and links with foreign markets. They are helpingIndianfirms to absorbtechnical and managerial knowledge 89 and have been providing the impetus for outsourcing to India (inIT and R&D). An increasing number of f i r m s have their "front offices" in the UnitedStates and the "manufacturing facility" in India, generating morejobs. The deeper, more symbiotic relationship developing between Silicon Valley and India, thus, goes far beyondthe "body shopping" of the 1990s when U.S. companies mainly wanted low-wage software-code writers. Now the brain drain from India is turninginto a so-called "brain circulation," nourishing the technology scenes inbothnations (Hof and Kripalani 2003). As reforms progress in India and bureaucratic barriers come down, the IndianDiasporawill increasingly look for investment opportunities intheir country of birth.The Indian government has also taken some positive steps to encouragethe Diaspora: 0 InDecember 2003 the government institutedthe right to dualcitizenship to people of Indianorigin with the hope that the measure would enable the Diaspora to contribute more to the cause of national development. 0 Itlaunched an initiative (and Web site) to harnessthe talent of the globally mobile professional S&T Diaspora working in industries,researchlaboratories, universities, and scientific departments, as well as successful entrepreneursintechnology-intensive businessesand venture capitalists to encourage their collaboration on strengthening Indianeducation, research, andhumanresourcecapabilities in basic sciences and cutting-edge techn~logies.~~Other aims include enhancing India's competencies in technology entrepreneurship, utilizing venture financing and mentoring the younger generation, connecting alumni abroad with their alma mater for purposeful and sustainablerelationships, and catalyzing participationof Indian scientists as well as institutions inmajor international science projects and advancedresearchfacilities abroad. It i s hoped that these efforts will helpto promote India as a global R&D platform and apreferred R&D outsourcing destination. Summary of Issues and Recommendations Moving forward, India should take steps to improve its overall innovation system further by taking advantage of new knowledgecreated at home and disseminating it for increased economic and social development. To gain maximumbenefits, India needs to approach its innovationpolicy systematically by supporting innovators and entrepreneurs, removingregulatory and bureaucratic obstaclesto innovation, and cooperating with the private sector and industry to engage inmutually beneficial activities; an illustrationi s the experience of the United States and Finland,44which have been remarkably successful in establishing an innovative climate. Strategiesare needed to change the Indianmind set, that is, "the Iin India, should not stand for imitation and inhibition, but for innovation." Strategies are also neededto develop innovative and "pro-risk" organizations that "leam to dare and dare to learn" and create channels of innovative financing and innovative management.45 As mentioned, an importantpart of India's innovation systemrelates to how modem and more efficient practices can be diffusedto the greatest number of users. This chapter, however, has focused mostly on India's formal R&D efforts. Inthis context, some policies that can help to energize the Indian innovation systeminclude the following: 43 See India, Ministry of External Affairs (n.d.).For a discussion of increasing S&T capacity throughout the world, see InterAcademy Council (2004). For example, Tekes-the National Innovation Agency of Finland-is the main public funding organization for R&D in Finland. Tekes funds industrial projects as well as projects inresearchinstitutes and especially promotes innovative, risk- intensive projects. More informationi s available at http://www.tekes.fdeng/. 45 J. R. D.Tata Corporate Leadership Award Lecture by Dr.R. A. Mashelkar, director general, Council of Scientific and IndustrialResearchinNew Delhiat the 1999 All-India Management Association meeting, February 21, 1999, available at http://www.nifindia.org/jrd%20lecture.htm. 90 0 Tap into the growing stock of global knowledge more effectively and provide incentives for intemational technology transfer through trade, FDI, licensing, and personnel movements, along with informal means through imitation, reverseengineering, and spillovers. Attract FDImore effectively, given the importance of FDIinthe generation and dissemination of global knowledge and the role that they can have indomestic R&D.This should include removing regulations on foreign investment and encouraging FDIR&D into the country. Encourage members of the Diaspora and renowned expatriates to contribute further to innovative activities by appointing themto the managementboards of national researchinstitutes, universities, and so on to facilitate the design of university programs that better suit corporate requirements. 0 Motivate scientists and engineers from India working inthe United States and other developed countries to enter into alliances with multinationalcompanies and establish firms or labs to undertake R&D on a contract basis inIndia. 0 Audit and monitor S&T efforts and institutional performance to identify what works well and then redeploy resourcesto programs that have a proventrack record of success. 0 Use the savings to strengthen university-industry programs by means of matching grants and other initiatives, including encouraging academicsto spend sabbaticalsinrelevant industries so that their researchmeets the needs of the productive sector. 0 Findalternative sources of funding for R&D, especially as the government reduces its budgetary support for researchprograms. Insome countries such as China, academic institutions are launching commercial ventures of their own or incollaborationwith the corporate sector. 0 Allow national research institutes to collaborate with domestic and foreign firms to forge closer links with industry. Inrecent years, strong criticism has beenexpressed on S&T institutions inIndia pursuingresearchof little relevance to the private sector and the needs of the economy. One way of encouraging scientists to work closely with industry and in so doing improving linkages between technology development and application would be to provide incentives such as bonuses and a share of royalties from products createdthrough their research. 0 Pay adequate salaries and create a proper working environment for scientists and engineers that provides themwith access to capital equipment, instruments, and other infrastructureneededfor R&D. Failure to compensateresearchersadequately and lack of a supportive environment will only exacerbatethe problemof brain drain. 0 Restructure and modernize universities and publicly funded R&D institutions by giving them flexibility, freedom of operation, and financial autonomy. 0 Increase the intake of students into science and engineering, given the competition for recruitment of trained personnel; this may require adding colleges and universities (such as I l T s or others modeled after them). 0 Develop entrepreneurial skills and management training for S&T professionals to encourage themto undertake business activities. 0 Encourage the private sector to invest inR&D. 0 Strengthen R&D by companies so that they can have a more demand-driven and market-oriented approach with closer collaborationamong researchers, partners, and customers indeveloping new products and services that can be speedily brought to the market. 0 Develop communication and other infrastructure for R&D, and create an attractive environment to motivate R&D investments, including favorable tax, and other incentives. 0 Establish scienceand technology parks to encourage industry-university collaboration. Such parks might attract R&D work from both foreign and domestic firms if the parks are situated close to reputable academic institutions. 0 Encourage venture capital, which can also be used as an incentive for commercialization of research. 0 Effectively enforce and implement IPRto create confidence among domestic and foreign innovators on protectionof their innovations inthe country. 91 0 Promote a national fund to support grassroots innovators, with the aimof building anationalregister of innovators, convertinginnovations into viable business plans, and disseminating knowledge of indigenous innovations, especially for job creation. 0 Strengthen the emerging new model of reversedrug design to produce innovations in a more cost- effective way basedon leveraging traditional knowledge with modem science and exploiting public- private partnerships. 92 5. INFORMATIONINFRASTRUCTURE Rapid advances inICTs are dramatically affecting the acquisition, creation, dissemination, and use of knowledge, which inturn affects economic and social activities, including how manufacturers, service providers, and governments are organized and how they performtheir functions. Applications of ICT are improving the efficiency of existing services and creating new opportunities intrade, governance, education, business connectivity, healthcare delivery, and environmental and natural resource development. As knowledgebecomes an increasingly important element of competitiveness, the use of ICTs is thus reducing transaction cost, time, and space barriers, allowing the mass production of customized goods and services and substituting for limited factors of production. With ICT use becoming all-pervasive and its impacts transformational, it has become an essentialbackbone of the knowledge economy. This meansthat countries need to harness the full potentialof ICTs for all sectors of the economy: for education, innovation, and learning; public sector management; private sector competitiveness; and capacity building.They not only needto address the "digital divide," but must also take advantage of the emerging opportunities to leapfrog and participate innew knowledge industries. The information infrastructure ina country consists of telecommunications networks, strategic information systems, policy and legal frameworks affecting their deployment, as well as skilled human resourcesneededto develop and use it. To develop a strong information infrastructure, it i s necessary to mobilize the many stakeholdersthat are involved inits deployment and use: government, business, individual users, the telecommunication and information service providers, and so on. Turningto India, although the country's IT industry and ITprofessionals have recently been on the cuttingedge of technological evolution, it is also true that the vast majority of people have neither the access nor the awareness and education to derive benefits from advancing technology. Provision of basic telephone services, long distance telephony, and data communications services was, untilrecently, the monopoly of government agencies.Privateplayers were not allowed to provide these services, and public sector enterprises hadno incentiveto extend the reach, enhancethe quality, or reduce the cost of services deliveredto customers. Regulationand centralization of communications development, restrictions on hardware imports untilthe mid-1980s, scant progress inmeeting infrastructure needs, and the inability to scale up good quality higher education constrained India's overall information infrastructure. The enabling conditions for increasedICT penetration and use, however, are slowly, but surely being createdinthe country. India's telecoms sector has registered rapid growth inrecent years, spurred by reforms to open upthe market and introduce greater competition to the sector. Many domestic and internationalprivate sector entrants are now providing consumers with high-quality services at low prices. Figure 5-1 shows the increasing percentage of total (fixed plus mobile) telephone service provided by private operators inIndia. 93 Figure 5-1: Percentage of Total Telephone Service (Fixed and Mobile) Provided b y Private Operators in India, 2000-04 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 2000.5 2001 2001.5 2002 2002.5 2003 2003.5 2004 2004.5 Fiscal Year __ Source: World Bank (2004g). Some spectacular successes have resulted: more than 47 million people inIndia hadmobile phones at the end of 2004! Fierceprice competition has ledto Indianmobile telephony becoming one of the cheapest in the world. This has beenaboon, especially to people inIndia's 600,000 rural villages, which had no access to communicationthrough traditional means, such as fixed lines. Butnow, from fishermen at sea and brokers ashore inKeralato farmers inPunjab-people inindustry and farming are embracing wireless technology for economic activity: to do business and increasetheir profit margins. The National Association of Software and Services Companies (NASSC0M)-the industry association representing the Indian IT industry nationally and internationally-also forecasts that by 2005 personal computer (PC) penetration will reach approximately 15 per 1,000 people (from 7.2 per 1,000 in2003). (For more information, see http://www.nasscom.org.) India i s also facing rapid growth indemand for satellite and cable television (EIU2003a). BenchmarkingInformationInfrastructure Despite these achievements, when viewed in a global perspective, the rates of teledensity and ICT penetration for India remain rather low. The global benchmarking presented inFigure 5-2 shows that, even though India does better than the South Asia and Africa Regions interms of information infrastructure indicators, the country has slightly worsened its performance between 1995 and the most recent period for which data are available, whereas China has soaredfar ahead. This seems surprising, given India's recent notable achievements inthe IT domain. This i s because, despite the several-fold increase inIndia's information infrastructure penetration ratios inabsolute terms inthe pasthalf decade (interms of fixedlinetelephones, mobiletelephones, computers, andInternet users), inrelative terms, the country has maintained its position intelephones (fixed plus mobile), made progressincomputers, but fallen behindinInternet users, while the world as a whole has made a much more significant improvement in all these indicators inthe same period. 94 Figure 5-2: Benchmarking Informationand CommunicationsTechnologies,India and the World, 1995 and MostRecentPeriod 10 9- 8 - 7 - Middle East and North Africa ; 6 - dv - 5 - China I4- 0 Mexico 3 - 2 - 1- 0 , 3 1I 2I 3I 4I 5I 6I 7I 8I QI 0 1995 Note: Countries above the 45-degree line have improved their positioninthe information infrastructure for the most recent period for which data are available relative to their positionin 1995 (or closest available date in the mid-1990s) and vice versa for countries below the line. Source: World Bank, "Knowledge Assessment Methodology," http://www.worldbank.org/kam. India's ICT scorecard inFigure 5-3 and the data presentedinFigure 5-4 (a, b, and c) and annex 11for India and comparator countries on telephones (both fixed lines and mobile), computers, and Internet hosts again highlight the fact that although some progress has been made, India's information infrastructure as a whole will need to be much further strengthened if India i s truly to transform itself into a knowledge- based economy, especially as compared to China, which has made remarkable progress in enhancing its overall infrastructure (annex 12presents the ICT indicators for India and China, based on the KAM).T o take an example ofjust one indicator: total ICT expenditures inIndia in 2001 were 2.8 percent of GDP, compared with more than double at 5.8 percent inChina and 8.3 percent inBrazil. The low level o f spending inIndia has been due to a high-level o f regulations, lack o f local applications (most IT applications have been servicing the global market), and hightariffs on hardware, among others. More investment i s clearly required so India can make greater strides in strengthening i t s information infrastructure. 95 Figure 5-3: India's Scorecard on Information and CommunicationsTechnologies, Selected Variables, Most RecentPeriod Telnphonesper 1,000 people (71 00) (2 78) ICT Expendrture as $h of GD am Telephone lines per 1,000 (46 3U) (5 18) E-Government Mobile phone per 1,000(24 70) (3 201Internetionaltelecommunications, cost of call Computers per 1,000people (7 20) (174 66) Internet users per 10,000 people \v' Sets per 1,ail0 (83 00) (0 821Internethosts per 10,O adios per 1,000 1120 00) (60 001Daily newspapers per 1,ail0 Note: Each of the 80 variables inthe KAMis normalizedon a scale of 0 to 10 for 128 countries.The fuller the scorecard, the better poised a country i s to embrace the knowledge economy.But an economy should not necessarilyaim for a perfect score of 10 on all variables. This is becausethe scorecards may be shapedby the particular structural characteristicsof an economy or by trade-offs that characterizedifferent development strategies. Values inparenthesesdenote actual values for India for the most recentperiod for which data are available. Source: World Bank, "Knowledge Assessment Methodology," http://www.worldbank.org/kam Figure 5-4: Telephones, Computers,and the Internet: India and Comparators, 1995-2002 a. Telephones (fixed and mobile per 1,000 people), 1995-2002 1200 , - 0 ' - 1000 1I e Korea c 800 i 0 ..... .......... zz ,/ 0 I # 600 i *( Poland c L o , 400 Bra& # China 200 t- L- I India O J 1 1995 1996 1997 1998 1999 2000 2001 2002 Source, World Bank internal database. 96 b. PersonalComputers per 1,000 people, 1995-2002 0 c 500 # + Korea c 0 400 T , I / 300 I . I 200 100 0 1995 1996 1997 1998 1999 2000 2001 2002 Source; World Bank intemal database. c. Internet Hosts per 10,000 people, 1995-2000 100 1 I . . / Korea , I 1 I , # I c c c c 4ol:"d 0 c c 1995 1996 1997 1998 1999 2000 Source; World Bank intemal database. , 97 India's Global Standing on Information Communications Technology A variety of indexes have beendeveloped to rank countries' performance on ICTs. This section reviews some of these to see where India stands on ICTs on the global stage. The indexes provide a variety of rankings on where India stands in a global perspective and differ with regard to their context and specific informational functions. One possible explanation for the differences inIndia's rankings i s the way the different indexes are calculated; all of themuse different methodologies and differ inthe scope interms of the number of countries and indicators covered. As a result, India seems to do better than some countries on some indexes andnot muchbetter on others. This i s certainly true when comparing India with China. On average, China seems to do better as an economy than India on usingICTs for its overall development, whereas India has some noteworthy pockets of excellence and needs to do more to use and apply ICTs to meet domestic needs. Inthis context, itis alsoworthnotingthattheglobalITindexespresentedherealsoprovideamore somber picture of India's readinessthan is perhaps apparent from looking at the progress made by some of the major Indian cities, such as Chennai, Bangalore, Delhi,Mumbai, Kolkata, Hyderabad, and so on. Several indexes have placed Denmark, Finland, Sweden, and Singapore inthe top spots. These countries are rather small in size and population, compared with India. Given that India is sucha large country with major metropolises the size of some European countries, an interesting exercise would be to compare the progress made by some major Indiancities with the performance of the top-rankingcountries. Networked Readiness Index. The World Economic F0I-I." s Global Information TechnologyReport of 2004-2005, the fourth inthe series, highlightsits Networked Readinesshdex (NRI)of 104countries (WEF2004d). The NRImeasures the degreeof preparation a nation or community has to participate in and benefit from ICT developments. The NRIi s composed of three component indexes, which assess the following: 0 Environment for ICT offeredby a given country or community 0 Readiness of the community's key stakeholders (individuals, businesses, and governments) 0 Usage of ICT among these stakeholders. The NRIfor 2004-05 places Singapore as the best performer worldwide inanumber of categories, including the quality of math and science education, affordability of telephone connection charges, and government prioritization and procurement of ICTs; it also gets extremely high scores in other areas, such as affordability of Internet access. Singapore i s followed by Iceland, Finland, and Denmark, and the UnitedStates occupies fifth spot on the 2004-05 NRI. Interms of India and its comparators, Korea tops the list and holds 24th place, but India i s next on the list at 39th, surpassingChina at 41st, Brazil at 46th, and Russia at 62nd. India and China have both moved up the ranks in 2004-05 and have shown significant improvements on the rankings in2003-04, when India ranked45th and China ranked 51st. E-readiness rankings.The Economic IntelligenceUnit's 2004 "e-readiness'' ranhngs (EIU2004a) provide another interesting benchmark for countries incomparing and assessing their ICT-related environments, related to e-readiness.E-readiness or the extent to which a market is conducive to Internet- basedopportunities takes into account a wide range of factors-from the quality of IT infrastructureto the ambition of govemment initiatives and the degree to which the Internet is creating real commercial efficiencies. The rankings cover the world's 64 largest economies. Inthe 2004 rankings, several countries have improved their scores since 2003, thanks to continued rollout of broadband services, uptake of mobile telephony, and a spate of Internet-related legislation and government programs. Four tiers of e- readinesshave emergedinthe 2004 ranking: 98 Denmark holds the top spot, and Korea i s ranked 14th. Korea has the densest broadband market inthe world today. The countries inthe second tier includes countries, for example, Brazil (35th) and Poland (36th), that do not yet have dense communications and Internet infrastructure or have less well-coordinated "e- government" policies, but do have significant and quickly growing "e-service'' industries. The thirdtier includes large and increasingly "e-ready'' economic powerhouses: India (46th), China (52nd), and Russia (55th). In2003 India was also at 46th place, above Russia (48th) and China (50th). Ifwerenotfortheentryoffournewcountriesinthe2004rankings,Indiawouldhavemovedup it four places! Inthefourthtier (56ththrough 64thplaces) isacluster ofmarketsinwhichInternetservices are struggling.The occasionalbright star does arise, as is evidenced by the success o f Vietnam's software development industry. Digital Access Index. The International Telecommunication Union (ITU) unveiled the Digital Access Index (DAI) (ITU2003), which ranks ICT access for 178 countries. The DAIdistinguishes itself from other indexes by including a number o f new variables, such as education and affordability. Countries are classified into four digital access categories inthe DAI: high, upper, medium, and low. Table 5-1 shows the following: Table 5-1: Digital Access Index, Various 0 Sweden leads the DAI, and Korea comes infourth. Countries, 2o02 Apart from Canada, which i s ranked tenth, the top 1.Sweden 0.85 ten are all Asian and European countries. The 2, Denmark 0.83 3. Iceland 0.82 United States holds eleventh place. All these 4. Korea 0.82 countries are placedinthe "high-access" category. 5. Norway 0.79 0 Brazil, Poland, and Russia are classified inthe 6. Netherlands 0.79 "upper-access'' category. Other countries inthis 7. HongKong, China 0.79 category include those that have been usingICTs as 8. Finland 0.79 development enablers. Positive government policies 9. Taiwan, China 0.79 have helped them reach an impressive level of ICT 10. Canada 0.78 access; this has been the case for Dubai Internet 11.UnitedStates 0.78 City inthe United Arab Emirates (the highest- 12.UnitedKingdom ' 0.77 ranked Arab nation), the Multimedia Super Corridor Note: On a scaleOf'to ` 1for which =bhest inMalaysia (the highest-ranked developingAsian access. Source: ITU (2003), nation), and Cyber City inMauritius (along with Seychelles, the highest-ranked African nation). 0 India is classijied in the "middle access" category and lags behind China, showing that it needs to do more to join the ranks of countries that have been usingIT as a lever for enhancing overall development, not just in a few pockets of development. Information Society Index: The Information Society Index (ISI) in2004 measures the abilities of 53 nations to participate inthe information revolution (see http://www.idc.com/groups/isi/main.html). The IS1combines 15 variables infour infrastructure "pillars" to calculate and rank each nation's ability to access and utilize information and IT. Inmuch the same way that GDP measures a country's economic wealth, the IS1measures its information capacity and wealth. The four pillars are: 0 Computers. This pillar looks at the basic buildingblocks of information society by measuring the number of PC households, IT spending as a percentage o f GDP, software spending as a percentage o f total IT spending, and IT services spending weighted against GDP. 99 0 Intemet. The Internet i s a key factor indevelopment of an advanced information society. This pillar factors inthe number o f Internet users within a country, percentage o f users with Internet access at home, number o f mobile Internet users, and e-commerce spending. 0 Telecoms.To understand better how each society accessesinformation, this pillar measures variables related to broadband adoption, wireless services, and mobile handset shipments. 0 Social. Social factors provide the glue that enables society to fix onto advantages offered by innovation. This pillar evaluates a society's ability to utilize information technology by measuring education, civil liberties, and government corruption. Inthe2004rankings, Denmarkwas infirstplace, followed bySweden. TheUnitedStates, Switzerland, and Canada rounded out the top five. The top Asian country i s Korea, ineighth place. Braziltook 38th place, Russia 41st, China 44th, and India 51st. Interms o f the component rankings, India ranked 51st on computers, 53rd on telecoms, 43rd on the Internet, and 51st on social indicators. Incontrast, the component rankings for China were 46th for computers, 39th for telecoms, 38thfor the Internet, and 48th for social indicators. E-readiness assessment of Indian states. The above indexes provide a glimpse o f India's ranking on the global stage. The recently released report India: E-ReadinessAssessment Report 2004for States/Union Territories46differs fromthe others by looking at the level of e-readiness of various Indian states. The report classifies Indian states into the following categories: 0 Leaders. Kamataka, Tamil Nadu, Andhra Pradesh, Maharashtra, and Chandigarh. 0 Aspiring leaders. Kerala, Gujarat, GoamDelhi, Punjab, and Haryana. 0 Expectants. West Bengal, Pondicheny, and Madhya Pradesh. 0 Average achievers. Uttar Pradesh, Chattisgarh, Orissa, Sikkim, Himachal Pradesh, and Rajasthan. 0 Below average achievers. Mizoram, Jammu and Kashmir, Assam, Meghalaya, Uttaranchal, and Jharkhand. 0 Least Achievers. Lakshadweep, Manipur, Tripura, Arunachal Pradesh, Andaman and Nicobar Islands, Bihar, Daman and Diu,Dadra and Nagar Haveli, and Nagaland. ICT infrastructure and ability to use it i s clearly strongly dispersed across Indian states. Some states in India, such as Andhra Pradesh, have made notable strides inusingICTs for their development. Among the leaders, Tamil Nadu has improved its e-readiness in the past year by consciously working on the environment, especially involvingthe private sector in development of ICT infrastructure and introducing ICTs in state-level policies. Among aspiring leaders, Kerala has used the competitive advantages of the state (highproportion of literacy, and awareness of citizens) to "pole vault" inthe usage segment, and Gujarat has tried to replicate its success in industry segments, such as petrochemicals and chemicals in the ICT sector. Among the expectant category, Madhya Pradesh's ascent is notable and largely due to private sector involvement indevelopmental activities (for example, in e-Choupal). In all cases, these Indian states have made the progress due to leadership, connectivity, availability of skilled manpower, increased private sector development, and creation of institutional mechanisms with sustainable impact. 46 For more information, including the methodology, refer to India, Ministry of Communications and Information Technology, andNCAER (2004b). 100 Issues and Recent Developments inthe Telecommunication and IT sectors Itis clear that developing countries must invest inbuilding their information infrastructure. This includes not only developing the basic telephone and telecommunications services, but also ensuring that these services are provided at the lowest cost, as well as promoting the application of ICTs to facilitate improvements in the efficiency o f the delivery o f economic and social activities. Furthermore, as the application o f ICTs becomes even more important for economic growth and increased social welfare, special attention must be given to new investments in upgrading the skills and competencies o f workforces to use ICTs. Even though this chapter has so far shown that India has a way to go indeveloping its information infrastructure to reach advanced country standards, the country nonetheless has recently had some impressive achievements. This section reviews recent developments inthe India's telecommunications and IT sectors. Scaling up telecommunications. The number of fixed and mobile subscribers inIndia has increased greatly, especially inthe past four years (Figure 5-5). Infact, the number o f mobile subscribers has now surpassed the number of fixed lines (or landlines). From 1998 to 2004, mobile subscribers increasedfrom 1.2millionto 47.3 million, and fixed line (or landline) subscribers from 21.5 million to about 44 million.47This growth has resulted in a total teledensity in India from 10.7 per 1,000 people in 1995 to 71 per 1,000 people in 2003 and 87 per 1,000 people in 2004 (Figure 5-6). The growth in the mobile market i s likely to be sustained in the next few years as the number o f subscribers i s expected to top 100million, whereas the market for landlines continues to grow at a more conservative pace. Figure 5-5: Growthof Telephony inIndia: Numbersof Landlineand MobileSubscribers, 1996-2004 I 1996 1998 2000 2002 2004 Source: Abraham (2005) 47 For more information, see http://sify.com/finance/fullstory.php?id=l3645428; http://news.bbc.co.uW2/hiA~usiness/3994761 .stm; and ITUat http://www.itu.int/ITU-D/ict/statistics/. 101 Figure 5-6: Teledensity in India, 1995-2004 100 e a 8 90 (1. 0 2 0 80 % a 70 .- 60 e 50 c ," 40 5 0 30 E ; 20 v .$ 10 E $ 0 1995 1999 2001 2003 Oct-04 I Source: Abraham (2005). Developing a new broadband policy. The Indian government, inkeeping pace with up-to-date technological advancements, announced its Broadband Policy in2004, to give impetus to broadband and Internetpenetration inthe country. Prime considerations guiding the policy include affordability and reliability of broadband services, incentives for creation of additional infrastructure and employment opportunities, introduction of the latest technologies, and encouragement of a competitive environment in order to reduce regulatory interventions. The policy sets a goal of three million broadband subscribers and six million Internet subscribers by December 2005 and 20 millionbroadband subscribers and 40 million Internet subscribersby the end of year 2010. The new policy encouragescreation and growth of infrastructure through various coexisting access technologies, such as optical fiber technologies, digital subscriber lines on copper loop, cable TV network, satellite, and terrestrial wireless techn~logies.~~ Reforming telecommunications. In spite of impressive progress inthe telecommunications landscapein India, the reform agenda i s still unfinished. Important areas that continue to need attention include the following: 0 Completion offull un$ed licensing. This involves development and implementation of a second stage of the unifiedlicensingregime, which would extend to all telecom services. 0 Tariffs and network interconnection. Tariff rebalancing and terms of network interconnectionneed continued attention. 0 Rural connectivity digital divide. As the telecommunications sector moves quickly to a more commercial and competitive environment, the government needsto review and develop policies regarding service needs of rural areas of India, including those groups who are not well servedby the market. This issue will be discussedin some length later inthis chapter. 0 Strategy to accelerate Intemet and broadband use. This strategy i s inline with the government's broadband policy highlighted above to accelerategrowth of the Internet and broadband penetration in the country (World Bank 2004g). 48For more information, see India, Ministry of Communications andInformationTechnology (2004a). 102 Creating global niches in IT. India's I T sector can boast of remarkable and impressive global achievements. The prediction that India will dominate IT work inthe developed world, just as China and other East Asian countries commandeeredmanufacturing, is becoming a reality. Companies suchas TCS, Wipro, Infosys, HCLTech, and Satyamtopped the list of India's IT services firms in2004 interms of total revenues (TheEconomist 2004b). In2004 Infosys ranked as the ninthmost respectableIT company inthe world, behindHewlett Packard,IBM,Dell, Microsoft, SAP, Cisco, Intel, andOracle (Merchant 2004). As a result, Bangalore4' and, more recently, Hyderabad, Chennai, Mumbai, and Pune are emerging as competitive IT hubs inthe country. According to NASSCOM, the Indian IT market overall has grown from $1.73 billion in 1994-95 to $19.9 billion in2003-04, accounting for more than 3 percent of India's GDP in2003-04. India's IT software and services exports recorded revenues of $12.5 billion in2003-04. The domestic market, on the other hand, accounted only for $3.4 billion in2003-04. Several factors have contributed to India's success inthe ITindustry, including the existence of a highly skilled, English-speaking workforce graduating from India's engineering schools and eaming lower wages than European and U.S. counterparts, low dependenceof IT on physical infrastructure, the Indian Diaspora, and introduction of current account convertibility and easing of controls and regulations inthe early 1990s. The IT industry inIndia has looser labor regulations and less corruption and bureaucracy, arguably, becauseit developed without government intervention! Box 5-1 provides information on the recent status of India's ITmarket and the software and services industry. Software and services exports continue to remain on top of the ITindustry's revenue table. Major long-term projects inthe export-driven software sector have come into India, and Indian companies have beentaking on an increasingly larger share of the global outsourced business. Interms of software services delivery, in2002-03, offshore project revenuesgrew by 49 percent compared with on-site revenues.Interms of geography, IndianICT companies have beguntapping into regions outside the U.S. market, which remains the largest user of software solutions from India. Revenue contributionsby the U.S. market continued to rise due to the large number of RES/ BPO projects outsourced to India. Lookingahead, some of the key service lines for Indiancompanies continue to be customapplication development and maintenance, applications outsourcing, ITES, and R&D services. Although, on the one hand, India i s reaping tremendous revenues from continuing to expand provision of distance services globally, on the other hand, the high fees gamered from providing foreign IT services preempts Indiancompanies from developing ICT applications to meet domestic needs.Domestic demand accounts for less than one-fifth of the IT turnover, which highlights the potential and urgent need for developing IT applications for the domestic market. This i s a major issue for India, as it strives to transformitself into a knowledge-based economy. 49For more information, see the official Web site of the Department of IT and Biotechnology, Govemment of Kamatakaat http://www.bangaloreit.cod. 103 Box 5-1: Snapshot of the Indian Information Technology Market and Software and Service Industry Figure a: IndianIT Market, 1997-2003 Figure b: Indian Software and Service Industry, 2002-04 Figure a shows the evolution o f the Indian IT market in 1997-2003. The market has been increasing by leaps and bounds, and the IT industry is estimated to contribute to 3.82 percent of India's GDP in 2003-04, compared with 1.22 percent in 1997-98. Thus, India's I T sector has defied predictions that it would never outgrow "body shopping"-simple, low-cost software fixes done at the client's site. Indiansoftware companies have proven themselves and gone on to win bigger, longer-term, and more demanding contracts that they have fulfilled on time, on cost, and with high quality, thus reinforcing and cementing their dominant position in the world. Figure b shows total revenues of the Indian software and services industry in2003-04 o f $15.9 billion, including domestic revenues of $3.4 billion. The Indiansoftware and service industry i s likely to grow to $20.5 billion in 2004-05, with domestic market revenues of $4.2 billion. Indian software and services exports registered a growth of 30.5 percent in2003104, clocking revenues of $12.5 billion, and are likely to witness a 30-32 percent increase to reach revenues of $16.3 billionin2004-05. North America, which accounts for more than 55 percent of global IT spending, represented approximately 70 percent of Indiansoftware exports in 2003-04; Europe ranked second at 22.25 percent of total exports. North America remains the dominant market for ITES-BPO services, accounting for more than 80 percent of ITES-BPO businessinIndia. Some initiatives to make India a sustainable hubfor ITES should include instituting single window clearances for the ITES industry, such as call centers, tele-education, telemedicine, and telemarketing; ensuring ease of operations and start-up assistance for ITES units through support from local authorities and state governments; setting up degree-level courses for ITES industry as well as ITES training infrastructure, and involving industrial training institutes and polytechnics for call center management; creating an "India Brand" marketing fund for promoting India as a preferred destination for the ITES sector; and establishing a suitable venture capital fund and developing special incentives to promote entrepreneurship and teleworking, especially for women inthis sector. Sources: NASSCOM (http:l/www.nasscom.org),NASSCOM's IT IndustryFactsheet 2004 (http://www.nasscom.org/download/IndianITIndustryFactsheet.doc), andIndia,PlanningCommission(2002~). Moving up the value chain. India's IT services are movingup thevalue chain, and India i s undertaking new and innovative work, such as management for clients o f IT-related business processes. At present, call services and IT-enabled services (back-office operations, remote maintenance, accounting, public call centers, insurance claims processing, medical transcriptions, insurance claims, legal databases, digital content development, online education, data digitizatiodGIS, payroWhumanresource services, and other bulkstandards processing), which use cheap labor and do notrequire knowledge for software engineering, are expanding rapidly in India, and have substantial potential to generate wealth and create 104 employment opportunities. As an example, Indian companies are offering back-office services to firms that do not want to set up their own Indianoperations. Daksh.com near Delhi answers questions from customers of Amazon, the biggest online retailer, mainly by e-mail. One of the first big online travel agencies, e-bookers, uses a call center inDelhito provide round-the-clock service for offices inEurope. Large global systems integrationcompanies, such as IBMGlobal Services, are also relocating work and expanding their presence inIndia to take advantage of the country's cost and manpower strengths. Inaddition, India is also increasingly making animpact inITconsulting: companies suchas Wipro, Infosys, and Tata are managing US.IT networks and reengineering businessprocesses.Inchip design, Intel and Texas Instruments, for example, are usingIndia as R&D hubs for microprocessors and multimedia chips (Kripalani and Engardio2003). Indians themselvesare also investing abroad. According to NASSCOM, the Indian software industry has recently made cumulative investments of $350 million abroad, most of it inthe United States (The Economist 2003b). The success of the IT industry on the whole influenced competitiveness inother sectors as well by buildingconfidence inIndian industry, enhancing the country's brand equity inthe world and offering entrepreneurial opportunities on a global scale. Inthe future, it i s expected that India will make inroads infinancial analysis, industrialengineering, analytics, and drug research. Expanding employment in the IT industry. The IT industry in2000-03 created employment opportunities for almost 700,000 people inIndia ( Figure 5-7). NASSCOM more recently estimatesthat by the end of fiscal 2005, the number of people employed inIndia's outsourcing industry will have reachedone million (Associated Press 2005). Some of the biggest U.S. employers inIndia in2003 were GE Capital Services (conducts back-office work with 16,000 people), GE's John WelchTechnology Center (conducts product R&D with 1,800 people), IBM Global Services (provides IT services and software with 10,000 people), Oracle (provides software and services with 6,000 people), Electronic Data Systems (provides IT services with 3,500 people), Texas Instruments (designs chips with 900 people), Intel (designs chips and software with 1,700 people), and J. P.Morgan Chase (conducts back-office work and analysis with 1,200 people) (Kripalani and Engardio 2003). Figure5-7: Employmentinthe IndianInformationTechnology Sector, 2000-03 (thousands) 590 400 300 200 100 0 Note: Years shown end inMarch. Source: Basedon chart in The Economist (2003~). Contributing to economic growth. Various forecasts have been given on where India's IT industry is heading. According to WEF's Global Information Technology Report 2002-2003 (WEF2003), India's IT industry i s expectedto grow at a compounded annual rate of 38 percent to reach $77 billion by 2008, 105 contributingto 20 percent of India's anticipated GDP growth inthis period and 30 percent of its foreign exchange earnings. By that year, it i s also expectedto employ more than 2 million people and indirectly create another 2 millionjobs (WEF2003; "India's Shining Hopes" 2004). McKinsey forecasts that by 2008, IT services and back-office work inIndia will swell to a $57 billion annual export industry employing 4 million people and accounting for 7 percent of India's GDP. Figure 5-8 shows the projected status of India's IT industry in2008. The infrastructure neededfor a growing knowledge economy must accompany this growth. One cannot have a successful IT industry when every company has to buildits own infrastructure. InBangalore, for example, many companies have created their own walled enclaves with their own electricity, bus service, telecommunications, and security (Friedman 2004) ! Figure 5-8: India's Projected Information Technology Industry, Export andDomestic Markets, 2008 (billions of U.S.dollars) EXPORT MARKET ITservices. R Remote IT-enabled services Productsltechnology DOMESTIC MARKET !OLower estimate UDDer estimate1 *Application maintenance,systems integration,support Source: Basedon chart in TheEconomist (2004d). Growing trend towards ofshoring to India. India was inthe news in2004, especially inthe United States, because in addition to beinga leading supplier of IT services, its exports of BPO services have also been growing rapidly. Suchservices have arisen from the outsourcing (or out-location) of noncore business processes throughout the value chains of both manufacturing and services industries. The business practice of offshoring has been enabled worldwide by two main changes inthe business environment. First,the improvement ininternationaltelecommunications capacity andthe concomitant reductionin global telecommunications costs are fundamental to the economics of offshoring. Second andjust as important, inthe past two decades, personal computers have enabled the computerizationand digitization of most businessesservices. As a result, information can now be transmitted across long distances at low ' cost and with little loss of quality. These changes make organizational boundaries and national borders muchless important indecidingthe locationof service functions. The incentive for companies, especially from the United States, to outsource operations to India i s based not only on labor cost savings (estimated to be between 30 percent and 60 percent), but also on reaping productivity gains (estimated as ranging from 15 to 25 percent). Destination countries such as India also see increasedinvestment andjob creation through offshoring. But it i s important to note that this outsourcing benefits both India and the United States, as demonstrated by a 2003 study by McKinsey Global Institute (Figure 5-9). Of the $1.45-$1.47 of value McKinsey estimates is created globally for every dollar that aU.S. company choosesto divert abroad, the United States captures $1.12-$1.14, 106 whereas the receiving country, such as India, captures on average 33 cents. Inother words, the United States captures 78 percent of the total value. Figure 5-9: Gains f r o m Offshoring $1of Services from the United States (Source) to India (Host) Gainsto the USis $l.O from every Gainsto'lndia is 33 cents from $lof offshoring 1 h Government Suppliers Labor Retained Repatriated New Redeployed Cost revenue profits earnings revenues labor savings Source: Adapted from McKinsey GlobalInstitute (2003) inWorld Bank (2004i). Despite the current controversy surrounding this phenomenon, offshoring will allow the United States to capture economic value through multiplechannels: Reduced costs. Savings from reduced costs means more savings, which can be passedto consumers or investors to reinvest. 0 New revenues. Offshoring createsdemand indestination countries for U.S. products, especially for high-tech items. 0 Repatriated earnings. Several providers serving the U.S. market are incorporated inAmerica, which means they repatriate their earnings backto the UnitedStates. 0 Redeployed labor. U.S. workers who lose theirjobs to offshoring will take up other jobs, which will inturngenerateadditionalvalue for the economy. Emerging possibilities for e-commerce. The "e-commerce'' market inIndia has a long way to go, but i s already helpingto fuel competition and offering new opportunities to businesses and consumers. The Internet scenarioinIndia has improved vastly inrecent years, thanks to improving telecommunications infrastructure, better bandwidth availability, multiplicity of Internet service providers, and relatively cheaper computer hardware than previously. A major jump i s still required, however, before India can achieve "anytime-anywhere" connectivity and the stage at which enhancedInternet penetration translates into highvolumes of online transactions. E-commerce could flourish if India installed appropriate policies to ensure competitive pricing of Internet services and provided an appropriate regulatory environment and legal infrastructure to deal with online transactions. Table 5-2 presentsInternet usage patterns inIndia from a recent study by NASSCOM. The study showed that about 64 percent of users surf the Internetfor 0.5-2 hours a day. On a work day, about 29 percent of users access the Internet from their workplace. At present, the Internet i s usedprimarily for accessing e- mail and users are reluctant to make online purchases. Nonetheless, everyone from Yahoo, Microsoft, and IBMto local carpet vendors, hotels, and IndianISPs aretrying to claim a slice of the rapidly emerging Indian e-commercemarket (NASSCOM 2003 and 2004b and The Asia Society 1999). 107 Uses Users Time E-mail 90 35 Information 50 9 Chat 43 9 Educatiodacademic information 41 11 Downloads 38 6 Music/movies/entertainment 21 4 Jobs 23 4 As borne out by NASSCOM's Strategic Review 2004 (2004b), e-commerce activity inIndia is thus currently at a very nascent stage. The speed at which e-commerce can be adopted by various industriesin India will depend on the current industry structure, supply chaincharacteristics of the industry, and current IT adoption within the industry. Among Indianindustries, automotive and consumer goods are expected to lead e-commerce activity. India is expectedto have an Internet user base of 52 million by 2005. Despite this, the Internet is unlikely to become a key sales channel inthe near future due to cultural factors and current convenience inoffline trading. According to NASSCOM' s Strategic Review 2003, Indianbusiness-to-consumer spending in2002 i s estimated at about Rs. 380 million. Travel i s emerging as the fastest-growing category for business-to-consumertransactions and accounted for about 23 percent of transactions during2002. Indian Railways and domestic airlines are launchingthe online sale of tickets; this segment i s expectedto account for a large proportion of business-to-consumer transactions in the near future.With a large base of mobile phone users, the potentialfor mobile applications-also calledm-commerce-is huge.50Business-to-businesstransactions are increasingly expectedto dominate total transaction volumes inthe near future.This will, however, require greater investing inthe telecommunications infrastructure as well as addressingissuesrelated to intellectual property rights and legal protections for commerce via the Internet. E-commerce faces a number of challenges inIndia. India is still inthe main plagued by low PC penetration, highcost of Internet access, lack of hardware, and low telephone penetration. As far as e- commerce is concerned, a bigproblemrelates to the use of credit cards and resultingsecurity issues. The relatively small credit card population and lack of uniformcredit agencies create a variety of payment challenges unknown in advancedcountries such as the UnitedStates.Although the cyber-environment in India has improved thanks to the ITAct 2000, which regulates e-commerce on the Internet and makes e- commerce, online transactions, and digital signatures legally valid, more needs to be done to create a 50 "M-commerce" includes application services that can be accessed by a user on a mobile phone (such as checking bank accounts, paying bills, and transferring funds).According to MemllLynch, short message service (SMS) couldbring in as much as $75 million inrevenues for Indian GSM (Global System for Mobile Communications) operators by 2005. An emerging trend inthe Indianm-commerce market is integrationof service providers with web portals. For instance, Hutchhas a tie-up with Yahoo, which allows Hutch users to check their e-mail on Yahoo through their mobile phones; thus, WAP (wireless access protocol)-enabled applications are beginning to pick up their pace inthe Indian market. The m-commerce market in Indiai s still inits infancy compared with the United States and Europe. High-value transactions, which involve credit and debit transfers, point-of-sale terminals, merchant terminals, and so on have not found widespread application inIndia. One of the major hurdles facing growth of m-commerce applications i s the lack of steadiness in terms o f technology and security. Two competing standards,namely WAP and SIM (subscriber identity module) are being used for mobile data applications. No commerce-capable cellular networks exist that can guarantee secure transactions inreal time. This requires a considerable amount of coordination among the different parties involved in the entire m-commerce value chain, such as wireless infrastructure providers, service providers, certifying authorities, application or software providers, equipment manufacturers, credit card companies, and banks. Furthermore, m-commerce applications will not proliferate untilhigh- bandwidth networks are deployed and wireless service providers cooperate with each other. 108 conducive environment for online business. Other factors that impede the growth of e-commerce inIndia include the following: 0 Poor telecommunications infrastructure, including cost of hardware and unreliable Internet connection 0 Hightelecomcosts on dial-up charges as a barrier to growth 0 LimitedInternet access amongcustomers and small businesses Lack of payment gateways for secure transactions on the Internet 0 IT systems andprocessesunpreparedfor e-commerce activities 0 Logistical difficulties, suchas insufficienttransport networks representing a serious hurdle to business-to-business development, because they make it difficult for companies to realize potential gains of increased efficiency intheir supply chain 0 Uncertainty of return on investments, for example, some Indiancompanies find returns on investments ine-commerce initiatives hardtojustify, and many do not see any urgency to entering this areadue to lack of competitive pressures. Measures to Strengthenthe Information Infrastructure The above discussion has underlined the ways inwhich the Indiantelecommunications sector has been quickly moving to a more commercial and competitive environment and the ITindustry i s moving on to greater heights. As this happens,the government also needs to establish and implement practical policies to develop IT skills inthe workforce, reorient strategiesinthe IT industry to sustain growth, enhance the reach of IT to groups that are not well served by the market (Le., bridging the "digital divide"), increase ICT applications throughout the economy, and usher inrural development through connectivity. Develop IT skills in the workforce. One of the key inputs to achieving sustainedgrowth and exports inthe IT sector i s the availability of adequatenumbers of high-quality professionals. For continuous growth in this sector, Indianeeds to maintainand enhance its competitive advantageof abundant, high-quality, and cost-effective humanresources.The country needs to ensure the right mix of technical, business, and functional skills inthe workforce to meet the needs of individual business segments and customer markets, which requires harmonization between the demand of the industry and the supply of trained manpower by Indianeducational and training institutions. India produces some 120,000 graduates inIT a year, from a variety of institutions, such as the newly launched IndianInstitute of Information Technology inBangalore, a new-generation graduate school focusing on all aspects of IT. Even though around one million people are employed inIndia's IT sector, the country could face an estimated shortage of anywhere between 65,000 to 530,000 ITprofessionals by 2005, depending on market conditions. Indian software companies are also increasingly concerned with the risk of brain drain, as worldwide competition for knowledge workers intensifies and India risks losing its best and brightest. For the first time, India i s looking over its shoulder at China, which could become a competitor, initially at the low end of the market. India has an edge in English and experience, but the Chinese are learningquickly. Despitethe slowdown, Indiamay not produce enough good engineers and IT professionals to meet the expected growth inIT incoming years. The needexists, therefore, for rapid expansion of suitable training opportunities at home. Given the extent of demand for IT skills, many private IT training institutes offering IT-focused training have sprung up inIndia, such as NIIT and the Internet Training Centre Initiative for Developing Countries, developed by the ITU and Cisco systems (Box 5-2). Many large companies, such as Infosys, have also developed their own training infrastructure to ensure that they deliver good quality services to their clients. 109 Box 5-2: Information Technology Training Initiatives inIndia NIIT offers the gamut of computer training for individuals and organizations from entry-level IT literacy programs to advanced courses on state-of-the-art technologies. According to its Web site, inthe past 20 years, NIIT has trained 2 million students throughout the world in IT. NIIT provides on-site, "anytime-anywhere'' training to customers across India through its extensive network of centers. Its training facilities are equipped with state-of-the- art infrastructure. NIIT provides on-the-job or project-based training, in which a mentor assists specific participants, while they use the technology on a sample NIIT project. NIIT thus customizes training programs to suit the requirements of different customers, enabling achievement of higher productivity in the workplace. NIIT has worked to date with major public and private sector organizations, such as the IndianDirectorate of Income Tax, Indian Army, and IndianNavy. Private and IT companies include Hindustan Levers, Ranbaxy, Tata Steel, Pfizer, Maruti Udyog, Ericsson, and Coke India. Banks and insurance companies include the Reserve Bank of India, State Bank of India, and the Life Insurance Corporation. ITUand Cisco Systems have developed an Internet Training Centre Initiativefor Developing Countries.The initiative, a model for public-private partnership to bridge the "digital divide," now has more than 26 centers worldwide. The 800-plus students currently enrolled inthis initiative are now armed with skills to face the challenge of the new economy. InAsia, eight centers exist inChina, India, Indonesia, Malaysia, Maldives, Philippines, and Samoa. The centers provide affordable and relevant training and education to students in developing countries using both face-to-face and web-based curricula. Through the Cisco Networking Academy Program, Cisco Systems provides all I T U Internet Training Centers with hands-on coursework designed to teach students the skills neededto design, build, and maintain small- to medium-sizedIP-based networks Source: NIIT (http://www.niit.com)and Cisco Systems (2002). India thus needs to put inplace suitable human resource development initiatives, starting at the primary school and moving on to tertiary levels to meet the needs of the ITand other productive sectors of the economy. This includes the following: 0 Continuously upgradingof basic standards of education at the secondary school level with enhanced emphasis on physics, mathematics, and English 0 Updating syllabusesincomputer engineering, electronics, and IT invarious technical institutions to meet the demands of industry (curricula in other branches of engineering should also be broadly basedto includeIT subjects) 0 Upgrading the skills of teaching faculties and introducingteaching aids, such as computers, videos, accessto the Internet, videos, and so on 0 Strengthening postgraduateeducation and innovative researchinIT to maintain quality standards to face new challengesinthis dynamic sector 0 Augmenting RECs (now to become NITS)and other notable engineering colleges under deemed universities to the level of IITs, so the country has a critical mass of such institutions by the end of the TenthFive-Year Planto meet the requirements of quality manpower. Reorient strategies in the IT industry. Although India has earned well-deserved recognition inthe internationalsphere inthe IT and software development area, to have sustained growth, strategies mustbe reoriented, especially as the industry i s being threatened by emerging competitors, such as China, Philippines,Korea, and the Commonwealthof Independent States countries. A recent McKinsey study of China's software sector, however, shows that China needs to work on several fronts before it can truly compete with India (Box 5-3). 110 Box 5-3: Can China Compete inInformation Technology Services? Chinese revenues from I T services are barely half of India's $12.6billion a year. A recent study by De Filippo, Hou and Ip (2005) notes that, to move forward inthis domain and compete with India, China must first consolidate its highly fragmented industry to gain the size and expertise neededto capture large international projects. Growth is driven mainly by domestic demand, and most customers are small and mid-sized Chinese enterprises. China's nascent foreign software-outsourcing businessaccounts for just 10percent of the industry's total revenue, compared with around 70 percent for India. Inaddition, despite lower costs, operating margins inChinese software services companies average only 7 percent, compared with 11percent at similar companies around the world, becausemany projects are below optimal scale, suppliers often compete on price and collecting payments can be problematic. To compete effectively in global outsourcing, therefore, China's software industry must consolidate.'The top ten IT- services companies have only about a 20 percent share of the market, compared with the 45 percent commanded by India's top ten. Furthermore, China has about 8,000 software services providers; almost three-quarters of them have fewer than 50 employees, and only five have more than 2,000 employees. India, on the other hand, has fewer than 3,000 software services companies. O f these, at least'15 have morethan 2,000 workers, and some-including Infosys, Tata Consultancy Services, and Wipro-now have international recognition and global clientele. Fragmentationexacerbates the Chinese industry's other problems, including weak process controls and product management. Only six of China's 30 largest software companies are certified at levels five or four of the capability- maturity model; incontrast, all the top 30 Indian software companies have achieved these rankings. Chinese software services providers will also have to managetheir talent muchbetter. Most do little to develop their employees, and very few use stock options, training programs, or other incentives to build talent. Organizational and operational changes are also neededto protect the intellectual property of clients. Source: De Filippo,Hou, and Ip (2005). Nevertheless, India cannot afford to be complacent about its current positioninthe global IT market. Its domestic market inparticular needs to be developed and catered to effectively to ensure sustainedlong- term growth and provide benefits to the masses. The experience of countries, such as China, which have very strong and vibrant domestic markets, should be considered. The Indianindustry, however, needs to improve productivity continuously to hold its competitive edge inthe global market. Some issues that requireconstant attention by India's IT industry include: 0 Moving up the value chain by developing high-value products through R&D, improving the quality of products and services, and nurturingand generating the high-quality manpower neededfor this. 0 Focusingthe industry to shift from "software solutions providers" to become manufacturers of "packaged products." 0 Marketing its products and buildingbrand equity to position further the "India" brandname abroad. This requires strengthening marketing channels with strategic global links,expandingthe focus outside the United States to emerging markets inAsia, Pacific, Japan, and so on. 0 Encouraging industry associations, such as NASSCOMand the Manufacturers' Association of Information Technology, to provide support to SMEs intheir export efforts, because these enterprises do not have the requisite expertise and resources required for aggressive marketing. 0 Promotingthe development of software applications for the domestic market indifferent Indian languagesto meet localrequirements (India, Planning Commission 2002~). Enhance the reach of IT to the population at large. As a result of the IT explosion and the impressive progress inthe telecommunications and ICT sector showcased above, the usage of ICTs has, not surprisingly, beenrising inthe country. But this increase has mainly been concentrated inurban areas in the country, not so much rural. Village information kiosks, however, are gradually enhancing the reach of ICTs to a larger section of the population (Box 5-4). 111 Box 5-4: Bridgingthe DigitalDivide: Village InternetKiosksin TamilNadu IIT-Madras i s pioneering an approach inTamil Naduthat i s turning over thejob of connecting rural India to the Internet to profit-mindedentrepreneurs.This new approach seeks to bridge the "digital divide" with a national network of owner-operated computer centers with Internet access-part cybercafes, part digital town halls-that earn income from a broad range of small transactions. I t takes advantage of low-cost wireless technology that eliminates the need for telephone lines. Central to the effort is the "wireless local loop" (WLL), which provides cheap, relatively fast Internet connections to fiber-optic cables as far as 18 miles away. Although many villages still lack phone service, India's fiber-optic network i s sufficiently well developed to provide wireless coverage for up to 85 percent o f the country. An independent company that spun off from this IIT, n-Logue Communications, identifies promising kiosk owners, trains them, and provides equipment-computer, printer, battery backup, and wireless Internet antenna-for about $1,000. N-Logue helps the owners arrange financing, which i s then paid off with revenue from the kiosks. The company makes its money from hourly connection fees. So far, n-Logue has set up more than 500 kiosks in Tamil Nadu and other states and has plans for another 10,000 in the near future. Source: Excerptedfrom Lancaster (2003). Ensuringthe sharing of ICT benefits among all will be critical to boost India's growth andpoverty reduction efforts. This requires creation of an enabling environment for ICTs. Critical factors include increased (a)access to ICTs (through widespread availability of telephones, PCs, and mobile telephones and connectivity to the Intemet), (b)enhancementof ICT literacy and skills inthe population, and (c) development of ICT applications providing much-needed services to citizens: 0 Access. Due to hightariff levels (3040 percent of basis cost of an assembledPC), the cost of PCs and other hardware inIndia is significantly higher than inother countries. For example, a PC inIndia costs about 24 months of averageper capita income, compared with 4 months inChina and 12days in the United States! Butthe rapid growth of software exports has attractedthousands of people intothe IT industry and has stimulated demandfor computers. Sales of computers rose by 9.6 percent to 1.76 million in 2001. Import liberalization and the entry of foreign manufacturers have transformed this industry, which, until five years ago, was tiny and dominated by a few Indian manufacturers. The ease of importing components has nurturedhundreds of unbranded assemblers, which command 62 percent of the market. Only three major Indian brands remain. HCL sold 151,000 computers in2001, Wipro sold 65,000, and Zenith sold 64,000. Among foreign manufacturers, Compaq (147,000 units sold in2001), Hewlett Packard (84,000 units), IBM(72,000 units),Dell (35,000 units),and Acer (18,000 units)have significant presence.After their recent merger, Compaq and Hewlett Packard have become the largest branded supplier (EIU2003a). Although these developments are laudable, steps need to be taken to increasethe reach of ICTs to the vast portion of the Indian populationthat i s currently unserved through measures such as reducing tariffs and promoting the use of ICTs for domestic needs. 0 ZCT literacy and skills. These skills are critical to ensuring that people can derive benefits from the IT revolution. Although opportunities exist for acquiring the skills inurban areas (through govemment- sponsoredprograms to connect schools, private schools, and training institutes), the situation inrural areas i s very different. Illiteracy; lack of access to ICT infrastructure and, where available, highcost of access; and lack of content prevent large rural populations from usingICTs. But some innovative technologies, such as Simputer (Simple Computer, a low-cost altemative to PCs) and corDECT (wireless access systemintegratingvoice and Intemet service^),^' can helpto raise awareness of the potential of ICTs for rural areas. 51The key to bridging the digital divide i s to have shared devices that permit simple andnatural user interfacesbasedon sight, touch, and audio. 112 0 ZCT applications. ICTs can help to improve the delivery of social, economic, and government services to rural populations in a variety o f ways inareas with the highest potential. ICTs are already enhancing transparency and efficiency of government operations, and progressive states such as Karnataka and Andhra Pradesh have made significant strides inusing e-government applications to create an environment conducive to enhanced p r o d ~ c t i v i t yB. ~o~ x 5-5 presents some examples of e- government applications inthe country. ICTs are also being used for community development: the M. S. Swaminathan Foundation, for example, helped establish ICT-networked village knowledge centers based o n the principle o f ownership by local communities (for more information, see http://www.mssrf. orgl). Box 5-5: Three E-GovernmentInitiativesHoldPromiseinIndia The following examples illustrate the kindof promising e-governance initiatives underway inIndia: Bhoomi: online delivery of land titles in Karnataka. The Department of Revenue inKarnataka has computerized 20 million records of land ownership for 6.7 million farmers in 176 taluks (administrative unit under a district) inthe state. Farmers previously hadto seek out the village accountant to get a copy of the record of rights, tenancy, and crops, a document neededfor many tasks such as obtaining bank loans, with accompanying delays, harassment, and bribes to bepaid. Today, for a modest fee of Rs.15, a printed copy of this document canbe obtained online at computerized land-recordkiosks (Bhoomi centers) in 140taluk offices. Inthe next phase, all the taluk databases will be uploaded to a web-enabled central database. The record of rights, tenancy, and crops would then be available online at Internet kiosks, even inrural areas. (See http://www 1.worldbank.org/publicsector/egov/bhoomi-cs.htmand http://www .revdept-01.kar.nic.in43hoomi/Home.htm.) Land and property registration in Andhra Pradesh. Landregistrationoffices throughout Andhra Pradesh now operate computerized counters to help citizens complete registrationrequirements within an hour instead of several days, as was necessaryunder the earlier system. The lack of transparency inproperty valuation under the old system resulted ina flourishing businessof brokers and middlemen leading to corruption. Antiquated procedures, such as manual copying and indexing of documents and their storage inpaper form inill-maintained backrooms, have all been replaced, showing the benefits of I T inimproving citizen-government interface. (See http://www 1.worldbank.org/publicsector/egov/cardcs.htm.) Empowering dairy farmers through a dairy information and services kiosk. Inrecent years, the milkcooperative movement initiated by India's National Dairy Development Board has led to a substantial increase inmilk production in India. Two main reasonsfor this increase are more efficient collection of milk and higher profits for producers, both of which have been influenced by IT. The milkbuying process has been automated at 2,500 rural milkcollection societies. The Dairy InformationServices Kiosk makes it possible for cooperatives and farmers to manage a databaseof all milk cattle and access a dairy portal with information about valued services. This demonstrates the willingness of rural farmers to invest in technology, provided it can deliver real value (see http://www1. worldbank.org/publicsector/egov/diskcs.htm.) ISource: Author's research. The Simputermeets these demands throughabrowser for the InformationMarkupLanguage (IML).IMLhas been created to provideauniform experienceto users andto allow rapid development of solutions on any platform. For more information, go to http://www.simputer.org. Jointlydevelopedby Analog Devices, Midas CommunicationTechnologies, and the TeNeT group of IIT Madras, corDECT i s India'svery own wireless local loop technology. Basedon the Digital EnhancedCordless Telecommunicationsstandard specifiedby the EuropeanTelecommunications Standards Institute(ETSI), corDECT providescost-effective,simultaneous high-qualityvoice anddata connectivityin bothurbanandrural areas. Thls revolutionarynew technologyprovidesvoice communicationusing32 Kbps ADPCM, andIntemetconnectivity at 35/70 Kbps.For more information, see http://www.tenet.res.inkordect/cordect.html. 52 For moreinformation, see AndhraPradesh'sportal at http://www.ap.gov.in,its Centre for GoodGovernance at http://www.cgg.gov.in,andits Department of IT andCommunicationsat http://www.ap-it.com. 113 Increase ZCT applications. Other noteworthy examples of ICT applications inIndia include the following: Agricultural value chains and extensionservices that linkfarmers with end-market suppliers to increase value by better anticipating consumer demands and also raise upstream earnings. The "E- chaupal movement," for example, i s a programinitiated by ITC, a private company that uses electronic kiosks to source agrocommodities across 18,000 villages inthe country, reaching 1.8 million farmers. The electronic kiosks installedinvillages enable a virtual aggregation o f poor farmers' demand and supply needs by linkingthem to neighboring village agromarkets and providing them real-time information on prices. It thus connects rural farmers inorder to procure produce such as soya, coffee, and prawns, allowing farmers to obtain information on market prices and good farming practices, place orders for inputs such as seeds and fertilizers, and negotiate the sale of their produce directly with ITC (for more information, see http://www.echoupal.coddefault.asp). Land titling systems that link rural landholders to a transparent systemfor verifying and updating tamper-proof land records. These are then used by banks, courts, private organizations, ISPs, and development program formulation. An example i s Bhoomi (Box 5-5). Education and health managementfacilities that link rural students and patients with relevant information and techniques. An example i s allowing village health workers to interact online with expert systems to improve primary care. Drishtee, a private initiative to scale up Gyandoot-type rural information kiosks, i s an effort inthis direction, connecting rural citizens with government and private service providers, which allows citizens to send complaints to government regarding services such as health and water and provides computer education and e-health services (for more information, see http://www.drishtee.com/). Inless than two years, Drishteehas successfully demonstrated its concept inmore than 300 kiosks across six Indian states. Other types of information systems that empower thepoor, for instance, systems that allow demand- driven learning fromrural communities regarding what types o f information and ICT initiatives are most needed to increase standards o f livingto ensure that initiatives are not supply centered. Another example i s a system allowing local information retrieval to improve benchmarking and thereby to spur upgrading inthe level and quality of infrastructure services, such as water supply and sanitation, local transport, and electricity. Box 5-6 presents some additional notable ICT initiatives inIndia. Box 5-6: Information CommunicationsTechnology EffortsExpandinIndia A number of notable ICT initiatives are now underwayinIndia: Inan endeavor to bridge the digitaldivide, Kerala embarkedonthe Akshayaproject inNovember 2002, which addresses three key issues inI T disseminationto the masses: access, content, and skills. The aim of the project i s to generate and distribute locally relevant content, improve public delivery of services, and catalyze the I T industry inthe state. The plan i s to develop 6,000 information centers, provide 30,000 employment opportunities, and create investmentopportunities. SustainableAccess inRuralIndia is a demonstrationproject set up with help from Harvard and the MassachusettsInstitute of Technology and financed in part by India's ICICIBank.Situatedinthe Madurai district of Tamil Nadu, the project has so far set up 40 kiosks inrural villages. The "Hole inthe Wall" experiment conductedby the NIIT has shown that semiliterate poor children can quickly teach themselves the rudiments of computers and Internet. By installingan unmannedPC ina local slum, it was proventhat children canlearn the basicsof ICT literacy without the help of instructors. This shows the potential for enhancingliteracy by installing Internet-enabledPCs insuch areas with occasional guidance from instructors.The development of Simputer, as mentioned earlier, is yet another exampleof such research. Inthe "Rural ReachProgram," beingconductedby Infosys, ICT professionalsandeducatorsvisit rural schools and help studentsfrom grades 5 to 10to becomefamiliar with technology. Another program i s "Catch Them Young," which providesbasic knowledge of software development and the ICT industry to young students. Infosys' "Train the Trainer" workshops are conducted inassociationwith eminent universities invarious cities with Infosys developmentcenters. The primary objective i s to have active industry-academyinteraction and 114 I keep academia updated on the latest trends inIT. The company i s conducting these programs in most of its development centers across India: inBangalore, Chennai, Mysore, Bhubaneshwar, Hyderabad, Mohali, Mangalore, and Pune. [naddition, the number of ICT pilot projects is growing. Examples include the following: Franchise model computer projects or kiosks (Gyandoot) inthe state of Madhya Pradesh, which generates revenue and is expected to become independent of state funding. Swayam KrishiSangam smart card project, which uses ICTs to reduce the cost of credit. Computerization of the MandalRevenue Offices inthe State of Andhra Pradesh. India Health Care Project initiated by CMC Limited, which is intended to improve the effectiveness o f health prevention programs by using computers, communication technologies, and personal digital assistants for data collection inrural healthcare delivery systems inAndhra Pradesh. Seelampur project of Datamation, which entails putting ICTs into the hands of Muslimwomen ina slum area in Delhi and directly linking the use of ICTs to alleviation of their poverty. A number of schemesto useICTs ineducation (Indira Soochna Shakti, empowering a quarter million schoolgirls through ICTs), bicycle-based connectivity inrural West Bengal, mobile classrooms through IT buses inrural Pune, and the Project Shiksha-Computer Literacy, which are intended to accelerate computer literacy by providing instruction insoftware solutions, comprehensive training for teachers and students, IT curriculum development, and scholarships for teachers and students across India. Use of ICT for education and e-commerce, as in"Empowering the Poor: A Pilot ICT Program for the Rural Areas o f Pune District," whose objectives are to promote e-literacy and I T education and develop e-commerce opportunities. Handheld computers that enable auxiliary nurse-midwives inAndhra Pradeshto eliminate redundant paperwork and data entry, freeing time to deliver health care to poor people. Nurse-midwives provide most health services inthe state's vast rural areas; each serves about 5,000 people, typically acrossmultiple villages and hamlets. They administer immunizations, offer advice on family planning, educatepeople on mother-child health programs, and collect data on birth and immunization rates. They usually spend 15-20 days a month collecting and registering data. But with handheld computers, they can cut that time by up to 40 percent, increasingthe impact and reach of limited resources. Sources: World Bank 2002e; Lancaster2003; IIT n.d.; Hole inthe Wall EducationLtd. 2003; author's e-mail correspondence with Infosys(October 2003); Akshaya (http://www.akshaya,net);http://Gyandoot.nic.in;andintemalBank documents. Enhance rural connectivityfor development. India's economic development i s predicated on India's rural development, becausearound 700million Indians live inrural India in600,000 villages. The essential needs of the villages today are many and include water, power, road, sanitation, healthcare, education, and sustainableemployment generation opportunities. Lack of these services has resultedinlack of economic opportunities inrural India, which has burdened the population with low incomes and significant illiteracy. The private sector has neglected rural markets, becauseof a market failure in coordinating the investments requiredfor basic infrastructureand provision of services. Two promisingmodels, however, have beenproposed, but not yet implemented, for rural economic development: PresidentA. P.J. Kalam's initiative ProvidingUrban Amenities inRural Areas (PURA) and the Rural Infrastructure and Services Commons model (RISC) (Box 5-7). Their goal i s to raise awareness and get buy-in from policy makers to beginpilots allowing market-based solutions to issues of rural connectivity and rural development. These initiatives show what i s possible; it i s hoped that successfulpilots will lead to rapid scale-up. 115 Box 5-7: Ushering in RuralDevelopment through Connectivity: The P U R A and RISC Models Providing UrbanAmenities in Rural Areas (PURA). President A. P. J. Kalam's vision for development of rural India zonsists of empowering rural people by providing them with four forms of connectivity: Physical connectivity, by providing good quality roads inruralareas for movement of people and goods as well as for access to schools, health centers, farming areas, markets, and so on. With 600,000 villages, the means to physical connectivity is to organize villages in clusters of 10or more. A ring road would provide physical connectivity to these clusters, which would become loci of economic activity by reducing transactions costs. 0 Electronic connectivity, through telecommunications by providing reliable and high-quality telecom, Internet and I T services. Electronic connectivity will be useful inproviding services such as tele-education for farmers and villagers, village Internet kiosks, public call offices, telemedicine, e-market, e-governance, e-commerce, and so on. Knowledge connectivity, through education by developing educational and training institutions at these clusters to provide vocational training for farmers, artisans, and craftsmen as well as entrepreneurship programs. Economic connectivity, inwhich integration of the three preceding forms of connectivity would lead to economic activity that would help villagers maximize their economic potential by starting enterprises with the help of banks, microcredits, and marketing their products. Inhis vision, PURA is an economically sustainable businesspropositionmanagedby local entrepreneurs and consumers. The government's role is largely supportive in providinginitial economic support and finding the right structure to manage and maintain the village clusters. Rural Infrastructure and Services Commons model (RISC). The RISC model recognizes an "ecological" approach, that is, ifone creates a sufficiently rich environment ina location, sustainable economic activity will evolve. It also recognizes that India's 600,000 villages have very poor infrastructure, very low rural per capita incomes, and severely limited resources to provide infrastructure to every village. RISC is a strategy to initiate rural economic development through a modular, scalable, low-risk solution that recognizes that investable resources are severely limited. RISC i s based on triage: it concentrates infrastructure investments (private and public) inspecific locations that are within "bicycle commute" of about 100,000people (or 100villages) to create a standardized infrastructure platform. A wide range of services provided by public and private sector firms can be colocated on this platform. Market forces will determine the services provided by commercial firms and will be largely supported by user fees, which inturn will support the cost of infrastructure. The participation of the government will be critical, but not primary. RISC conceptually and operationally has two levels: the lower infrastructure level (I-level) consists of power, broadband telecommunications, and physical plant (building, water, air conditioning, sanitation, and security). The user services level (S-level) consists of services that are relevant to rural economic activity, such as market making, financial intermediation, education and library, health, social services, governmental services, and so on. The I-level provides a reliable, standardized, competitively priced infrastructureplatform achieved by coordinated and cooperative actions of firms specializing inthe component activities. A variety of firms providing user services are colocated on the S-level. The presence of the I-level reduces S-level costs and, therefore, the prices for users. The presenceof the variety of different service providers obtains economies of scope and agglomeration. RISC i s a way to bootstrap limited resources to initiate rural economic development by inviting the private sector to invest inprofitable ventures in rural areas. As prosperity increases, the rural areas themselves will have a surplus to plowed back in.Ina few years, the transportation network as envisioned by PURA will evolve organically and make President Kalam's Vision 2020 a reality. Inother words, implementation of RISC i s only the first step inthe task of implementing PURA. Sources: Details of PURA are includedinPresidentKalam's Address at the CEO's Summit on September 26, 2003 (http://presidentofindia.nic.in/scripts/sllatestl.jsp?id=163)as well as in h s ConvocationAddress at JamiaMillia Islamia,New Delhi, August 30,2004 (http://jmi.nic.in/Notices~otices04/convocation~address.htm).The RISCmodelhasbeenjointly developedby Vinod Khoslaat Kleiner, Perkins, Caufield, andByers, andby Atanu Dey at DeeshaaVentures and Netcore Solutions. For more information,see http://www.deeshaa.com.ReubenAbraham, ColumbiaUniversity, and AtanuDey undertookthe RISCPURA comparison. 116 Summary of Issues and Recommendations As is amply demonstrated inthis chapter, Indiahas made impressive progress inthe IT domain, and its IT industries, and IT-enabled services have become one of the most globalizedand dynamic industries and services inthe world. At the same time, India also needs to boost the use of ICTs throughout its economy. To reap full benefits of ICTs (new and traditional) and equitably extend reach, India needs to address national and local dimensions of ICT infrastructure and connectivity (access, content, and language). Some critical policy measures includethe following: 0 Enhance regulatory certainty and efficiency to facilitate new services that will enable India to reap the benefits of the convergence of existing and new technologies and enable the sector to contribute more to economic growth. 0 Boost ICT penetration by resolvingregulatory issues incommunications and reducing and rationalizingtariff structures on hardware and software. 0 Increase the use of ICTs as a competitivetool to improve the efficiency of production and marketing inareas suchas supply chain management, logistics, information sharing on what goods are selling in the markets, responding to rapidly changing market needs, and so on. 0 Move up the value chain inIT by developing high-value products through R&D, improving the quality of products and services, marketingproducts and building brand equity to position the "India" brand name further, including by strengthening marketing channels with strategic global links, expanding the focus outside the UnitedStates to emerging markets inAsia, Pacific, Japan, and so on. 0 Provide suitable incentives to promote IT applications for the domestic economy, as the focus currently seems to be mainly on IT services exports. This includes developinglocal language content and applications. 0 Put inplace suitable human resource development and training initiatives, starting at the primary school and moving on the tertiary levels to meet the expected growth of IT and other productive sectors of the economy. 0 Update syllabuses incomputer engineering, electronics, and IT invarious technical institutions to meet the demands of industry (curriculum inother branches of engineering shouldalso be broadly basedto include IT subjects) 0 Massively enhance ICT literacy and skills among the population at large through conventional and nonconventional means, so that people can begin to use ICTs to derive benefits, both economically and socially. Create opportunities for local communities to benefit from ICTs by providing support (seed money for local innovationon low-cost and appropriate technologies), enhanceprivate investment inICT infrastructure, and promotenational and internationalsupport for rural community-based access. Strengthen partnerships among government agencies, research and academic institutions, private companies, and nongovernmental organizations (NGOs) to ramp up the ICT infrastructure and achieve faster penetration of ICTs. 0 Furtherdevelop and scaleup (injoint public-private initiatives where feasible) ICT applications, such as community radio, fixedmobile phones, smart cards, Internet, and satellite television, to bring the benefits of connectivity to rural communities all across the country and improve the delivery of services to rural populations. 0 Share successfulapplications of ICT, for example, ine-government among different Indian states. This also requires scaling up successful ICT initiatives to bringthe benefits of connectivity to rural communities all across the country. 0 Create a suitable environment for the effective use of ICTs to permeate the entire economy and lead to flourishing competition and business growth. This calls for the government to continue with the economic reform agenda put inplace inthe past decade. 117 6. MOVINGAHEAD WITH THE KNOWLEDGEECONOMYININDIA This report, particularly inchapters 2-5, has lookedat developments inIndia regarding the four pillars of the knowledgeeconomy, highlighted some reforms that have already been accomplished, and outlined some of the issues on which further reforms should be focused. It underlines the unarguable fact that India has tremendous assets as it moves to transformitself to a knowledge-based economy. This chapter looks at how India can build on various initiatives that have beenput inplace inrecent years to springboard into the knowledgeeconomy of the twenty-first century. Indian Initiatives on the Knowledge Economy The notion of a knowledge economy i s not new or foreign to India. India's past achievementsinscience, philosophy, mathematics, and astronomy reinforcethe notion that the country has for millennia been a leading "knowledge society." Ineconomic terms, India was the world's largest economy inthe first millennium,producing athird of global GDP (Figure 6-1). By 1500its share haddeclined to 25 percent, as China overtook it and Western Europe's share beganto expand rapidly. India's share continued to fall after 1700due to the collapse of the MoghulEmpire, the costs of adjusting to Britishgovernance, and the rapid increaseinthe share of Western Europe, followed by the spectacularrise of the UnitedStates. India was a latecomer to the industrial revolution. It cannot afford to miss the knowledgerevolution! Figure 6-1: India: Percentage Share of Global Gross Domestic Product, Years 0-1998 (percent) 40 , 35 30 +Western Europe 25 -e- United States 20 -A- Japan 15 +China +India 10 5 0 Source: Maddison(2001). Inthecurrentknowledge-drivenera, Indiahasalreadydevelopedaprofilefor theIndianknowledge society (Box 6-1). Broader than a knowledge economy, a knowledge society includes spiritual, social, intellectual, and philosophicalknowledge. Box 6-1: IndianKnowledge Society As noted by a high-level Indian team, the main aim of an Indianknowledge society is to use knowledge to drive societal and economic transformation to enrich all. I t has three elements: A learning society that is committed to innovation 0 A society with the capacity to create, absorb, protect, disseminate, and useknowledge to create economic wealth and societal good A society that uses knowledge through all its constituents and endeavors to empower, enrich, and enlighten its people to take an integrated view of life as a fusion of mind, body, and spirit. Source: As presentedby agroup of senior Indianpolicy makers andleaders at the "K4D PolicyForumfor Brazil, China, and India," March22, 2001, Wilton Park, UnitedKingdom. In2000theIndianPrimeMinisterlaiddownavisionfor developing Indiaas aknowledgesociety. Stating that "a knowledge-based society will enable us to leapfrog infinding new and innovative ways to meet the challenges of building ajust and equitable social order and seek urgent solutions," he unveiled a five- point agendathat includes strengthening education for developing alearning society; broadening global networking; encouraging vibrant government-industry-academia interactioninpolicy making and implementation; leveragingexisting competencies inIT, telecom, biotechnology, drug design, financial services, and enterprise-wide management; and building economic and business strategic alliances on capabilities and opportunities. Taking these on board, India's PlanningCommissiondeveloped the reportZndia as Knowledge Superpower: Strategyfor Transformation (2001a), which identified three key drivers for the Indian knowledge society for the twenty-first century (Box 6-2). I Box 6-2: Key Drivers for the Indian Knowledge Society Per the IndianPlanning Commission report, India as Knowledge Superpower: Strategyfor Transformation (2001a), three key drivers exist for the emerging Indianknowledge society: societal transformation for ajust and equitable society, wealth generation, and protection of knowledge, not only generated inresearch labs, but by communities as traditional knowledge. The report focuses on education as the foundation for the knowledge-driven economy and examines issues related to connectivity, governance, and use of I T to reduce the "digital divide." As part of a strategy to become a knowledge-driven economy, it recommends a four-tiered approach for increasing employment inthe new economy that includes: Creating structures for biotechnology promotion and application Promoting knowledge-based service industries in which India has competitive strengths (such as software and IT) Packaging and marketing traditional knowledge, especially in medicine Improving capacity building inthree mutually supportive areas: human resource development, R&D capabilities, and the application of technologies flowing from innovations. Source: India,PlanningCommission (2001a). In2002India'sPresident,Dr.A.P.J. AbdulKalamunveiledZndia2020: A Visionfor theNew Millennium (Kalam and Rajan 2002), which calls for developing an India that i s free from poverty and strong intrade, commerce, and science and technology and that provides healthand education to all. For India tojoin the ranks of developed nations, it must invest inits people, grow the economy, and create critical infrastructure. India should leverage its strengths inthe agro-food, engineering, and chemical industries;further globalize its service sector; capitalize on its vast mineral wealth; and strengthen its infrastructure. Tackling issues related to food, agriculture, healthcare, and service sector development 119 will require an interdisciplinary approach because, as he noted, "for a nation to progress,the golden triangle of R&D laboratories-academia-industry must emerge." Buildingon these premises, the IndianPlanningCommission's Zndia Vision2020(2002a) envisages that "by 2020 the people of India will be better educated, healthier, and more prosperous than at any time in i t s long history. India in 2020 would be a nation bustling with energy, entrepreneurship, and innovation." The report conceives of India evolving into an information society and knowledgeeconomy built on the foundation of ICTs. The vision is predicated on the belief that human resources are the most important determinant of overall development. The vision document highlights several areas critical to India's transition to the knowledge economy: (a)creating employment opportunities and raising the level and quality of education, all the way from abolishing illiteracy to achieving 100 percent enrollment at primary and secondary levels, (b)broadening access to higher education and vocational training through traditional and nontraditional delivery systems, (c) encouraging high-tech science and technology, (d) enhancing India's expenditures on R&D, (e) improving linkages between technology development and application by fostering close ties between researchand business, cf) spurring growth of Indian IT and biotechnology sectors, and (g) stimulating growth of manufactured and service exports. Inlightofthese initiatives,in2003, aHigh-LevelStrategicGroup(HLSG)was setupcomprisingleaders from industry, academia, and government to discuss policies that would enable India to optimize the emergingopportunities and see how all stakeholders can work together to advancethe country's effective transition to the knowledge economy and promote knowledge-based industries.The HLSGdeveloped a report, India's New Opportunity, 2020 (AIMA 2003), that identifies the acceleration of economic growth and employment of skilled youth inthe next two decades as the key concerns for what it calls "India Inc." The HLSGestimates a net workforce shortfall of 32-39 millionby 2020 inthe developed countries of today. This challenge presents a great opportunity for India inthe provision of remote services. It is estimated that by 2020, the contribution of remote services alone will be inthe range of $133-$315 billion of additional revenue flowing into the country and the addition of 10-24 millionjobs (direct and indirect). Furthermore, bringing customers into India (medical tourism,53educational services, and leisure tourism)54could add another $6-$50 billion inrevenuesand create an additional 10-48 millionjobs (direct and indirect) by 2020. The HLSGestimatesthat through the provision of remote services and the importation of customers, India could enhanceits annual GDP growth by up to 1.5 percent above current growth rates, most of which (approximately 80-85 percent) would be through remote services. Box 6-3 provides additional information on the recommendations of this HLSG. 53 According to Dr.NareshTrehan, executive director and chief cardiovascular surgeon, Escorts Heart Institute and Research Centre, India, the country has great potential as a healthcare center for the world, because healthcare costs are one-tenth to one- seventh the cost indeveloped countries. India could also become a source of human capital for nurses and therapists. What i s needed inthis domain i s a uniform accreditation system for hospitals, simplification o f procedures for setting up medical schools, provisionof infrastructure for tertiary health care, and enabling of policy frameworks for research andclinical trials (WEF 2004e). 54 The India Economic Summit 2004 also noted that India i s consistently cited as one of the top five tourism destinations worldwide. Yet, it has failed to leverage this strong interest as a means to rebuilding its infrastructure, encouraging FDI, and producing nonagricultural employment. More flights, paved roads, clean water, and reliable power would lead to the levels of tourism spending that developed countries rely on to grow their service sectors. India should look at how it can make tourism a catalyst for greater infrastructure investment and a source of future job growth (http://www.w e f o r u m . o r g / s i t e / h o m e p u b l i c . n s f / C o n t e n V I t + 2 0 0 4 ) . 120 Box 6-3: India's New Opportunity: 2020 HLSG's report, India's New Opportunity, 2020 (2003), states that India i s positioned well to take advantage of the new opportunities given its large pool of qualified manpower, track record in service delivery insectors such as IT, and lower costs (specifically inareas such as medical treatment and education services). To convert these opportunities into actual revenues, however, "India Inc." will have to take several initiatives. To boost demand for India's services, Indiamust strengthen the "India Inc." imagebrand, focus marketing on select countries with select services, build customer credibility, promote acceptability of the "offshore" concept, improve service experience for customers, and invest inpromoting trials. Actions to boost the supply of India's services include developing expertise in specific areas, reforming its education and training sector to increase the base of skilled professionals, strengthening its connectivity infrastructure (telecom, IT, airports, and the like), promoting public-private partnerships, forming interest groups around emerging opportunities, and aligning its legal and regulatory structure. Inaddition to identifying areas in which action needs to betaken, the HLSGreport also provides a structured framework for key stakeholders to participate inthe assimilation of ideas and development of their implementation plans. The report, however, is just the first in a series of steps; the next step will include appropriate agencies developing implementation plans for the critical areas that have been identified. These agencies may be interdepartmental task forces to look at key areas, joint industry government task forces, or business organizations that will pilot and then implement projects to realize the benefits of the opportunities analyzed inthis report. Source: AIMA (2003). India, thus, has already developed a vision and strategies to address its transition to the knowledge economy. Inthe main, its initiatives have, however, largely been developed around the three functional pillars of the knowledge economy (education, innovation, and ICTs). Butto get the maximumbenefits from investments inthese areas, these initiatives must be part of a broader reform agenda, becausesome elements of India's current economic and institutional regime are constraining full realization of India's potential. India will, for example, not reap the full benefits of its investments inincreasing education, ramping up ICTs, or even doing more R&D, unless its broader institutional and incentive regime stimulates the most effective use of resources inthese areas, permits their deployment to the most productive uses, and allows entrepreneurial activity to flourish to contribute better to India's growth and overall development. India's current Tenth Five-Year Plan (India, PlanningCommission 2002e) i s already beginningto address some of the broad issues related to the economic and institutionalregime (India, Planning Commission 2002b). Its core strategy includes improving governance, targeting poverty, managing the economy for growth, and strengthening the productive base by addressing deficiencies in infrastructure, invigorating agricultural and rural development, and removing controls to encourage industry and services bothat the central and state levels. The emphasis is on inclusive development-in which all sections of society would benefit from the opportunities engenderedby the knowledge revolution, notjust the elites. Four critical dimensions of this transformation include: 0 Improving governance by bringingabout dramatic improvements inthe functioning of administrative andjudicial systems to foster a dynamic and vibrant market economy 0 Dismantlingof barriers to inter-state and intra-state trade and commerce 0 Reversing a wide range of controls and restrictions on entrepreneurial initiatives that have retarded the emergenceof an investor-friendly climate, and creating an environment that welcomes entrepreneurship with open arms 0 Strengthening effective delivery of basic social services by empowering local institutions (Panchayati Raj) so that they can become the focal point of democratic decentralization. 121 Looking Ahead It is hoped that this report will help stimulate, through a consultative process, a greater sense of the importance of the emerging policy agenda on the knowledge economy in India. India's effective transformation to a knowledge economy calls for it to act inmany different policy domains, deepening, complementing, or reorientingongoing reforms to use knowledge efficiently and sustaining development inthe longterm to achieveinclusive growth. Indianeedsto recognize that many policy reforms leadingto a knowledge-based economy will not yield results overnight. It will thus needto make some tough choices inthe short term; yet, other reforms will be of a medium- to long-termnature. It i s clear, however, that going ahead with such an ambitious agenda inIndia first and foremost requires raising massive awareness and consultation among all interested stakeholdersin government, the private sector, and civil society on the need and plans for such a transformation. Creating a shared vision among all parties on ways to accelerateIndia's progress toward the knowledge economy i s thus important, as well as commitment on the part of all stakeholdersto stay the course in order to manage such a transition effectively. Effective leadership will be key to articulatingthis vision, through the involvement of all stakeholders. It also requires that the country develop a "virtuous" cycle between growth and the reform process. Moving to a knowledge economy, however, is not only about stimulating such a reform agenda from the top. What will be neededis trial-and-error experimentation on what works ina bottom-up fashion and what does not work inthe Indian context as well as scaling up successfulbottom-up initiatives. The process requires that India constantly monitor its achievements and adjust its strategy inlight of changing conditions. The challenge of developing such new governance structures is not unique to India, but to all countries, including OECD economies. Countries such as Korea, Ireland, or Mexico and emerging economies such as China have become examples of so-called pragmatic agendas, which have placed innovations in governance at the center of policy making and implementation.Inall these cases, national economic crises compelled diverse actors to define and implement a new agenda through explicit or implicit national agreements on goals and mechanisms for moving forward. The crises have also promptedpolicy makers and private sector leaders to lengthen the time horizon of the policies adopted. These countries are continuing to work with concerned groups and are balancingthe interest of varied stakeholders to shape their transitionto the knowledge economy. For example: InKorea, themainimpetusfor thistransformationandfor thedevelopment ofasharednationalvision came from the private sector. The government i s steadfastly monitoring progress made to date and making rapid and continuous adjustments to its overall knowledge strategy in light of its experiences and changing circumstances (Box 6-4). Irelandalso exemplifies a successful combination of top-down and bottom-up policies. It invested in education and R&Dinfrastructure inthe 1980s, followed by drastic policy changes beginning in 1987. To complement its top-down policies, Ireland institutedpragmatic bottom-up programs: regional partnerships to mitigate highunemployment and a programto expand national-supplierlinkages from FDI(for moreinformation, see http://www.ida.iehewdendofyear-2003. pdf). China has adopted more of a top-down approach, but some exemplary initiatives do exist. The most impressive is inShanghai, which has developed a coherent strategy that covers all the key policy planks of the knowledge economy, including 20 well-focused, mutually reinforcing programs. Another i s Shenzhen, which had the first special economic zone open to foreign investments (for more information, see Dahlman and Aubert 2001). 122 0 Mexico i s following a two-pronged strategy, which includes undertaking major reforms to create contestable factor markets as well as making major advances ineducation, innovation, enterprise upgrading, and ICT systems (for more information, see World Bank 2005a). Box 6-4: Implementing the Republic of Korea's Knowledge Strategy The Republic of Korea, at the initiative of its president launcheda national strategy to move to a knowledge-based economy inthe wake of the financial and foreign exchange crisis of 1998. The impetusfor this came from the private sector-the MaeilBusiness Newspaper-which concluded in 1996that an urgent need existedfor a more coherentvision of the future of the Korean economy.The newspaperlaunchedthe "Vision Korea Project" as a national campaigninFebruary 1997 and developedthe first "Vision Korea Report." The president's initiative was ledby the Ministry of Finance andEconomy, with intellectual supportby the KoreanDevelopment Institute, which coordinatedthe work of adozenthink tanks. A joint World Bank-OECD report provided a framework, outlining concretesteps for reforms in various policy domains.Close monitoring of progresshas been important inkeeping up with the reformprocess and identifyingareas of inertia or resistance, for example, inthe area of education. Korea's knowledge strategy of April 2000 evolved into a three-yearaction plan for five main areas: information infrastructure,human resources, knowledge-basedindustry, science and technology, and elimination of the "digital divide." To implement the action plan, five working groups involve 19 ministries and 17 research institutes; the Ministry of Finance andEconomy i s coordinating implementation. Every quarter, each ministry submits a self- monitoring report to the Ministry of Finance andEconomy, which publishes an integratedquarterly report detailing progress.The mid-termresults and adjustmentsto the plan are sent to the executive director of the National Economic Advisory Council, which reportson implementation progress and appraises the three-year action planto its advisory members. 1Source: DahlmanandAubert (2001). TakingAction The knowledge economy i s no doubt a critical element o f India's reformagenda. As has been highlighted: India has already developed a strategic vision o f how knowledge and expertise can be harnessed for the benefit o f all. It also has examples of states that are making rapid strides inputtinginplace pragmatic agendas to further growth and competitiveness and reduce poverty. Such successful state- led initiatives should be shared across the country to engage other states inthe process o f preparing the bases for the more effective use o f knowledge for development. The Indian government has publicly acknowledged that its role in the twenty-first century i s to remove bottlenecks, both legal and bureaucratic, that are impeding India's successful transition to the knowledge economy. It i s focusing on ways to accelerate India's transition to the knowledge economy by carrying out economic legislationthat will enable the country to have better infrastructure, strengthening property rights and institutions, enhancing social infrastructure in terms o f education and health, protectingknowledge through patent legislation to reap innovation dividends, and using ICTs to meet the needs o f the population at large. The government i s trying to communicate better to the citizens on the need for economic reforms in the various domains, and to be an effective facilitator of the dialogue on the knowledge economy in India. Inaddition, some recent noteworthy initiatives inIndia are tryingto bringtogether concerned stakeholders to promote India's transition to the knowledge economy. The HLSGhas most recently discussed ways inwhich different agencies can work together to help India accelerate economic growth and mitigate the unemployment problem that i s forecast for the coming decades; this includes seizing a huge opportunity provided by a combination o f global developments in industry, trade, and demographics (Box 6-5). 123 Taking these initiatives to fruition and moving forward with energy and determination, India too can take its rightful place among nations that are embracing knowledge, innovation, and technology to spur inclusive growth and achieve sustainable development. Box 6-5: "India Inc.": Moving to Action The report developedby the HLSG is different in that it first analyzed why India, despite having sufficient knowledge of what needs to be done, often fails to "make it happen." The collective experience of HLSGmembers suggested that the inability to make things happen faster, with alignment, i s the mainreason why India misses opportunities. On further study, it was felt that the lack of speed was generally a result of an implementation model that enforces compliance rather than obtaining commitment. As a result, the energy inthe process peters out. To obtain commitment from all stakeholders, the HLSG embarked on a path that designs and guides the process of involvement and action using the report as a stimulus.The report thus takes an innovative approach to developing what it calls "India Inc." and i s basedon two principles, which have been found to be highly effective in situations involving disparate interest groups: first, creating an appreciation of the opportunities that exist and prioritizing areas for action, and second, aligning processesand participants (implementation partners) toward a common goal. Withthis inmind,the HLSGidentifies changesrequired at the macro level and recommends solutions inthree broad areas: marketing India, educating and training the Indian workforce, and connecting India (through telecoms, IT, airports, and so on). For each of these areas, HLSGthen identifies concrete actions steps the central government, state governments, and the corporate sector can take. The HLSG concludes that in each of these domains, the concerned agencies must now be vigorously engaged in many sectors, and the private sector and government agencies must continue to work together or begin to work together more effectively to ensure that India Inc. wins. Source: AIMA (2003). Launchinga Process To make this agenda even more action oriented, an important signal needs to be given, as is amply demonstrated by the experience of other countries highlighted above. A concrete way to begin this process would be to designate a national "knowledge" champion to advance the knowledge economy agenda inIndia by integrating the economic reform agenda with initiatives already taking place inmore functional areas. A very appropriate nationalchampion to coordinate and orchestrate the necessary knowledge-related actions across the various domains would be the Prime Minister's office. Infact, recently, the Prime Minister has proposed the setting up of a Knowledge Commission to leverage various knowledge networks to make India a knowledge engine of the world. This function could, for example, organize a Knowledge Economy Task Force, headed by the Prime Minister and comprising stakeholders from government, the private sector, academia, think tanks, research organizations, and NGOs. The main objective of the task force would be to determine ways o f coordinating action involving diverse stakeholders to tackle key reforms inthe four pillars of the knowledge economy and sequence the investments necessary to move India successfully into the knowledge economy o f the twenty-first century. Some examples of cross-cutting knowledge economy issues that the task force could address include: 0 Inthe past decade, Indiahas undertaken major economic reforms; as a result, its growthrate has increased from 3.5 percent in the 1950sto 1970sto approximately 6 percent between the 1980s and 2002. Duringmuch of this period, however, China has been growing at about 10percent. What are the fundamental reforms needed to unleash India's tremendous entrepreneurial potential and benefit from more active participation inthe global knowledge economy to achieve this higher rate o f growth sustainably? 124 India has the advantage of a highly skilled human resourcebase, which has gained world renown. It also has world-class institutions that train this world-class manpower, but on a limited scale. What would it take to ramp up suchinstitutions even further so that India can become a leader ineducation and training, not only inIT and software, but also more generally inhigh-skill areas that can provide greater outsourcing services to the world? An increasing number of multinational corporations are currently working with Indian f m s to contract and subcontract high-endR&D. How can India become a global leader ininnovation inits own right, not only inIT-related areas inwhich it has carved out a global niche, but also inother knowledge-intensive industries,such as pharmaceuticals and biotechnology? India i s a leadingexporter of IT services and software, but has not yet fully harnessedthe potential of ICTs at home to reduce transaction costs and improve efficiency. As it has a large localmarket and many needs, what will it take for India to exploit this capability on a larger scale domestically and help the country leapfrogeven more rapidly into the knowledge economy of the twenty-first century? Dealing with the kinds of illustrative issues highlightedabove requires prioritization and working with many different interest groups, which is not an easy task; thus, some guiding principles for the KnowledgeEconomy Task Force would includethe following: 0 Defining priorities and establishing budgets 0 Adopting systemic, integrated approachesfor the different policy planks at all levels of government 0 Mobilizing state governments, which are key to the Indianeconomy and its modernization Multiplyingexperiments and publicizing concrete initiatives that clearly exemplify the move to a knowledge-based economy. The role of the PrimeMinister's office would be to put inplace arobust mechanism to facilitate, monitor, and scale up successfulinitiatives. Insum, Indiais well positionedto take advantage ofthe knowledgerevolutionto accelerate growth and competitiveness and improve the welfare of its citizens and should continue to leverage its strengths to become a leader inknowledge creation and use. Inthe twenty-first century, India will bejudged by the extent to which it lays down the appropriate "rules of the game" that will enable it to marshal its human resources, strengths ininnovation, and global niches inIT to improve overall economic and social development and transformitself into a knowledge-driven economy. Sustained and integrated implementationof the various policy measuresinthese domains would help to reposition India as a significant global economic power, so that it can rightfully take its place among the ranks of countries that are harnessingknowledge and technology for their overall economic development and social well-being. A Final Note This report presents an outside view of India's positionon the global scale, recognizes India's achievements, but sees a tremendous potential that i s yet to be unleashed. What i s needed i s an India-led process of coordination and integrationof the different reforms, combining those inthe economic and institutional regime with the many initiatives that are actually beingundertaken inmore functional areas, as covered inmany Indian strategy reports. Consolidating and launchingthese can only be done through a domestic process of consultation, stakeholder awareness, and buy-in to get backing for the necessary reforms to implement the various actions neededto leverage India's potential. It i s hoped that this perspective serves as an additional vote of confidence to help catalyze such an integratedand well- grounded process. 125 Annex 1: India's Total Factor Productivity Construction: Theoretical Framework Inthis total factor productivity decomposition exercise, aneoclassicalaggregate productionfunction that accounts for the quality o f labor i s considered. For simplicity, a human-capital augmented version o f the Cobb-Douglas productionfunction along with perfect competition and constant returns to scale i s assumed: where: Y i s the level o f aggregate output K i s the level o f the capital stock H i s the level o f the human capital stock L i s the size of the labor force A i s total factor productivity a i s the share o f capital innational income Taking logs and time derivatives and rearranging leads to the estimate o f growth rate o f total factor productivity with human-capital augmentation: d - f - a K - ( l - a ) ( H + i ) Where: 2 represents the growth rate o f variable X. FollowingWoessmann (2000), human capital stock i s specified to have the Mincer specification: H = e rs where: r i s the market returns to education S i s the average years o f schooling. Data Sources Real GDP (inconstant 1995 U.S. dollars) and labor force figures are taken from the World Bank's internal database. The capital stock i s constructed using gross capital formation (inconstant 1995 U.S. dollars) obtained from the World Bank internal database. The perpetual inventory method i s used with an assumed depreciation rate o f 5 percent. To calculate the initial value o f the capital stock, the average growth rate of gross capital formation for the first five years i s used, and the formula i s applied for the sumof an infinite geometric progressive series. Estimates for the returns to education are taken from Bils and Klenow (2000). For the average years o f schooling, the simple average o f the estimates obtained from Barro and Lee (2001) and Cohen and Soto (2001) are used. Note that, given that data for the average years of schooling are available only on a decade basis, interpolationby growth rates i s used to obtain annual estimates o f the average years o f schooling in order to construct the human capital stock on an annual basis. The estimate for the labor share innationalincome for India i s taken from Gollin (2001), whereas that for Ireland i s taken from Bemanke and Giirkaynak (2001).The estimate for labor share for India and Ireland are 0.828 and 0.750, respectively. The capital shares were obtained by taking 1and subtracting the respective labor shares. 126 Annex 2: Knowledge Assessment Methodology The Knowledge Assessment Methodology (see www.worldbank.org/kam) i s a user-friendly tool designed by the World Bank Institute to assist client countries inunderstanding their strengths and weaknesses interms of their ability to compete inthe global knowledgeeconomy. The KAh4is designed to proxy a country's preparednessto compete inthe knowledge economy through a series of relevant and widely available measures: 80 structural and qualitative variables-available for 128 countries-that benchmark how an economy compares with other countries. The KAMhelps to identify the problems and opportunities that a country faces and where it may need to focus policy attention or future investments. The unique strength of the knowledge for development methodology i s its cross-sector approach, allowing the user to take a holistic view of a wide range of relevant factors, rather thanjust focusing on one area. The 80 variables used serve as proxies for the four areas (pillars) that are critical to the development,ofa knowledge-based economy (economic and institutional regime, education, innovation, and ICTs). Also includedinthe 80 variables are severalmeasures that track the overall performance of the economy. Normalization Procedurefor the KAM The raw data (u) are collected fromWorld Bank datasets and internationalliteraturefor 80 variables and 128 countries. Ranks are allocated to countries based on the absolute values (raw data) that describe each and every one of the 80 variables (rank u). Countries with the same performance are allocated the same rank therefore, the rank equals 1for a country that performs the best among the 128 countries inthe sample on a particular variable (that is, it has the highest score), the rank equals 2 for a country that performs second best. and so on. The number of countries with a worse rank (Nw) is calculated for eachcountry. The following formula i s usedto normalize the scores for every country on every variable according to their ranking and inrelation to the total number of countries inthe sample (Nc) with available data: Normalized (u) = 10*(Nw/Nc). The above formula allocates anormalized score from 0 to 10for eachof the 128countries with available data on the 80 variables. Ten i s the top score for the top performers and 0 the worst for the laggards. The top 10percent of performers get a normalized score between 9 and 10, the secondbest 10 percent get normalized scores between 8 and 9, and so on. As mentionedabove, more than one country may be allocated either at the top or bottom of the normalized scores. The 0-10 scale describes the performance of eachcountry on eachvariable, relative to the performance of the rest of the country sample. The KAh4is updated about once ayear. More information on the most recent version of the KAM,its functionalities, technical notes, data sources, and a user guide are available on the Web site: www.worldbank.orglkam. 127 Annex 3: Knowledge Economy Index for India and Comparator Countries, 1995 and Most Recent Period I Knowledge I Economic I Information I Economy Index Incentive Regime Innovation Education Infrastructure Most 1995 Most 1995 Most 1995 Most 1995 Most 1995 recent recent recent recent recent Korea 7.59 7.60 5.39 6.74 8.11 7.61 7.86 8.11 9.00 7.95 Poland 6.70 6.49 5.84 5.15 6.15 6.30 8.22 7.96 6.59 6.54 Russia 5.91 5.99 3.34 2.33 7.50 7.89 7.88 7.78 4.91 5.98 Brazil 5.05 4.49 3.94 4.18 5.02 4.59 5.75 3.85 5.50 5.32 China 3.80 2.86 2.55 2.29 4.42 3.95 3.74 3.48 4.50 1.71 India 2.72 2.75 2.91 2.85 3.58 3.34 2.33 2.38 2.06 2.42 Note: The Knowledge Economy Index (KEI)i s the average of the performance scores of a country or region inall four knowledge economy pillars:economic incentive regime, education, innovation, and informationinfrastructure. Source: World Bank, "Knowledge Assessment Methodology," http://www.worldbank.org/kam. 128 Annex 4: Overall Knowledge Economy Scorecards for Brazil, China, Korea, Poland, and Russia, Selected Variables, 1995 and Most Recent Period China BraziI GDP groMh(%) (7 90) GDP giov*lh(%) (1 60) (632 48) internet users per 10,000 DevelopmentIndex (0.75) (822 41) Internetusers per 10,000penpi menDevelopment Index(0.78) (27 60) Computers per 1,OD0 peo (ifnontariffbarriers(2.00) 8 (74 80) Computers per 1,000 peo 1118 ncntanff barriers (4.00) (423 20) Telephones p H 1,000people Regulatory Quslriy (-0 41) (486 80) Telephoner pw 1,000 people Regulslory Qualty(0 26) (12.68) Tertiary Enrollment Rule 01 Law (-022) (17 93) Telliary Enrcllment Rule01Law (-0 30) (68 2 9 Secondary Enrollment Researchers in R8D 1million(583 88) (107.53) Secondary Enrollm earcherr in RRDImillii (323 94) (90 92) Adun lnerscy rate (% age 15 and abov lentlflc andtechnm lournal BI1lCieSImil w.(9 31 (87.30) AdM lriereq rete (% age 15 B andtechnicalpurns1 srticle~Imil pop. (30.81) (0 33) Patent applications grented by the USPTOImil pop (1.02) Patent epplicetionsgranted by the USPTO1mil pop. Russia Korea GDP growth(%) (6 70) GDP growth(%) (6 40) (409 32) internet usersper 10,000 peopl manDevelopment Index (0.80) (6034 20) Internetusersper 10,000peopl manDeveiOpmMt Index(0 89) (66 70) Computersper 1,000 peo le TBrllf 8 nnntsnii barrkrs (6 00) (551 40) Compderi per 1,000peop lit18 nantarilfbarrerS (4.00) (362.30) Telephonesper 1.000pewe RegulatoryQusilty(-0 30) (1166.10)Telephones per 1,WOpeople Regulatory Qualny (0 86) (68 37) Terliary Enrollment Rule01 Law (-0.78) (82.03) Tertiary Enrollment Ruleof Law (0 88) (91.96) Seccndaiy Eniclm earchers inR8DImillion(3492 94) (94 17) Secondary Enrollm esearchert n R8D Imilion (2662 39) (99.59) Adut lleracy rsle (%age 15and 9 !tic andtechnicaljournal articles Imll POP. (106.99) (97 90) Adun litwocy rate (% age 15 an andtechnicaijournalsll~clerlmilpop (143 19) (1 41) PatentapphCstlOnEgrsnted by the USPTOImil pop (86 25) Patent apphcstlonsgranted by the USPTO /mil pop Poland GDP groMh[%) (3 50) (2324 M)Internetusersper 10,000 p e o p l m f i n i a n Developmentlwex (0 65) (105 60) Computers per 1,000pec in8 rmntsrili barriers(6 00) (769 60) Telephones per 1.000 people RegulatoryQusIRy (0.67) - most recent (56 50) Tertiary Enrollment Ruleci Law (0 6 9 ---- 1995 (101 27) Secondary Enrollm esearchersnR8Dlmillion (1474 59) (i 00)Adultilteracyrate[%age15anda b O v e ) ~ S c i e n t i Iandtechnicalpuma1srticlefImilpap(117OD) 00 o (0 50) Patent eppl~cet~olls granted by the USPTOImtl POP Note: Each of the 80 variables inthe K A M i s normalized on a scale of 0 to 10. The fuller the scorecard, the better poised a country i s to embrace the knowledge economy. But an economy should not necessarily aimfor a perfect score of 10 on all variables. This i s becausethe scorecards may be shaped by the particular structural characteristics o f an economy or by trade-offs that characterize different development strategies. Values inparentheses denote actual values for the particular country for the most recent period for which data are available. Source: World Bank, "Knowledge Assessment Methodology," http://www.worldbank.org/kam. 129 Annex 5: Data for the Scorecards for India, Brazil, and China, 1995 and Most Recent Period India Brazil China (actual/nonnalized)* (actualhormalized) * (actualhomalized) * most Variable most recent 1995 recent 1995 most recent (1995) Average annualGDP growth(percent) 5.4018.66 6.6018.98 1.60/1.57 3.2013.54 7.90j9.69 9.9019.84 HumanDevelopment Index 0.6012.30 0.5512.11 0.7815.40 0.7415.12 0.7514.21 0.6813.41 Tariff & nontariff barriers 2.0010.00 2.oo/o.00 4.0011.75 4.0013.44 2.0010.00 2.0010.00 Regulatory quality -0.3413.54 -0.1313.39 0.2615.67 0.1314.96 -0.41l3.07 -0.lOl3.70 Ruleof law 0.0715.20 -0.0115.16 -0.3014.41 -0.2414.13 -0.2214.57 -0.4313.17 ResearchersinR&D per million people 98.8512.00 146.0012.45 323.9413.56 168.0012.87 583.8814.56 464.0014.47 Scientific andtechnical joumal articles per 9.2314.09 9.3614.17 30.6115.51 19.6515.04 9.3114.17 5.8113.70 million people Patentapplications grantedby USPTOper 0.3314.64 0.04l3.39 1.0216.00 0.4415.87 0.3314.55 0.0513.67 million people Adult literacyrate (percent age 15 and 61.0311.42 53.3011.43 87.30/4.O9 83.2014.13 90.9214.65 80.8013.57 above) Secondary enrollment 48.4712.50 48.8013.05 107.5318.83 55,6013.59 68.2513.28 65.8014.77 Tertiary enrollment 10.5813.07 6.5812.66 17.9314.33 12.9013.83 12.6813.31 5.3012.11 Telephonesper 1,000 people(mainlinesand 7l.OOl2.03 13.0012.03 486.8015.86 93.0014.77 423.2015.3 1 36.0013.05 mobiles) Computersper 1,000 people 7.2011.58 1.2911.33 74.8015.25 17.3315.50 27.6013.58 2.2712.08 Intemetusers per 10,000 people 174.8612.58 3.0013.91 822.4115.39 11.0015.70 632.4814.61 0.oo/o.00 * Actualvaluelnormalizedvalues are for the group comprisingall 128 countries inthe database. Notes: Average annualGDP growth(mostrecent) is the average annualGDP growth for the period 1998-2002. Average annual GDP growth (1995) i s the average annualGDP growthfor the period 1993-97. Source: World Bank. "Knowledge Assessment Methodology," http:l/www.worldbank.org/kam. 130 Annex 6: Economic and Institutional Regime: Scorecards for Comparator Countries, Selected Variables, Most Recent Period China BraziI Gross Captal Formetlon(39 30) Gross C~pRalFormation(21 20) (80 00) Press freed neral GOY?budget balanceas %01 GDP (.2.50) (36 00) Press freedo neralGovl budget balance 8s % of GDP (-3 80) (148 00) DomeEtic credt to plvate sector (% Of Trade 8s % 01 GDP (54 77) (34 60) Domedic creddto private sector GDP) (% of Tradeas % of GDP (29 41) GDP) (5.30) LOCII~ compettion (5 20) Localcompetnlon Tariff 8 norhariff barrier$ (4 00) (33 00) ExpoRs01 goods and services as % of G ellectual Property1s well protected(3 40) (I550)ExportsofpodsandServiCeSas%ofG llectuslPropeRy ISweil protected(3 60) (3 70) Soundnessof banks (6 20) Soundness of banks Russia Korea Gross CapdalFormation(21.501 Gross C8pdaIFormation (31 00) (67 00) press freed nersl God budget balance as % of GDP (I70) (29 00) Press freed neial Govl budgel balance as % 01 GDP (0 30) (20 90) Domed~ccreddto privde sectorGDP)(%01 Trade as % of GDP (58 67) (103 80) Domedic credt Io p w d e sector (%of Tradeas % of GDP (78 59) GDP) (4 00) Localcompetdion Tariff 8 nortariff barriers (6 00) (5 30)Local compettion Tariff 8 nontarinbarriers (4 00) (31 70) Exports of goods and Serwes BE % o i G llectualProperty IS well prdected (2 30) (3820) Expods of goods and ServlCeS as % of G ellectualPropetty Iswell protected (4 50) (3 80) Soundness of banks (4 70) Soundness of banks Poland Gross Caplal Formation(21 70) (19 00) Press freedomh G e n e r d Gwt budget bsboce8s %of GDP (-4.90) (29 00) Domedic crednto Privatesector (% 01 Trade as %of GDP (59 45) GDP) (4 80) Local competlion Tariff 8 norharill barriers (6 00) (21 00) Expotts of mods and Servbes as % of GDP Property IS well protected (3 50) (4.90) Soundness of banks Note: Each of the 80 variables inthe KAMi s normalized on a scale of 0 to 10. The fuller the scorecard, the better poised a country is to embrace the knowledge economy. But an economy should not necessarily aimfor a perfect score of 10 on all variables. T h ~ iss becausethe scorecards may be shapedby the particular structural characteristics of an economy or by trade-offs that characterize different development strategies. Values inparentheses denote actual values for the particular country for the most recent period for which data are available. Source: World Bank, "Knowledge Assessment Methodology," http://www.worldbank.org/kam. 131 Annex 7: Governance Data for India a. Governance Indicatorsfor India: 1998 and 2002 Percentile Estimate Standard No. surveys Govemance Indicator Year Rank (0-100) (-2.5 to+ 2.5) Deviation and polls Voice and accountability 2002 60.6 +0.38 0.17 10 1998 59.2 +0.26 0.23 6 Political stability 2002 22.2 -0.84 0.20 9 1998 35.2 -0.34 0.24 7 Government 2002 54.1 -0.13 0.15 9 effectiveness 1998 52.5 -0.13 0.20 8 Regulatory quality 2002 43.8 -0.34 0.17 8 1998 41.8 -0.08 0.21 7 Rule of law 2002 57.2 +0.07 0.13 13 1998 67.0 +0.21 0.17 11 Control of corruption 2002 49.5 -0.25 0.15 10 1998 60.1 -0.17 0.16 10 b. Governance Indicatorsfor India and Regional Average, 2002 Estimate Regional Percentile (-2.5 to + Standard No. surveys Average Governance Indicator Year Rank (0-1 00) 2.5) Deviation and polls (percent) Voice and accountability 2002 60.6 +0.38 0.17 10 29.6 Political stability 2002 22.2 -0.84 0.20 9 32.4 Govemment effectiveness 2002 54.1 -0.13 0.15 9 48.1 Regulatory quality 2002 43.8 -0.34 0.17 8 35.3 Rule of law 2002 57.2 +0.07 0.13 13 42.1 Control of corruption 2002 49.5 -0.25 0.15 10 41.5 c. Governance Indicators for India and Income Category Average, 2002 Income Estimate Category Percentile (-2.5 to + Standard No. surveys Avg. Governance Indicator Year Rank (0-1 00) 2.5) Deviation and polls (percent) Voice and accountability 2002 60.6 +0.38 0.17 10 27.9 Political stability 2002 22.2 -0.84 0.20 9 28.6 Govemment effectiveness 2002 54.1 -0.13 0.15 9 24.6 Regulatory quality 2002 43.8 -0.34 0.17 8 25.1 Rule of law 2002 57.2 +0.07 0.13 13 24.9 Control of corruption 2002 49.5 -0.25 0.15 10 25.5 Source: Kaufmann, Kraay, and Mastruzzi (2003). 132 Annex 8: Various Costsof DoingBusinessinIndia,2004 ~~ a. Starting a Business (2004) The challenges of launching a business in India are shown below through four measures: procedures required to establish a business, the associatedtime and cost, and the minimumcapital requirement. Indicator India Regional Average OECDAverage Procedures (number) 11 9 6 Time (days) 89 46 25 Cost (percent gross national 49.5 45.4 8 income [GNI] per capita) Minimumcapital (percent of 0.0 0.0 44.1 income per capita) b. Hiring and Firing Workers (2004) The difficulties that employers inIndia face inhiring and firing workers are shown below. Three indexes measure how difficult it i s to hire a new worker, how rigid the regulations are on working hours, and how difficult it i s to dismiss a redundant worker. Conditions covered by the indexes include availability of part-time and fixed-term contracts, working time requirements, minimumwage laws, and minimumconditions of employment. Each index assigns values between0 and 100, with higher values representing more rigid regulations. The overall Rigidity of Employment Index i s an average of the three indexes. Firing costs are calculated on the basis of (a) the number of weeks' worth o f salary inseverance, (b)notification, and (c) penalties that must be paid to dismiss a worker. Indicator India Regional Average OECDAverage Difficulty of Hiring Index 33 37 26.2 Rigidity of Hours Index 20 36.7 50 Difficulty of Firing Index 90 53.3 26.8 Rigidity of Employment Index 48 42.3 34.4 Firing Costs (weeks of wages) 79 84.7 40.4 c. RegisteringProperty (2004) The ease with which businesses can secure rights to property i s measured below using the following indicators: the number o f procedures necessary to transfer a property title from the seller to the buyer, and the time and the costs as a percentage of the property value. Indicator India Regional Average OECDAverage Procedures (number) 6 5 4 Time (days) 67 55 34 Cost (percent of property per capita) 13.9 6.0 4.9 d. Getting Credit (2004) Measures on credit information sharing and the legal rights of borrowers and lenders in India are shown below. One set of indicators measures the coverage, scope, quality, and accessibility of credit information available through public and private registries. A second set measureshow well collateral and bankruptcy laws facilitate lending; the scores range from 0-10; higher scores indicate that those laws are better designed to expand access to credit. The Credit Information Index measures the scope, access, and quality of credit information available through public registries or private bureaus; the index ranges from 0-6, and higher values indicate that more credit informationi s available from a public registry or private bureau. The Legal Rights Index measures the coverage, scope, quality, and accessibility of credit information available through public and private registries; the scores range from 0-10, and higher scores indicate that those laws are better designed to expand access to credit. 133 Indicator India Regional Average OECDAverage Cost to create collateral (percent 11.3 8.0 5.2 of income per capita) Legal Rights Index 4 3.8 6.3 Credit InformationIndex 0 1.7 5 Public Credit Registry coverage 0 1.4 76.2 (borrowers per 1,000capita) Private bureau coverage 0 3.1 577.2 (borrowers per 1,000 capita) e. Protecting Investors (2004) The degree to which investors are protected through disclosure of ownership and financial information is measured below. The Disclosure Index captures seven ways of enhancing disclosure: informationon family, indirect ownership, beneficial ownership, voting agreements among shareholders, audit committees reporting to the board of directors, use of external auditors, and public availability of ownership and financial informationto current and potential investors. The index varies between 0 and 7 ;higher values indicate more disclosure. Indicator India Regional Average OECDAverage Disclosure Index 4 3.2 5.6 f. Enforcing Contracts (2004) The ease or difficulty of enforcing commercial contracts in India i s measured below, using three indicators: the number of procedures counted from the moment the plaintiff files a lawsuit untilactual payment; the associated time; and the cost (incourt and attorney fees), expressed as a percentage of debt value. Indicator India Regional Average OECDAverage Procedures (number) 40 29 19 Time (days) 425 375 229 Cost (percent of debt) 43.1 39.6 10.8 ~ ~~ g. Closing a Business (2004) The time and cost requiredto resolve bankruptcies are shown below. Costs include court costs as well as fees of insolvency practitioners, lawyers, accountants, and so on. The recovery rate measuresthe efficiency of foreclosure or bankruptcy procedures, expressedinthe number o f cents on the dollar claimants recover from the insolvent firm. Indicator India Regional Average OECDAverage Time (years) 10.0 5.2 1.7 Cost (percent of estate) 8 8.3 6.8 Recovery Rate (cents on the 12.5 21.4 72.1 dollar) Note: Dataare available at http://rm.worldbank.org/DoingBusiness/. Source:World Bank (2004b). Even though India has a relatively vibrant private sector and has made some improvements, the data in Annex 8 show that India needs to do more to spur greater entrepreneurial activity. One important reason for less competitive markets inIndia i s excessive regulation o f entry and exit of firms. India has higher requirements for obtainingpermits and a significantly longer median number of days to start a firm than many other countries. Annex Sa shows the challenges o f launching a business inIndia through four measures: procedures requiredto establish a business, associated time and cost, and minimumcapital requirement. Entrepreneurs can expect to go through 11steps to launch a business within 89 days, on average, at a cost equal to 49.5 percent of gross national income (GNI) per capita. There is, however, no minimumdeposit 134 requirement to obtain a business registration number, compared with the OECD average of 44.1 percent of GNI. Starting a business inIndia requires about the same number of permits as in China (12), but in China it takes less than half the time (41days), on average, to take care of all procedures and at a much lower cost (14.5 percent of GNIper capita). They must, however, deposit at least 1,104.2 percent of GNI per capita inabank to obtain a businessregistration number. India also has one of the more regulatedlabor markets inthe world, andrestrictions on the hiringand firing of workers are a great obstacleto doing business (see annex 8b). India's overall Rigidity of Employment Index i s 48, higher than in China (30), but lower than inBrazil (72). Ina World Bank-CII survey (World Bank 2002c), the typical firmreported it had 17percent more workers than desired and that labor laws and regulations were the main reasonswhy it could not adjust its workforce to the preferred level. These regulations are a key reasonwhy f m s are reluctant to take on new employees. InIndia, it takes 67 days to register property, higher than it takes inbothBrazil(42 days) and inChina (32 days). This i s important interms of the ease with which businessescan secure rights to property (see annex 8c). Interms of getting credit, annex 8d provides data on credit information sharing and the legal rights of borrowers and lenders in aparticular country. India does better than Brazil and China on the Legal Rights Index. India has a score of 4 on this index, and Brazil and China bothhave a score of 2. The DisclosureIndex measures the degreeto which investors are protected through disclosure of ownership and financial information (annex 8e). This index shows that India and China bothhave a score of 4, but Brazildoes better with a score of 5. Enforcing a contract i s also a major probleminIndia, as it takes more than a year (425 days) to resolve a payment dispute inIndia, compared with 566 days inBrazil and 241 days inChina (annex 8f). Inaddition, although it takes less than six months to go through bankruptcy proceedings inIrelandand Japanand 2.4 years inChina, inbothIndia and Brazil, it takes more than 10years (annex 8g). These indicators, thus, reveal some strengths and weaknesses of India's national business environment that needto betackled to improve its competitiveness inan increasingly integrated and knowledge-based global economy. 135 Annex 9: Education: Scorecards for Comparator Countries, Selected Variables, Most Recent Period China Brazil Adun lneracy rate (% age 15 and above)(90.92) Adun lneracy rate (% age 15and above) (87 30) (I 61)well educatedpeopledo not emlgrateabr rage years of schooling(6 35) (4 33) Wei educatedpeopledo noi emigrate abr rage years of schooling(4.88) (3 60) Avaiisbilnyof msnsgement educatlo econdaryEnroliment(88 25) (4 70) AVaIIabiHy 01 management edllcatlo ecandsry Enrollment(107 53) (3 60) Extent of Staff Training Tediary Enrdlment (12 68) (4 SO) Extent of Staff Training Tertiary Enrollment(17.93) (4.40) Quady of science and matheducati e expectancy at bifih, Yeais (70 70) (3 30) Pu~lityof science and math educati e expectancy d birth, years (68 60) (2.20) Public spendingoneducationas % of at access inschoob (3 50) (400) Publicspendingon educBlionas % of et access in schools(4 00) Russia Korea AduR lterscy rate (% age 15 and above)(99 59) Adun ineracyrate(% age 15and above) (97 90) (3 08) well educatedpeopledo not emigrate abr rageyears of Schooling (10 03) (4 17)well educatedpeopledo nd emigate abroad Average years of Schooling (10 84) (3.90) Avallabiiityof managementeducatlo econdary EnroHment(91.96) (4.20) Amlabilny of manilgement education SecondaryEnrollment(94.17) (3 00) Extent of Staff Training Tediary Enrollment(68 37) (4 90) Extentof naif Training Tertiary Enrollment(82 03) (5.40) Qualdy of science andmath education Ife exPeCtanNat birih, Years (65 80) (4.70) QuaMyof science and math educatlon ife expectancy at birth, years (73 90) (3 I O ) Public Spendingon educationas % Of et accessinschools (3.20) (3 61) Publicspendingoneducatianas % of at access in schools (6 40) Poland Aduk Uer8cyrate (% age 15 and above) (I00 00) (3 66) Well educatedpeopledo n d emigrate abrc Average years of schooling(9 84) (4 10) Availabildy of managementeducation Semndary Enroilment(I01 27) (3.60) ExtentOf Staff Training Tertiary Enrollment(55 50) (4.70) Qualdyof science and matheducation Ile expectancy at bitth, years (73 80) (5.00) Pubiic spendingon educationas % of 0- Internetaccess in schools(4.10) Note: Each of the 80 variables inthe KAMis normalized on a scale of 0 to 10. The fuller the scorecard, the better poised a country i s to embrace the knowledge economy. But an economy should not necessarily aimfor a perfect score of 10on all variables. This i s because the scorecards may be shaped by the particular structural characteristics o f an economy or by trade-offs that characterize different development strategies. Values inparentheses denote actual values for the particular country for the most recent period for which data are available. Source: World Bank, "Knowledge Assessment Methodology," http://www.worldbank.org/kam. 136 Annex 10: Innovation: Scorecards for Comparator Countries, Selected Variables, Scaled by Population, Most Recent Period Poland Giom ForeignDired ln~edment8s % 01GDP (3 60) (3 40) Rivda %&or rpmdn di,canfatcarpaymsotslrml pop (1458) (3 W) Hlgh-lechexpollf as % of manut and lhemseleer recepls I mil pop (0 89) (3 20) Sate 01cludcr developme 1eme8 englneerlnnenrolmentlot10(% 01 laly ICYII dudentr) (28 00) (0 50) Patent applications granted by the USPTOlmll pop. ReSCBlChnS In R8D lmlllon (1471 59) (3 30) Avsilsbildy01 Venture csplsi otsl experdlura tor R8D LIS % 01 GDP (0 67) (3 80) A d " Bwden lor Sort. I Tradeas%01 GDP(4120) (117 Oo)Ss~ent~lissndleshnieallournsl 8111deslml erfdy4ompany rEfCBtCh COllWDiat~Dn(3 40) (11 20) Cart IDenforce contract(% 01 ON1per c 0 iegider a burinerr (% 01GNI per cspls) (20 30) Note: Each of the 80 variables inthe KAM i s normalized on a scale of 0 to 10.The fuller the scorecard, the better poised a country i s to embrace the knowledge economy. But an economy should not necessarily aim for a perfect score o f 10 on all variables. This i s because the scorecards may be shaped by the particular structural characteristics o f an economy or by trade-offs that characterize different development strategies. Values inparentheses denote actual values for the particular country for the most recent period for which data are available. Source: World Bank, "Knowledge Assessment Methodology," http://www.worldbank.org/kam. 137 Annex 11:InformationInfrastructure: Scorecardsfor Comparator Countries, SelectedVariables, Most Recent Period China Brazil Telephoner per 1,000peOpk (423 20) Telephoner per 1,WO people (486 BO) (5 81) ICT Expendlureas % 01 www ID~Dper 1.000 (209 mi (6 32) IC1Expendnweos % 01 eiephme lylesper 1,000(223 20) (3 16) E.Governm bi~phancperi,000(21400) (6 32) E 4 o I C l m bdC Phone per 1,000 (263 80) (6 70) IneinaODnaItelecommuniCd~Onr, CBB Cod 01 Computersper 1,000pmple (27 60) (1 77) Intorndionaltdccomwncdions, mdcall01 CDmpUlersper 1,000people(74 80) (632 48) Mernd uself per 10,000PeOP 56s per 1,WO(350 00) (622l1)Inte,ndurerrperlO,OWpe Set$ per 1,000(349 00) (1 28) Intern6 hods per 1 (17978)lnternet hodtperl 5 per 1,WO(433 00) (42 00) DallyneWsPBPell P e l .ooO (43 00) Ddy ncwsp~persper 1,000 Russia Korea 1slephOneSper 1,000people(362 30) lel~phoneSplr1,000pe~pie(116610) (3 69) IC1Expendlureas % of WP am Tdephme LnsP per 1 ,MO(242 20) (6 49) KT hpcndhrc %Of GDP 81"Telephow lmespci 1,000(472 40) (2 83) E.Gavernment (6 84) E-mvanment M M I I phoneper 1,000(693 70) (2 91) lntern~,0naltclccomm"nr6~0nr, cost 01 Computersp c i l .OOOpeo~lc(8870)(1 74) lnternation~lelecommunsd~ons,~~S1ol comp!Aer* per i.000 people (551 40) call tdl (409 32) Internelmeisper 10,000pea Satpet 1,000(538 00) (En3420JInterneturerrpcr10,OWpeo Sets per 1,000(363 00) (42 18) Mernd hod3 per 1 (52 84) interlct hods per I f pn1,000(1034 W) (1M.00)Dailyniwspapors pi, 1,000 (383 00) Daily nwysp~peisper I,WO Poland TClqhMel pel1,000pmple(769 60) (5 22) IC1Expardkurc at % 01 ~ephoneInprper1,000(31870) obllephonep a 1.000(450 90) (179) IMemMiOnaltelecammunlcdians,cost 01 coymuero per 1,OMpmpie(1 05 En) (2324 501lntemelU f l f W 10,OMP P I V Sds per 1,000(422 00) (203 62) lnterndhosts per I O f per 1,WO(523 00) (10200) Dally newfpaperf per 1,000 Note: Each of the 80 variables inthe KAMi s normalized on a scale of 0 to 10. The fuller the scorecard, the better poised a country i s to embrace the knowledge economy. But an economy should not necessarily aim for a perfect score of 10on all variables. This i s because the scorecards may be shapedby the particular structural characteristics of an economy or by trade-offs that characterize differentdevelopment strategies. Values inparentheses denote actual values for the particular country for the most recent period for which data are available. Source: World Bank, "Knowledge Assessment Methodology," http:Nwww.worldbank.org/kam. 138 Annex 12: ICT Indicatorsfor Indiaand China, Various Years Variable India China Telephones per 1,000 people (mainlines + mobiles), 2003 71.00 423.20 Telephone main lines per 1,000 people, 2003 46.30 209.20 Mobile phones per 1,000 people, 2003 24.70 214.00 Computers per 1,000 people, 2002 7.20 27.60 TV sets per 1,000people, 2002 83.00 350.00 Radios per 1,000 people, 2001 120.00 339.00 Daily newspapers per 1,000 people, 2000 60.00 42.00 Internet hosts per 10,000 people, 2003 0.82 1.28 Internet users per 10,000 people, 2003 174.86 632.48 International telecommunications, cost of call to the United States ($ per 3 3.20 6.70 minutes), 2002 E-Government, 2003" 5.18 3.16 ICT Expenditures as percent of GDP, 2002 2.78 5.81 Source: World Bank, "Knowledge Assessment Methodology," http://www.worldbank.org/kam. *Representsthe percentageof companies inacountrythat usethe Internet for online government services. 139 References Abraham, Reuben. 2005 (forthcoming).Mobile Phones and Economic Development: Evidencefrom the Fishing Industry in India. 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