Inclusive Innovation: India’s New Growth Mindset

 Inclusive innovation is more than innovation for the poor; it can be a blueprint for effective governance and a model for inclusive growth and sustainable development. Declaring 2010-2020 as the ‘Decade of Innovation,’ India’s President Pranab Mukherjee, recognises the need for a new growth model – one that capitalises on India’s human and technological capital to meet its development challenges and sustain its long-term growth.

Image courtesy of indianhillbilly, © 2010, some rights reserved.
Image courtesy of indianhillbilly, © 2010, some rights reserved.

Jugaad in the first “turnabout”  

India owes its thriving low-cost communications sector, a fundamental element of high growth rates since 1991, to its spirit of “jugaad”: a form of innovation that champions resourcefulness and entrepreneurial creativity. India’s bias towards technical education allows the structural reformations of the Narasimha Rao government to catalyse the software and services movement in the 1990s. India’s economic turnabout demonstrates that government support is essential for technological breakthrough and growth creation – and that subsidy provision is insufficient on its own. Rao’s stringent infrastructural changes enables an existing base of jugaad innovators in the IT-based sector to realise their potential in a freer and dynamic market. It is no secret that jugaad thrives in a competitive environment, where agents fail cheap and fast for survival only. If the government had not liberalised the telecom industry, India would not have been able to mobilise its available human capital to prompt its wholesale technological upgrading to global standards.  A competitive services industry naturally became a generator of growth, as India liberalised its services market to foreign agents. A competitive advantage over US software brought in a surge of FDI, which contributed to India’s all time high growth rates in the 2000s.

Inflection point?

Key indicators place the economy in a “sticky” situation. India’s potential growth rate has fallen by 1.5% points to 7% and it is generally accepted that growth in 2012-13 will be lower than the Reserve bank’s baseline projection of 5.8%. So what does the picture look like for the Finance Ministry? While recovery from the 2008 financial crisis demands that the government spur domestic aggregate demand through expansionary policy, the economy shows signs of overheating with interest rates as high as 7.18%. This severely limits the Reserve Bank’s capacity to cut interest rates to revive capital investment. Nevertheless, most analysts anticipate interest rates to be lowered to 7.75% from 8% at the Reserve Bank’s quarterly review. India’s twin deficits create a logjam. With a budget deficit that stands at 5.7% of GDP, another fiscal stimulus package is simply unsustainable. Excessive government borrowing since 2008 has fed inflationary pressures through its net positive effect on the repo rate. Consequently, the fiscal deficit stifles the effectiveness of expansionary monetary policy and threatens to continue crowding out investment.

While the global turndown and India’s “oil and gold drag” exacerbate the fiscal crisis, they are not the principal causes for persistent inflation and overheating. Growth creation has been the main priority of the post-reform agenda, but sources for growth have been few and India suffers from low per capita income, inadequate infrastructure, and supply side rigidities. Government spending may have increased in the past decades, but it has not been accompanied with stronger revenue mobilisation and improved performance in the public sector. India’s burgeoning fiscal deficit is an outcome of these trends. The economy entered into an inflation trap in 2006 because the productive potential of the economy had fallen behind policy measures to spur consumption. Entrenched in deep economic imbalances, India’s economic progress depends on the government’s ability to merge its growth and development agendas. India needs another 1991 moment. Short-term “fixes” will not kick-start the economy in the absence of low-cost, effective policies to tap into India’s human and technological base and, thus, increase its long run potential output.

Jugaad in the next turnabout

It is time for Finance Minister Chidambaram to address the issue of equitable growth and tackle India’s major supply constraints, which pose substantial risk to its long-term macroeconomic stability. An inclusive growth model provides one way of overcoming supply rigidities and improving public sector performance. The services sector may continue to play a significant role in growth creation, but what persistent inflation and fiscal deficits indicate is that India cannot continue to be ‘services-only’ if it is to compete on a global scale. It is estimated that India’s high-growth software and information technology services (ITES) provide merely 1.63m employment opportunities in a workforce that annually increases by roughly 12m. The current crisis provides ample evidence that job-less and imbalanced growth is unsustainable in the long-term. As a predominantly rural country, the agricultural sector holds up to 50% of India’s labour force and is lagging behind with an average yearly growth rate of 4%. Moreover, low agricultural growth compounds inflationary trends; for example, supply shortages caused wholesale prices to hike up by 7.2% in April. Agriculture is currently a subsidy-dependent regime; it is therefore in the government’s immediate interests to create an innovative environment so as to remove a heavy burden on its budget. Besides obvious bottlenecks such as corruption, over-regulation, and infrastructure, subsidisation fails to boost productive capacity as it crowds out crucial investments in agricultural technology, rural infrastructure, and education. By spreading jugaad into the agricultural sector, India can accelerate poverty reduction and broaden its sources for future growth.

So what stifles the innovative potential of the poor? Labels of the poor as sink for aid. For inclusive innovation to take momentum, the base of the pyramid should be seen as a “source of ideas, innovations, values, institutional norms and practices” (Professor Anil K. Gupta of IIM Ahmedabad). How to bring about greater inclusion? Enterprises such as the National Innovation Fund and the National Agricultural Innovation Project pave the way forwards. Greater support for grassroots is imperative – India’s Honey Bee Network and SRISTI help finance innovations by engaging potential private investors with grassroots innovators and therefore establishing credit facilities for start-ups. Such efforts should increase to better commercialise pro-poor products, which service both rural and non-rural needs, and thus enhance the market for inclusive goods.

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