As globalisation creates greater reliance and interconnectedness, middle-income economies like India provide a good example of how a skilled workforce paced with productive potential in select sectors are a positive context for greater investment, innovation and growth, as Abhishek argues in this post.
Whilst identifying pathways for developing economies to avoid the ‘middle-income trap’, the World Development Report 2024 suggests they make two transitions: from investment to infusion, and from infusion to innovation. Further, it says that ‘countries cannot leap all at once from investment-driven growth to innovation-driven growth’ because the infusion of technology needs to come first, followed by innovation. Taking examples from Latin America, the Report cautions that, at the country level, ignoring the imperative of infusion to quicken innovation can in fact worsen the investment climate, setting middle-income economies back by years if not decades. However, when we examine different sectors and firms, many middle-income countries have space for adopting paths of innovation in select sectors as they have (or can create) the required skill ecosystem. India provides an example to understand this proposal.
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India faces neither a demographic challenge (i.e., plateaued labour force) nor is it a mineral-dependent economy like the Latin Americas where slowdown happened due to commodity price cycles. The working-age population of India is set to increase till 2050, and their education and skill levels are also increasing at pace. As the International Monetary Fund notes, in recent decades India has diversified its exports by adding higher value-added services. The country is estimated to account for 40 per cent of Global Capability Centres (GCC) and the firm-level data on financial metrics from ORBIS (a commercial database) shows that some Indian firms are highly productive in the technology sector. Bringing these together will strengthen India’s position as a net exporter of high-tech services and ensure that growth does not fade.
The innovative capacity of an economy depends on various factors and includes the skill level of the workforce, which has been a key concern for India. It has been frequently advised that for India (and other South Asian nations) to avoid stagnating at their current income levels and to catch up with levels of economic and human development on par with successful Southeast Asian economies, they need to raise the quality of education and skills of its workforce. This lack seems to be changing now. The gross enrolment ratio of population to schools has increased and has either reached (or is close to reaching) the desired level of primary and secondary schooling in India. On the skilling front, there is a fairly developed dynamic, industry-centric and forward-looking skilling ecosystem that is itself innovating to promote ease of skilling and job-matching through platforms like the Skill India Digital Hub.
Sectoral heterogeneity in terms of innovative capabilities should be factored in while thinking of middle-income countries like India. For instance, while looking at the skill level of the workforce it will more useful to not employ the concept of national skill equilibrium but the idea of the ‘skill ecosystem’, defined as ‘a dynamic network of interdependent institutions and actors which through their various interactions, roles, interests, needs and resources is in a constant process of change — evolving in ways that cannot always be predicted — but which shape the development, supply, demand and deployment of skills in any given industry or region’. Unlike skill equilibrium which focuses only on supply, the skill ecosystem emphasises utilisation, mitigation of the mismatch problem and efficient use of available resources in equal measure. Ecosystems may be regional or sectoral formations; however, they interact with the outside world and many a times become catalysts for further development.
There are more than 1,600 GCCs in India with a market share of around US$ 50 billion. By 2028, the number of GCCs is expected to increase to 1,800, and the market size to US$ 90 billion. The GCC landscape is expanding to Tier 2 cities as well where it can act as incubators for high-level skills and knowledge transfer provided it successfully establishes a symbiotic relationship with the available talent pool. An example to note is Bengaluru which, in the early days, provided an ideal human resource and physical infrastructure needed for the development of the IT industry: young entrepreneurs recognised this and converted the city into India’s IT hub. However, the IT revolution did not stop at one city; with some government support, cities in different states soon became equally favourable IT locations and today India has almost half a dozen cities that are visible on the global IT industry map. With digital infrastructure, digitalisation of skilling and the expanding network of Skill India Centres in Tier 2 cities, India is very much likely to become a GCC hub.
Similar opportunities lie in the field of semi-conductors, which is fast becoming one of the key priorities for the country. The prospect for India rises given the US–China Chip War, which increases the possibility of infusion of technology due to friendshoring supply chains. However, to fully utilise the potential and ensure that it remains the best place to relocate or build new semi-conductor manufacturing facilities, India will have to emphasise innovation by developing a skill ecosystem facilitating the same. The advantage for India is that in the last few years it has successfully demonstrated its capability to foster different skill ecosystems working in tandem to increase the overall competitiveness of the country and providing space that caters to a diverse set of aspirations that different segments of its population possesses.
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