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Modi Should Foster Innovation Climate to Transform India

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Last month, India concluded a groundbreaking election that saw the ouster of the country's ruling Congress party and the installation of a new government with Prime Minister Narendra Modi and his Bharatiya Janata Party (BJP) at the helm. Prime Minister Modi and his BJP colleagues have articulated a grand vision for India, as outlined in their 2014 Election Manifesto, which seeks to reinstate a pro-business climate, in part by strengthening India's international trade relationships, increasing inbound foreign direct investment (FDI), and providing more regulatory and tax certainty for businesses.

Modi's reforms are needed now more than ever. In the early 1990s, India executed a comprehensive package of economic and trade liberalization reforms -- including privatizing some state-controlled industries, loosening trade restrictions, and opening up the country to additional FDI -- which led to nearly two decades of unprecedented economic growth that came to be known as the "Indian Economic Miracle." In fact, the Indian economy grew 40 percent faster per year in the two decades that followed the 1991 reforms than it did in the two decades preceding it. However, in recent years, that success has begun to wane. In 2013, India recorded economic growth of only 4.4 percent, its lowest rate in a decade. And with the so-called "demographic dividend" looming -- with 13 million young citizens poised to enter India's workforce each year over the coming decade -- without significant reforms to improve India's environment for doing business, there will not be enough jobs to meet the demand.

There is little doubt that India's recent economic stagnation has been related to its increasing embrace of "innovation mercantilist" economic policies -- policies that advantage domestic producers at the expense of foreign competitors -- over the past several years. For example, India has issued local content requirements (LCRs) across several industries, including its Preferential Market Access (PMA) policy, which stipulates that a certain percentage of information and communications technology (ICT) products and electronic equipment procured by the Indian government must be manufactured in India. Elsewhere, American solar panel and wind turbine equipment manufacturers have found their access to Indian markets hampered by LCRs, part of a dispute that is now being adjudicated by the World Trade Organization. In addition, the U.S. biopharmaceutical industry has experienced difficulty securing intellectual property (IP) protections in India, encountering patent revocations and denials as well as the issuance of compulsory licenses. These difficulties led the United States Trade Representative's Office (USTR) to place India on its Priority Watch List in its 2014 Special 301 report, an annual index of the state of IP protections in the United States' most significant trading partners.

As ITIF documents in a new report, The Indian Economy at a Crossroads, while innovation mercantilist policies may appear to offer short-term benefits to countries by enhancing domestic production, in the long-run they represent an unsustainable, non-optimal economic growth strategy. Instead, India should seek out an alternative approach to restore robust economic growth: a "modern economy path" which holds that the best way for India to sustainably grow is by encouraging market-based competition (including among domestic and foreign competitors), embracing an across-the-board productivity growth strategy, and investing in the innovation potential of its economy.

If Modi truly plans to transform India and restore its status as a global economic powerhouse, he should start by overhauling the country's IP laws. Indeed, the BJP's party platform has a specific provision devoted to reforming the intellectual property regime. While this is a promising sign, it remains to be seen what specific policy reforms he will enact. In addition, Prime Minister Modi should embrace opportunities to expand free trade, by having India join negotiations to expand the Information Technology Agreement (ITA) and by indicating India's interest in joining the Trans-Pacific Partnership (TPP) in the coming years.

These reforms should be paired with a comprehensive innovation strategy that includes a plan to raise the across-the-board productivity of Indian industries, which would make the economy as a whole more competitive. In addition, India should focus on increasing research and development and technology transfer in targeted industries which can spur advancements in next-generation products, technologies, and businesses. In this regard, it's promising that the BJP's Election Manifesto calls expressly for "a nation-wide, district level incubation and accelerator programme encouraging innovation and entrepreneurship" and for expanded "tax incentives for investments in research and development." It's also promising that the platform has stated that "FDI will be allowed in sectors wherever needed for job and asset creation, infrastructure, and acquisition of niche technology and specialized expertise," although it is disappointing that the platform specifically excludes the multi-brand retail sector from this renewed openness to FDI. Still, it points India in the direction of seeking to attract, rather than to compel, foreign direct investment in India in industries such as ICT and the life sciences.

The election of Prime Minister Modi portends a new economic direction for the world's largest democracy and, hopefully, India will capitalize on this crucial opportunity with which it has been presented. A course correction back to the policies that enabled the Indian Economic Miracle is Modi's ticket to making an impact on India's economy.

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