Innovation in Indian industrial sector: Implications for employment and development

Innovation in Indian industrial sector: Implications for employment and development

How smart technologies and new innovations can help the industrial sector? How can these factors play key roles in employment and development?

Innovation basically refers to the process of creating new technologies and utilizing them in the economy for improving the productivity of the factors and technical efficiency in production. It is often said to be beneficial for influencing total factor productivity growth in a positive manner. In broader terms, innovation evolves from the interactions among the researchers, inventors, companies and organizations. However, innovation is not an easy task for an industry or economy, especially for third world economies.

The process of developing and implementing new technologies require a huge investment in research and development (R&D), which, in most cases, are incompatible with the financial and political status of the nations. The priority differs from nation to nation and the third world developing nations are often preoccupied with spending a huge sum of money for non-developmental purposes.

The industrial revolution and jobless growth

Industrial revolutions have provided a “big push” to the industries and economy for since long, sometimes with steam power and sometimes with electric power. However, the third industrial revolution initiated to automate production by means of electronics and information technology. The fourth industrial revolution is characterised by the digital revolution which focuses on the fusion of technologies and takes all the possible spheres of production into account.

The prime concern in the backdrop of this new revolution is the possibility of jobless growth in the labour surplus developing economies. The third world nations import capital and skill intensive technologies from the developed nations but the application of this technology requires some other complementary macroeconomic reforms which were initiated in India and other developing nations through structural adjustment process induced by IMF and World Bank. In spite of these reforms the imported technology cannot be optimally utilized if the importing nation does not have the adequate technological capability.

Imported advanced technology often suits the skilled labour compared to the unskilled labour in developing nations.

It is observed that the imported advanced technology often suited the skilled labour compared to the unskilled labour in the developing nations. Thus, the skill difference in the economy enhances the income inequality which is suggestive of the inappropriateness of the modern skill-intensive technology in developing nations like India. However, if the imported technology is conducive to both the growth of employment and productivity in the developing economy the optimal solution will be the adoption and implementation of this technology.

Conversely, if it is found to be labour displacing due to its nature of adopting the capital-deepening process, then it will be a matter of serious concern for the government of the developing nations.

Industrial sector

Can domestic innovation be the solution?

This calls for the introduction of domestic innovation which may lead to the adoption of suitable technology for improving both the productivity and the employment scenario of the economy. But it is extremely important to assess the effect of the innovation on the technical efficiency and total factor productivity growth in order to understand the efficacy of the innovation in the industrial sector of the economy.

Besides this, complementary factors like infrastructure, government policy, labour laws are equally important, as without them the capacity of the innovation to raise productivity cannot be properly realized. In the context of welfare, the innovation may dampen the employment growth in the developing nations, especially for the unskilled labours while the capital intensity of the process may absorb the skilled labours and thus violate the objective of inclusive growth in the economy.

Removal of trade restrictions increases the degree of foreign competition which can act as a catalyst for spending more on R&D.

So there is a possibility that the unskilled and the semi-skilled workers will remain outside the domain of the core economic activities leading to a situation of jobless growth. Thus it requires some exploration to understand whether the innovation is acting as a bottleneck for the broad-based or inclusive growth of the economy or not.  

Most of the studies in this context suggest that innovation and capital intensity are complementary to each other. It is often claimed that innovation-induced capital intensity and technical progress can ensure growth but at the same time reduces labour absorption. Moreover, the maturity of an old product or service naturally reduces employability. So, for employment generation, new products have to be produced and that is only possible through innovation.

In addition to this, the removal of trade restrictions increases the degree of foreign competition which can act as a catalyst for spending more on R&D. This, in turn, will lead to process and product innovation. Hence the demand for skilled labour will rise, but the unskilled labour will not be able to participate in the core economic activities.

Innovation can widen the inequality gap between the skilled and the unskilled workers.

We see that innovation always may not be labour displacing but in that case, it will be in favour of skilled professionals. Innovation can widen the inequality gap between the skilled and the unskilled workers. However, there are also some arguments that focus on the employment generating capacity of the innovation.

According to this viewpoint, innovation induced capital accumulation will increase employment in the capital goods sector. It will also reduce the wages resulting from the price adjustment mechanisms and hence there is every possibility of rising employment in the industrial sector. Thus country characteristics, commodity characteristics and nature of industries play an important role in determining the impact of innovation on labour employment.

R&D expenditures of a firm are taken as a proxy of innovation and the performance index implies the Technical Efficiency (TE) and Total Factor Productivity Growth (TFPG).

A study on Indian Industries

The present author has conducted a study to assess the impact of innovation on the performance index of 11 groups of industries in India. R&D expenditures of a firm are taken as a proxy of innovation and the performance index implies the Technical Efficiency (TE) and Total Factor Productivity Growth (TFPG). TE refers to the ratio of actual output from given inputs to the maximum potential output from the given inputs.

On the other hand, TFP refers to the part of output not explained by the number of inputs used in the production. We have received mixed results showing both positive and negative impacts on the performance index. In most cases, the innovation has a favourable impact on TE but a detrimental effect on TFPG. For instance, in the case of the pharmaceutical industry, where the degree of innovation is maximum, innovation indicates a positive impact on technical efficiency. Surprisingly, this has a huge negative impact on TFPG.

The negative impact on TFPG may also be the result of the fact that technology, in most cases, is imported from abroad.

The economic explanation behind this result is too much experimentation, which may be responsible for this outcome. Moreover, it can also happen, that here innovation only focuses on the improvement of the product quality, not on technical progress. The negative impact on TFPG may also be the result of the fact that technology, in most cases, is imported from abroad.

Thus, our study, on the whole, depicts that innovation in the form of R&D does not have a considerable or significant impact on the performance index or technical progress. The imported technology from abroad may be inappropriate to bring the technical progress and improve the performance index due to the prevailing labour market conditions in India and other developing nations.

The imminent danger of dissemination of increased skill-intensive technology

The possible trade-off between the prevailing labour market conditions in India and the future skill-intensive technology is a matter of interest among economists. The issue of employability in a labour surplus economy amidst the introduction of innovation induced skill intensity will be a major concern for industrialists and planners. It is almost obvious that this skill-intensive technological progress will initiate growth but maybe at the expense of unskilled labour in the system.

Unskilled labours in the economy do not possess the necessary capabilities and knowledge to adopt the new techniques of production.

The unskilled labours in the economy do not possess the necessary capabilities and knowledge to adopt the new techniques of production. Thus this technological revolution is leading to more unemployability in the Indian labour market. The lack of skills is due to the minimal penetration of the vocational and other training programmes in the unorganised and informal sectors of the economy where a sizeable portion of the total population is engaged.

In 2008, National Skill Development Corporation (NSDC) was formed which has set a target for training and skill formation among 150 million people by 2022. NSDC has planned to establish a research base and also conducted a study to understand the geographical and sector-specific skill requirements which will be able to influence the working environment in the near future. This will be beneficial to remove the disparity between the skill requirement and the availability of the appropriate working force.

Infrastructures like health, education and others have a greater influence on Total Factor Productivity compared to the physical and financial infrastructure.

However, it was found by some economists that the social infrastructure like health, education and others have a greater influence on Total Factor Productivity compared to the physical and financial infrastructure which is suggestive of the important role of human capital in the improvement of the performance index. Especially the manufacturing sector in India is experiencing a severe skill shortage and this skill gap is widening over time. The fourth industrial-technological revolution in India may initiate lopsided growth with a fair amount of labour displacement in the industrial sector.  

Lack of productive employment is dangerous and harmful for the economy in many respects.

The lack of productive employment is dangerous and harmful for the economy in many respects. In the regions of lesser opportunity, the educated unemployed youth got frustrated and often engaged themselves in social unrest and insurgency which is totally unproductive and destructive in nature. The developmental programmes adopted by the government often fail to create an impact over there. The scope of private investment becomes limited due to these disturbances.

Lack of productive employment and opportunities lead to a vicious circle of low productivity and less development in that particular region.

The lack of productive employment and opportunities lead to a vicious circle of low productivity and less development in that particular region. In addition to this, the presence of corruption in third world economies like India often generates sub-optimal solutions which can be regarded as one of the causes for loss of output and productivity. Another striking feature of developing economies like India is the existence of mass poverty.

This mass poverty is indicative of low purchasing power and as a result, there is an obvious reduced demand for goods and services including what is produced in the informal goods sector through labour-intensive technology. The lesser demand for goods in the informal sector creates more unemployment in the informal goods sector also. It is also not surprising in this context that the entrepreneurs are reluctant to go for innovation as due to the low level of income and purchasing power there is a quite limited demand for higher quality goods.

Lack of innovation naturally reduces the export potential of the economy which in turn ruins the possibility of generation of more employment.

The lack of innovation naturally reduces the export potential of the economy which in turn ruins the possibility of generation of more employment. The capital intensive imported technology is often acting as a threat towards the labours who are lacking adequate skills to be commensurate with the advanced production system.

Industrial sector

The possible solution

Our analysis suggests that the innovative activities prevalent in the West are found to be incompatible with the labour market of the third world labour surplus economies like India. The fourth industrial revolution-led innovation requires adequate skill intensity and complementary infrastructure to increase employment and productivity simultaneously, which most of the third world economies do not possess.

Import of new capital intensive technology will suit the skilled workers, but the absorption of the unskilled labours will be extremely difficult.

The import of new capital intensive technology will suit the skilled workers, but the absorption of the unskilled labours will be extremely difficult. Thus innovation may be labour displacing on one hand, and it will raise the inequality on the other hand especially for the third world economies like India. So innovation coupled with capital intensive technology has the capacity to aggravate the employment problem of India.

Innovation can be successful and effective here, only if the dual objectives of growth and employment are satisfied. It is evident and clear that without innovation it will be very difficult for the industrial sector to ensure the sustainability of the demand for its product across the world in this competitive environment. The counter-strategy which should be adopted in this context is the drive of skill imparting training programmes both in the formal and informal sectors of the economy.

Since India comprises a sizeable unorganised segment in its manufacturing sector, there is a huge scope of improvement in terms of both growth and employment.

Moreover, since India comprises a sizeable unorganised segment in its manufacturing sector, there is a huge scope of improvement in terms of both growth and employment. This segment is still outside the domain of new techniques, innovation and skill formation.

The introduction of information technology, proper marketing strategy, adequate credit facilities and frequent training programmes for skill formation to adopt the new technology can create enormous employment potential in the country which will be consistent with the present innovative activities. This can ensure the emergence of the fourth industrial revolution-induced innovation as the “engine of inclusive growth” in the Indian industrial sector.

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(Sujatra Bhattacharyya is an associate professor in Economics Maharaja Srischandra College, Kolkata.)

(Disclaimer: The views expressed in the article above are those of the author’s and do not necessarily represent or reflect the views of Autofintechs.com. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.)

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