A Parasitic Dependence

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Aakar Patel’s column in Mint Lounge this morning is about why everything is not the government’s fault. It is a reasonable argument, which perhaps could be a bit comforting for those looking for some positive press for the UPA government. He goes on to list five reasons for why he thinks that the high growth phase of India was temporary and would end. He also adds these as reasons for why India would remain poor and developing for a long time. It is quite damning but hits the nail right on. I am sure he would have his sources and people to draw his insights from. Among the five reasons, the following is an unusual one –

A parasitic dependence on the outside for technology. This is a product. The cause is a cultural lack of scientific curiosity and a disinterest in invention , and on basic science and applied science. India’s creative contribution to the world is insignificant and can be dismissed. We are a net importer of ideas and of quality.

This connects to our work and my partners would sure agree on the above reason. A few weeks back we started a new company in life sciences which hopes to set up a large instruments and consumables distribution business across the Asian countries. We aim to be cost effective suppliers of technology as well a range of necessary laboratory consumables like reagents, media, test kits etc to university labs, hospitals, research centers. This is a conventional business which is fairly well developed and companies make money on the margins and commissions earned in dealing instruments manufactured by US, British, German or Japanese companies in the Asian countries. There is a reason we got into this business, in spite of beginning with product development when my partners and I were fresh out of college. Our product design attempt with microscopes and thermocycler died last year with us realizing that there is no more money that we can pour into product prototyping. We thought we would be able to design, prototype and release a completely Indian thermocycler (called a PCR in life sciences) which would be cheaper and would be affordable for Indian research and academic establishments. It is this failed attempt that I want to connect with Aakar Patel’s reason of our “parasitic dependence on the outside for technology” and very little support within the country – by industry or by the government to even promote efforts in this space.

Back in our university, I remember that we had just about 4 thermocyclers for an entire lot of about 300 students all wanting to run their experiments on those four machines. By the end of an undergraduate degree you could go happy at least with the fact that you saw the machine, you touched it and were lucky enough to run an experiment on it by you own! The germ for our startup lies in those days when we saw the ridiculousness of the situation. And we thought we could develop one – completely Indian and affordable machine to run these tests. Several experiments and five years later we are nowhere close to it and have in fact abandoned the plan for a few years until the company has surplus cash to invest in setting up a good lab and hire some smart graduates and engineers to work with us on this.

Why did we fail in developing a completely Indian thermocycler? May be that it takes more than five years to work this out or may be weren’t smart enough to know much about it. But let us ask, why did we abandon the idea and instead joined the band of instrument dealers who only know to import machines and goad our scientists, researchers and others into buying it?

It was abandoned because of the same “cultural lack of scientific curiosity and a disinterest in invention” that Patel talks about. There were little government funds to come by, to fund an idea, a startup like ours. The “innovation fund” five years back was a joke that the “technology business incubators” played on behalf of the departments of science and technology, biotechnology and the myriad other institutions who funnel money budgeted for science and technology in the country. Entrepreneurs must have a good ability to pander the heads of institutions and should have stellar academic performance in addition to a mighty deal of patience to do the paperwork which leads to your startup idea featuring somewhere visibly in the galaxy of applications that are sent to these departments. We didn’t have that!

This note is not written with a sense of my colleagues and I being victims of the Indian system, but to look back into our startup experience and place this reason of India’s lack of scientific curiosity and dependence on outside for technology in that context. Ours is a small example of how the country is grossly undervaluing and in fact dis-incentivizing product development in critical spaces as life sciences.

We are now on plan B, where we generate surplus from a distribution business and then channel that money into new product development. And sure enough, we will be importing technology, make money in selling it locally and further add to the parasitic dependence.

So, in the wake of that list of reasons, here are my reasons to believe that in spite of a dismal innovation support and funding scene, India has good chances of breaking out of this rut and develop some kickass products –

  1. The Indian entrepreneurs – they come in many colours now. And from many different social classes. They defy the once bitten, twice shy adage. For them it is once bitten, twice smitten – with ideas, creating businesses and experimenting. Just last evening I saw this guy – an HBS grad who has started a chain of chai outlets in the city, intensely studying his outlet in the evening rush hour at a prominent location in Bangalore. In an India of pre-2000 it would have been “with a Harvard business degree all you could think of is opening a tea stall?” But today, it is a serious business, respectable business, perfectly in line with that heavy business degree and big money invested in it by a leading VC firm from the US. In our work, we have come across some fantastic work done by Indian companies like – Xcyton Diagnostics which is on to some exciting research.
  2. Service innovation – this is the route that we have taken. Our company now survives on offering data analysis and research services and carry the surplus into product development. And a couple of companies have already tried this route to developing indigenous products.
  3. The reach and power of capital – for all those furious takes and theories on how capitalism is evil and how it is out to sell the world, it still rules. Private sector is and will pave a path for India to break through some of these serious problems in sectors like education, research and technology development. I do not see it within the government’s ability to even sense what is on with its entrepreneurs and what do they need! The insular bureaucracy has seldom known to have responded to industry’s demands on time neither do the nebulous government agencies have any clue about how could it help startups like ours to even take a shot at these serious issues that impair the country’s growth. Private capital is what fuels philanthropy, which is another “lack” that Patel points to. It is private capital which is experimenting with private universities in India today (I attend a graduate program in one of those). It is the private capital again which is shaping several major bills tabled in the parliament – from water resources framework to land acquisition. As the Companies Act 2013 comes into force, the government is again eagerly looking forward to the huge stash that it will collect as corporate contribution under corporate social responsibility (CSR).

The numerousness and the interconnected nature of the problems in this country makes it difficult to confine oneself to a single issue. So, the bottomline is India wouldn’t shine just on a Rs 100 crore ad campaign. It will shine with its teachers, its entrepreneurs and its industry. And that is where many such 100 crores need to be directed. This could be a simple enough start!

Social Responsibility of Business & the Companies Act 2013

(Image: nationsroot.com)

(Image: nationsroot.com)

In an earlier version I titled this post as – Legalizing loot by the state – Companies Bill 2013. It was due to the coercive way of making businesses part with their profits over and above the taxes they pay (by the way of Companies Bill 2013) , to get some of its own work done. The question is – who is responsible and what is this emergent form of ‘social responsibility’ that is being forced upon businesses.

The legendary economist Milton Friedman wrote that the ‘social responsibility of businesses is to increase its profit’ in New York Times magazine in 1970. The analysis is remarkably relevant even now, when there are all sorts of loose analysis on responsibilities, mandates and spending being attempted which refer to ‘corporate social responsibility’ (CSR) with vague references to who actually is responsible and what are its/his responsibilities in the social context as implied by CSR. Such inexacting tendencies are typical of Indian policy process and can be witnessed in the new Companies Bill which has been passed. The resultant Companies Act 2013 mandates a compulsory annual spending as a percentage of net profits made by companies in India towards social causes. This is being done under the notion that businesses have a social obligation and that it must then be their responsibility to direct a part of their profits towards ‘social’ causes – it could be towards education for children, healthcare in areas with poor access, serving poor and below poverty line population and works of similar order. If that is what is expected of the businesses now then what are governments to do? And what is being done to the corporate taxes being paid by the companies? Doesn’t that make it a good share of spending which now the government has to direct and which it is not able to over these years as we see in India. If this primary responsibility of taking care of the economically weaker and basic services deficient constituencies too is to be imposed on businesses then what might the government want to do? Be a cashier perhaps.

In an opinion piece Samir Saran and Vivan Sharan of the Observer Research Foundation hold a quick trial of Indian businesses and dispense a poor performance judgement. Following this they list their reasons for why the new act is important and how this ‘scheme’ might work in transferring profits  –

Perhaps, the most important new element introduced in Clause 135 of the Bill is the notion of mandatory Corporate Social Responsibility (CSR). Colloquially referred to as the “2 per cent clause,” it has the potential to transform the landscape of CSR in India. Indian businesses have been loath to go beyond the “glorified worker towns” syndrome or providing employee services and benefits passed off as social interventions. Indeed, “Corporate India” has fared rather poorly when it comes to affirmative action in employment, environmental responsibility and in resource efficiency and revitalisation over the years. Therefore, a scheme that potentially transfers profits towards social causes, environmental management and inclusive development could be the much needed medicine for a nation with such deep socio-economic cleavages. This provision in the new bill must be welcomed and its efficient implementation must be ensured.

There is some excitement among the NGOs in India about the resultant fund inflow or the ‘CSR money’ that is likely to come in annually, after the Companies Bill comes into effect. This has also led to a positive outlook on the hiring in development sector and for entry level jobs for graduates with social work, social science and development studies degrees. The buzz is rather appalling. I find that it is absurd and (policy wise) misguided to mandate corporate spending on ‘social responsibility’ by a legal statute that Indian government has brought into force now.

The reference to Milton Friedman was to highlight this brilliant analysis of social responsibility, which is being ignored in India. The socialist streak of India’s early years keeps surfacing and sometimes in a damaging form as this Companies Bill.

What does it mean to say that the corporate executive has a “social responsibility” in his capacity as businessman? If this statement is not pure rhetoric, it must mean that he is to act in some way that is not in the interest of his employers. For example, that he is to refrain from increasing the price of the product in order to contribute to the social objective of preventing inflation, even though a price increase would be in the best interests of the corporation. Or that he is to make expenditures on reducing pollution beyond the amount that is in the best interests of the corporation or that is required by law to contribute to the social objective of improving the environment. Or that, at the expense of corporate profits, he is to hire “hardcore” unemployed instead of better qualified available workmen to contribute to the social objective of reducing poverty.

In each of these cases, the corporate executive would be spending someone else’s money for a general social interest. Insofar as his actions in accord with his “social responsibility” reduce returns to stockholders, he is spending their money. Insofar as his actions raise the price to customers, he is spending customer’s money. Insofar as his actions lower the wages of some employees, he is spending their money.

Companies Bill in India and similar such coercive measures by governments are against the interest of economic growth as well as human development in the long run. In principle what it is doing is to reaffirm the idea that businesses are extractive and that government can step in to redistribute the wealth so generated. This is a negative view of markets and is likely to create an environment which could be stifling for growth of businesses and consequently impact production, employment and overall growth.