Bernstein: IndiaтАЩs Ambitions are Hollow Without R&D Investments
1. No nation in history became a developed economy with R&D @ 0.65% of GDP
2. Labor Arbitrage Economy: Demand broken as wages stagnate for 10 yrs. You raise wages, you canтАЩt compete. AI dents it further.
INSIGHTS:
R&D Intensity (% of GDP)
2000s
Korea: 3.12%
Taiwan: 2.7%
China: 1.32%
India: 0.82%
2010s
Korea: 4.29%
Taiwan: 3.3%
China: 2.11%
India: 0.75%
2020-25
Korea: 5.21%
Taiwan: 4.0%
China: 2.8%
India: 0.65%
Widening Innovation Gap: ChinaтАЩs GDP is 5X of India. Its R&D budget is 4X in % of GDP. So, in dollar terms, China is 5x4 = 20X of IndiaтАЩs R&D every year.
Labourers vs. Innovators
a. IndiaтАЩs Top 10 Companies: Combined R&D Expense 2025 (Thinking in Quarters): Below $1B
b. China Companies R&D Expense 2025 (Thinking in Decades): BYD $8B; Huawei $14B; Xiaomi $5B
c. Korea: In 1970s, private to government R&D share was 20:80. In 1990s, the ratio became 80:20. Korean government forced private sector to invest in R&D, reject short-termism, and massively incentivized firms with export credits and R&D tax credits.
d. Taiwan: In 1980s, the government funded research labs for semiconductors. The тАЬseedтАЭ was sown by the government; the тАЬscaleтАЭ was led by private sector. Today a single company TSMC controls 70% world market share in semiconductor pure-play, driven by AI demand.
e. China: In 1980s, India and China had similar R&D investments. China realized that technology was their only guarantee of national survival. The government and private sector formed a combined тАЬwar machineтАЭ to become the тАЬIP ownerтАЭ and not just the тАЬworldтАЩs factoryтАЭ for tech goods.
IndiaтАЩs Scarcity Mindset
a. While Korean and Chinese companies operate in a culture that rewards global innovation, Indian companies operate in a culture that rewards bowing down before bureaucrats and ministers.
b. To grow in India, you donтАЩt need to build world-beating products. You just need to operate in those areas of the domestic economy where government policy favours Indians over foreign businesses.
c. Think of a student whose father owns the school, and no other students are allowed to sit in the exam. What will be his capability? While other countries demand global dominance as a point of national pride, Tata, Reliance, and Adani cannot even make a candy that sells in the world market.
d. Curse of Cheap Labor: Indian IT companies realized that when you can make 20% margin by selling cheap labor, why build a semiconductor factory that requires $20 billion CapEx? They kept distributing lakhs of crores in dividends (mainly to promoters) while the world invested in AI and chips.
e. The GCC Paradox: India now has over 50% of the world's Global Capability Centers (GCCs). From Google to Walmart to Mercedes, the worldтАЩs best tech innovation and research is happening in India, but the Intellectual Property (IP) belongs to other countries. So, we remain only тАЬcheap labourтАЭ for others.
Low Wages; Broken Consumption
a. Labour arbitrage economies enjoy GDP growth till wages keep rising. But wage growth stalls when other poor economies like Bangladesh or Philippines catch up with lower wages. ThatтАЩs when their dream of becoming a тАЬdeveloped economyтАЭ gets a reality check.
b. From 2015 to 2025, real wages in India have stagnated. Rural wages have seen a negligible CAGR of 0.1%, and entry-level IT salaries have famously remained stuck at тВ╣3.5 LPA. ChinaтАЩs real wages (inflation-adjusted wages) have grown at 8 to 9% CAGR during the same period.
c. Indian companies continue to operate in low-complexity, me-too product/service segments where low wages are a competitive advantage. But now AI is the new emerging threat to IT sector and GCCs.
Endpiece
In absence of an urgency to shift from Labour Arbitrage to Innovation Premium, India risks falling into the Middle Income Trap. IndiaтАЩs demographic dividend is ending by 2040. Without investing patient capital in R&D, India will squander its opportunity to achieve a developed nation status by 2047.
@arabicatrader