At one level, the numbers are damning. India faces a huge task – how should it become rich and prosperous if only meandering progress is possible? While India is often compared with other Asian emerging markets, the country’s sheer size presents a unique governance and economic growth challenge. On metrics such as geographic footprint and population, countries like Vietnam and Bangladesh are about the size of one or two major Indian states. Comparable Indian regions have experienced a transformation in the same time frame – Andhra Pradesh (from which the state of Telangana was created in 2014) has seen a sea of change over the last 25 years, with a largely poor, rural and agrarian region now more urbanized and home to some of India’s key knowledge industries. Today, Andhra Pradesh and Telangana both have per capita incomes substantially higher than the all-India average.

There are incipient regional and persistent sectoral imbalances in the Indian economy. While some states and regions have outperformed by liberalizing and adopting market-friendly policies, the manufacturing and agriculture sectors even within those better-performing regions continue to trail due to inadequate sectoral reform. The introduction of the Goods and Services Tax (GST) has made a measurable impact on the formalization of firms, and the war on corruption and black money. Alongside a number of measures that make high-value cash transactions difficult, there is now a greater incentive for the financialization of savings. India has recorded a notable rise in the World Bank’s ease of doing business ranking, improving from 142 in 2014 to 63 in 2019. But a lot remains to be done on factor market reforms for land, labour, capital and long pending direct tax reforms. The union government along with state governments need to retrench from activities that are best left to the private sector. There has been a robust debate on the liberalization measures required in various areas. Scholars such as Columbia University economists Jagdish Bhagwati and Arvind Panagariya have expounded at length on policy measures that are required to accelerate economic growth.

Comprehensive reforms are necessary for India to attain prosperity, but they are not sufficient. As of 2019, US GDP per capita (constant 2010 US dollars) was $55,809, whereas GDP per capita in India was $2,169. The US, an archetype of a wealthy nation, had output per capita that was more than 25 times that of India. China has output per capita nearly four times that of India. Closing this gap and achieving national scale transformation will require India to make a technology-driven productivity leap in business and government. In economics jargon, India has to expand its production-possibilities frontier to achieve prosperity, so that we can have more from less for more, to use eminent scientist-technologist Dr Raghunath Mashelkar’s quip.

The US, an archetype of a wealthy nation, had output per capita that was more than 25 times that of India. China has output per capita nearly four times that of India. Closing this gap and achieving national scale transformation will require India to make a technology-driven productivity leap in business and government

The Solow-Swan model, formulated by economic theorist Trevor Swan and the 1987 Nobel laureate in economics Robert Solow, posits that growth in output comes from three sources, namely population increase (which in turn raises demand), savings (which are reinvested) and productivity gains. Looking at the population factor of the Solow-Swan growth model when assessing the different experiences of Vietnam, Bangladesh and India is revealing. Building on Dalmia’s example, since 1990, Vietnam’s population has increased from 67.9 million to 97.3 million, a compounded annual growth rate of 1.20%. India’s population increased from 873.3 million to 1.38 billion, a materially higher growth rate of 1.54%. Bangladesh’s population rose from 103.2 million to 164.7 million, clocking a growth rate of 1.57% and matching India. An analysis of Vietnam’s relative outperformance over the last three decades indicates that its growth has been driven by raising capital and labour efficiency and relying on capital stock accumulation. Elements of this should be part of the playbook for Indian states and regions, but more is necessary for a national-scale transformation.

Where Swan and Solow viewed technology as an exogenous factor, the 2018 Nobel laureate in economics Paul Romer integrated it as an endogenous factor – in a seminal 1990 paper, Romer wrote that growth was driven by “technological change that arises from intentional investment decisions made by profit-maximizing agents”.

Aadhaar and the India Stack infrastructure have demonstrated what digitalization can deliver for governance, welfare delivery and payments. They stand out as trailblazing exemplars of govtech innovation globally. The endogenous role of technology in driving economic growth is relevant for India’s private sector too, especially if the government retrenches from business activity as has been committed under the Atmanirbhar Bharat reforms package, whereby public sector enterprises in specified non-strategic industries will be privatized. This is where entrepreneurs and investors should step up and deploy risk capital to fund innovations harnessing novel general-purpose technologies.

Aadhaar and the India Stack infrastructure have demonstrated what digitalization can deliver for governance, welfare delivery and payments. They stand out as trailblazing exemplars of govtech innovation globally

General Purpose Technologies (GPTs) make a horizontal, economy-wide impact, transforming entire value chains rather than just particular industries. Commercializing such technologies, which entails mainstreaming new knowledge and pioneering business models, is perhaps the most challenging style of entrepreneurship. But the market is primed for such innovation in India given the need for doing things differently for economic transformation on a national scale. We are seeing glimpses of what this entails – and the wealth creation opportunity it offers to investors and entrepreneurs – with technology’s impact on the financial services, education, entertainment and media industries.

Take financial technology. The combination of Aadhaar, GST electronic records, along with India Stack-enabled payments and electronic Know-Your-Customer (eKYC) identity verification has made it possible for digital-first lenders, financial intermediaries and asset managers to emerge. Where govtech has reduced the cost and speed of compliance, private entrepreneurs and investors are trying to capitalize on the wealth creation opportunity offered by financializing India’s savings through new digital conduits. The innovation is delivering results – the number of new demat accounts in India rose 22.5%, from 4 million in 2019 to 4.9 million for the financial year 2020, and with the total number of such accounts at about 40 million, there remains enormous headroom for growth. The advent of India Stack-based Sahamati and Sahay, for consent-based financial information aggregation and cash-flow based lending respectively, will help catalyze a transformation in how households manage wealth and savings, and in how small enterprises access credit.

India faces significant supply side challenges in health and education. In health, the shortage of trained medical professionals and doctors will have to be partially bridged by virtualization and digital tools. In education, new edutech platforms have tapped into massive latent demand, accruing tens of millions of users and delivering better education on a scale that would simply not be possible through physical modes alone.

India faces significant supply side challenges in health and education. In health, the shortage of trained medical professionals and doctors will have to be partially bridged by virtualization and digital tools

In manufacturing, rigid, antiquated labour laws as well as low labour productivity are among the issues that have stymied potential. Where the promise of automation and robotics for advanced economies lies in alleviating the challenge of an ageing population, for a country like India the promise of robots and “cobots” is in raising productivity. In agriculture, biotechnology, digitalization and automation can transform what has traditionally been subsistence activity in India into a corporatized, profitable industry.

A customer-centric and combinatoric application of GPTs is required for raising India’s economic output 40-50x over the span of a few decades. Artificial intelligence, augmented and mixed reality, intelligent machines and advanced materials are other GPTs that herald a new productivity dawn. Unlike smaller countries, the productivity jump that India needs for national-scale prosperity will require invention and innovation, for importation of technologies and business models alone will not suffice. There is an opportunity for Indian industry, venture investors and entrepreneurs to don the mantle of Romer’s “profit-maximizing agents”, rewrite playbooks and forge new paradigms using technology to create wealth.

Part II:

Enabling India to lead in the development and deployment of critical emerging technologies

For India, there are clear economic and strategic payoffs to investing in critical emerging technology (CET) development

The global turmoil precipitated by the pandemic and subsequently the military confrontation in Europe is not limited only to the macroeconomic domain—geoeconomic considerations and supply chain security have come to the fore. Attaining industrial and technological self-reliance and sustainability, especially for critical emerging technologies (CETs), is now a high priority for both established and emerging powers. The security challenges in our neighbourhood, coupled with the dual-use nature of CETs, make self-reliance in this domain a special priority for India.

The Chinese threat complicates the picture, given its status as the world’s manufacturing hub, contributing 28.7 percent of global manufacturing output in 2019. Additionally, as Deng Xiaoping had observed with perspicacity in 1992, what Saudi Arabia is to oil, China is to the rare earth metals, the elements that are indispensably important for the modern electronics and communications-filled world that economies rely on. When it comes to futuristic CETs, such as autonomous machines, unmanned aerial vehicles, new energy vehicles, and advanced materials, China’s control of rare earth materials and preponderance in manufacturing represents a significant challenge.

Attaining industrial and technological self-reliance and sustainability, especially for critical emerging technologies (CETs), is now a high priority for both established and emerging powers.

How can democracies compete with China? 

The process-driven, rules-based, consultative approach of liberal democratic republics creates long-term resilience but exacts short-term costs when up against an authoritarian, single-party state. Even for non-hardware-oriented CET areas, such as artificial intelligence and biotechnology, the latter has more latitude to make mistakes and course correct than the former, where a safety-first approach can tend to hamstring policymakers.

Thus, competing effectively requires a two-pronged approach, harnessing both internal reform and external cooperation. This effort on two fronts will have to be impactful across the value chain – from sourcing input materials, making intermediates and components, and finally manufacturing end products. Succeeding demands shedding many shibboleths, so that CETs—which are essentially vanguard, sunrise sectors in manufacturing and services—can be both developed indigenously and regulated appropriately.

The road ahead for India

Much of the internal reform effort broadly necessary for India’s economic transformation to become a US $10 trillion+ GDP economy is especially crucial for achieving global leadership in CETs. India has always had high quality human capital and munificent natural resources to make a major global impact, but homegrown innovators were hamstrung by dearth of capital and a litany of red tape. While the latter has seen improvement, policymakers need to do a lot more to deepen equity capital markets in both the public and private spheres. The government has done well to financialise retail savings and incentivise investment in modern financial instruments through a raft of measures over the last eight years, but a structural shift is necessary so that long-term domestic institutional capital, including in insurance and pensions, contributes its share to the risk capital pool. After all, one should not rely on foreign capital to step up to enhance Indian capacities in CETs, especially for those with dual use—that is, both commercial and military—applications. Alongside such equity capital market reforms, direct tax reforms and administrative reforms on the domestic front are the need of the hour. Finally, tapping expertise available outside of government officialdom, through lateral entry or other mechanisms, can be especially impactful when it comes to designing policies for CETs.

Additionally, the country’s scientific research establishment needs to be reoriented and rejuvenated. The National Research Foundation, announced in 2021 to oversee and coordinate research activities across disciplines, is yet to be established. In the context of the transformational industrial, economic and defence sector reforms that have been implemented, leaving the country’s higher education and scientific base relatively untouched is not an option. Bringing together teaching and research rather than keeping them separated in siloed institutions, injecting more competition in different industries by implementing the aforementioned set of broadly applicable reforms so that businesses invest more in R&D, and positioning India as a destination for global scientific talent would be some measures that would unlock potential.

While India has enormous potential in the mining and minerals sectors, it has not delivered on its potential due to several constraining factors, the most obvious one of which has been disruption of mining businesses by environmental activists.

In the external cooperation domain, India needs to work with trusted partners that can help bridge gaps in the value chain. This would entail, for example, a closer partnership with resource-rich Australia, which is also seeking new export avenues for its mining industries now that relations with China are strained. While India has enormous potential in the mining and minerals sectors, it has not delivered on its potential due to several constraining factors, the most obvious one of which has been disruption of mining businesses by environmental activists. Through a combination of internal reforms and international partnerships, whether through bilateral initiatives or multilateral forums like the Quad, the materials deficit must be bridged.

The second aspect of external cooperation is in trade policy. By adopting a regime of tariff protections—much to the consternation of free trade ideologues—and boosting domestic manufacturing through targeted production-linked incentive programs, India has shown it will not be hidebound by received economic wisdom which may not be as universally applicable as the ideologues claim. Some promising results have already been achieved, with electronics assembly gaining significant traction and companies now integrating backwards in the value chain, and manufacturing intermediates and components. The same playbook is likely to deliver results in sectors such as pharmaceuticals, specialty chemicals, and advanced materials. But while trade defense instruments, as some European think tanks like to call tariffs, are gaining acceptability with more countries taking cognizance of the Chinese mercantilist model, it remains imperative for India to close bilateral trade agreements with friendly countries, thus linking trade policy to foreign policy.

Through a combination of domestic and external-focused policy interventions targeted across elements of the materials, intermediate and product segments of the value chain, India will create space for its globally sought-after engineering talent to excel at home and build up high-value export industries and national capabilities in CETs. There are clear economic and strategic payoffs to investing in CET development, and without the right enabling measures, both sustained economic growth and national security would be under a cloud.

[Originally published as two essays by New Delhi-based think tank ORF:

Part I - https://www.orfonline.org/expert-speak/innovating-for-prosperity/

Part II - https://www.orfonline.org/expert-speak/enabling-india-to-lead-in-the-development-and-deployment-of-critical-emerging-technologies/]

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Tata Group, India’s first venture capitalists

The Genesis Of Tata Group

The development of technology to mass produce steel in the 1850s, credited to British inventor Henry Bessemer, was a watershed event. Large scale, low cost production of the alloy enabled a number of other innovations in construction and transportation, most importantly in railways by enhancing the durability of railroads and thus lowering the overall cost of rail transport1.

Steelmaking was the cutting-edge technology of this period, and as Henry Bessemer himself recognized, it was the military exigency ignited by the Crimean War fought in 1853 by Britain, France and the Ottoman Empire against Russia that led to a burst of innovation in metallurgy, principally to augment artillery production. In 1867, a 29-year old Indian entrepreneur listened to Scottish historian and philosopher Thomas Carlyle2 expound on the importance of steelmaking for nation-building. Carlyle had said that the nation which controlled steel production would also control gold, thus enjoying tremendous global power.

The young entrepreneur, Jamsetji Tata, would go on to found the Tata Group in 1868. Early in his business career, the nationalist-minded Tata had set out three goals that he wanted to achieve for the group and for India - building a steel plant, building a hydroelectric power generation unit and establishing a world-class scientific research institution.

His dream to make steel in India had to wait for over three more decades, and even though he conceptualized the project, Tata did not live to see the business come to life. Against all odds, in the trying environment of British rule, Tata had fervently sourced metallurgy technologies, engaged experts from across the world and persuaded the British overlords to permit a steel unit to be established in mineral-rich India. Frederick Upcott, the chief commissioner of the Indian Railways had remarked dismissively to Charles Page Perin, a renowned geologist from New York3 whom Jamsetji Tata had convinced to come to India and help build a steel plant:

Do you mean to say that the Tatas propose to make steel rails to British specifications? Why, I will undertake to eat every pound of steel they succeed in making.

The project saw opposition from even Indian business interests, who were more than happy operating as importers, traders and distributors and saw no reason to manufacture steel. The Tatas were not deterred. Jamsetji Tata conceptualized the Jamshedpur township in present day Jharkhand as the home of the Tata Iron and Steel Company, which became the first industrial steelworks in all of Asia. Today, Tata Steel ranks among the five largest steel producers in the world outside of China.

Jamsetji Tata passed away in 1904 and his successors, Dorabji Tata and Ratanji Tata, realized his vision for hydroelectric power and scientific research by establishing the Indian Institute of Science (IISc), which is now recognized as the finest scientific research institution in India, in 1909 and Tata Hydroelectric, which built India's first hydroelectric power plant in Khopoli near Mumbai in 1915.

IISc in particular was born from a unique intellectual and philanthropic collaboration - Tata had a chance meeting in September 1893 with Swami Vivekananda on a ship from Japan to North America. While the industrialist was travelling for business, the Hindu monk was on his way to the World Parliament of Religions in Chicago. Tata had been ruminating on Swami Vivekananda's advice4 on "combining the science and technology of the West with the ascetism and humanism of India" and wrote to him thus in 1898:

I very much recall at this moment your views on the growth of the ascetic spirit in India, and the duty, not of destroying, but of diverting it into useful channels. I recall these ideas in connection with my scheme of Research Institute of Science for India, of which you have doubtless heard or read. It seems to me that no better use can be made of the ascetic spirit than the establishment of monasteries or residential halls for men dominated by this spirit, where they should live with ordinary decency and devote their lives to the cultivation of sciences – natural and humanistic.

IISc would open its doors in Bangalore in 1909, with financial support from the Tatas and 372 acres of land donated by the House of Wadiyar, the royal family of Mysore state. The Tata brothers later donated their ownership stakes in the Tata Group to philanthropic trusts, and by the 1930s, the Tata Group was majority owned by the philanthropic trusts.

The JRD Tata Era

The visionary zeal for incubating and building businesses in new industries, inculcated by the founder Jamsetji Tata, would become a distinguishing feature of the Tata way over the next century, succeeding through the tumultuous periods of colonial rule and the Indian independence movement, the Partition of India and post-independence anti-business climate, into the liberalization era that commenced three decades ago in 1991.

Shortly after taking over as chairman in 1938, JRD Tata led the group's entry into the chemicals, aviation and automotive industries. Aviation was a sunrise industry in the 1920s - Charles Lindbergh had created an international sensation in 1927 by completing the first solo, nonstop transatlantic flight from New York to Paris. JRD Tata, himself a pioneering aviator, founded Tata Airlines in 1932, now known as Air India.

Underpinning Tata's entrepreneurial DNA has been a strong commitment to India's national development, an ethos again set by Jamsetji Tata when he established the JN Tata Endowment for the Higher Education of Indians in 1892. The Endowment institutionalized the deployment of business earnings towards a philanthropic cause for perhaps the first time in the world. Several Tata scholars who benefited from the Endowment returned to India and also went on to lead Tata companies and non-profit institutions backed by the group.

For example, Xerxes Desai, an Oxford-educated Tata scholar, co-founded Titan Company in 1986. Titan, a joint venture between Tata Group and the Tamil Nadu state government, started as a homegrown quartz electronic watchmaker, and under Desai's leadership, entered branded jewellery and other consumer-focused segments in the 1990s. Titan is today the second most highly valued Tata Group company, with a market capitalization of over Rs 1.5 trillion ($20 billion).

With this entrepreneurial approach of entering sunrise sectors, seeding new businesses, and creating a platform for managerial as well as technical talent to thrive, Tata Group's style has been analogous to that of a classical venture capital firm. The group's foray in information technology, which began through Tata Consultancy Services and Tata Elxsi under JRD Tata’s leadership, well before the dawn of the personal computing era, is emblematic of this approach.

After obtaining an MS in electrical engineering from MIT in 1950, Faqir Chand Kohli worked in the United States briefly and returned to India in 1951, at the age of 27, to join Tata Electric, the group's power business. Kohli computerized Tata Electric's operations5:

We put up information systems in real-time mode. There were real-time communications between Khopoli and Trombay…the systems took instantaneous feedback... we were the third or fourth country in the world to have this technology, and we were ahead of even Britain and Japan. We were pioneers.

In 1968, Tata Group chairman JRD Tata asked Kohli to set up Tata Computer Systems, now known as Tata Consultancy Services (TCS), to extend similar practices to other Tata companies and non-Tata companies too. Kohli led TCS as the founding CEO for three decades, till 1997, catalyzing a new industry in India that would become one of the country’s largest exporters and the crown jewel of the Tata Group.

The TCS story is well-known - lesser appreciated is the founding story of Tata Elxsi, a relatively smaller business in the group but one that was connected closely to some of the leading innovators of Silicon Valley at the dawn of the information technology and computing era.

Funding The First Silicon Valley Startup Started By An Indian

In 1974, then-36 year old Ratan Tata, who would become chairman of Tata Group in 1991, met the technologist and engineer A. Thampy Thomas in Silicon Valley, and tried to persuade him to return to India. Thomas was a graduate of the renowned Birla Institute of Technology and Science, Pilani, and then completed his PhD in electrical engineering from Stanford University. He had been working at National Semiconductor, an early pioneer in semiconductor manufacturing.

Thomas turned down Tata's request. As he recalled6:

He tried to convince me to come back to India. And I told him that there was really nothing that I could do in India, other than be a manager. By that time I got the startup bug, I wanted to do something here.

Some years later in 1979, Thomas and Balasubramanian Kumar, a professor at Stanford University who had graduated from IIT Madras in 1973, came together to start Elxsi to build a new kind of computer hardware, the mini-supercomputer. Elxsi was commercializing technology from the research conducted by Thomas and Kumar. Mini-supercomputers were cheaper than high-end supercomputers, and aimed to expand the use of computers for business. Thomas pitched Tata Group chairman JRD Tata for an investment.

JRD Tata, who had backed FC Kohli and incubated TCS a decade earlier, decided that Tata Group should enter the fast-growing computer hardware industry. The Computer History Museum records Elxsi as the first startup started by an Indian in Silicon Valley, and also records Tata Group as an early investor in the company, alongside venture capital pioneer Arthur Rock. Prior to funding Elxsi, Rock had backed Intel and Apple Computer, two startups that would go on to become titans of the personal computing era.

Apple Computer and Microsoft were still early-stage ventures and personal computers were uncommon curiosities. Even though India had strict foreign exchange controls, the Tata Group held offshore capital accumulated before the controls were imposed, and invested a significant chunk of this capital into the new venture7. In addition to the investment, the startup Elxsi and Tata Group decided to form a joint venture in India.

Owing to the notorious licence raj system, Tata Group needed a special licence to bring Elxsi to India. The high-tech computing sector had been reserved for government participation, and any business in the new industry was also barred from making exports. To get things off the ground, Thomas recalls8 how the joint venture was set up first in Singapore, where the innovators were welcomed by the government:

Tata Elxsi was the first computer company to do any kind of original computer work in Singapore...Singapore government gave us a lot of money and land. But...there were no computer people in Singapore, so you ended up hiring people from India, Australia, New Zealand and bringing them to Singapore.

Most of the engineers at Tata Elxsi in Singapore then moved to California, eventually staying back in the United States and going on to found or participate in technology ventures in the Silicon Valley ecosystem, Thomas recollected.

By the time Tata Elxsi got the licence to operate in India nearly a decade later, personal computers had been developed and the mini-supercomputer business had run out of steam after an initial spurt. Tata Group was left with a licence, even as Elxsi itself moved on. Adapting to the changed context, Tata Elxsi pivoted to providing maintenance and support services to Elxsi customers.

In 1991, Tata Elxsi made another attempt to enter the computer industry and struck a technology transfer deal with Silicon Graphics9, the graphics computing pioneer co-founded by Jim Clark (who later founded Netscape with Marc Andreessen in 1994), but yet again government regulations stymied the opportunity by requiring indigenization. Tata Elxsi kept building the computer maintenance services business, its ambitions in technology hardware and software having been torpedoed by Indian government policy. JRD Tata, who was funding and building these technology business against the tide of repressive government policy, had been disheartened by the difficult experiences, and remarked to India Today magazine in 198610:

When I started in business - nearly 60 years ago the conditions were very different to what they became. There was no licensing system, so there was nobody to bribe. Business was reasonably honest. The taxes were reasonable. So there was no great inducement to evade taxes. But then came a controlled society, under the impulse of Jawaharlal [Nehru]. The Government needed money to run elections, and the whole culture changed. Along with this came punitive taxes of 98 percent. When you have a licence-permit raj and very heavy taxes, you get tax evasion, black-marketing, and corruption...I must confess that I've been very frustrated. When I was young I was an angry young man: we were under foreign rule, people were oppressed. Now I'm an angry old man because of all the opportunities that have been missed.

Betting On General Purpose Technologies Since 1868

TCS and Tata Elxsi today are thriving software businesses in the Tata Group, with a combined market capitalization of over Rs 12 trillion ($160 billion), the vast majority of it contributed by the former. The latter, while much smaller in size, has stayed true to its high-technology roots by emerging as a global leader in the engineering R&D services segment. The stories of TCS and Tata Elxsi are important not just as case studies in business incubation and creation, but also because they are illustrative of the Tata DNA, given the challenging context in which the Tata Group built the businesses.

When TCS was founded in 1968, India's GDP per capita (in constant 2010 US dollars) was $369 - GDP per capita in the United States was $23,071. When Tata Group made the Elxsi investment in 1979, India's GDP per capita had crawled up to $405, while US's GDP per capita stood at $28,93911. Thomas was correct in his assessment that he simply would not be able to work in India in the technical field where he had expertise, largely due to government policy intent on blocking such activity. India had been struggling economically since independence from British colonial rule due to such repressive policies. But despite the economic stagnation, Tata Group did not dilute its DNA and waver from the larger vision of participating in high-technology industries, nurtured since the founding of the group by Jamsetji Tata in 1868. It was steel and hydroelectric power then, and computers and software a century later.

Much like steel and electricity, software and computers were general purpose technologies that could expand what economists call the production possibilities frontier12, and would have been transformational for India. Despite efforts of entrepreneurial business houses like the Tata Group, India missed the opportunity in computer hardware and electronics by persisting with failed policies. Several Asian countries benefited by staying open to foreign investment and promoting exports in the new sectors. Relatedly, a lesser known aspect of Tata Group's history has been the support extended by the group to votaries of liberal economic policies. Two of independent India's leading public intellectuals, Ardeshir Shroff and Nani Palkhivala, were also prominent business leaders and served as Tata company chiefs.

Shroff, a banker and industrialist who chaired two Tata companies in the financial services industry that were later nationalized by Prime Minister Indira Gandhi, had founded the Forum of Free Enterprise in 1956 to make the case for free markets and an open economy, when Prime Minister Nehru was pushing socialist economic policy. Palkhivala, an eminent jurist who was also India's Ambassador to the United States from 1977-1979, served India with peerless distinction as a defender of individual rights and protector of India's Constitution during Prime Minister Indira Gandhi's onslaught on civil liberties and property rights.

Through the dark decades when the words "profit" and "market" were made toxic, Palkhivala educated the public on the importance of economic freedom through his writings and extraordinarily popular annual public speeches on the government budget, all while serving as a key Tata director. An accomplished business builder, such was Palkhivala's standing in the group that when Ratan Tata was asked who would have become Tata Group chairman in 1991 had it not been him, he named Nani Palkhivala13.

Tata Goes Global

Ratan Tata's ascent to leadership of the group coincided with the first wave of economic liberalization in 1991 which ended the industrial licensing system and enunciated other pathbreaking structural reforms. In 1982, when he became chairman of Tata Industries, Ratan Tata had formulated a strategic plan to overhaul - and unify - the sprawling group, putting together a document called the Tata Plan. When he became chairman, he had the opportunity to start implementing the Plan. Even as the group consolidated and globalized its operations, Ratan Tata very much wanted to ensure that Jamsetji Tata's pioneering spirit guided Tata Group, recalling in a 2007 interview14:

My hypothesis in the early 1980s was that Jamsetji Tata entered new businesses at the turn of the century - businesses that Indian companies did not want to enter. They were indeed heavy industries - steel, power, textiles, etc., but they broke new ground. What I was saying was that, in the 1980s, there were new technologies on the horizon such as biotechnology, electronics, computing, artificial intelligence and communications. So why don’t we, at this time, have a new wave for Tatas to get into these businesses?

Tata companies such as Tata Motors and Titan expanded into consumer categories to cater to new demand unshackled by liberalization. By the time Ratan Tata retired in 2012, Tata Group had transformed from an India-centric industrial group to a globalized conglomerate with infotech powerhouse TCS as its principal dynamo. Liberalization brought its own set of challenges - Tata companies had to reorient and restructure extensively to compete in the dramatically altered competitive landscape. Where the Tata Group abided by a self-imposed code of ethics, new conglomerates had emerged that would adopt any and all means to grow their businesses.

The internet era had begun in the 1990s - Jim Clark, the founder of Tata Elxsi's technology partner Silicon Graphics, launched the Netscape web browser in 1994 with Marc Andreessen, a 23-year old computer science wunderkind. Netscape's blockbuster public offering in 1995 marked the beginning of the internet boom. While the world was going online, India didn't even have widespread voice telephony - persistent shortages created by a national government monopoly had turned phones into a mark of wealth and status. Internet service provision was similarly a government monopoly, making internet access into a luxury available to a minuscule segment of the population, an even smaller subset of the tiny number of people who had landline phones.

Even as Indian-trained engineers and technologists achieved spectacular success in Silicon Valley, there were simply no avenues for India's talent to succeed at home due to restrictive government policies. In 1999, smart policy reforms by the Atal Bihari Vajpayee government began a transformation in voice telecommunications15 by unleashing animal spirits in the private sector. The government's pro-market approach and privatization of VSNL, acquired by Tata Group in 2002, helped improve internet access but it was not enough, and India did not see mass-scale adoption of the internet until the launch of Jio by Reliance Industries in 201616.

Notably, after his retirement in 2012 from the chairmanship of the group, Ratan Tata turned to venture capital investing at a time when technology entrepreneurship was still viewed with mixed prospects in India - as I've written in my book, A New Idea Of India17, the entry of India's most respected and recognized industrialist to the venture scene provided instant credibility to technology entrepreneurship and startup investing. Ratan Tata had seen the venture capital industry take shape in the California of the 1970s and 1980s, through Tata Group's investment in Elxsi - he had envisioned the entry of Tata Group into biotechnology, computing and artificial intelligence as early as the 1980s, so it was no surprise, then, that he sensed something was changing in India, well before his peer industrialists did.

Tata Enters The Digital Sector

Tata Group has now made a foray into internet and digital businesses, this time through acquisitions by group company Tata Digital, under the leadership of Natarajan Chandrasekaran, the CEO of TCS who became chairman of the group in 2017. Like the general purpose technologies of steel, electricity, software and computers, the internet is transforming multiple industries by shifting firm boundaries18. Alongside the digital push, Tata Group also appears to be going through an internal transformation where the group's principal holding company, Tata Sons, takes on the role of an investment holding company, becoming more financially-driven compared to the earlier objective of ensuring strategic ownership in group companies.

The emergence of Tata Group as a business builder and acquirer in the Indian technology ecosystem is terrific news for two reasons - first, given Tata's leadership mindshare in India Inc, more Indian business houses will now take innovation very seriously. Second, the rise of Tata Digital creates a new pole as an alternative to Reliance Industries and the American tech giants, expanding both financial and strategic options for India's startups.

It would be a mistake to see Tata Group's entry into the digital space as something driven by FOMO - rather, this is a return to Tata's roots given its track record of experimentation and risk-taking since Jamsetji Tata's entrepreneurialism during the Industrial Revolution and JRD Tata's gritty push for participating in the Information Technology Revolution despite the ambient constraints. The most important difference today is that for the first time in its existence of over 150 years, Tata Group will have structural economic and policy tailwinds rather than headwinds. This time, there is no colonial ruler or Kafkaesque licence raj bureaucracy to frustrate efforts.

In Tata Group's long history of triumphs and travails, there is also a lesson for Indian policymakers - it is self-defeating to ban or curtail activity in new industries. Regulation and governance have to keep up with changing technology, and crushing the novel by brute state power only succeeds in driving away India's talent to more welcoming climes. As ludicrous as it sounds, some of the issues that dogged Tata Elxsi four decades ago continue to hobble Indian startups to this day. Indian startups still elect to domicile abroad because of the stultifying bureaucracy, suffocating regulations and strict foreign exchange controls that an Indian registered business with global aspirations has to contend with.

Tata Group, India's First Venture Capitalists

The Tata Group is a unique institution because of its expansive philanthropic work and commitment to nation-building, and this has imbued Tata businesses with a special sense of purpose. In addition to creating IISc, Tata Group established the Tata Institute of Fundamental Research (TIFR) in 1945 to promote fundamental scientific research. TIFR became the academic home for dozens of talented scientists who came back to India after independence to contribute to the nation's progress, and it was where India's nuclear program was seeded before being moved to the Bhabha Atomic Research Centre in 1954.

While there are other business houses too that have made substantial national contributions, the scale and scope of Tata Group's work dwarfs the rest. Interestingly, the group's unique structure, where capital accumulated and profits earned are ultimately ploughed back from the investment holding company to philanthropic foundations, welfare endowments, hospitals and educational institutions, is very similar to the model employed by venture capital firms who typically have such foundations as fund sponsors and limited partners. In Tata Group's case, Tata Sons can be viewed as the evergreen fund vehicle with the Tata Trusts as limited partners.

As India has liberalized its economy and prospered, so have Tata businesses, and thanks to business success, the Tata Trusts have also acquired significant scale, compounding alongside the group’s businesses. In 2018, the Trusts disbursed over Rs 1000 crore in a single year for the first time.

FC Kohli, the founding CEO of TCS, once described JRD Tata as "both a nationalist and an internationalist"19. As a nationalist, JRD Tata unequivocally wanted India to succeed and be a world leader. As an internationalist, he stayed open to ideas, influences, and best practices from across the world. Tata did not see nationalism and internationalism as mutually exclusive categories, but sought to combine the best features of both in service of a larger cause, manifested in the unique structure of the Tata Group, where business-building, nation-building and giving back to the community have an umbilical connection. As India's new generation of technology entrepreneurs rises to the vanguard of Indian business, there is no better role model than Tata Group - a business house that has always reached for the stars, while keeping its head on its shoulders and feet firmly on the ground.

Technology, on the other hand, enables “vertical progress”, which Thiel argues is harder to imagine because it means “doing something nobody has ever done”. Moreover, while technology has for many come to mean information technology, there’s no reason to restrict its definition in this way, since “any new and better way of doing things” can be called technology.

There has been an explosion of entrepreneurship across the world over the last decade - but most of these ventures are pursuing horizontal progress (going “from one to n”, to use Thiel’s expression) and not vertical progress (“from zero to one”). The well-earned success of several internet and software ventures in India and other countries has been achieved by deploying and scaling a proven business model in the domestic market.

But adopting and adapting technologies and business models from advanced economies has its limitations. Can economic growth be sustained and delivered through the globalization model alone? Large populations in Asia and Africa aspire to join the ranks of the middle and upper class; bringing sustainability to so many people will take innovation across a wider range of industries.

There is an enormous amount of latent consumer demand in India and across the developing world that will be difficult to meet without breakthrough innovation. Energy requirements are very large, and using fossil fuel-based technologies would result in environmental degradation, as China’s experience is proving. In healthcare, there is a need for a more cost-effective drug development model, as well as new government welfare mechanisms to deliver medicines to the bottom of the pyramid without violating the intellectual property rights of drug innovators. In finance, tens of millions of people stand to gain by joining the formal financial system. In manufacturing, greater automation is necessary to enhance safety and raise labour productivity. In services, virtualization brings the possibility of local consumer services trade across borders.

The scale of need across these and other industries is such that the globalization approach alone is not sufficient: new technology is an imperative. It is more difficult for entrepreneurs and investors in advanced economies to deliver such innovations because they are not close to the customer. Increasingly, entrepreneurs in emerging markets will need to take the initiative and attempt to do what nobody has done, because the problems in these markets will be problems that nobody has really solved before. These will be problems that advanced economies don’t really have a stake in solving.

In other words, entrepreneurs will need to think of how to go “from zero to one” in myriad industries. This is the great entrepreneurial opportunity of the 21st century.

(A version of this post was originally published by the author for World Economic Forum’s Agenda blog.)

Coase, who went on to win the Nobel Prize for economics in 1991 for his work as the pioneer of the theory of the firm, posited that the transaction costs of doing business in a market economy necessitated that individuals should organize themselves under the rubric of a firm. The world has changed unrecognizably since Coase developed the theory for why a centrally-planned institution like a firm exists in any market economy. The principal forces affecting the size and structure of the firm are government policy and technology. The Coasian lens of transaction costs helps explain why conglomerate firm structures are commonly found in emerging and frontier markets – wherever government policy-making is a powerful exogenous force and the rule of law is weak, it makes sense for firms to integrate vertically or expand corporate scope by entering new industries.

Over the last 25 years, technology too has had dramatic effects on the nature of the firm. Technological changes strike at the heart of possibly the most important strategic decision made by the capital allocator, christened the “entrepreneur-coordinator” by Coase. This is the decision of what to buy and what to build. Stated differently, technology has always been a critical determinant of setting and resetting the boundary of the firm, and momentous changes over the last three decades have hastened the speed at which this boundary shifts.

Shifts in the firm boundary inevitably lead to shifts in the value captured by the different actors in an industry. The rise of e-commerce undercuts both offline retailers and legacy brands. “Direct-to-consumer” means that even small, niche brands are able to gain global distribution without having an offline footprint. Retailers, product marketers and manufacturers who were operating in an equilibrium deemed to be settled by the dominance of organized retail are being disrupted by the emergence of new marketing and distribution channels enabled by the mobile internet that have made certain segments far less profitable or even irrelevant.

The media business has felt the impact of shifting firm boundaries even more dramatically than retail. In the old television entertainment business model, studios created content that broadcasters would licence, offsetting content acquisition costs with advertising. Now, technology has shifted the firm boundary to fuse content production and distribution, where consumers are willing to pay for an advertising-free viewing experience. In print media, content production and distribution that were both controlled by media houses have been disaggregated, as consumers read individual articles rather than bundles curated by professional editors that are distributed and discovered through channels the content producers have almost no control over.

Applying Coase’s insight, the transaction cost that caused the emergence of a firm in the industry value chain can be reduced or eliminated by technology. When this happens, the “entrepreneur-coordinator” or capital allocator of the firm must act to re-position the firm in the new context. Viewing technology as a force that reduces transaction costs and shifts the firm boundary is a powerful way to anticipate how an industry might change in response to innovation. Armed with this understanding, an investor can make better judgments about which businesses will accrue market power and which segments stand to lose.