From UPSC perspective, the following things are important :
Prelims level : Not Much
Mains level : Need for an comprehensive industrial policy in India
- The contribution of manufacturing to GDP in 2017 was only about 16%, a stagnation since the economic reforms began in 1991.
- In India manufacturing has never been the leading sector in the economy other than during the Second and Third Plan periods.
Manufacturing sector: A prime moving force
- Manufacturing is an engine of economic growth because it offers economies of scale, embodies technological progress and generates forward and backward linkages that create positive spillover effects in the economy.
- No major country managed to reduce poverty or sustain growth without manufacturing driving economic growth.
- This is because productivity levels in industry (and manufacturing) are much higher than in either agriculture or services.
Market Failures urges govt to intervene
- The specific instances of market failure that require a government-driven industrial policy are:
- lack of adequate investments
- imperfect information with respect to firm-level investments in learning and training and
- lack of information and coordination between technologically interdependent investments
- These are good reasons why an economy-wide planning mechanism is needed in India.
- However, the India should steer clear of the “command and control” approach that harks back to pre-1991 days.
Lack of Policy measures in India
- The United Nations Conference on Trade and Development or UNCTAD finds that over 100 countries have, within the last decade, articulated industrial policies.
- However, India still has no manufacturing policy.
- Focussing (as “Make in India” does) on increasing FDI and ease of doing business, important though they may be, does not constitute an industrial policy.
Urgent need for a comprehensive Policy
I. Promoting investments
- There is the need to coordinate complementary investments when there are significant economies of scale and capital market imperfections.
II. Subsidization and providing stimulus
- Industrial policies are needed to address learning externalities such as subsidies for industrial training, on which we have done poorly.
- However, a lack of human capital has been a major constraint upon India historically being able to attract foreign investment (which Southeast Asian economies succeeded in attracting).
III. Govt. role as facilitator
- The state can play the role of organizer of domestic firms into cartels in their negotiations with foreign firms or governments — a role particularly relevant in the 21st century.
- It rose after the big business revolution of the 1990s with mega-mergers and acquisitions among transnational corporations.
- In fact, one objective of China’s industrial policies since the 1990s has been to support the growth of such firms.
IV. Efficient Capacity Management
- The role of industrial policy is not only to prevent coordination failures (i.e. ensure complementary investments) but also avoid competing investments in a capital-scarce environment.
- Excess capacity leads to price wars, adversely affecting profits of firms — either leading to bankruptcy of firms or slowing down investment, both happening often in India (witness the aviation sector).
- Price wars in the telecom sector in India which hampers investment in mobile/internet coverage of rural India where access to mobile phones and broadband Internet, needs rapid expansion.
V. Reservation of products
- An industrial policy can ensure that the industrial capacity installed is as close to the minimum efficient scale as possible.
- The missing middle among Indian enterprises is nothing short of a failure of industrial strategy.
- It includes products exclusively for production in the small-scale and cottage industries (SSI) sector from India’s 1956 Industrial Policy Resolution onwards.
- By the end of the 1980s, 836 product groups were in the “reserved” category produced only by SSIs (which encouraged informal enterprises).
VI. Preventing structural failures
- When structural change is needed, industrial policy can facilitate that process.
- In a fast-changing market, losing firms will block structural changes that are socially beneficial but make their own assets worthless.
- East Asian governments prevented such firms from undermining structural change, with moves such as orderly capacity-scrapping between competing firms and retraining programmes to limit such resistance.
IT Sector: A self taught lesson for Policy Makers
- If evidence is still needed that the state’s role will be critical to manufacturing growth in India, the state’s role in the success story of India’s IT industry must be put on record.
- The government invested in creating high-speed Internet connectivity for IT software parks enabling integration of the Indian IT industry into the U.S. market.
- The government allowed the IT industry to import duty-free both hardware and software. (In retrospect, this should never have continued after a few years since it undermined the growth of the electronics hardware manufacturing in India.)
- The IT industry was able to function under the Shops and Establishment Act; hence not subject to the 45 laws relating to labour and the onerous regulatory burden these impose.
- Finally, the IT sector has the benefit of low-cost, high-value human capital created by public investments earlier in technical education.
- These offer insights to the potential for industrial policy when a new government takes over soon.
- The East Asian miracle was very much founded upon export-oriented manufacturing, employ surplus labour released by agriculture, thus raising wages and reducing poverty rapidly.
- The growing participation of East Asian countries in global value chains (GVCs); manufactured consumer goods to more technology- and skill-intensive manufactures for export, was a natural corollary to the industrial policy.
- India has been practically left out of GVCs.
- Increasing export of manufactures will need to be another rationale for an industrial policy, even though India has to focus more on “make for India”.
- In this quest for increased exports, economies of scale (a proportionate saving in costs gained by an increased level of production) are critical.