Industrial Policy and its role in economic turn around

INTRODUCTION #

Industrial Policy is a typical character of a mixed economy. It is policy of government inter- vention which is sector specific and is aimed at giving preferential treatment to a particular sector over others. Sector are recognized by policy makers, which are worthy of government support and targets are set. We have already seen government support toward renewable energy sector, organic farming, food processing and export promotion of various products. All these are part of Industrial policy.

BACKGROUND #

India after Independence deliberately opted to promote Heavy Capital Industry which was to be under state control. This was implemented through five year plans. After 2nd five year plan, what is popularly called Nehru-Mahalanobis model was adopted. Investments were made through state owned PSUs in various sectors such as Hydro/ Thermal/ Nuclear power, Iron and Steel Industry (SAIL), Mining etc.

At that time, there was another opinion from some eminent economists in favor of support to traditional handicraft sector and agro economy (which was Gandhian model) in India which was employment intensive; in this case, heavy industry will be left to markets. But Congress government opted for Mahalanobis model and debate over this choice still continues.

Nehru Mahalabobis model was instead capital

intensive. There was strong affinity to heavy indus- try at that time. Developed countries’ progress and decent standard of living endorsed investment in favor of heavy industry. At the same time govern- ment of USSR was pursuing rapid industrialization and our leader were in strong influence of socialist ideas originating in USSR.

To balance this loophole, India’s small scale industry was protected from external and domestic competition. For protection from external competi- tion, high Tariff and non-Tariff barriers were placed and in case of internal competition, certain industries were reserved only for small scale sector.

An Overview of Industrial Policies till 1991 is as follows: The Industrial Policy 1991 is preceded by the Industrial Policy Resolutions of 1948 & 1956 & Industrial Policy Statements of 1973, 1977 & 1980, which are in brief as follows:

• Industrial Policy Resolution, 1948 – The Policy aimed at outlining the approach to Industrial growth & development. It empha- sized the importance to the economy of securing a continuous increase in production and ensuring its equitable distribution.
• Industrial Policy Resolution, 1956 – Under this Policy, the role of State was given more importance as an engine for accelerating the economic growth and speeding up the indus- trialization as a means of achieving a socialist pattern of society.

●    Industrial Policy Statement, 1973 – The #

thrust of this Policy Statement was an iden- tification of high-priority industries where investment from large industrial houses and foreign companies were permitted.

• Industrial Policy Statement, 1977 – The Policy emphasized on decentralization and growth of small scale industries
• Industrial Policy Statement, 1980 – The Policy envisaged promoting competition in domestic market, technology upgradation and modernization. The policy laid the foundation for an increasingly competitive export based and for encouraging foreign investment in high- technology areas.

REFORMS IN INDUSTRIAL POLICY #

• The process of industrial policy reform started in 1970s.
• Automatic capacity expansions were per- mitted during the 1970s and 1980s and few industries were delicensed in 1975 but this liberalization was trivial.
• Systematic deregulation began in earnest in the mid-1980s.
• Taxation reform – mainly the conversion of multi-point excise duties into a modified value- added tax (MODVAT) in all sectors except petroleum products, textiles and tobacco by 1990 – also impacted industrial performance by reducing the taxation of inputs and the associated distortion.
• In 1985 a “system of “broad-banding” was introduced that allowed existing license-hold- ers to diversify into a number of related industries without obtaining prior permission.
• By 1988, the number of broad product groups that required capacity licensing by the Gov- ernment had been reduced to 27 from 77 previously.
• Further, deregulation in 1993 brought this down to 18 items that were important for strategic, environmental or social reasons or were producers of luxury items and finally to only six in 1999. All other industries were permitted to expand according to their market

needs without obtaining prior expansion or capacity clearance from the Indian Govern- ment.

• The New Industrial Policy (NIP) statement of 1991 introduced reforms in regulations governing licensing, monopoly, foreign investment and small-scale sector industries and in the role of public sector enterprises.
  • Liberalization of industrial licensing and opening up industry to foreign invest- ment was an important part of the NIP statement of 1991. This element has pro- gressed fairly well as far as Central Gov- ernment controls are concerned.
  • Another important aspect of the reform process of the 1990s was the amendment to the Monopolies and Restrictive Trade Practices (MRTP) Act which eliminated the need for prior Government approval for new investment, capacity expansion and mergers by large firms. The amend- ed MRTP Act gave more emphasis to prevention and control of monopolistic, restrictive and unfair trade practices, so as to provide adequate protection to con- sumers.
  • The reforms of 1991 reduced the role of the public sector by abolishing Schedule B (It included 12 industries) and reduc- ing the number of items reserved for the public sector alone (i.e. the Schedule A industries) from 17 in 1983 to six in 1993 and finally to four in 1999 – arms and ammunition, atomic energy, miner- als used in atomic energy production and rail transport.
  • The scope of Public Sector Units (PSUs) was restricted to the provision of infra- structure services.
  • Under the amended Sick Industrial Com- panies Act, poorly performing PSUs could be referred to the Board for In- dustrial and Financial Reconstruction (BIFR) for rehabilitation and were given prioritized allocation from the National Renewal Fund for displaced workers. In

the early 1990s, greater autonomy was given to more efficient PSUs and some divestment of Government equity was carried out.

• Complete privatization, finally intro- duced in the late 1990s, made slow prog- ress with the first major successful pri- vatization taking place in 2001.
  • Reforms were also undertaken to encour- age foreign investment and technology. The Government had established a more liberalized foreign investment policy.

Consequent to the above changes, a separate set of policy measures were introduced for the pro- motion and strengthening of Small-Scale Industries (SSIs) in August, 1991. In due course, the sector was substantially delicensed and investment limits in plant and machinery were increased.

Policy for Small Scale Industries: As per the MSMED (Micro Small & Medium Enterprises Development) Act, which was notified on 29.9.2006, industrial undertakings with an investment between Rs. 25 lakh to Rs. 5 crore are within the Small Scale sector and between Rs. 5 crore to Rs. 10 crore are in the Medium sector. The investment limit for Micro units is Rs. 25 lakhs. As of now, only 21 items are reserved for manufacture, exclusively in the small scale sector. All undertakings other than the small scale sector dealing with reserved items are required to obtain an industrial licence and undertake an export obligation of 50% of the annual production. This condition of licensing is however, not appli- cable for those undertakings operating under 100% Export Oriented Undertakings Scheme, the Export Processing Zone (EPZ) or the Special Economic Zone Scheme (SEZs).

Liberalization of the Locational Policy: Vide notification dated 14.8.2008, the requirement of licensing for setting up of industries within 25 kms of the periphery of cities having population of more than million for a certain class of industries has been done away with.

Non-Resident Indians Scheme: The facilities for Foreign Direct Investment as available to foreign investors/company are fully applicable to NRIs as well. In addition, Government has extended some

concessions especially for NRIs and overseas cor- porate bodies having more than 60% stake by the NRIs. This inter-alia includes:

• NRI/OCB investment in the real estate and housing sectors upto 100% and
• NRI/OCB investment in domestic airlines sec- tor upto 100%. NRI/OCBs are also allowed to invest upto 100% equity on non-repatriation basis in all activities except for a small nega- tive list. Apart from this, NRI/OCBs are also allowed to invest on repatriation/ non-repatri- ation under the portfolio investment scheme.

Electronic Hardware Technology Park (EHTP)/ Software Technology Park (STP) scheme: For building up strong electronics industry and with a view to enhance export, two schemes viz. Electronic Hardware Technology Park (EHTP) and Software Technology Park (STP) are in operation. Under EHTP/STP scheme, the inputs are allowed to be procured free of duties.

Policy for Foreign Direct Investment (FDI) Promotion of foreign direct investment forms an integral part of the industrial policy. The role of foreign direct investment in accelerating economic growth is by way of infusion of capital, technology and modern management practices. The Department has put in place a liberal and transparent foreign investment regime where most of the industries are open to foreign investment on automatic route without any limit on the extent of foreign owner- ship. Some of the recent initiatives taken to further liberalize the FDI regime, inter alia, include open- ing up of sectors such as Insurance (upto 26%); development of integrated townships (upto 100%); defence industry (upto 26%); tea plantation (upto 100% subject to divestment of 26% within five years to FDI); Enhancement of FDI limits in private sector banking, allowing FDI up to 100% under the automatic route for most manufacturing activities in SEZs; opening up B2B e-commerce; Internet Service Providers (ISPs) without Gateways; electronic mail and voice mail to 100% foreign investment subject to 26% divestment condition etc. The Department has also strengthened investment facilitation meas- ures through Foreign Investment Implementation Authority (FIIA).

To summarize, firms operating in the Indian market in the pre-reform period (i.e., before 1991) faced barriers to entry due to Government control over private investment through the licensing regula- tions, reservation of production for the public sector and lengthy and opaque procedures for approving foreign direct investment (FDI) that were further subject to a maximum limit of 40 per cent equity share. These restrictions on entry were gradually eased during the 1990s. With the industrial policy reforms of 1990s, India has moved into an era of a more competitive industrial environment in which entrepreneurs respond to market signals rather than try to skirt around bureaucratic controls.

IMPACT OF INDUSTRIAL POLICY CHANGES #

Pre-Reforms Period #

Early Growth Phase: Till 1965-66 #

Industrial growth was rapid during the first two decades, especially during the Second Plan and the Third Plan. The high rates of industrial growth witnessed during the period were due to:

• Emphasis on industrialization in economic policies.
  • The heavy industry-oriented strategy of in- dustrialization, and the pursuit of industrial growth as a supreme objective in the industri- al policy and planning.
  • The substantial investments made and the capacities created in industrial sector as fol- low-up of the first two decisions.
  • Growing demands for a variety of new prod- ucts on the part of the consumers in urban areas and the relatively better-off sections of the community.

This period of growth has been named the period of “industrial growth with regulation”.

Slowdown Phase: Decade of 1970s #

Industrial growth slowed down after the Third Plan. The structural retrogression took place at two stages:

• Growth of basic and capital goods industries were slower than even the meager average growth in industrial output.

• Where growth was moderately high, a major- ity of the industries belonged either directly or indirectly to elite-oriented consumption goods sector.

A disproportionately large increase in the output of man-made fibers, beverages, perfumes and cosmetics, commercial and office clocks, finer varieties of cloth, etc., took place. This phenomenon emerged at the cost of allocation of investible funds for mass consumption goods. Thus, an imbalance in the industrial structure took place.

Revival During the 1980s #

The industrial scene underwent a change with the onset of the 1980s. Industrial growth rate moved up during this period, and the stagnation which characterized the earlier period overcame. The major factors that contributed to this ‘turnaround’ can briefly are summarized as follows:

• Liberalization of industrial policy; the pro- cess began in early 1980s, and caught up since 1985.
  • Public investment which played a crucial role in determining the growth of Indian industry had been at a much higher level during the 1980s than in the 1970s.
  • There had been a noticeable improvement in the investment made by the private corporate.
  • Manufacturing sector.
  • Increased investment in industry got corrobo- rated by the dramatic rise in imports of capi- tal goods in the 1980s.
  • Rapid investment in industry was facilitated by what has come to be known as ‘liberal fis- cal regime’.

Revival    and    Subsequent    Slowdown 1994-2002 #

The slowdown in the rate of industrial growth during 1991-94 turned out to be only transitional, immediate fallout of the stabilization measures ini- tiated by the government for the macro-economic adjustment of the economy. It may be noted that the rate of industrial growth began to accelerate in the second half of 1993-94.

The change in trend could be accounted for by the following factors:

• Increased government expenditure/ public in- vestment; Government expenditure provides both supply and demand side stimulus to growth.
• The excise and customs duty cuts.
• Growth in export volumes since 1993-94.
• Continued stability in the growth of agricul- tural output.
• The release of funds from the banking system because of the sharp decline in the SLR; and
• Extension of MODVAT to capital goods.

Slowdown #

Industrial revival was indeed remarkable; it generated enough euphoria among industry and government, so much. However, the rate of growth slowed down during 1996-97 and continued to fall subsequently during 1997-2002, except for a short- lived recovery during 1999-2000.

Reasons for the slow down #

Demand Constraints #

• Demand constraints arose in the form of low investment demand and low consumer demand.
• Real investment in industry which had risen fast until 1995-96 stagnated thereafter.
• Key reforms in industrial policy and privati- zation remained unfinished or undone.
• Huge ‘hanging investment’: Hanging invest- ment may be defined as the gap between approved and actual FDI. Given the fear of competition from foreign investors, the domestic investors kept away or postponed their investments from such sectors where FDI was already approved or was anticipated to come. To these may also be added global slowdown and recession in advanced econ- omies. These adversely affected demand for our export industries.

Structural and Cyclical Factors #

The major structural factors could be identified as follows:

• The adjustment process of industry in re- sponse to increased competition in the form

of mergers and acquisitions is taking longer time than required.

• High costs and inadequate and unreliable supply of services in transport, communica- tions and the power sector.
• Low levels of productivity in the industry because of low volumes and inability to reap economies of scale, outdated technology and restricted labour laws.
• Lower speculative demand for sectors like automobiles and real estate due to expecta- tion of lower prices and reduction of taxes and duties in the short and medium term.
• High real interest rates.

The major cyclical factors could be identified as follows:

• Periodic investment cycles, reinforced by government decision to reduce customs duties to levels in East Asian countries by 2004, which might have deferred investment decisions.
• Business cycles affecting demand of some cyclical industries like cement, automobiles and steel.
• There is no pent-up demand for consumer durables.

Revival and Strong Growth 2002-08 #

The year 2002-03 opened on a slow note. How- ever, during 2003-04, it became increasingly clear that strong revival was in offing. In 2004-05, and again in 2005-06 the manufacturing sector grew at

9.1 per cent, 12.5 per cent during 2006-07 and 9.0 per cent during 2007-08.

The surge in industrial growth could be attrib- uted to important structural changes in the economy. One is the rise in the savings rate from 23.5 per cent in 2000 – 01 to 37.7 per cent in 2007-08.

Most of this increase came from turnaround in corporate and public savings.

Due to rise in the savings rate, the economy moved to an altogether higher investment rate.

• The second important structural change was enhanced export competitiveness that got reflected in the rising share of exports. The

total exports (trade plus invisible receipts/ GDP) ratio aroused sharply from 16.9 per cent in 2000-01 to 33.2 per cent in 2007-

08. Third change in recent years is financial deepening.

• The bank assets/GDP ratio rosed from 48 per cent in 2000-01 to 80 per cent in 2005-06 on the back of a surge in bank credit.
• One factor in common to these three struc- tural changes has been lower interest rates. The decline in interest rates helped fiscal con- solidation; it boosted firms’ competitiveness and led to a huge increase in retail credit. Lower interest rates were made possible by the rise in inflows on both the current and capital accounts. In other words, it is clear that the industrial sector responded to the buoyant demand conditions of the economy through new capital stock additions.
• Modernization of the capital stock, reduction/ rationalization of import tariffs and other taxes, increased openness of the economy, higher FDI inflows, and greater competitive pressures, increased investment in informa- tion and communication technology, and greater financial deepening also contributed to productivity gains in the industry.

– As a result, the industry increasingly be- came an important growth driver in con- junction with the services sector. Many of the services such as trade, transport, communication and construction are di- rectly linked to industry.

Slowdown 2008-09 Onwards #

The slowdown in manufacturing over successive quarters started from the first quarter of 2007-08. This was more or less replicated by the mining sector and closely followed by electricity

The major factors responsible for this drop in industrial production can be briefly stated as follows:

• Rising prices of crude oil and other com- modities, particularly metals and ores had their adverse effect on the cost side of the manufacturing sector, which in turn had an adverse effect on the profit margins.

• Another key component on the cost side, namely interest costs, also increased due to higher interest rates.
• In recent years, the Indian corporate sector started to raise external capital (i.e., other than internal resources) mainly to fund its investment and this included foreign insti- tutional sources. On the external front, re- source mobilization from American/Glob- al Depository Receipts almost collapsed during 2008-09 and the flow of external commercial borrowings also suffered a sharp decline.
• Among the domestic sources, while private placement by non-financial institutions grew on the strength of the resource mobi- lization by public sector non-financial in- stitutions, the private sector resource mobi- lization on this count declined sharply. The sharp slowdown in financing accentuated the industrial slowdown that had already set in from the previous year.
• With the opening up of the economy, the trade orientation of Indian manufacturing increased over the years. The shrinkage in demand for exports that followed beginning with September 2008 sharply dented the performance of industries with high export intensity. The impact of the export slow- down has been particularly pronounced in sectors like textiles, leather and transport equipment.
• The manufacturing sector also suffered be- cause of a decline in the construction and real estate affecting non-metallic minerals, wood and wood products and basic metals. These developments fed into the domestic economy, setting off what may be termed as second round effects that seem to have continued to the end of fiscal year 2008-

09. The manufacturing demand, therefore, witnessed double squeeze, a decline in the demand originating from exports and a de- cline in domestic demand.

• The foregoing developments impacted the growth of profits of the manufacturing sec- tor. From the abridged results of a sample

of manufacturing companies, it is seen that while profitability was under strain since the third quarter of 2007-08, it came down sharply in the third quarter of 2008-09 ac- companied by a sharp dip in the growth in sales.

Sharp Revival #

Green shoots had began to appear in the first two quarters of 2009-10. Manufacturing output accelerated fast during this period. This is evident from the National Accounts Statistics (NAS) data as well as the Index of Industrial Production (IIP).

While the Central Statistical Organization (CSO’s) estimates place industrial-sector growth at

8.2 per cent, as against 3.9 per cent in 2009-10, the IIP industrial growth is estimated at 7.7 per cent, significantly up from 0.6 per cent during 2008-09. The manufacturing sector, in particular, has grown at the rate of 8.9 per cent in 2009-10.

Growth in the major industrial groups has been a mixed bag. There was strong growth in automobiles, rubber and plastic products, wool and silk textiles, wood products, chemicals and miscellaneous man- ufacturing; modest growth in non-metallic mineral products; no growth in paper, leather, food and jute textiles; and a slump in beverages and tobacco products in 2009-10.

In terms of use-based classification, there was strong growth in consumer durables and intermedi- ate goods (partly aided by the base effect); moderate growth in basic and capital goods; and sharp decel- eration in consumer non-durables.

Some of the important factors contributing to growth are as follows:

• The improvement in the cost structure of manufacturing companies seems to have cat- alyzed the recovery.
  • The strength of the recovery has been helped by the favourable base effect and mild infla- tion in manufacturing articles, especially of industrial inputs.

Major contribution to this revival was made both by easy money policy pursued by the RBI and fiscal stimuli provided by the government. However, these proved inadequate. Growth rate began to slowdown afterwards.

NATIONAL MINERAL EXPLORATION POLICY #

The Union Cabinet has approved the National Mineral Exploration Policy (NMEP).

Need #

The Ministry of Mines has, in the recent past, taken a series of measures for the growth of the min- eral sector, including allowing 100% FDI. However, these initiatives have fetched only limited success.

Of India’s entire Obvious Geological Potential (OGP) area, identified by GSI, only 10 per cent has been explored and mining is undertaken in 1.5-2 per cent of this area.

Salient Features #

• Aim:accelerating the exploration activity in the country through enhanced participation of the private sector.
• States will also play a greater role by referring exploration projects, which can be taken up through NMET.
• NMEP has proposed that private entities engaged in carrying out regional and detailed exploration would get a certain share in rev- enue in mining operation from the successful bidder after the e-auction of the mineral block.
• The revenue-sharing could be either in the form of a lump sum or an annuity, to be paid throughout the period of mining lease with transferable rights.
• E-Auction: Selection of private explorer is proposed to be done through a transparent process of competitive bidding, through e-auction.
• For this, reasonable areas or blocks for regional exploration will be earmarked or identified by the government for auctioning.

Major Impacts #

• The pre-competitive baseline geoscientific data will be created as a public good and will be fully available for open dissemination free of charge. This is expected to benefit public and private exploration agencies.

• The collaboration with scientific and research bodies, universities and industry for the scien- tific and technological development necessary for exploration in public- private partnership.
• A National Aerogeophysical Mapping pro- gram will be launched to map the entire coun- try with low altitude and close space flight to delineate the deep-seated and concealed mineral deposits.
• Government will launch a special initiative to probe deep-seated/concealed mineral deposits in the country.
• Government will engage private agencies for carrying out exploration in identified blocks/ areas with the right to certain share in the revenue accruing to the State government through auction.
• Public expenditure on regional and detailed exploration will be prioritized and subject to periodical review based on assessment of criticality and strategic interests.

NATIONAL CAPITAL GOODS POLICY #

National Capital Good policy has been launched for the first time to give a boost to the capital goods sector and also support the Make in India initiative. It would be implemented by the Dept of Heavy Industries.

Overview #

• The capital goods sector provides direct employment to 1.4 million people and the sector is growing at 1.1% per annum.
• The policy envisages increasing exports from the current 27 per cent to 40 per cent of production while increasing share of domestic production in India’s demand from 60 per cent to 80 per cent, thus making India a net exporter of capital goods.
• The policy addresses key issues: availability of finance, raw material, innovation and tech- nology, productivity, quality and environment friendly manufacturing practices, promoting exports and creating domestic demand.

Highlights #

• Integration of major capital goods sub-sec-

tors such as textile, earth moving and plastic machinery among others as priority sectors under Make in India initiative.

• To facilitate improvement in technology depth across sub-sectors, increase skill availability, etc.
• Strengthening the existing scheme of the DHI (Department of Heavy Industry) on enhance- ment of competitiveness of Capital Goods sector by increasing budgetary allocation
• Enhancing the export of Indian made capital goods through a ‘Heavy Industry Export & Market Development Assistance Scheme (HIEMDA)’.
• Provision for launching a Technology Devel- opment Fund, upgrading existing and setting up new testing & certification facility, mak- ing standards mandatory in order to reduce sub-standard machine imports
• Providing opportunity to local manufacturing units by utilising their installed capacity.

Way Forward #

The present policy has tried to deal in a com- prehensive manner with the issues facing the sector but the policy needs to be supported with a proper environment, which would require several structural reforms including infrastructure, regulatory reforms, improving ease of doing business etc.

SEZ REVIVAL PLAN #

Since SEZs are an important mainstay for sup- porting the ‘Make in India’ campaign and boosting exports, the government had set up a high-level team to review and resolve the problems of special economic zones.

What are SEZs? #

Special Economic Zones denote geographical areas which enjoys special privileges as compared with non-SEZ areas in the country. They were conceived as tax free enclaves with world class infrastructure for exporting goods and services.

The main objectives of the SEZ Act are:

• Generation of additional economic activity.
• Promotion of export of goods and services.

• Promotion of investment from domestic and foreign sources.
• Creation of employment opportunities.
• Development of infrastructure facilities.

Why SEZs failed? #

• Incentives offered under the foreign trade policy to exporters outside of the zones.
• Disincentives arising out of free-trade agree- ments (FTA).
• Land Acquisition is one of the major hurdles.
• Inflexibility of labour laws in SEZs.
• Policy uncertainty because of differences between Finance and Commerce Ministry.

Way Forward #

There is a need to change the perception of SEZs as tax heavens to enclaves with excellent infrastructure facilities. SEZs should provide better infrastructure facilities, which in turn will reduce the cost of operations and act as an incentive for exports. Government should provide sufficient support in this regard. Fiscal incentives need to be carefully designed so that it doesn’t violate WTO rules. SEZs should be allowed to sell within the country without payment of customs duty on the product. Abolition of MAT and DDT (Dividend Distribution Tax).

MAKE   IN   INDIA   –   SCOPE  AND CHALLENGES #

Government launched the “Make in India” campaign in September 2014 which is the first of its kind for the manufacturing sector as it addresses areas of regulation, infrastructure, skill development, technology, availability of finance, exit mechanism and other pertinent factors related to the growth of the sector. It contains a vast number of proposals including easier norms and rules designed to get foreign companies (and domestic) to set up shop and make the country a manufacturing powerhouse.

The main targets under the scheme were:

• Increase in manufacturing sector growth to 12-14% per annum.
• Increase in the share of manufacturing in country’s GDP from 15% to 25% by 2022.

• Create 100 million additional jobs by 2022 in manufacturing sector.
• Increase in domestic value addition and tech- nological depth in manufacturing.
• Enhance the global competitiveness of the Indian manufacturing sector.
• Create appropriate skill sets among rural migrants & urban poor for inclusive growth.
• Ensure sustainability of growth, particularly with regard to environment.

Scope for manufacturing / Make in India #

After India liberalized its economy in 1991, the services sector was among the fastest growing part of the economy, contributing significantly to GDP, economic growth, international trade and invest- ment. Manufacturing contributes just 17 percent to India’s GDP, compared to a 54 percent contribution by services. But the services sector employs fairly skilled people and India’s most abundant resource is unskilled labor that is why it has not been able to provide employment to the large unskilled Indian population. At present, 12 million people enter the Indian workforce each year. A substantial part of them is low skilled workers, many having migrated from rural India to the urban centers. Jobs are not being created at a proportionate pace. During 2005- 12 India added only 15 million jobs, a quarter of the figure added in the previous six years. The scale and nature of employment that is required to employ these people with limited skills and education can only be provided by low and semi skilled manu- facturing. While India is good at making complex things which requires skilled labour and frugal engineering (cars and automotive components), it is quite uncompetitive at low skilled manufacturing.

For manufacturing to take off in India, we must create hubs that are ecosystems for innova- tion, specialized skills and supply chains as it is difficult to make a country the size of India into a uniformly attractive manufacturing location. Even China started its manufacturing journey by creating a few oases in the form of four special economic zones which were remarkably easy places to manu- facture in Pune, Chennai, Bengaluru and Delhi are already emergent hubs but we must give incentives to attract the world’s leading companies to establish

global innovation and manufacturing centres in these hubs. India must improve the physical infrastructure, reform labour laws, invest in skills development, make it easier to acquire land, implement Goods and Services Tax (GST) and fast track approvals. And through these measures, it should improve in the ranking of “ease of doing business” from the current 130 out of 189 countries to become a man- ufacturing powerhouse in order to gainfully employ its demographic dividend. With China’s competitive advantage in manufacturing eroding (because of higher wages), India has the opportunity to take some share of global manufacturing away from China and fortunately we have two major natu- ral advantages of a big labour pool and a large domestic market.

Challenges #

There is only one time-tested way for a country to get rich. It moves farmers to factories and imports foreign manufacturing technology. When surplus farmers are moved to cities their productivity soars. So far, no country has reached high levels of income by moving farmers to service jobs all together. This may be because manufacturing technologies are embodied in the products themselves and in the machines that are used to make the products, while service businesses get their productivity from organizational models, human capital and other intangibles that are harder for poor countries to imi- tate and tougher to grow quickly. But the problem is that manufacturing is shrinking. Although the total amount of physical stuff that humans make keeps expanding, the percent of our economic activity that we put into making physical goods keeps going down. This is happening all across the globe, even in China. This may be partly because manufacturing has been a victim of its own success – this sector has grown so productive that it is now pretty cheap to make all the stuff we need. (And after all that is what happened in agriculture). The main engine of global growth since 2002 has been the rapid industrializa- tion of China. By channeling the vast savings of its population into capital investment, and by rapidly absorbing technology from advanced countries, China was able to carry out the most stupendous modernization in history, moving hundreds of mil- lions of farmers from rural areas to cities. And that

in turn also powered the growth of the countries like Brazil, Russia and many developing nations which exported oil, metal and other resources to the new workshop of the world. But now China has started slowing down.

Comparison with China #

There is a risk in focusing on manufacturing and attempting to follow the export-led growth path that China followed.

First, the slow growing advanced/ industrial countries will be much less likely to be able to absorb a substantial additional amount of imports in the foreseeable future and the world as a whole is unlikely to accommodate another export-led China.

Second, industrial countries have been improving capital-intensive flexible manufacturing, so much so that some manufacturing activity is being re-shored (brought in their own countries). Emerging markets wanting to export manufacturing goods will have to compete with this.

Third, when India pushes into manufacturing exports, it will have China to compete with. Export- led growth will not be as easy as it was for the Asian economies who took that path before us.

Accordingly, China might have been the last country to hop on board the industrialization train. And in that case, India, Africa, Latin America and the Middle East might get left behind and may not be able to catch up, as China did.

Our Strategy for “Make in India” #

While focusing on “Make in India”, we should not follow export-led strategy that involves subsi- dizing exporters with cheap inputs as well as an undervalued exchange rate, simply because it is unlikely to be as effective at this juncture. And we should accept that, India is different from China and is developing at different time. Further, we should also not see “Make in India” as a strategy of import substitution through tariff barriers (import substitution means substituting our import require- ments with domestic manufacturing). This strategy has earlier not worked because it ended reducing domestic competition, making producers inefficient and increasing costs to consumers. Instead “Make

in India” shall mean more openness, creating an environment that enables our firms to compete with the rest of the world and encourage foreign firms to create jobs in India. As building things (manufacturing) becomes less important and doing things becomes more important to the global econ- omy, human capital will be more crucial than ever. This requires enhancing the quality and spread of healthcare, nutrition and sanitation, better and more appropriate education and training for skill valued in the labour markets. So, while we should continue to push to improve infrastructure of the country but it may be even more important to focus on education (human capital).

MANUFACTURING OR SERVICES #

India’s most abundant resource is unskilled labour. But the services sector employs fairly skilled labour and if India wants that its growth is driven by services then it must focus on “Skilling India” aggressively. But skilling (which requires greater focus on education) will take time and a major por- tion of the present unskilled population can be left out if we focus just on services to achieve growth. If we want our growth to be driven by manufacturing then we should start building the infrastructure and logistics/connectivity that supports unskilled labour in intensive manufacturing.