Loose ends in industrial policy

When the Union Cabinet approved the ‘new' National Manufacturing Policy (NMP) recently, it formalised the outcome of a two-year-old discussion by various policymakers — from the Prime Minister to the Reserve Bank of India Governor and the Planning Commission— about the need to ramp up the manufacturing sector's contribution to GDP. The DIPP's (Department of Industrial Policy and Promotion) paper on NMP incorporates viewpoints of various stakeholders and provides the strategic backdrop to the methods that, it is hoped, will create the resurgence of Indian manufacturing within a decade and half.

The paper starts by pointing out that a 16 per cent share of manufacturing in GDP is “a cause for concern especially when seen in the context of transformation registered in this sector by other Asian countries in similar stages of development”. It goes on to refer to the increasing gap in output and productivity between India and Asian countries, and draws the conclusion that we “have not been able to fully leverage the opportunities provided by the dynamics of globalisation”.

Much of the background leading up to the specific measures for revitalising the sector could have been written 60 years ago in the first flush of the new Republic's ambitions to become an industrial power in its own right, with appropriate nods at “employment generation, small and medium enterprises” — handy catchwords used to reiterate a fading commitment to social democracy.

The draft also makes some observations on India's trajectory of growth in the late 1990s and the post-millennium IT boom. That boom, coupled with a series of policies that were generous towards India's yet-to-be-born telecom and nascent IT sector, provided the platform for a new set of entrepreneurs to seize the chances that came their way from the US and partly Europe.

The government also pitched in with generous tax exemptions for software exports that continue to this day.

Services surge ahead

That convergence of domestic policies favouring the budding IT sector, India's “infant” industry at the time, and the promise of rich harvests in the US, catapulted India into the global economy.

It also tilted the balance in favour of the services sector, that within a short while had overtaken manufacturing as the main driver of GDP.

The newly-minted global professional and rising incomes within the urban middle class galvanised economic expansion in a way manufacturing could not — all it could do was to reap the collateral benefits of that rapid growth in purchasing power of an urban middle class caught surprised at its ability to straddle the choices offered by global and look-alike domestic products and services.

A trickle-down effect was at work all through the new decade of the new millennium, leading to a cycle of expansion never witnessed before.

When the UPA assumed power in 2003-04, and in 2004-05 it rubbed its eyes in disbelief at the increase in GDP, what it was witnessing was makeover in the GDP constituents. Since then real estate, transport, hotels and of course software exports have driven both consumption and output and resulted in an average 8-9 per cent GDP growth.

Incorrect comparison

The paper's comparison of manufacturing in India and other Asian economies therefore is misplaced. India's post-dotcom trajectory was partly a result of haphazardly conceived taxation and licensing policies of the late 1990s for telecom and other services, and ready global markets eager to exploit cheap and talented labour.

In contrast, some Asian economies focused single-mindedly on replicating Japan's model of merchandise export-led growth. If India was going to provide the software, East Asian economies and soon China would provide the hardware — along with apparels and Barbie dolls.

If India did not leverage the “opportunities” provided by the “dynamics” of globalisation it was because the time wasn't ripe to do so. Nor was it ripe for an improvement in the domestic components sector in manufacturing. When the paper complains of “relatively low level of value addition”, high capital equipment imports it obfuscates the systemic problem.

In a globalised world, value-addition is also globalised. The distinction between domestic and foreign content loses meaning as the US found when its competitive advantage in the IT sector built to a large extent, on global inputs.

So has it been evident among multinationals that have sub-contracted components across borders to “hubs” with cheap labour for decades. The only “local content” then — quality control — determines the brand name and the competitive edge of the final product, not physical value-addition.

Perhaps, the auto sector will help India break the mould. With its strong domestic market and relatively high-skilled labour force and a vast small and medium enterprise sector, the ‘feeder' sector as it were, multinationals could find it expedient to source a greater part of the components from local suppliers. What global IT firms did for Indian middle-class professionals, the increasing number of global car firms seeking to locate in India might do for that feeder industry. So could India become a manufacturing hub?

For the dreamy eyed policymaker it just might. With General Motors, Hyundai and Volvo scouting for sites, has a new manufacturing makeover already begun? Labour “troubles” in Maruti Suzuki plants in Gurgaon may puncture the dream. From all accounts, trade unionism is about to witness a revival raising the spectre of “industrial relations” and “archaic” labour laws once again.

ISLANDS OF PRIVILEGE

Ironically, the NMP may pour fuel over a growing fire and in the process set back the “revival” of manufacturing.

According to the position paper, clustering “enhances supply chain responsiveness, provides easier access to market, talent and substantially lowers logistics cost”. Clusters in Europe were driven by these purely “efficiency criteria”.

They were not meant to provide ‘hothouses' of rapid growth, amidst an arid landscape of poor infrastructure and backwardness. Both the Special Economic Zones and National Investment and Manufacturing Zones are just that: exceptional arenas of nurtured export and industrial expansion. Together with the SEZs the NIMZs will create “archipelagoes of privilege”.

Such landed industrial ‘aristocracies' could further cleave the countryside, perpetuating tensions over land acquisition. Together with the spread of industrial labour agitations, will the Commerce and Industry Ministry have created yet another zone of conflict?

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