A few weeks ago visiting Israeli foreign minister Eli Cohen made a telling point: soft power is no good without hard power. More recently, India’s Foreign Minister S Jaishankar interpreted hard power to mean industrial and technological strength. This is worth pondering because for the last one year or so the government has been in a highly self-congratulatory mode on the performance of the economy. Much of this is justified, especially on the macroeconomic management and infrastructure investment side.

But there’s one huge failure that cannot be ignored. This is the failure to increase the share of manufacturing in GDP. It remains around 15 per cent. That’s shameful by any standards. Indeed, if anything, over the last two decades, thanks mainly to cheap Chinese imports, India has actually de-industrialised. So it’s worth asking why it has failed so utterly in becoming a major industrial economy.

The answer is quite simple, actually: an obsession with equity at the expense of efficiency. So while domestic policy has focussed, almost obsessively on equity, China has focused, again obsessively, on efficiency. The results are there for all to see. The bias starts as far back as 1948, when Parliament passed labour laws with standards that couldn’t be found even in the western hemisphere at that time. Then, from about 1956, the financial sector too was emasculated. And in 2011, the then government made the acquisition of land hideously expensive. In sum, all three major factors of production — land, labour and capital — are both expensive and difficult to obtain. To top it all, India has a regulatory regime that’s a prisoner in the hands of the lowest levels of the bureaucracy which are notoriously corrupt. It’s also held to ransom by political parties that make unconscionable demands on investors wanting to set up manufacturing units.

To its credit, the Modi government has tried hard to solve these problems. It has done its best to reduce the compliance burden but without much success. It’s made capital cheaper, with somewhat more success. And it has tried to loosen up the ossified labour market via the labour codes (but most State governments, because labour is a State subject, have baulked at adopting them). Its greatest failure, however, despite an early attempt in 2014, has been to make land acquisition cheaper. Without land no one can set up a manufacturing facility — unless if the government hands over some of its own land — but that has turned out to be a nearly insurmountable problem. All in all, manufacturing in India is about 33 per cent more costly than in most countries that are competing with it to attract investment. So it’s cheaper to import than make in India. As if this wasn’t bad enough, India has entered into FTAs with more efficient producers. This has made imports and CKD assembly even cheaper. Finally, that’s why the Make in India project is incompatible with the low tariff trading regime. The West has discovered this to its cost as China has hollowed out western manufacturing.

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