Policy for manufacturing

Twenty-seven years after the watershed industrial policy of 1991, a new avatar is before the Cabinet for its consideration. This comes as an extension of the ‘Make in India’ programme, which was essentially meant to direct FDI inflows —so far concentrated in a clutch of services sectors such as finance, electronics and telecom — into manufacturing. A draft version of the industrial policy was placed in the public domain a year ago, which rightly identifies core concerns — infrastructure, labour market constraints, slow technology adoption, inadequate R&D spending and fallouts of free trade pacts. The policy aims at creating global brands and raising FDI inflows to $100 billion annually (from $60 billion levels at present). Having moved up several ranks in the ease of doing business index, the idea is to become a key player in the global digital scene. The creation of jobs in a scenario of automation remains an abiding challenge. As an overall strategy, the proposed draft marks a continuation of the process that began in 1991. India has progressively reduced both its trade and financial barriers, which infused the business ecosystem with a new energy. The phased manufacturing programme (PMP), which mandated a level of local sourcing as a condition for exports, was a cornerstone of a liberalised investment regime of the 1990s; it helped in the creation of indigenous capacities in auto and telecom.

However, it is important to do some stocktaking. The reforms impetus was two-pronged: first, a reduction in tariffs on capital and intermediate goods was expected to make domestic industry competitive; and, second, FDI flows were expected to improve technology and efficiency levels, besides creating jobs. FDI flows have picked up, but there is little evidence to suggest that these have gone substantially into greenfield investments in manufacturing. Such flows find their way into acquiring domestic facilities, in the process not creating jobs. Similarly, it cannot be said that the gradual withdrawal of tariff protection has lifted efficiency and capabilities as a whole. The pharma sector no longer produces bulk drugs, while technology absorption in hardware and telecom has not taken place. The mismatch between the growth of the software and hardware sectors reflects a policy failure. However, returning to knee-jerk protectionism of the past is no solution.

A new system of incentives is needed. Strategic industries should be protected (the Centre needs to identify them) on the condition that R&D spends increase. Unlike the PMP, this will not run foul of the WTO. Taking a leaf out of China, the government should create clusters so that overheads are reduced. Logistics needs a major boost. The Centre could direct resources away from export subsidies into such priorities. A balance between returns on finance and on physical investment needs to be maintained. The draft policy is sketchy in these respects.

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