How India can rejig its industrial policy

Ajay Shankar | Updated on August 03, 2020 Published on August 03, 2020

Focussed reforms Policy support packages need to be tailor-made for the identified sectors Istockphoto   -  Evgeny Gromov

Haphazard reforms have shortchanged producers, raising costs. A sector-specific focus with public investment support is needed

India needs to craft a strategy on how to reverse the lockdown-induced severe industrial slowdown. We need new policy instruments that steer market forces to deliver desired outcomes of creating jobs and achieving self-reliance in our open market economy. Understanding global as well as our own experiences would be of help in designing the right approaches.

The experiences of Korea followed by China, both of whoich emulated Japan’s post-War recovery strategy, are relevant as they are leading industrial powers. Korea supported its national conglomerates by keeping its domestic market initially closed for both imports of finished goods and investments. This meant easy import of capital goods and technology tie-ups, and minimal imports of finished goods such as cars and consumer appliances. It also artificially depreciated its currency. In political economy terms, the producer had precedence over the consumer.

China kept its currency depreciated. It pursued foreign investments, especially in labour-intensive industries, in its new special zones. Its state-owned enterprises were transformed to compete in a globalised market economy. It learnt from Russia’s experience. In spite of having had cutting-edge frontier technologies, Russia is yet to recover industrially from the ‘shock therapy’ of market reforms, including immediate privatisation of state-owned enterprises undertaken in the early 1990s. The Chinese supported its state enterprises, nurtured the newly emerging private ones, and invited foreign investments. It also insisted on joint ventures with global firms using the lure of its large market. It had no compunctions about reverse engineering and appropriating intellectual property.

So, for every major global firm, like Apple or GE, China had the national goal of creating Chinese firms which in due course would become competitors first in the domestic market and then in the global market. The state financed the technical education of thousands of Chinese in the US and Europe and got them to return to work in China. China and India have usually the same number of students in US universities, with the major difference being that most Chinese go back and work for China whereas most Indians stay back and work for the US. The education of these Chinese individuals has created the human capital that gives China the confidence that it can challenge and overtake the West technologically. Huawei’s 5G capability is a good example.

Where we fell short

India, till the economic reforms of 1991, pursued self-reliance through infant industry protection, a strategy not very different from that of East Asian nations. One material difference which led to such disappointing results was that industrial licensing reduced competition in the domestic market. The East Asian nations, on the other hand, created competitive industry structures. The other material difference was the push to firms to export to Western markets. Success in global markets needed competitive prices and acceptable quality. The state-controlled financial system funded such growth with far greater leverage than normal banking norms and prudence would permit.

India, on the other hand, took the view that being a large sub-continental economy, it could avoid integration into the global economy. The result was that by 1990, we had a broad-based but technologically obsolete industrial capacity, like that of the Soviet Union.

Post 1991, we embraced the policy paradigm of the Washington Consensus; openness to trade and investment and reduction of the role of the state in the economy. The state would try and take care of physical and social infrastructure and be a facilitator to improve the ease of doing business. The rest would be left to market forces. On public sector enterprises, there has been ambivalence. Aggressive privatisation was what reformers have wanted, but the political leadership has been cautious. Strengthening these enterprises has not been seriously attempted. Gradually, these have been declining. Some are so sick that by now asset sale is the only viable option.

Further, faith in growth based on market forces did not translate into a policy of lowering the cost of production and doing business. These costs had been raised in the earlier closed economy to generate resources through higher taxes and cross-subsidies. Not lowering costs after liberalisation has prevented India from having the fundamental prerequisite for global competitiveness. Continuing real exchange rate appreciation, high real interest rates, an asset price bubble in land, higher energy costs, regulatory risk and uncertainty, and an unskilled workforce with labour market rigidities have all been contributing to the lack of competitiveness. These weaknesses need to be rectified first and with urgency. The transition to giving primacy to the producer has to take place. Society needs to bear these costs.

Revamping policy

Designing policy packages for a few key industries would be challenging. Labour-intensive sectors must get priority. Recent experience has shown the limitations of simple traditional approaches. Interventions need to have a critical mass. Providing an interest subsidy to the textile industry is a good example where results have been below expectation. Capital subsidies given to ship-building have had, similarly, a modest impact. Raising import duties for many items is now under consideration. Concessional rates for leasing land, provision of cheaper energy, and public investment for common facilities of training, testing and waste management should all be options on the table. Selective government equity investments in areas where the risk perception is too high, as in the case of chip manufacturing, may be the only way to get such investment.

Spending scarce fiscal resources or getting the consumer to pay more would be worthwhile only if a major breakthrough is the target. A sub-optimal effort is avoidable. This needs better closed-door and transparent dialogue with industry to put together an attractive package that should trigger private investment. An end date for the support package also needs to be settled at the outset so that after success, scarce resources can move on to some other sectors. Packages need to be tailor-made for identified sectors. Electronics, toys, solar power, batteries for cars and grid storage are good candidates for industrial policy packages.

The writer is former secretary, DIPP and distinguished fellow, TERI. Views are personal

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Published on August 03, 2020
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