Among many trends that the Covid pandemic has accentuated is a shift towards real economy comprising production, jobs, and localisation replacing the earlier emphasis on finance, consumerism, and globalisation.

Harvard economist Dani Rodrik calls this trend ‘Productivism.’ Governments around the world are adopting industrial policies that incentivise domestic manufacturing to create jobs and reshoring of the value chains. Industrial policy, shunned in the heydays of globalisation, is now back in fashion in industrialised as well as developing countries.

In the US, once the greatest champion of free markets and globalisation, the Biden Administration has defined its industrial policy recently with the $280-billion CHIPS and Science Act, the $737-billion Inflation Reduction Act, and the $550-billion Infrastructure Investment and Jobs Act. These Acts will foster local manufacturing and innovation of semiconductors chips, electric mobility, and other new technology products through hundreds of billions of dollars in subsidies and tax breaks. The use of domestic content regulations on solar panels has also been authorized under Buy America Act.

India’s recent manufacturing push with Make-in-India for job creation is a part of the global trend. India’s new industrial policy has unfolded with ease-of-doing-business, production-linked incentives (PLIs), tariffs protection, sectoral missions such as the Semiconductor Mission, and Gati Shakti, among many initiatives. India’s recent emergence as a net exporter of mobile handsets and toys gives confidence that the industrial policy can work.

But an updated industrial policy framework for the changed context is desirable.

Vision 2047

After 75 years of Independence, a more confident India is aiming high with a 2047 vision of a developed country status and the third-largest economy. Successes in leveraging technology for inclusive development, leadership in ICT services, a new generation of entrepreneurs scripting success with their unicorns, and vaccination not only of her own population in a record time with made-in-India vaccines but also helping other countries across the globe, are among the achievements boosting the national confidence to aim high.

In that context, the recent government proposal to come out with a new Industrial Policy Resolution is most timely. What should one expect in a New Industrial Policy (NIP) Resolution?

NIP should provide a framework for accelerated industrialisation of the country to contribute to the Vision 2047 of a developed country by generating jobs and prosperity in an inclusive and balanced manner, and a roadmap for achieving it. It should identify the sectors that would be targeted for building leadership in garments and leather goods (sectors in which we have the advantage of labour, skills and natural resources), dynamic and high-value adding sectors with potential to drive economic growth and meet aspirations (such as consumer durables), those that determine competitiveness in others due to linkages (like capital goods), or help enhance sustainability (such as EVs, storage solutions).

It should also define the approaches to harness the full potential of MSMEs and start-ups, foreign direct investment and MNCs for India’s development. It should lay out a framework for fostering innovation-based rivalry between firms to lead India on the path of innovation-led growth. It should lay out a path for tapping the opportunities of green industrialisation like EVs or Solar PV equipment manufacturing and also push towards sustainable practices and retrofitting. Much more importantly, it should create policy space to leverage certain strategic interventions of the type that the East Asian countries adopted for building competitive manufacturing capabilities. These include creative non-tariff measures to incentivise domestic products, performance requirements that could help MSMEs get integrated with global value chains and tap the global markets, and leverage public procurement for domestic manufacturing, among others.

Some of the policy flexibilities or policy spaces have since been sanctioned under multilateral trade rules like the TRIMS Agreement of WTO. India could leverage its G20 Presidency to reform the WTO, seeking to retrieve some of these policy flexibilities, especially to pursue sustainable industrialisation.

Need for industrial bank

Exchange rate management has been another critical factor for building a competitive manufacturing sector in East Asian countries and should not be overlooked. A new institutional architecture for industrial financing is sorely needed especially given the limitations of commercial banks in term-lending due to asset-liability mismatches. Hence, an ISID study has recommended the establishment of a new national industrial development bank for the term-lending needs of the manufacturing sector.

The Union Budget 2023-24 could consider the establishment of a new industrial bank like it created one for infrastructure investment in 2021.

Finally, the East Asian experience shows that coordinated implementation of different aspects of NIP would be most critical. A high-powered institutional framework for coordinated implementation in a whole-of-the-government approach would be imperative!

The new industrial policy would be an important document shaping the future development trajectory of the nation over the next quarter century and scripting the emergence of a new confident India able to provide inclusive and sustainable prosperity to all its people!

The writer is Director, Institute for Studies in Industrial Development (ISID), New Delhi.