The vision of a developmental state, which India aspires to be by 2047, is built on the shoulders of robust industrial policies. The transformation of East Asian economies into industrial behemoths in the second-half of the twentieth century was driven by carefully designed industrial policies which tapped into their own comparative advantages by leveraging institutional synergy.

One of the key facilitators for tapping into this comparative advantage is the ability of the state to direct capital towards productive enterprises and extract performance from firms with a designated sectoral focus. This is indispensable for any version of industrial policy in a developmental state, which places a central role for governments at multiple levels, national, federal and regional, to carefully design and implement a set of coherent interconnected initiatives.

What does industrial policy mean and why is it so hard to get it right? Industrial policy in all its essence is a set of interventions which seeks to extract economic performance from firms as a trade-off against subsidies/benefits accrued from the government. The role of governments is critical when it comes to designing suitable industrial policy interventions.

The key issue here is to incentivise (hand-hold) firms towards achieving performance targets which are critical to the overall growth and development of the economy. Depending on the ability of the firms to achieve those performance targets, they can be provided with subsidies, incentives or concessions. However, this brief framework of designing robust industrial policies is contingent on the ability of the state to achieve two goals: facilitate economic performance and, at the same time, discipline stakeholders towards the goals of industrial policy.

Moving from a macro perspective to micro implementation is where we would realise that it is hard to design workable industrial policies. One of the most important issues here is the diverging interests of the stakeholders in economic activity. There are three key stakeholders, whose interest needs to converge: governments, capital, and labour. Each of these stakeholders have their own interests which might not necessarily align with the goals of economic performance.

This is where the governments, at multiple levels, need to assume the responsibility of co-ordinating and disciplining the stakeholders and achieve the necessary synergy so that the goals of industrial policy can be achieved. The other key issue is the mechanism by which economic performance can be achieved on account of providing subsidies and concessions. Ideally, the state should be able to allocate resources ex-ante to the set of firms which show the potential to achieve those targets and at the same time be able to take away resources when underperformance becomes evident. This sounds straight-forward in theory but is very hard to achieve in practice.

A functional implementation of this mechanism is driven by the institutional set-up which is responsible for implementing industrial policies. This would include the monitoring of projects, mapping of performance targets, releasing subsidies contingent on achieving these performance targets, and in cases of project default, finding ways to reduce financial exposure to the exchequer. Each of these functions have their own elements which further constrains the ability of the state to achieve the required institutional synergy necessary for industrial policy implementation.

In addition to that, and specifically in relation to the structure of the federal system in India and the separation of subjects between the Centre and the State, this synergy becomes all the more challenging to achieve. The argument here is that as much as the impediment to robust industrial policy is the issue of the stakeholders and the elements of industrial policy, it is also an issue of scale, precisely.

Structural bottlenecks

There is empirical evidence to suggest that States which have designed robust industrial policies are also the ones which have the highest contributions to the overall growth performance of the national economy. Whether it is Tamil Nadu, Maharashtra, Gujarat, or Karnataka, these States contribute a bulk of India’s output in various sectors. A first step towards extracting economic performance from underperforming States would be to design industrial policies at the State level by carefully understanding the structural bottlenecks which impede industrial performance.

This would require a revamp of the present institutional setup which is responsible for implementing industrial policy in these States and create necessary institutions in case they are completely absent. One of the key aspects would be to create an institutional setup which reduces turnaround time and limits the number of departments or agencies which are responsible for implementing industrial policy.

An idea, which needs to be explored further in this context, is the setting up of a State Industrial Policy Authority (SIPA) which will have overarching jurisdiction over all aspects of industrial policy design and implementation. This will reduce the timelines of project scrutiny, approval, monitoring, and disbursement of subsidies and at the same time ascribe the necessary responsibility and accountability to a particular body.

The rationale behind initiating a body like SIPA is to achieve the most important preconditions for successful industrial policy: institutional synergy and state discipline. Designing industrial policy on a State level must revolve around mapping comparative advantages and disciplining the stakeholders towards the goals of a coherent policy.

A body like SIPA must have three key elements: a planning authority, a network of nodal agencies which communicate the vision of industrial policy with the stakeholders, and an organisational structure which has the necessary skill-sets and acumen to facilitate and extract performance from firms.

It is important that States which have been laggards in economic performance tap into the potential of implementing a set of coherent policies to contribute towards higher growth of not only the state but of the country as well.

Babu is Advisor to Economic Advisory Council to the Prime Minister and Professor of Economics at IIT Madras, and Kumar is researcher at EAC-PM. The views are personal