Till a few years back, a rather caricaturish view of India’s liberalization held the period prior to the 1990s to be lost years.
The Nehru-Mahalanobis model of favouring heavy industry was thought to be completely flawed and public sector intervention in the economy thought to be uniformly disastrous. That view has become more nuanced today, with many economists pointing to the creation of a scientific and technological base during those years.
In their paper, Felipe, Kumar and Abdon grapple with these issues.
The paper finds that India’s export basket is more diversified than is usual for a country at its stage of development. Moreover, they find that diversification in what they call “core” products—metals, machinery and chemicals, in other words, the more capital-intensive sectors—is more than usual at India’s level of per capita income.
This was the result of the emphasis on heavy industries, in “machines to build machines” in the Mahalanobis model.
That emphasis led to the development of knowledge and skills in these industries, skills that were of great help once the restrictions of the licence-permit raj were done away with.
The authors also say that this was buttressed by the creation of a scientific and technical infrastructure, through spending much more on tertiary education than other poor countries usually do. The setting up of premier institutes of technology and management also helped greatly.
The researchers point out that “Institutions of higher education, research and development, which were established in the post-independence period, provided the much-needed know-how and highly skilled low-cost labour for industrial development, especially the heavy machinery, metals and chemical sectors and later for the growth of the information technology and communications industry.”
In short, the pre-liberalization period led to India acquiring a comparative advantage in many sophisticated products.
At the same time, India has lagged behind in labour-intensive manufacturing and its share in these sectors is below what is usual for a country at its stage of development. This is because, till recently, most of these products were reserved for the small-scale sector. The authors also cite restrictive labour laws as holding up the growth of labour-intensive sectors.
Given the fact that the maximum employment potential is in this sector, the researchers say that this is the major flaw in following the capital-intensive model.
The authors argue that while there is no question of going back to a command economy, we should also not go to the other extreme and do away with industrial policy.
Nor are they of the view that industrial policy should only correct market distortions. Rather, they say that policy must step in to raise agricultural productivity, to adopt new activities and technologies, apart from addressing market failures.
They approvingly cite development economist Dani Rodrik’s view that the private and public sectors should be viewed as strategic collaborators to find new opportunities and achieve comparative advantage in new products. In short, they say policy tools must be used to help the private sector “venture into activities that it would not enter otherwise”.
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