Indian enterprises need protection to grow
It is all very well to say that India’s aspirational youth, who want the good things in life, are a large market. However, if they cannot have sustainable incomes, they cannot buy whatever they aspire for. And frustrated aspirations can be fuel for social unrest, retail violence and political upheaval, all of which India is experiencing now. Therefore, India must create more opportunities for its large population of young people to earn adequate incomes in a dignified way, whether through jobs in large enterprises and small enterprises, or self-employment.
This is the rationale for Make In India. Indian youth must be engaged in enterprises that produce stuff and services in India, and not be merely aspirants for the best stuff produced elsewhere. The principal objective of Make In India policies must be to grow enterprises within India whose products and services can compete with the best in the world, so that Indian consumers are not short-changed when they buy Indian, and so that India can also export more to the rest of the world.
Many Asian countries have increased the standard of living of their people by rapid industrialization of their economies in the last 70 years—Japan, Taiwan, Korea, and China, for example. They stimulated “make in” their countries with industrial policies that nurtured the growth of their own enterprises. They provided their enterprises with assistance and shielded them from stronger competitors abroad until they had built comparable strengths. Nevertheless, “industrial policy” became a bad word with the advent of the Washington Consensus in the 1990s. Countries like India that needed to grow their economies were pushed to drop all barriers to global trade. The consequence of this is that India’s imports increased, especially of “value added” goods in which value is added by workers elsewhere, while exports of raw materials to feed other countries’ factories increased too.
The contrast between India’s and China’s trajectories of industrial growth since the 1990s is stark. In 1996, the large industrial countries invited all countries to “voluntarily” join the Information Technology Agreement (ITA) of the World Trade Organization and reduce import duties on IT-related manufactured products to zero. Their idealized argument was that since information technology is a fundamental backbone for economies, all countries should use the best and cheapest IT-related products. This would stimulate the overall growth of their economies. Of course, the countries promoting ITA, with the US leading, were the largest producers of these products at the time. ITA would expand their markets and also kill nascent competition.
India joined ITA early on, in 1997, from a position of weakness in its industry (and weakness against powerful foreign lobbies)—whereas China withheld. It joined ITA six years later. Meanwhile, it built itself to be the “factory of the world” in many electronic products. By the time it joined ITA, its industries were able to compete effectively. Many Western economists say that China protected its industries; it even “stole” intellectual property, and allegedly “manipulated” its currency to shield its producers while they built their capabilities. Meanwhile imports of electronic goods into India soared, especially from China, equalling imports of petroleum products.
India needs a better concept for a policy to grow competitive enterprises that will generate more employment. “Industrial policy” may be ideologically unacceptable to some economists. “Manufacturing policy” is inadequate because the boundaries between manufacturing and services are blurring. Moreover, India’s economy needs to fire on all cylinders—manufacturing, services, and agriculture too—to create sufficient numbers of productive enterprises that can provide large numbers of income-generating opportunities for its citizens. What India needs is a “policy for building capabilities for competitive enterprises”.
There is a large gap between the capabilities India presently has and the capabilities it needs. India has huge gaps in the skills of its people. It also has large gaps in the management capabilities of its small enterprises (and many of its large ones too). Capabilities are built by a process of learning to do what one could not do before. In a competitive world, the less capable must learn faster than those who are ahead of them. Their capabilities will have to be nurtured. And they may have to be shielded from larger, predatory competitors until they are stronger. The shields can be in the shape of import duties to compensate for the poorer infrastructure and bureaucratic hassles within, and/or a favourable exchange rate. Indian policies have failed domestic producers on both counts. There is a reluctance to tune the exchange rate to support domestic production. And, naïvely, import duties have been reduced too sharply to comply with demands from powerful lobbies for “free trade”.
Shields are easier to provide than is the process of building enterprise capabilities behind the shields. The shields must be very temporary. Therefore, the capabilities must be lifted up very fast. People learn by doing, and enterprises grow by succeeding. As they learn and grow, they acquire more complex capabilities. Thus, they are lifted on to higher levels of the economic escalator. A policy for building competitive enterprise capabilities, which is essential for India to grow more income-generating opportunities for its youth, must focus on interwoven processes for growth of enterprises and growth of people’s skills. The Indian economic escalator is missing steps at the very bottom, with which to lift up unskilled people and small enterprises into the upper steps of the “formal” economy, to levels that conventional experts in economics and management are familiar with.
Deng Xiaoping described China’s strategy for development as “crossing the stream by feeling the stones underfoot”. Policymakers must receive the signals sent by enterprises on the ground. They must tune policies to remove the constraints these enterprises face, and to enable them to learn and progress faster. India’s policymakers must pay much more attention to signals from tiny enterprises around the country than to macroeconomic theories.
Arun Maira was a member of the erstwhile Planning Commission.
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