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India’s new industrial policy

India’s new industrial policy
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First Published: Tue, Jul 20 2010. 08 46 PM IST
Updated: Tue, Jul 20 2010. 08 46 PM IST
Some Japanese scholars have used a picturesque analogy to describe the gradual spread of development in Asia, with countries escaping mass poverty in a V-shaped formation that resembles a flock of flying geese.
Japan led the way after World War II, till rising wage costs in the 1960s led to the shift of low-value manufacturing to other regional economies in decadal waves that pulled millions off the farm and into the factory.
Most Asian countries that prospered used explicit industrial policies—and a rigged exchange rate—to build manufacturing prowess. Such policies went out of fashion in recent decades, but seem to have made a comeback in the entire ideological churn in the wake of the Western financial crisis.
World Bank chief economist Justin Lin says it is time to rethink development policy, with the state playing an important role even though “the market is the basic mechanism for effective resource allocation”. There are clear signs that there has been a change in the attitude of the Indian government as well: Industrial policy is making a quiet comeback in India.
The contours of the new industrial policy seem quite different from the sort of policies followed by Nehruvian India and other Asian countries in their early stages of development. “The needs of building competitive enterprises and meeting WTO requirements need to be taken into account,” Planning Commission member Arun Maira told me during a telephonic chat. This means the new industrial policy that is emerging will not have much of the old statist and protectionist policy mix: protection through high import tariffs, preferential access to bank funds, promotion of national champions and resource allocation by a government agency.
Yet, there is a clear belief that the country needs an explicit industrial strategy. The government will choose which industries need encouragement and design suitable policies. Physical and social infrastructure will also be developed, a process that should lower transaction costs and raise the rates of return on investment.
Maira gave me three key policy parameters that will be kept in mind in designing the new economic strategy —there should be a growth in quality jobs, the Indian economy should get strategic depth in capital goods such as power and telecom equipment, and defence and security issues should be kept in mind.
There will be both technical and political economy challenges here. The technical challenge is to identify industries that need a helping hand, and one assumes that government agencies have an understanding of India’s factor endowments and comparative advantages. The political economy challenge is perhaps even more complex. Comparative advantage rapidly changes in the modern economy and technology cycles are getting shorter. Policy will have to be flexible if India is not to stagnate.
A market economy has immense flexibility. Japan was a pioneer of successful industrial policy, but it lost the flexibility that it needed to fight its long economic stagnation. South Korea provides another lesson. Industrial policy there led to the formation of industrial conglomerates—the chaebol —and the gradual decline into crony capitalism.
What the Planning Commission has now set out to do is thus interesting but fraught with risks of regulatory capture and rent-seeking by favoured industrial groups. Maira says it is important that the focus of industrial policy remains on sectors rather than companies, in the attempts to forge closer collaboration between “productive sectors and policymakers”.
The core goal of the emerging industrial policy is interesting: job creation. This column has often argued that the only path to truly inclusive growth is the creation of high-productivity jobs that will allow millions to escape poverty. This job creation has to be done by companies in modern sectors. The Asian experience tells us that no country can banish mass poverty unless it creates millions of new jobs a year in manufacturing and services. India needs around 10 million such new jobs every year. Maira told me that our current pattern of development has not created enough quality jobs and that this should be “the highest national imperative”.
The current attempt to design a new industrial policy and development strategy should be an important part of the national economic debate, but it remains sadly ignored. Economic growth has already accelerated and public policy will have an important role to play in deciding down which path India goes in the future. Former Reserve Bank of India governor Y.V. Reddy made a very perceptive remark in his review of a book of essays in honour of Montek Singh Ahluwalia: “…the future…will be largely determined by political economy, and on how to rather than what to do to improve the Indian economy.”
Niranjan Rajadhyaksha is managing editor of Mint.
Your comments are welcome at cafeeconomics@livemint.com
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First Published: Tue, Jul 20 2010. 08 46 PM IST