Data released earlier this week shows that industrial output virtually slumped this year. The Index of Industrial Production (IIP) rose by a feeble 0.1% in April (on a year-on-year basis) after a contraction of 3.2% in March. While the IIP numbers are notoriously volatile, and often unreliable due to patchy data, the trend since early 2010 has been unmistakable: downward.
After mouthing suitable expressions of concern, various government functionaries—ministers and senior civil servants—have gone back to doing nothing. That, however, is not strictly true. The government does have a plan to revive manufacturing. This time, it has borrowed a leaf out of Mao Zedong’s China: it is aggressively pursuing an “industrial policy”. This is not the China of gigantic special economic zones of the kind seen in Shenzhen, but that of the Great Leap Forward—a collection of steps that were taken from 1958 to 1961 to turn China from a country of impoverished peasants into an industrial powerhouse. In the history of “industrial policies”, that experiment ranks as the most ambitious.
The Union government has something similar in mind, if only in scale. Early in June, the government notified the national manufacturing policy (NMP). NMP aims to enhance the share of manufacturing in the gross domestic product to 25% within a decade and create 100 million jobs. Even in the heyday of Nehruvian thinking, nothing remotely similar was imagined.
Perhaps it is unfair to compare short-term problems such as the decline in IIP with a longer-term plan such as NMP. It isn’t, for the simple reason that the government is doing nothing to revive sagging industrial fortunes today, but is busy charting a quixotic course for the future.
Under NMP, a manufacturing industry promotion board (MIPB) has been established. The government has also notified a board of approval, a green manufacturing committee and a high-level committee. MIPB is replete with its collection of secretaries (nine in all) and two “industry representatives”. The board has been tasked “to periodically review the overall situation in the manufacturing sector in the country…also review the implementation of NMP in general”. In addition, the board will also oversee the development of manufacturing zones. (Details can be found in the press release issued by the ministry of commerce and industry on 3 June).
Were it not for ideas of recent origin, one could have said these steps hark back to the Industrial Policy Resolution of 1948. The “intellectual respectability” has been virtually lifted from the pages of Harvard economist Dani Rodrik’s book One Economics Many Recipes (Princeton University Press 2007). Even a cursory glance at the chapter on industrial policy (especially pages 113 to 119) shows its unmistakable imprint on NMP.
The original reason for pursuing industrial policies was quite clear: there were pervasive market failures that prevented the newly independent countries from industrializing. Unless governments invested across different industries—or engaged in a “big push”—there was no way that industrialization could occur. Instead if different parts of a relatively underdeveloped economy adopted what economists call increasing returns technologies simultaneously, this could lead to income generation across sectors and, hence, a source of demand for goods in all sectors. The logic was compelling: even if no individual sector could break even, simultaneous industrialization across many sectors could do the trick. This is what the government tried from 1952 until the idea lost traction in the early 1980s.
What was not understood then—and could be grasped only much later when economists learnt how to model increasing returns phenomena—was that there are only two outcomes in such situations: either industrialization happens or it does not. To use economists’ jargon, there are two Nash equilibria in which either all firms industrialize or none of them do. There are specific conditions under which a positive outcome occurs. There is no need to dwell on economic history and why India failed to achieve a “big push” in its years of infatuation with planning. The fact is it did not happen.
Today most of those factors for failure don’t exist. India has a robust market and if anything, it is a supply-constrained economy. There is no need for a “big push”. The private sector, if left alone, can generate what the country wants.
Then what is the logic behind NMP? The motives are clearly political. In any industrial venture, employment and wages are determined by factor markets. The location of the industry and the kind of output it produces are determined by what the market demands. For the current political dispensation, this state of affairs is considered unacceptable. Intellectually, it is argued that an industrial policy represents “restructuring policies in favour of more dynamic activities generally, regardless of whether they are located within industry or manufacturing per se.” (Rodrik page 100). In India, where electoral fights are viciously competitive, industrial policy is a thinly-disguised effort to reorder relations between capital and labour; be it wages, conditions of unemployment or any other matter. If NMP manages to create even 10% of the jobs it has in mind, the reordering of the political landscape will be colossal.
There are good reasons to seek industrialization, but what the designers of NMP have in mind is something different. If the government wants to promote industry, then it better do something now for existing industries instead of imagining a dreamscape.
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