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Lure of industrial policies

Lure of industrial policies
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First Published: Sun, Oct 23 2011. 10 08 PM IST

Dhiraj Singh/Bloomberg
Dhiraj Singh/Bloomberg
Updated: Sun, Oct 23 2011. 10 08 PM IST
It is raining industrial policies around the world.
Not a week goes by without an announcement somewhere about “strategic intervention” in “strategic industries”. France contributed $3 million last year to keep toy company, Meccano, afloat. President Barack Obama (in)famously provided $535 million in government loans to the now bankrupt solar panel maker Solyndra. In Japan, the ministry of economy, trade and industry (METI), the successor to the once mighty ministry of international trade and industry (MITI), has announced a strong reactionary industrial policy to those being followed in the West. The “E” for economy has replaced the “I” for international presumably to reflect the domestic focus of the policy. Brazil is the latest country to join the bandwagon. Manufacturers in four labour-intensive industries—furniture, clothing, footwear and software—will see the main payroll tax, of 20%, abolished.
The goal of industrial policy is to influence sectoral development in an economy. “Horizontal” measures such as reduction in corporate tax or easing of credit in the economy are different from “vertical” measures such as subsidized credit to a sector, research and development incentives or protection from foreign competition. The record of industrial policy in achieving its goals is decidedly mixed. A few policies in Israel (venture capital), Singapore (pharmaceutical manufacturing) and China (telecom equipment) have succeeded. Famously, the Internet was born from the work done at the US Defence Advanced Research Projects Agency. India has had much success in space technology, particularly in the successful launch of its own polar and geo-stationary satellites. But the record of failures is large in magnitude and has occurred across regions. The UK’s semiconductor industry attempt, the US’ clean energy support, India’s subsidies for textiles and jewellery and its multi-decadal support of “small-scale industries” are examples of outright failures or successes incommensurate to the money and effort expended.
Dhiraj Singh/Bloomberg
The Indian government had dabbled in industrial policy at various times. Its pattern of intervention is fairly typical of industrial policy in any democratic country in the world—ad hoc, waxing and waning in intensity and spread over several micro industries. The spread usually comes to blunt public criticism about “pet projects”, the waxing and waning because cabinet ministers and governments come and go. There are several ongoing industrial policy “schemes” in various ministries. Promotional support for the food processing industry, tax incentives for automotive research, a leather development programme, a special purpose tea fund, and a scheme for development of urban infrastructure in satellite towns reveal the potpourri of policy initiatives. The Union government’s department of industrial policy and promotion is “responsible for formulation and implementation of promotional and developmental measures for growth of the industrial sector, keeping in view the national priorities and socio-economic objectives”. While most of its measures are horizontal in nature, for some odd reason it is in charge of a mega project such as the Delhi-Mumbai Industrial Corridor on the one hand and a micro idea like leather development on the other.
At the state level, industrial policy has usually been a giant MOU (memorandum of understanding) circus. The Karnataka Global Investors’ Summit 2010, generated Rs 4 trillion ($80 Billion) worth of MOUs. No public tracking of the projects promised with government largesse is available now. The Vibrant Gujarat summits launched by chief minister Narendra Modi, in India and abroad, have fared a little better. Bihar, under chief minister Nitish Kumar, has launched a new policy modelled on that of Gujarat and Himachal Pradesh that identifies nine “thrust areas” — food processing, agro-based industries, tourism, super-specialty hospitals, IT, technical and high education, electronics, hardware and non-conventional sources of energy. The Uttar Pradesh government has created a furore by promising entertainment tax breaks to the F1 circuit. The Supreme Court has intervened and asked the UP government to create an escrow account with 20% of the ticket proceeds.
So should India go the whole hog on industrial policy, or practice the received wisdom of the 90’s and refrain?
I believe that India should intervene only lightly. I say this not from an ideological point of view, but because India has so much still to do in terms of the general enablers of business. India’s resources are best concentrated in creating a better supply side atmosphere. We should focus our efforts on building roads, ports, airports, power distribution and next generation telecommunication. We should improve access to markets, simplify tax rules and facilitate easy business creation and operation. If we do this, structural inflation will likely come down, which will reduce the real cost of capital across a range of industries (obviating the need for creating a fund for each micro industry). For India, for now, the best industrial policy is no policy.
P.S. “To do nothing at all is the most difficult thing in the world, the most difficult and the most intellectual”, said Oscar Wilde.
Narayan Ramachandran is an investor and entrepreneur based in Bangalore. He writes on the interaction between society, government and markets. Comments are welcome at narayan@livemint.com
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First Published: Sun, Oct 23 2011. 10 08 PM IST