Pitfalls of the Make in India campaign
India has to be ever alert of import substitution industrialization
An industrialized India has been the holy grail of leaders from Jawaharlal Nehru to Narendra Modi. Only the means to that end have changed: from the commanding heights for the public sector to a more agnostic approach today. If only a change in emphasis could industrialize the country, all would be well. But the means and ends are so entangled that any industrial policy approach is full of pitfalls.
The dangers in any government-led approach to industrialization were highlighted last week by the governor of the Reserve Bank of India Raghuram Rajanin a lecture. Rajan pointed out twin dangers of the receding scope of export-led growth in the world today and a return to the failed idea of import substitution industrialization (ISI).
How do these realities square with India’s motivation for a bigger chunk of industrial output in its economic pie? Since independence successive governments in India have wanted to industrialize the country as a solution to move out the excess number of people in agriculture. That remains a goal with the Make in India campaign as well with an additional problem. In the years after independence, the number of people sought to be moved out of agriculture were a couple of million that has swelled to tens of millions now as India is witnessing its largest injection of working age population in this decade.
These numbers not only create a problem for the tempo of industrialization—the pace of setting industries has to be fast to absorb the huge number of youth—but also its objectives. The most labour-intensive industrial segment in India is the medium, small and micro enterprises sector (MSME). Estimates by the Organization for Economic Cooperation and Development (OECD) show that in India 65% of all employment in the manufacturing sector is in firms with less than 10 employees. This sector employs labour most inefficiently with productivity gains being negatives in many industries in this sector. It is this sector on which India’s industrial hopes—more employment and greater exports—rest. The danger that Rajan alluded to—one of government giving preferential allocation of key resources and credit to this sector—is real. If in an earlier age, ISI created large inefficient industrial units—both public and private—this time the danger is of the story being repeated in the MSME sector.
It has been argued in these pages that as China re-balances in favour of consumption against exports as the basis of growth, India can take its position. Rajan has poured cold water over this idea. His argument is that as Western countries find themselves in a structural economic slowdown, the possibilities of export-led growth have diminished greatly. India cannot replicate the Chinese and the Japanese experiences of the past 50 years. While Rajan’s reasoning is impeccable, export-led growth is also a matter of searching for opportunities and foreign markets and there is nothing fixed about them. This is where his other point becomes relevant: India needs to invest in building physical infrastructure such as roads, ports, etc.; allocate resources such as water, land, minerals and power transparently; and link as many citizens as possible financially and electronically to the broader system. If that happens, industries will sort themselves out and the government will not have to indulge in any allocational favouritism.
This simple logic eludes most governments. Virtually every new government in New Delhi feels that it can get the allocation game right without understanding that in the end any resource allocation activity ends in being discretionary and anti-market. Rajan only highlighted these dangers.
A word is in order here about the possibility of an enlightened industrial policy to resolve the problem of creating jobs and furthering appropriate industries. This hope is based on replicating the experiences of Japanese and German economies where government and industries conferred to solve problems. The conditions that made possible an industrial policy with emphasis on learning and problem-solving are absent in India. The desire for a learning-based industrial policy is understandable even if it is flawed. Make in India needs something other than government intervention to be successful.
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Business NewsOpinionPitfalls of the Make in India campaign
First Published:15 Dec 2014, 05:21 PM IST
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