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Minimizing uncertainty

Minimizing uncertainty

Readers’ responses to my previous two columns on Chinese and Indian manufacturing have provided ample proof, if proof was needed, that India needs a strong and dynamic manufacturing sector. The rapid and sustained growth of manufacturing is a necessary condition for not only generating the required employment for our young workforce, but also for modernizing our society and eliminating the dualism—stark differences between the organized and unorganized sector—that currently characterizes our economy. Too much reliance on financial and information technology-enabled services could actually produce the opposite results by creating enclaves and exacerbating the dualism.

So this objective of accelerating the growth of manufacturing, increasing its share in India’s gross domestic product (GDP) and eliminating the dualism must form one of the cornerstones of our economic policy. Let me note right away that it is very difficult to achieve a consensus on any policy objective in our country, given our diverse vested interests and perspectives. This inhibits policy formulation and implementation and often engenders policy paralysis with deleterious consequences. Hopefully, there will be universal agreement across ideological and political lines on the promotion of manufacturing as a central policy objective both at the Centre and in the states. Given the critical nature of this issue for economic prosperity and social stability, the Inter-State Council could consider convening a special session to forge a formal consensus on this across states.

The issue is how to achieve the required 13-14% annual rate of manufacturing growth in order to raise its share in GDP, and at least prevent it from declining below the unacceptable 16-17% of our output that it is now. That this rather ambitious growth rate target is eminently achievable can be seen by noting that in some growth nodes—such as the National Capital Region, the Vadodara-Surat-Ahmedabad belt, the Mumbai-Pune-Nashik and Hosur-Chennai-Coimbatore regions—such manufacturing growth rates are already being achieved and even exceeded. The National Manufacturing Competitiveness Council would do well to study the developments of these rapidly growing manufacturing hubs with the objective of identifying the principal drivers and conditions which have enabled such growth dynamism. These drivers and conditions can be replicated, with necessary adaptations to suit the local environment, elsewhere in the country. This will perhaps be more effective than to continue trying to identify labour-intensive sectors and design packages for their growth and expansion.

The crucial difference in the two approaches is that the first attempts to identify the underlying structural and thematic “drivers" that promote rapid growth, while the latter approach tries to identify specific sectors or, in a sense, pick winners on the wrong assumption that these can be promoted across the country—irrespective of marked differences in the underlying structural conditions and endowments. It is clear to me that industrial policy in any form is unworkable in a country as diverse as ours and, in any case, the objective of policy should be to create overall growth-promoting conditions rather than to identify sectors.

Another overriding aim should be to reduce uncertainty for potential investors. Uncertainty is different from risk, which the entrepreneur is trained to deal with. Uncertainty arises when we cannot assign any probability to expected outcomes. An example would be the “change of land use" (CLU) that nearly all prospective manufacturing units have to obtain. This should be a routine matter but is clearly not, as is reflected in major celebrations by the beneficiary on receiving CLU. The reason is that the outcome—despite connections, bribes and knowledge of the inside track—is completely unpredictable. The worst cut is that it can be reversed in the future as well. Such uncertainty is a sure killer of any animal spirits. It is really remarkable that private investment continues under these conditions. For this, we must salute our entrepreneurs who simply don’t take no for an answer.

Uncertainty can only be reduced if we minimize the number of conditions manufacturing units have to comply with. At present, the attempt is to have norms on paper that cover the entire panoply of international best practices, simply unachievable in a poor economy such as ours. The only purpose these norms serve is to generate bribes and corruption and “keep them in line".

The only four requirements that I think have to be strictly enforced are: not employing child labour; not using female workforce in conditions that compromise their dignity; working conditions that don’t damage health; and operating only after having obtained sales and excise tax registrations. This ensures that units do not remain part of the shadow economy, which can be a security risk. Beyond these four conditions, which I guess are not obtained by more than two-thirds of our production units, the government should review the existing laws for jettisoning them forthwith.

Finally, the rationale for manufacturing units having to take advance clearances is not clear. The benchmarks can be listed on the Internet and otherwise for compliance under the threat of exemplary punishments. This works in enforcing other laws and should work in achieving compliance of minimally essential industrial norms.

Rajiv Kumar is director and chief executive of the Indian Council for Research on International Economic Relations. These are his personal views. Comment at

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