Commanding heights again

Commanding heights again

India is set to try out an old, unworkable idea once again. As reported in Mint on Thursday, the government is close to finalizing a national manufacturing policy (NMP). This is an effort to give a fillip to industry in the country and raise its share in the national output. In an earlier age, it was called by a different name: industrial policy.

Broadly understood, industrial policy is a set of incentives and disincentives used to promote industrialization of a country. It has been tried with varied degrees of success in different parts of the world. It created a miracle in Japan, South Korea and Taiwan. It boomeranged spectacularly in India and much of Latin America.

Today, the Union government is all set to try it out again. The NMP will rationalize and simplify business regulations, provide tax breaks and subsidies, help industry with land acquisition and other incentives. The effort is to promote industries with strategic significance such as aerospace, electronics, telecom, defence equipment, among other important areas. The final goals: making the manufacturing sector contribute 25% of gross domestic product by 2025 and create 100 million additional jobs by that date.

It is unlikely to work. This is for two reasons. For one, there are significant continuities with past policies: the list of incentives is exhaustive, while disincentives hardly find any mention. Herein lies the reason why India failed to industrialize while, to give one example, South Korea did. In Asia’s Next Giant: South Korea and Late Industrialization, economist Alice Amsden showed how ruthlessly disincentives were applied to firms that did not meet the objectives set by the Korean bureaucracy and leadership.

India lacks the environment in which such enforcement can occur. If anything the NMP can turn into another instrument of patronage and runaway corruption: “friends" of ministers and politicians can be rewarded with land, credit and all the help at the hand of the government. There is a good chance that cronyism will be the end point of the NMP. Perhaps, this is harsh judgement for a policy that is yet to be implemented, but recent policymaking experience gives enough reasons for scepticism.

The second objection to the NMP is fundamental: How is a set of incentives, administered by bureaucrats, better from a deregulated environment in which capital is free to enter and exit any business? If anything, the one big impediment to industrialization is the set of labour laws that discourage any employer from hiring labour: once hired getting rid of workers is a nightmare. The NMP pays lip service to labour law reform. A better approach would be to junk the entire NMP framework and just focus on reforming these killer laws.

Liberal labour laws or an industrial policy: what does India need? Tell us at