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Has the Narendra Modi government signed on to what one might dub the myth of manufacturing? Is Make in India a move in the wrong direction?

Garden variety criticisms centre on the idea that it’s all sizzle and no steak—that, beyond a slick marketing slogan and a travelling road show, little substantive policy change has accompanied the drive to make India a hub for manufacturing.

Yet, a far more potent criticism, if it were true, will be that the government’s obsession with manufacturing is fundamentally mistaken. Cue Reserve Bank of India governor Raghuram Rajan’s much-discussed speech in Delhi on 12 December—“Make in India, Largely for India"—which has been widely read as a criticism of the government’s proposed tilt toward manufacturing.

One possible danger of a focus on manufacturing, as a recent editorial in this newspaper warned (Pitfalls of the Make in India campaign, Mint 16 December), is a reversion, willy nilly, to a policy of import substituting industrialization (ISI), which was a centrepiece of the failed development paradigm pursued in India, Latin America and elsewhere.

Yet another pitfall is that the turn toward manufacturing will be conceived principally as geared toward the export market—a policy stance known as export promotion (EP). This, of course, was the model successfully used by East Asia and then China, and this appears to be Rajan’s chief concern. While not signing on to the export pessimism that characterized India’s planning regime, and which buttressed the ISI model, Rajan’s argument is, rather, that global conditions today are not propitious for the rise of another EP champion. Stagnation in the advanced economies means that even a powerhouse exporter like China is looking to cultivate its domestic market. In such an environment, it will not be easy, to put it mildly, to jumpstart EP-oriented manufacturing in India.

Defenders of the Modi government point out that nowhere does the new policy point toward either ISI or EP, but toward the development of manufacturing more broadly. And there is the crux of the matter. If it is to have any meaning at all, a strategy such as Make in India will necessarily entail some form of industrial policy: an attempt by the state to direct resources toward manufacturing rather than another activity—such as services, where India has excelled while industry has languished.

This is where free marketeers will argue, correctly, that government ought not to try to pick winners, but rather allow the play of market forces to determine the structure of the economy—and this appears to me to be at the core of the Rajan critique. The best bet, rather, is to provide basic public goods, including vital infrastructure such as power, roads and so forth, remove or reform onerous regulations and irrational impediments to economic activity—such as arcane labour and land acquisition laws—and then, with a level playing field in place, let the chips fall where they may.

The economist Jagdish Bhagwati has been an especially harsh critic of what he calls the “manufacturing fallacy". That criticism is in the context of fears in the US and other advanced economies of what is known as deindustrialization, and the desire to use government policy to keep “good jobs" in manufacturing at home rather than lose them to China and emerging economies. This can easily be turned around and used to argue that there is nothing magical about manufacturing in the Indian context either.

Yet, there is a difference. While debates in advanced economies centre on alleged and unproven externalities that manufacturing confers and which services cannot —such as productivity spillovers—the debate in India is, quite simply, about jobs. There is legitimate concern that, without large scale expansion in manufacturing, and with continued stagnation in agriculture, service industries will just be unable to absorb the vast pool of surplus labour. The resulting large scale unemployment—even if growth rates return to a higher trajectory—will then be a recipe for social disaster and political unrest. On this view, then, there is simply no realistic alternative for a large economy such as India other than to shift into labour-intensive manufacturing in a big way. A small Caribbean island may grow rich through an economy centred on tourism and banking services, but this is not feasible for an economy housing over a billion people.

History also teaches us that no large economy has ever grown rich, and pulled millions of people out of poverty, without an early stage in which labour-intensive manufacturing is the driver of economic growth—from Victorian Britain to present-day China. There simply are no exceptions: one might call this an iron law of economic history.

It seems incontrovertible that India needs manufacturing; yet industrial policy is unlikely to succeed and may even backfire. How might these two positions be reconciled? The answer is that, if a level playing field is genuinely created, the law of comparative advantage will be allowed to work rather than being stifled. A large, labour-abundant economy will naturally tend to specialize in labour-intensive manufacturing.

The best Make in India campaign will be to let markets do their job. That is the surest way to make India a manufacturing powerhouse—not a return to central planning under a different name.

 Every fortnight, In the Margins explores the intersection of economics, politics and public policy to help cast light on current affairs.

 Comments are welcome at views@livemint.com. To read Vivek

Dehejia’s previous columns, go to www.livemint.com/vivekdehejia

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