Opinion: Reposition Industrial Policy

February 8, 2023

Bharat Times

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Elevate Production Linked Incentive scheme into a full-blown Industrial Policy 2.0, enabling industrial ecosystem.

By B Sambamurthy

Hyderabad: In the post-war era (WW II) many countries in the underdeveloped world and those battered by the war deployed Industrial Policy (IP) as a strategic intervention by the state to accelerate economic development. South Korea, Japan, Germany, Taiwan and many more have succeeded and became highly industrialised countries. China, a full-blown communist country, started late but surpassed all these countries. Its communism did not come in the way of the build-up of global-scale private sector companies, an innovative ideological tweak. Similarly, our democracy cannot be a constraint for faster economic development through mature management of social and class frictions.

India’s tryst with industrial policy began well with the creation of high capital-intensive heavy industries. It crowded in private sector investment. But it did not sustain for long. Fiscal/monetary policies crowded out private investment. Besides, the policy was plagued by political capture, rent-seeking, picking winners and controlling the commanding heights of the economy for too long (ideological). It is no surprise that our performance has been suboptimal.

The economic reforms of 1991 marked a decisive shift towards a market economy. Industrial policy as a strategic tool was abandoned and this was replaced by the manufacturing process. But even then, the success is largely limited to a few industries like automobiles and pharma. IT is a different story. Infra has been a patchy success.

Industry Policy 2.0

The global economic trajectory over the last two decades faced a lot of challenges like growing inequalities, frequent and massive market failures, jobless growth, transition to low-carbon economy, increasing financialisation of productive activities, and regional economic and trade arrangements. Moreover, the global power dynamics affected the creation, capture and distribution of economic and financial value.

Over the last few years, there has been a lot of academic research and empirical evidence on the usefulness of industrial policies. Dialogues at Columbia University provide enough policy inputs.

Prof Dani Rodrik of Harvard University and bestselling author on this subject, while arguing the case in favour of a new industrial policy that is more about governance and institutional design, also tackles the ills in the earlier editions like political capture and rent-seeking. The new policy is more about letting the failures/inefficiency go rather than picking the winners.

Countries as diverse as China to the US actively pursue industrial policies in one shade or the other and tweak them regularly to benefit by participating in the global production networks. They protect their infant industries too.

The new industrial policies also need to capture, among other things, new economic challenges and opportunities, slippery geopolitics, re-globalisation, positioning opportunities in new global supply chains, climate change, inclusiveness, sustainability and regional trade pacts. Atmanirbhar needs to be aligned with these opportunities.

Ecosystem: Beyond PLI

Despite several initiatives by various governments, our manufacturing has been stagnant at around 17% of the GDP over the last decade. The goal of achieving 25% of the GDP has been elusive so far. Production Linked Incentive (MORE) launched in 2020 marks a new initiative to help build an industrial powerhouse with an outlay of over Rs 2 lakh crore over a five-year period.

Despite several props by the government, private capex has been sluggish. We need to elevate PLI into a full-blown industrial policy 2.0. This needs nothing short of an industrial ecosystem that connects the horizontal dots. This needs a series of measures beyond ease of doing business. Let me spell out a few:

* Firstly, the government need to invest heavily in R&D on a par with industrialised countries. In fact, R&D policy doubles as industrial policy in the US. Eighty per cent of the R&D funding is by their government. Successful industrialised countries publicly fund R&D by over 40%. A number of research projects in the US, particularly in the defence sector, innovated internet, GPS, microchips, hot screens and many basic technologies, are funded by the government.

Former US President Barack Obama once said that one dollar of investment in genome mapping returns $140 to the economy. AI’s models need to train huge data sets with billions of parameters and massive computing power and it is beyond the means of educational institutions. Government must establish a national research cloud with free access to designated premier engineering institutions in the country so that they run AI models.

* Secondly, our premier scientific research institutions in several domains must actively partner with industries and work on solutions to their problems. This must form part of their KRAs ( key result/responsibility areas) and KPIs (key performance indicators). Mere publications and IPRs are not enough. So also, for top-notch academic institutions.

* Thirdly, entrepreneurs look for provision of factors of production at fair prices and faster rather than back-ended incentives.

* Fourthly, industrial development bureaus, like some successful industrialised countries, may be set up at several centres manned by engineers, scientists and lawyers. They must actively engage with industries by visiting shop floors regularly and nudging them to automate, scale, and in product development, productivity etc. This facilitates two-way learning and provides inputs to improve their performance. These bureaus may be manned by thousands of technocrats, as in Taiwan.

* Fifthly, vocational education and compulsory apprenticeship must be encouraged. Countries like Germany have built a strong industrial workforce with various levels of skills and crafts.

* Sixthly, de-carbonisation programmes are changing the very industrial landscape as we have known. The government needs to handhold the transition and incentivise infant industries.

* Seventhly, Digital India must include Digital Factories. It is a Phygital world. States must have a stake in policy framework and attaining targets. Political interoperability if not bipartisanship helps.

Predictable, not Precarious

Prof Ha-Joon Chang, the South Korean institutional economist, argues that job creation must fit into industrial progress. The jobs need to be predictable and not precarious. Enhancing competitiveness and productivity is equally essential.

We have several point solutions in the areas of R&D, innovation, energy, taxation, land (economic zones) fiscal /monetary policies etc. IP must connect the dots and create an industrial ecosystem, a la UPI.

It bears no repetition that India’s aspiration of $30 trillion and manufacturing powerhouse needs an agile industrial policy. ‘Building temples of modern India’ was the emotive tagline of the development push of Pandit Nehru and ‘Make in India for the world’ is that of current Prime Minister Modi. Both are earnest in their own ways. Emotions need to be backed up by smart policy choices for general prosperity.

bsmurthy123@hotmail.com