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Reorient Industrial Policy
Context:
The global economy is experiencing a surge in activist industrial policies, with governments offering extensive subsidies in sectors like chip manufacturing.
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- However, these policies often result in global overcapacity, lower international prices, and reactive protectionism, ultimately raising costs for manufacturing industries.
- In recent years, the number of such policies worldwide has risen dramatically, from a few hundred in 2017 to over 2,000 in 2023, including around 100 in India.
India’s Policies:
- Long Tradition: India has a long tradition of activist industrial policy, epitomised by the Make in India initiative launched in 2014.
- This policy introduced various sector-specific incentives, including the Production-Linked Incentive (PLI) scheme and subsidies for industries such as chip manufacturing.
- Outcomes: Yet, the outcomes have been underwhelming.
- Between 2014-15 and 2023-24, the manufacturing sector’s share of total gross value added (GVA) dropped from 16-17% to 14-15%, signalling a lack of acceleration in industrial growth.
Market-Friendly vs. Business-Friendly Policies:
- Shift: India’s industrial policy must shift from being business-friendly, which often breeds crony capitalism, to being market-friendly, fostering healthy competition and innovation.
- LPG Reforms: The economic reforms of 1991 offer a valuable lesson.
- These reforms—removing industrial licensing, reducing trade barriers, and transforming financial markets—spurred private investment and integrated India into the global economy.
- Financial Market Reforms: Key financial market changes, such as opening the banking and mutual fund sectors to private entities, dematerialising share trading, and empowering the Securities and Exchange Board of India (SEBI), boosted private investment and savings.
- These reforms significantly increased private corporate investment, with the ratio of private to public investment rising from 0.37 in 1990-91 to 1.63 in 2022-23.
- The private sector now accounts for 71% of manufacturing investment, while small enterprises contribute 22%, and the public sector just 7%.
Rethinking Industrial Policy:
- Minimised Sectoral Intervention: Sectoral interventions should be minimised, allowing corporations—large and small—to independently decide on sectors and technologies.
- Enabling Environment: Governments must create an environment that rewards risk-taking and innovation by reducing tariffs and opening up the manufacturing sector to global competition.
- Lowering Tariffs: India’s tariffs remain higher than those of other emerging economies, and lowering them to global averages can enhance competitiveness.
Key Areas for Government Focus:
While promoting competitive markets is crucial, the government also needs to address systemic issues:
- Land Acquisition: Complex ownership laws make land acquisition a major hurdle for industrial development. Governments can simplify this by acquiring land and packaging it for investors.
- Technology and Education: Long-term success depends on investments in research, development, and skill-building to prepare the workforce for emerging industries.
- State-Level Cooperation: States play a critical role in facilitating land acquisition, ensuring skilled labour availability, and maintaining regulatory standards. Tamil Nadu offers an example of success, attracting investments through its investor-friendly approach.
Towards a New Industrial Policy:
- Union-State Collaboration: India’s New Industrial Policy should emerge from collaboration between the Union and state governments.
- The Union should focus on infrastructure development, trade liberalisation, and long-term technology growth, while states should streamline land acquisition, provide skilled labour, and enforce environmental standards.
- State-State Collaboration: Coordination among states can further facilitate national manufacturing value chains, driving growth in output and employment.
- A well-designed industrial policy that balances market-friendly reforms with targeted government support can position India as a manufacturing powerhouse while ensuring sustainable, inclusive growth.
