12/29/2015 Budget 2015: What India’s industrial policy must include?

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ARUN MAIRA @arunmaira

MONEY | 5-minute read | 20-02-2015

The economic reforms of 1991 did not produce the results expected of themin a very crucial respect. The principal feature of the 1991 reforms was thedismantling of industrial licensing and the reduction of import duties formanufactured goods on the advice of economists, who said this wouldstimulate the growth of manufacturing sector in the country. Economicgrowth did pick up with the reforms, but the growth has been in the servicesector; as is well known. Manufacturing did not grow, as was expected. Infact, almost 25 years later, the proportion of manufacturing in the economyis the same as it was then about 15 per cent of the GDP, which is much lessthan China and Thailand. It is less also than what is there in Germany aneconomy with much higher wages and a very strong currency too.

The failure of manufacturing to grow has become a matter of great concern.Jobs have to be created for millions of aspiring young Indians who are

Budget 2015: What India’s industrial policy mustinclude?India’s strategy to grow its manufacturing sector must be built on the use ofmore people, rather than less.

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expected to provide the demographic dividend to boost economic growth which they can, only if they have jobs. Without which, they will be fodder forsocial and political unrest. While India’s manufacturing sector languished;China, adopting different policies, grew its manufacturing sectorenormously. Now India is being flooded with manufactured products fromChina, including sophisticated capital goods, which is creating pressure onIndia’s balance of payments.

In 1991, India threw the baby out with the bath water. India’s industrialcontrols before then had begun to stifle industry. So they were jettisoned.However, with them, the idea of having any industrial policy was also thrownout. In fact, according to the Washington Consensus whose economic ideasprevailed on India’s policymakers, "industrial policy" was a taboo. Chinaignored the advice. The Chinese response was, "We will do what you did, notwhat you tell us to do". The Chinese were well aware that all nations thathave grown large industrial sectors, including the USA, had "nurtured" theirindustrial sectors till they could stand up to foreign competition. Thereafter,these nations have advocated that the best course of action for othercountries is to open up their markets!

Now India has realised that it desperately needs an industrial policy. Beforeformulating an effective industrial policy, an understanding is necessary ofwhat the process of industrialisation is. Industrialisation of a country is theprocess of enterprises in that country learning to produce products theycould not produce before, and using production methods they did not knowbefore. Industrialisation is a process of learning: Learning to do what wasnot done before.

Moreover, in a competitive world, enterprises in a country must be able toproduce products at higher levels of quality and lower costs than enterprisesin other countries. Thus there is a race between countries and theirenterprises to learn and improve faster than others. Good industrial policy,therefore, is the creation of conditions in a country for its enterprises to

12/29/2015 Budget 2015: What India’s industrial policy must include?

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learn and improve faster than enterprises anywhere else.

What are these conditions for faster enterprise learning? Competitionamongst enterprises is clearly one of them. Going deeper, one must considerthe process of learning within an enterprise. Where does the ability to learnand improve lie? It lies in the human beings engaged in the enterprise — itsworkers and managers. Human beings can learn. They can improve theirown abilities in the right conditions. And they can improve the efficiency ofmachines and production processes, if they are motivated to. The effectiveengagement of the human side of the enterprise explains the sustainedcompetitiveness of the German and Japanese manufacturing enterprises;even when wages rose and currencies appreciated.

India’s strategy to grow its manufacturing sector must be built on the use ofmore people, rather than less. India has many more people it can deploy inmanufacturing: Therefore, costs of employees will rise more slowly in Indiathan elsewhere. Provided manufacturing enterprises develop the abilities toconvert unskilled people to skilled people. To use an analogy: If a countryhas hydrocarbon resources in the form of shale, it should developtechnologies to convert shale to useable petroleum, as the USA has, and thusstrengthen its position in the global petroleum competition.

India must build on its strategic advantage of a large pool of humanresources. India’s industrial policy must include a strategy, as its core, toimprove the quality of industrial relations in manufacturing enterprises sothat human beings, who are the only "appreciating assets" in an enterprise(machines, buildings, and materials will depreciate) are enabled to learncontinuously. This will become India’s sustainable competitive advantage. Sofar, this has not been appreciated enough in the policies and programs thatthe government has announced for "Make in India".

Manufacturing enterprises in India have competitive disadvantages too, withenterprises in other countries. Transportation and power infrastructure in

12/29/2015 Budget 2015: What India’s industrial policy must include?

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WriterARUN MAIRA @arunmaira

The writer is the member of the erstwhile Planning

Commission.

India, which manufacturing enterprises need more than service enterprisesdo, is deficient. The inefficient and often corrupt implementation ofregulations makes India a very difficult country to start and run amanufacturing enterprise. India ranks very low in the World Bank’s "ease ofdoing business," rankings. Infrastructure must be improved, and doingbusiness must be made much easier. These must be the critical componentsof India’s "industrial policy".

The government is determined to move India up many rungs on the WorldBank’s ease of doing business rankings. Other countries are also improving.India will move up only if it learns how to make improvements faster thanthem. The conclusion is, we must work together and learn and implementfaster than other nations, within enterprises by valuing our human assets,and amongst agencies too. Only then can we become a manufacturingpowerhouse which we must to realise our otherwise mythical demographicdividend.

#Narendra Modi, #Arun Jaitley, #Budget 2015,

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