There is no substitute for an industrial policy

There is no substitute for an industrial policy

Context- The Make in India initiative, which was introduced in 2014, is a stark contrast to the self-sufficiency doctrine that India adopted in the 1970s. The latter can be likened to chalk, while the former is more like cheese. Make in India (MII) doesn’t evoke memories of the license raj, self-sufficiency, or import-substituting industrialisation. It’s significantly different, although there have been concerns about how MII is being applied in certain sectors, particularly through the increase of tariff duties to stimulate the establishment of domestic industry.

• While the apprehension of this protectionist approach extending to other sectors might be overstated, it’s not entirely baseless, especially for those who experienced the 1970s and 1980s. Those years of indiscriminate protection led to shortages, black markets, and widespread rent-seeking, all under the guise of poverty alleviation and distributive justice.
• Public policy must appeal to relevant constituencies, and the licensing of cars, scooters, telephones, and several other sectors only profited producers, leaving the intended consumers without any alternatives.
• The producers who gained from the protection were fond of it and actively campaigned for the regime’s continuation. If we were to protect components for mobile phone assembly in India in the same way today, the industry would quickly collapse.
• After all, a mobile phone manufactured in our country contains approximately 80-85 percent of imported content (India Cellular and Electronics Association, 2022). Empirically speaking, MII is vastly different from self-sufficiency, and it’s time we moved past this unfounded comparison.
• That being said, there are valid inquiries that need to be made about Make in India (MII). How is it currently being marketed to the general public? In other words, what are its pledges, and how has it performed in relation to those benchmarks?
• Although MII has at least two other offshoots, Made in India and Make for India, we believe MII is the primary and fundamental policy; the other two are merely academic diversions.
• Make for India involves producing goods for consumption within India itself, focusing on manufacturing for the domestic market; however, a large domestic market is not a replacement for export competitiveness. Every country that has prospered before us has been competitive in exports.
• Countries like Japan, Korea, and China are immediate examples, but there are many others. Made in India is a marketing strategy to promote manufacturers that are a product of Indian factors of production — land, labour, capital, entrepreneurship, technology, etc. It can only succeed with an effective MII operation.
• Many consumers might remember Indian retailers dismissing complaints about their products by saying, “Oh, this is made in China — so you had it coming”. This narrative persisted, and China had to spend years, if not decades, to erase that stigma. We certainly do not want to be labelled in such a way in foreign markets.
• India launched MII in September 2014 as a follow-up to previous initiatives aimed at establishing a strong and competitive manufacturing sector. The National Manufacturing Policy (NMP, 2011) acknowledged that inadequate physical infrastructure, a complex and corrupt regulatory environment, and a lack of skilled manpower had hindered its growth.
• It aimed to increase the contribution of manufacturing to GDP from the stagnant 15 per cent since the early 1980s to at least 25 per cent and to create 100 million additional jobs. The fact that it did not succeed is self-evident.
• MII of 2014, in addition to the dynamic objectives of NMP 2011, aimed “to transform India into a global design and manufacturing export hub”. In other words, MII for the world.
• A few weeks ago, the government put the new industrial policy (NIP ’23), which has been in development for over two years, on hold. A draft had been circulated for consultation a year ago. With the coveted production-linked incentive (PLI) scheme already in place, what more can industrial policy accomplish at this stage of India’s economic progress?
• As per a press release, the aim of the Production-Linked Incentive (PLI) schemes is to draw investments into crucial sectors and advanced technology, ensure efficiency, and foster economies of size and scale in the manufacturing sector, thereby making Indian companies and manufacturers globally competitive.
• There’s a need for a clear industrial policy beyond PLI for sectors like toys, ready-made garments, and footwear, among others. In our view, in a country abundant in labour but with average educational achievements and skills, an industrial policy is essential to facilitate productive job creation.
• While other objectives are beneficial, the key focus should be on job creation, particularly for women, which can only be achieved through labour-intensive manufacturing. After all, empirical trade literature has underscored the critical role of abundant factors in fostering competitiveness and scale.
• The narrative of jobless growth has persisted due to the noticeable lack of quality jobs with some social protection.
• Research on India’s labour market indicates the prevalence of low-wage, low-productivity, and predominantly informal jobs in the unorganised sector. Over 99 per cent of India’s 63 million Micro, Small and Medium Enterprises (MSMEs) are in the unorganised sector, offering little scope for productive job creation.
• Their subsistence living is not conducive to job creation or scale. The example of China suggests the impact of scale in manufacturing for job creation. So, how has Make in India (MII), which encompasses several other complementary policies, performed in this regard?
• This is a significant and pertinent question for India, one that is difficult to examine primarily due to the scarcity of official data at regular and short intervals.
• In the absence of such data, policymaking is akin to shooting darts while blindfolded. Kaushik Basu, the former Chief Economic Advisor, once insightfully commented that economic policymaking should involve both intellect (to interpret data) and a moral compass to shape a better world. In the absence of high-frequency data on PLI, either on value added or jobs generated, the latter should be used extensively.

Conclusion- When the New Industrial Policy (NIP) is next released, it would be prudent to continue India’s pursuit of excellence in labour-intensive sectors. While PLI is beneficial for high-end manufacturing, for the masses, the traditional manufacturing sector remains the best option going forward.