This article is a part of an EXCLUSIVE SERIES on slowdown. If you haven’t yet read the previous part of this series, check it out here: PART II
The manufacturing sector is the one sector, which will requires a lot of structural modifications for it to be able to sustain the growth at which the nation is aiming to move. Increased dependency on agriculture as a source of employment for nearly fifty percent of our population is not doing any good for the country. While both sectors are having a stagnant contribution to the GDP, the productivity and the efficiency that the manufacturing sector is capable of delivering, the agricultural sector might not be able to provide the same.
Since the 1991 reforms, the contribution of the manufacturing sector to the economy has been stagnant, hovering around the 14-18% contribution levels. While, there have been other Asian counterparts who have been able to achieve economic growth through the development of the manufacturing sector. South Korea’s manufacturing sector’s contribution as a percentage to GDP has almost tripled from 10% in the 1960 to around 28% in the current times. Vietnam, Malaysia and Thailand have also shown these kinds of phenomenal conversion, as we can see from the mentioned chart.
IMPORTANCE OF THE MANUFACTURING SECTOR AND THE NEED FOR A PROPERLY ALIGNED INDUSTRIAL POLICY:
The manufacturing sector can be the impetus required for sustained growth for any economy. No major economy has managed to break the shackles of poverty or other economic issues without the base of the economy being manufacturing driven. Productivity of a nation increases with a settled base of manufacturing within it. The Asian tigers’ miraculous transformation had an export-oriented manufacturing strategy as the focal point within it. The surplus labour that was released from agriculture was given proper structural training and then the employment proved to be detrimental in reducing poverty drastically within these countries. Planning and forward looking industrial policies took the center stage of all of these developmental activities.
‘Industrial Policy’ had been a redundant word from the early 1990s after the Washington consensus which preached about minimal government involvement and allowing the market forces to take control but is critical to provide timely alignment to a de-railing economy. Even in the US and Europe after the sub-prime crisis, strategic government efforts were made to revive their industrial sectors. The United Nations Conference on Trade and Development (UNCTAD) finds that within the last decade over 100 countries have adopted an industrial policy. However, India still does not have any kind of Industrial policy. The ‘Make in India’ strategy or push towards ease of doing business still cannot be considered as industrial policies. Many economists believe that specific instances of market failure could require a government-driven industrial policy. These instances could be like problems of liquidity in the capital markets, lack of private investment to exploit economies of scale or lack of information and coordination between companies that are dependent on technology. Problems like these have been evident in the Indian setup since the last decade. Also, with exports declining on a dollar term basis with increasing imports, it is really important to give the manufacturing sector a push with a properly aligned industrial policy.
CRUX OF THE POLICY:
But the whole point lies in the question: why do we need an industrial policy?
The last time India worked with an industrial policy as the centrifugal aspect of planning was back in the second and the third year of the five year planning and those were the years in which India has till date achieved the maximum contribution from the manufacturing segment as a percentage of GDP. It is also important to restructure the manufacturing segment which largely looks unorganized in the hindsight.
In most of the East Asian countries, the industrial policy laid immense stress on the human capital, particularly into general academic as well as vocational education. The development of human capital should be pushed through the policy with subsidies so that all the labour that is employed is at first skilled for the job and then this skill sets are regularly updated with the change in technology. India has an immense pool of young labour which when nurtured well, would result in increasing the foreign investments.
The government can move aggressively to play the role of an organizer and syndicate the different domestic firms to have unanimous negotiations with foreign firms or government. This structure could be similar to something like a ‘cartel’ such that stress is laid on the promotion of the domestic firms. In fact, South Korea gave huge developmental push to budding entrepreneurial companies throughout its development phase which led to the formation of the ‘Chaebols’ (Samsung, Hyundai, LG to name a few). Along with synchronization, focus should be there with respect to competing investments in capital scarce areas. With excess capacity, there are high chances of price wars taking place which would ultimately reduce profits or even kick out some companies from the industry. A classic example for this in India is the aviation and the telecom sector.
Industrial capacity that is installed could be a really important aspect because if a really small production capacity is installed then there could be 30-50% reduction of the potential output; therefore the industrial policy can focus on the minimal efficient scale of capacity that is to be installed. The major issue was that India did miss out on the middle efficient scale capacity and hence when the reservation of products from the small-scale and cottage industries was reduced from roughly around 800 in the 1990s to only 15 at present, these companies did not have the resources to upscale and hence they slowly got entrenched in the Indian manufacturing. The other way to look at it is that these companies had to pay the cost for remaining too small without any potential policy kept purely in mind for their growth.
Industrial policies can also facilitate structural changes at ease with less resistance from the companies that would face a dampening effect on their balance sheets from those changes. It would also help to align the several complementary investments within the sectors which have several economies of scale and have capital market imperfections. Incentives could also be provided at an extensive length to make certain segments of the manufacturing unit export competitive so that it could lure foreign investments and also push domestic manufacturing units to produce more.
WHAT LIES AHEAD:
The role of the Industrial policy and the manufacturing sector has been continuously downplayed in our economy. While the Indian economy has not received any fruitful dividend through the agriculture sector, it is time to look ahead towards manufacturing as a major employment driver in the next set of structural changes that can drive much of the unemployment and disguised labour out of the system. This would help in flushing out excessive labour capacity from agriculture and increase the overall productivity of the agricultural sector and the nation as a whole. Significant government push with investments and policy changes would attract private players into the luring opportunities due to cheap availability of the resources. The second line of defence could prove to be detrimental in providing the excessive spending in the hands of the people which would re-fuel the consumption pattern of the economy.