Make in India: Ball lies in govt’s court

Bandi Ram Prasad

Why does industrial development continue to be sluggish in India? The country has one of the oldest stock markets in the world, a long tradition of trading and entrepreneurship, a wide network of global and regional commercial links and relationships, a history of innovative financial instruments, a robust risk-taking culture, and a well-developed domestic banking system.

Following Independence, newer themes (achieving commanding economic heights), extensive plans (Five-year Plans), and elaborate policies (several rounds of industrial licensing policies) formed the critical framework for the nation’s industrial development. Countries with similar levels of development at the time of India’s independence, marched far ahead in terms of industrial development. It is this context that has given rise to the call to ‘Make in India’.

Can grow more

It is not that India has lacked in industrial development. The concern is more about pace and depth. A report of the UN Industrial Development Organization echoed the prospects for India as “Global manufacturing has been shifting from developed to developing economies even faster, with economies such as China, India and Taiwan Province of China building strong manufacturing sectors”.

India also derived benefits from ‘Trade in Tasks’, an outcome of the globalisation that disaggregated production of individual components and spread various tasks of the global manufacturing process to different countries in accordance with climate, costs and competitiveness that led India to register remarkable gains in sectors such as information technology, telecom and pharma.

Statistics support this. Manufacturing value-added in India rose from a yearly rate of 6.9 per cent during 1992-2002 to 8.2 per cent during 2002-2012. Per capita manufacturing value added (MVA) in India rose from $116 in 2006 to $158 in 2011 and per capita manufactured exports from $90 to $202. Share in the world MVA rose from 1.70 to 2.25 per cent and share in the world manufactured exports from 1.17 to 2.01 during the period 2006-11.

The growth of MVA in India enabled the country to emerge as the second-leading manufacturer among industrialising economies, superseding Mexico and Brazil. Indian corporates entered big-ticket global acquisitions with the Tata group buying Corus (2007/Luxembourg) in a $12.2 billion deal, Bharti taking over Zain Africa (2010/Africa) for $10.7 billion and Hindalco buying out Novellis (2007/USA) for $6 billion. The pace of growth, however, has not been promising, given more than two decades of reforms and liberalisation. The share of industrialised economies in world manufacturing value added declined from 73 per cent in 2007 to 70 per cent in 2011.

In contrast, the share of emerging industrial economies (including China and India) rose from 27 per cent to 30 per cent. East Asia and Pacific increased their share in world manufacturing value-added, largely driven by China, from 14 per cent to 17 per cent, while in South and Central Asia — where India dominates — the share remained stagnant at 3 per cent throughout this period.

In the aftermath of the global economic crisis, the average growth rate of manufacturing value-added in East Asia and the Pacific declined from 11.37 per cent in 2003-07 to 9.08 per cent in 2007-12, whereas in South Asia it fell from 9.38 per cent to 5.61 per cent.

Many meanings of FDI

A programme of industrial development is not just about attracting foreign direct investment (FDI). It is also not right to assume that merely opening up the domestic economy will attract huge FDI.

True, FDI leads to higher exports and job creation apart from enhancing expertise and efficiency. However, evidence shows that the real benefits from it could more effectively be harnessed on the basis of policy pragmatism, prevalence of productive firms, effective forward and backward linkages, fair competition and tax laws, investor protection, and an infrastructure and legal framework that will work at the required speed. A 2011 study by the German Development Institute discussed certain hindrances to the pace of growth. The study analysed the experiences of seven countries with certain common features (such as state-driven development, heavy handed regulation of private business, limitations of central planning) with respect to industrial policies. It highlights factors such as (a) top-down decision-making in regard to industrial policy, (b) unwillingness to relax direct control of strategic industries, (c) interference in investment decisions, (d) neglect of entrepreneurship and competition, and (e) lack of proper coordination between different development agencies as affecting the pace of growth notwithstanding the FDI flows. India needs to watch these factors and amend them appropriately.

UNIDO, in its latest report, sums up the key features that make an industrial policy successful. “Industrial policy — the main objective of which is to anticipate structural change, facilitating it by removing obstacles and correcting for market failures” should seek to promote such change at each stage of development, in four main ways: (a) as a regulator establishing tariffs, fiscal incentives or subsidies; (b) as a financier influencing the credit market and allocating public and private financial resources to industrial projects; (c) as a producer participating directly in economic activity through, for example, state enterprises; and (d) as a consumer guaranteeing a market for strategic industries through public procurement programmes.

India has enough architecture in the form of a well-developed democratic system, a wide range of policymaking institutions, robust regulatory authorities, extensive financial markets, risk assuming and risk transfer instruments, and enterprising people. That makes it much easier to stir and stimulate growth with sound policy interventions.

State must act

Finally, the state plays a great role in creating a pathway for industrial development. A joint study of ILO and UNCTAD, ‘Transforming Economies: Making Industrial Policy Work for Growth, Jobs and Development (2014)’ brings out this aspect forcefully.

“History shows that in all cases of successful catching up, the State has played a proactive role, be it in building markets, in nurturing enterprises, in encouraging technological upgrading, in supporting learning processes and the accumulation of capabilities, in removing infrastructural bottlenecks to growth, in reforming agriculture and/or in providing finance. However, this is not to say that such successes all follow a uniform model; on the contrary, they encompass a variety of different institutional arrangements and policies”.

Thus the state in India has to play a proactive and pragmatic role in stepping the scope, quality and reach of interventions.

After the first wave of reforms, global interest in India has now reignited . It is a great opportunity for the country, with domestic economic growth picking up and poised to emerge as one of the fastest growing, interest in China ebbing, slowing down of Latin America and Eastern Europe in conflict. Africa has a long way to go before becoming a formidable competitor. India should seize this opportunity.

(The writer is former chief economist of the Indian Banks Association)