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Industrial Policy in India

TOPIC: GS PAPER-3; Indian Economy

TOPIC: GS PAPER-3; Indian Economy

The Indian manufacturing sector has evolved drastically in the past few years and has become one of the high growth sectors of India. Prime Minister of India, Mr Narendra Modi, had launched the ‘Make in India’ program to place India on the world map as a manufacturing hub and give global recognition to the Indian economy. India is expected to become the fifth largest manufacturing country in the world by the end of year 2020. Such a tremendous growth has made majority of foreign nations positive and confident of India’s manufacturing industry, such as the International Monetary Fund (IMF) and World Bank Group.

No major country managed to reduce poverty or sustain growth without manufacturing driving economic growth. This is because productivity levels in manufacturing are much higher than in either agriculture or services. Manufacturing is an engine of economic growth because:

  • It offers economies of scale
  • Manufacturing pulls along services, instead of the other way around.
  • A decline in the manufacturing sector growth rate will negatively affect the growth rate of the services sector, in both the short-run and long-run.
  • Manufacturing development not only promotes the incentives of savings, but also accelerates the pace of technological accumulation.
  • Embodies technological progress and generates forward and backward linkages that create positive spillover effects in the economy.
  • Enhances the utilization of human capital and economic institutions.
  • It offers economies of scale

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  • Manufacturing pulls along services, instead of the other way around.
  • A decline in the manufacturing sector growth rate will negatively affect the growth rate of the services sector, in both the short-run and long-run.
  • Manufacturing development not only promotes the incentives of savings, but also accelerates the pace of technological accumulation.
  • Embodies technological progress and generates forward and backward linkages that create positive spillover effects in the economy.
  • Enhances the utilization of human capital and economic institutions.

    • In India manufacturing has never been the leading sector in the economy other than during the Second and Third Plan periods. The US and Europe after the 2008 crisis with the efforts of Government have revived their industrial policies. The United Nations Conference on Trade and Development or UNCTAD finds that over 100 countries have, within the last decade, articulated industrial policies. However, India still has no manufacturing policy. “Make in India” focuses on increasing foreign direct investment and ease of doing business but that does not constitute an industrial policy.

    SIGNIFICANCE OF HAVING AN INDUSTRIAL POLICY:

    SIGNIFICANCE OF HAVING AN INDUSTRIAL POLICY:
    SIGNIFICANCE OF HAVING AN INDUSTRIAL POLICY:

    • Need to coordinate complementary investments when there are significant economies of scale and capital market imperfections (for example, as envisaged in a Visakhapatnam-Chennai Industrial Corridor).
    • Industrial policies are needed to address learning externalities such as subsidies for industrial training (on which we have done poorly).
    • The state can play the role of organiser of domestic firms into cartels in their negotiations with foreign firms or governments — a role particularly relevant in the 21st century after the big business revolution of the 1990s (with mega-mergers and acquisitions among transnational corporations).
    • The role of industrial policy is not only to prevent coordination failures but also avoid competing investments in a capital-scarce environment. Excess capacity leads to price wars, adversely affecting profits of firms — either leading to bankruptcy of firms or slowing down investment, both happening often in India (Example- the aviation sector). Even worse, price wars in the telecom sector in India have slowed profits (even caused losses), which hampers investment in mobile/Internet coverage of rural India where access to mobile phones and broadband Internet, needs rapid expansion.
    • Industrial policy can facilitate the much needed structural change which are blocked by losing firms in a fast-changing environment.
    • The state’s role will be critical to manufacturing growth in India, knowing the success story of India’s IT industry. The government invested in creating high-speed Internet connectivity for IT software parks enabling integration of the Indian IT industry into the U.S. market. It allowed the IT industry to import duty-free both hardware and software. The IT sector has the benefit of low-cost, high-value human capital created by public investments earlier in technical education. Without these, the IT success story would not have occurred. These offer insights to the potential for industrial policy in India.
  • Need to coordinate complementary investments when there are significant economies of scale and capital market imperfections (for example, as envisaged in a Visakhapatnam-Chennai Industrial Corridor).
  • Industrial policies are needed to address learning externalities such as subsidies for industrial training (on which we have done poorly).
  • The state can play the role of organiser of domestic firms into cartels in their negotiations with foreign firms or governments — a role particularly relevant in the 21st century after the big business revolution of the 1990s (with mega-mergers and acquisitions among transnational corporations).
  • The role of industrial policy is not only to prevent coordination failures but also avoid competing investments in a capital-scarce environment. Excess capacity leads to price wars, adversely affecting profits of firms — either leading to bankruptcy of firms or slowing down investment, both happening often in India (Example- the aviation sector). Even worse, price wars in the telecom sector in India have slowed profits (even caused losses), which hampers investment in mobile/Internet coverage of rural India where access to mobile phones and broadband Internet, needs rapid expansion.
  • Industrial policy can facilitate the much needed structural change which are blocked by losing firms in a fast-changing environment.
  • The state’s role will be critical to manufacturing growth in India, knowing the success story of India’s IT industry. The government invested in creating high-speed Internet connectivity for IT software parks enabling integration of the Indian IT industry into the U.S. market. It allowed the IT industry to import duty-free both hardware and software. The IT sector has the benefit of low-cost, high-value human capital created by public investments earlier in technical education. Without these, the IT success story would not have occurred. These offer insights to the potential for industrial policy in India.

    • India is an attractive hub for foreign investments in the manufacturing sector. Several mobile phone, luxury and automobile brands, among others, have set up or are looking to establish their manufacturing bases in the country. The manufacturing sector of India has the potential to reach US$ 1 trillion by 2025 and India is expected to rank amongst the top three growth economies and manufacturing destination of the world by the year 2020. With impetus on developing industrial corridors and smart cities, the government aims to ensure holistic development of the nation. The corridors would further assist in integrating, monitoring and developing a conducive environment for the industrial development and will promote advance practices in manufacturing.

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