Is lack of an industrial policy hurting us?

‘Industrial Policy’ is back in fashion after 25 years. It had become a bad word amongst economists and policy-wonks from the early 1990s with the dominance of the Washington Consensus over global economic policies.

The Indian government is feeling the need for a new industrial policy principally because the present pattern of economic growth is not producing sufficient jobs and livelihoods. Until the 1980s, industrial policy was driven by the theory that the government must closely manage the flow of investments into selected industrial sectors to nurture their development. Dissatisfaction with this approach, primarily because it stifled entrepreneurship, made the government change its approach from the 1990s towards a free market approach with the expectation that market forces would cause industrial growth to accelerate. However, that did not happen. India’s manufacturing sector, which should have been a principal driver of industrial growth and creator of jobs languished at 16% of the economy since the 1990s. While the services sectors grew, overall job growth did not keep pace with the growth of the population.

India’s capacity to produce capital goods—the machines and tools that are the muscles of industrial capability—was as strong as China’s in 1991, because of compulsions until then to produce capital goods in India, on account of shortages of foreign exchange as well as government policies for building self-sufficiency. By 2009, Chinese capital goods production capacity was about fifty times as large as India’s and India was importing machinery, power generation equipment, and other capital goods in increasing quantities from China. India’s industrial sector had become much smaller than China’s and lost its depth too. Why? Could it be that India had been trying too hard to be a ‘good boy’ in international economic circles, whereas China had maintained a vigorous ‘industrial policy’ to build its own capabilities, despite accusations about being ‘protectionist’, of ‘stealing’ intellectual property, and being ‘a currency manipulator’ too?

The underlying approach to industrial growth in India until the 1990s was a top-down planning approach, of attempting to manage the inputs-outputs of the economy through licenses to produce and allocations of resources. After the reforms of the 1990s, the paradigm shifted to the other extreme, of ‘leaving it to the market’, and hoping that freedoms to invest and produce would result in the growth of more jobs and livelihoods. However, the bureaucracy continued to tie up enterprises in knots.

The process of a country’s industrialisation is a process of enterprises in that country acquiring capabilities to produce more complex products that they could not produce before. Workers learn skills they did not have before. Managers of enterprises learn to apply technologies and manage processes that they could not before. And government policy makers and implementers learn how to create conditions for industrialization, which they could not earlier. Moreover, this process of learning and building capabilities happens in a competitive world. Therefore, later industrialisers must learn faster than those ahead of them to compete with them, and policy-makers must create conditions to ‘nurture’ industries in their country until they are strong enough for more open competition. Even the US protected its weaker industries against competition from stronger British and European competitors in the 19^th century.

Jobs and livelihoods cannot be sprinkled into the economy by government, except jobs on the government’s own payrolls. Jobs and livelihoods must grow out of the economy, and the government must create conditions for more enterprises to form and grow so that more jobs and livelihoods grow. Combinations of many interventions are required, in the right proportions, to induce the economy to generate more jobs and livelihoods.

The development of enterprises and the development of skills of workers cannot be put into separate, disconnected policy silos. People need skills because they want jobs. The skills they need must fit the jobs they do, and their skills can be honed only on the job. Therefore, successful programs to develop skills cannot be managed within a ministry dedicated to labour or skills. This approach, wherein industrial training institutes were under the Labour Ministry (and may now be transferred to the Skills Ministry), resulted in the mismatch between the output of the skills programs and requirements of industry, and trainees finding that they could not get jobs. Less than 20% of the millions trained by this government’s (and the previous one’s) drive to skill millions have found jobs. On the other hand, enterprises complain to the Industrial Development department that they cannot grow because they do not have people with the requisite skills. Therefore, policies for developing skills must mesh with policies to stimulate growth of enterprises.

Improvements to one part of the system can have unintended consequences on other parts. Making it easier for one sector to produce by reducing duties on its inputs creates inverted duty structures which can crimp the growth of the input sector. This has resulted in the weakening of India’s machinery sector, for example, and weakened the country’s industrial base.  

A clutter of branded schemes with catchy acronyms will not grow more jobs. A ‘systems view’ is required to connect many parts of the system and many policies—for investment promotion, trade regulation, enterprise regulation, labour policies, etc.—to enable the economy to deliver the results citizens want from growth viz. better jobs and livelihoods.  Effects of policies that may be good for one part of the system on other parts must be understood before they are implemented. Otherwise, they can become ‘fixes that backfire’, as the vigorous skilling mission had become, as well as the rush to demonetise, and some of India’s FTA’s too. Moreover, a ‘whole of government’ approach is required for coordinated implementation at several levels, at the center, in the states, and on the ground—to make it easier to do business in India.

(The writer is a former member of the Planning Commission and author of the recently released book “Listening For Well-Being: Conversations with People Not Like Us”)