India in Need of Industrial Policy 4.0

Two most dreaded words in economic circles and think-tanks these days is industrial policy. It is frowned upon because it has come to be associated with all the negatives of government intervention. Politics, geo-politics, picking winners, wasteful subsidies and creating distortions in what ought to be a free market economy. It has become a term loaded with negatives, when it is actually meant to do good for an economy and for business.

Well, guess what? Most countries have an industrial policy because it is essential to have a framework within which businesses operate, compete and grow. Countries formulate an industrial policy, at various critical stages in their history: recovery from a war or a natural calamity, upon gaining independence – as India did as a newly independent country under Jawaharlal Nehru – or liberalizing or diversifying, as China did in 1979, or Vietnam more recently. Or when economies wish to create a structural shift and also when they wish to reduce dependence on imports, as China seems to be doing with its recent China 2025 policy. If you ask me, the United Kingdom too is in need of an industrial policy, after Brexit.

Unfortunately, because it requires government intervention, many western economies see it as government planned and full of tax incentives, sops to various sectors, subsidies of the non-tariff kind, keeping out international competition, etc. Some of this criticism is valid, because of the sheer number of countries adopting such measures and crony capitalism.

However, if we accept that there are stages in a country’s economic growth, when informed policy can guide its path, in order to make deliberate and well-considered decisions that help achieve the desired results, we cannot be against it. Then there is also the need for economies to become more competitive, and that is usually to do with improved productivity and being able to compete with other economies. In today’s globalized economic environment, this is an imperative. For those of us who have read Michael E Porter, becoming more competitive isn’t about keeping competition out or gaining an unfair advantage over them, but about being the best in your industry because of the superior and differentiated product you produce.

I have been writing about the need for a new industrial policy in India on my blog. This is because I see our country at a critical inflexion point, where we can raise our game to take the overall economy higher. Looking back at our industrialization, there are a few important decisions we made at critical junctures in our journey. First, there was Nehru’s vision and plan for giving independent India a solid foundation through developing our core sector industries and investment in science and technology as well as in institutions of higher learning. Then came the massive computerization drive and investments in information technology in the 1980s, which we often don’t see as formal industrial policy, but it was absolutely critical in developing India’s technology base as well as improving efficiency and productivity.  The 1990s were the years of a liberalized Indian economy, and the 2000s have been important in terms of building our infrastructure.

Now the time has come to free India from the shackles of low-incomes, high-unemployment and high inequality. 90% of our employment is in the informal sector, as we already know and for India to reap the full benefits of economic growth, the country has to take all its people along. And we have to achieve this sooner rather than later. Else the bottom of the pyramid will continue to be a drag on the entire country. To this extent, I agree with many of the suggestions made in the HBS report India@100, which stresses on what India needs to do to get out of the low-income group of countries and move up to middle income and emerging countries by 2047. What I like about the report is that it doesn’t just talk about headline GDP targets, nor our ranking in the world economy. It focuses on achieving genuine growth in incomes and education and skills for everyone across the board. And they also focus on reducing the income inequality as well as skill gaps in the economy.

It is a broad strategy for India to be able to join the middle-income group of countries and become more competitive by 2047. However, while it emphasizes new policies and priorities, and it does take high unemployment into account, it does not adequately address the problem of low female labour force participation rates in India. Worse, it talks of low-skilled, female labour in the same breath several times in the document, as if female labour is low-skilled. Perhaps what they mean is that most of female labour in India is low-skill, but the document doesn’t treat this as an important problem to be addressed separately and in a concerted way.

Then, there is Niti Aayog’s own work on planning India’s industrial development. I was shocked to find that their website has hardly anything resembling an industrial policy. They talk of industry as Industry I and Industry II, where I is mining and mineral development and II is almost all of the rest of industry. Made no sense to me whatsoever. There is a document called the Niti Report which is a three-year action plan (2017-2019) which goes over the same tired theory and tactics that we have heard so often all these years, again and again. The usual argument of increasing the share of manufacturing in employment and GDP, and because Indian companies complain of lack of adequate domestic demand, we must look at exports as our saviour. This is policy-making to sidestep and circumvent the main issue: why the lack of domestic demand, in the first place. This is once again policy that doesn’t want to even acknowledge the problem areas in the Indian economy, but nevertheless wants to achieve some magic trillion-dollar GDP number somehow or the other.

It is this kind of lazy and tired thinking that has led to the PLI scheme, I suspect, which is short for industrial policy. The document also makes ridiculous recommendations such as coastal employment zones in India (CEZs), comparing it with China’s SEZs, for which large tracts of coastal land are required, if you please! Who or why anyone would want to invest in these is anybody’s guess. Worse, it recommends contract farming as agricultural reform. Perhaps that’s where the government’s agricultural reforms plans came from, which had to be shelved in the wake of massive protests mostly from farmers in three northern states.

According to media reports there is a new Industrial policy in the works, and one wonders what it contains. I have heard strange claims being made on TV discussions by former Niti Aayog chiefs about making every district competitive; I think this is ridiculous and wishful thinking. If what I read as being developed by DPIIT is true – in terms of its focus on new industries – then I can at least agree with the broad direction it is taking. However, there is need for greater dialogue and consultation between DPIIT, Niti Aayog and the Cabinet Committee.

I do not intend this article to be an industrial policy document, but to provide some direction to the efforts under way. As I have said before on my blog, I think the way for India to give industry new impetus has to be through its small and medium enterprises, which are the biggest employers in the economy. Large corporations have received more than their fair share of government attention and policy incentives, along with tax breaks to boot! It is time to turn our focus to India’s MSMEs across all sectors, and especially those that are of today and of the future. It appears from their website that NITI Aayog sees MSMEs as only artisans, craftsmen and women and cottage industry. They don’t think that millions of small businesses in manufacturing and in services are MSMEs.

I would like policy to first start with an objective that recognizes the employment and inequality issues upfront. So, while the HBS report India@100 has an objective of moving India into the middle-income group of countries, industrial policy too must have an objective and a time-frame within which to achieve it. I think that an objective that works at a human livelihood level will be more meaningful and effective than one at an aggregate macro economy-wide level. Therefore, I would recommend the twin objective of achieving a certain level of median income – which I think we don’t have a figure for – and reducing our income inequality to below 30% or below .30 by 2030. Since we don’t track median income in India, perhaps we shall have to settle for the less reliable per capita income coupled with lowering the income inequality.

Second, we must give up this recent and rather mischievous harping on sectors and seeing them as extremely narrow areas of economic activity. When I say industrial policy, I mean all of industry that is business and economic activity, which also includes services. To the extent that some businesses and industries are also increasingly linked with agriculture, such as supply chains, cold chains, food processing, etc. it would include agriculture as well.

Third, industrial policy is not just the central government’s responsibility, it must include all state governments as well. It is also a state subject and each state must formulate its own industrial policy based on its own factor conditions, competitive advantages, and supply conditions. In fact, in recent times, Indian states have often competed to win new investments in their states and this augurs well for a healthy economic competitive environment as it helps to raise standards across the board. However, historically, certain Indian states often known as the BIMARU states have lagged behind considerably and these are the states that need better policies and greater assistance from the central government so that they can catch up with the rest of India.

And finally, when we look at increasing employment as well as wages, we must factor these into any kind of labour reforms we undertake. There has been a lot of talk of the serious need for labour reforms in India, but we always approach it from the view of the western economic model: labour reforms = easier to hire and fire people. This must change to a more balanced and labour-friendly view, which is to improve the quality and level of skill and talent of labour, while remunerating them well. In recent times, most of manufacturing – and indeed services, including the IT industry – has been hiring short-term contract labour and not full-time employees on their payrolls. This too needs a rethink, because ultimately India’s human capital is only as good as how much industry and government invests in it. The short-term lure of low-cost labour arbitrage always leads to diminishing returns; China’s tech industry labour is a great example of wages rising, and yet staying the best and most-skilled.

Focusing on MSMEs as the engine of the next phase of economic growth in India will also help formalize the economy and increase direct tax revenue for the government as well as improve the tax-to-GDP ratio. What I recommend as the way to encourage and boost MSMEs is not through tax breaks or sops, but through creating more opportunities for them to specialize, scale up and sustain their growth. Incentivise R&D and innovation, make capital more easily available and on attractive terms and help them grow at a faster pace. In this regard, I recommend:

• Connecting MSMEs with India’s leading B-Schools such as IIMs and others who can provide management expertise to many MSME entrepreneurs who might otherwise lack formal management experience and knowledge. Perhaps, the IIMs can even partner with these MSMEs on specific projects and prototypes. The same ought to be done with IITs and regional engineering institutes across the country. We have a wealth of engineering and management talent in our country that isn’t being leveraged to build India’s next rung of companies and their innovations.
• Provide MSMEs regular mentorship from India’s leading corporations and their leaders in a structured way through our industry bodies, CII and FICCI. This would help provide many MSME entrepreneurs valuable guidance and advice that they need at various stages of their business growth.
• In addition to structured mentorship programmes devised for various stages of MSME growth, if each large Indian corporation takes it upon itself to mentor 5-10 MSMEs every year, there is no reason why we shouldn’t see our small and medium businesses scale-up, specialize and compete in a fast-growing India.
• Large companies might even invest in MSMEs if they see promise in their ideas and future.

These MSMEs would obviously be operating in a wide range of industries, so it might help to initially focus on those that are related to India’s knowledge-based industries in which we already have a competitive advantage and are also future-oriented. As I have written before in my blog post on Indian brands in the global arena, areas related to IT and pharmaceuticals and healthcare, and with the element of digital technology built-in would have huge potential to grow and be competitive in the future. In addition, I had also mentioned clean and green technology as a sunrise sector in which there is plenty of scope for pioneering innovations from India.

Below, you may read through a short document that I have created which explains at a glance how a new industrial policy will benefit India, make us competitive and grow, with all the aspects discussed in this article.

industrial-policy-4.0-document-for-blog-post

One of the many signs of a growing and vibrant economy is the formation of new businesses. I visited the website of India’s Ministry of Corporate Affairs to check how many new businesses are being registered in India, and I was shocked to see that no information had been compiled for an annual figure. However, media reports seem to suggest that 2023 will see over 200,000 new companies and businesses registered in India, at an approximate average rate of around 18,000 each month. I was also shocked to see that the website of Delhi-Mumbai Industrial Corridor has no current update on the status of the progress of the corridor and the creation of new towns and cities. It is terrible to see the general apathy and indifference in the government itself towards the pursuit of economic growth and growing investment. Another good sign of smaller companies scaling up is the number of IPOs (initial public offerings) that have taken place this year, with more lined up for the coming months. 

While we wait for DPIIT’s new industrial policy – which I hope focuses on these and other industries – I would also like to once again emphasise the importance of India’s economic think-tanks and the need to include them in this next phase of India’s industrialization. NCAER can help research and track the growth of India’s middle class as also its MSMEs. ICRIER can provide assistance in researching the market potential of these MSMEs both in India and in international markets and can continuously track their progress. And NIPFP can research the formalization of the economy through its MSME sector and how India can increase its tax-to-GDP ratio. It is time the expertise and research capabilities of these think-tanks are put to good use and are treated as valuable inputs in policymaking.

We have to look beyond GDP and economy rankings, to focus on human capital – of which we have plenty in India – and improved standards of living for everyone. We have to see beyond our large corporations – and indeed use their guidance – to realise the potential of India’s newer and younger businesses. And we have to take a concerted, scientific approach in devising a new industrial policy and tracking its progress.

Let us begin with raising our median income and reducing income inequality as objectives for a fit-for-purpose industrial policy 4.0.

Note: From reading some of the content on Niti Aayog’s website, I must say that a lot of it looks like unprofessional Perfect Relations’ idiot bosses’ mischief, perhaps in cahoots with their cronies in RK Swamy/BBDO, Chennai. For example, I don’t know what the three-year action plan (2017-2019) is doing there and what its benefit is. I certainly hope it is not referring to anything like the three-year relationship of Mahua Moitra that this article in the Sunday edition of Economic Times is about! One is sick and tired of the media attention on her and the sleaze around her cash for queries scam. Nor do I understand the coastal employment zones nonsense. Both seem like the mischief of completely unprofessional organisations who ought not to be in the corporate world.

This is the reason I have clarified that when I use the word industry in this piece I mean all economic and business activity. Because the same two unprofessional circuses have played enough mischief with various sectors of the economy, even turning me and my family into either farmers or factory workers or low-paid ‘service’ folk. They have even meddled with – and through – economists and publishers on this very issue, for which they have plenty to answer for.

This article was originally published on my blog on November 9, 2023.