A New Approach to India’s Industrial Policy

In News 

Recently, the importance of Industrial policy of  India was highlighted. 

Evolution of India’s Industrial Policy

• The quest for industrial development started soon after independence in 1947.
• The Industrial Policy Resolution of 1948 defined the broad contours of the policy delineating the role of the State in industrial development both as an entrepreneur and authority. 
• This was followed by comprehensive enactment of Industries (Development & Regulation) Act, 1951 (referred as IDR Act) that provides for the necessary framework for implementing the Industrial Policy and enables the Union Government to direct investment into desired channels of industrial activity inter alia through the mechanism of licensing keeping with national development objectives and goals.
• Economic reforms initiated since 1991 envisages a significantly bigger role for private initiatives. The policy has been progressively liberalised over years to at present,

Objectives 

• The main objectives of the Industrial Policy of the Government are 
  •  to maintain a sustained growth in productivity;
  • to enhance gainful employment;
  • to achieve optimal utilisation of human resources; 
  • to attain international competitiveness; and 
  • to transform India into a major partner and player in the global arena.

Existing Issues 

• The potential role of industrial policy has been consistently downplayed in developing countries outside of East Asia ever since the early 1980s after the growing dominance of the orthodox paradigm with well-known consequences in much of India, Latin America and also sub-Saharan Africa.
• Industrial policies   are more focused on large firms  and many of the industries currently chosen to be under PLI (production linked incentives) are highly capital- and skill-intensive. 
  • Even in Japan and South Korea, where industrial policy has been otherwise successful, it has often mainly helped large firms.
• In a world of geo-political conflicts and supply chain disruptions, national security is often considered a major goal.
  • Hence sometimes resources are less allotted to the industrial sector .
• Indian politicians and bureaucracy are more comfortable with “top-down” over-centralised policies.
• The government had failed to instil confidence even as its policies till now had crippled the construction, manufacturing, real estate, pharma and other major contributors to the economy.
  • Lakhs of workers have lost job opportunities because of the retrogressive policies.
•  The role of industrial policy is not only to prevent coordination failures but also to 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 (witness the aviation sector)
• Imperfect information with respect to firm-level investments in learning and training; and lack of information and coordination between technologically interdependent investments. 
•  Industry’s inadequate expenditure on research and development (R&D) and micro, the small and medium enterprises sector facing tough competition from cheap imports from China and other countries

• Lack of human capital has been a major constraint upon India historically being able to attract foreign investment (which Southeast Asian economies succeeded in attracting).

Suggestions 

• In policy implementation one has to be particularly vigilant in monitoring the performance of the target firms, be strict with non-performing firms, and, if necessary, withdraw support from them. 

• This often requires making an extra effort to go beyond the traditional hidebound bureaucratic culture in India. 

• The industrial policies need to be customised to local decentralised contexts, particularly when you want to help small and medium sized firms. 

• Support for industrial policy has to be nuanced, multi-faceted and vigilant in its disciplining functions.

• There is the need to coordinate complementary investments when there are significant economies of scale and capital market imperfection

• India should adopt ‘complex self-adaptive systems’, which is the appropriate model for industrial growth where  the Policy focus is on deregulating Indian industry; allowing freedom and flexibility to the industry in responding to market forces; and providing a policy regime that facilitates and fosters growth.