This Business World column of 24 July 2004 is about the low share of industry in India's national income, something that politicians get worried about from time to time. Manmohan Singh did, and appointed a grand Council; it proved quite ineffective.
Why worry about manufacturing?
The UPA’s CMP
talks about setting up a National Manufacturing Competitiveness Council. For a
committed liberal, manufacturing is nothing to worry about. If an industry is
uncompetitive, it will die, and so it should. As long as the economy is growing
satisfactorily, it does not matter whether one sector is thriving or dying. I
am not enough of a liberal to believe this. If all markets were perfectly
competitive and there were no state intervention, I would not worry about a
particular industry. But they are not, and there is.
It is perfectly
valid to ask whether Indian manufacturing is doing as well as it can. Going by
international comparisons, it is not. Manufacturing has been the leading sector
in virtually every rich country except, perhaps, Australia and New Zealand.
This is true of old advanced economies (the US, Britain, Germany, France) of
new ones (Japan, Spain, Italy) and newly industrialising economies (Korea,
Taiwan, Thailand, Malaysia and China). The share of manufacturing in India’s
GDP got stuck long ago at about 20 per cent. It has generated little
employment, and India’s share in world manufacturing trade is negligible. India
is comparatively a failure as a manufacturing nation.
Unfortunately,
the idea of a National Manufacturing Council conjures up Congress-created
official bodies of the 1960s. It would be manned by the party’s favourite
worthies, it would get prize property in Delhi and it would live forever with
nothing to show but profoundly uninspired reports — rather like the Planning Commission.
What India’s
lack of manufacturing prowess calls for is not another paunchy commission, but
an intelligent research effort. Why can India manufacture competitive software
but not hardware? Why can it boast of being a home for great research and development,
and be so bad at applying its results to producing something? Why has Indian
manufacturing remained so puny despite trade and investment liberalisation? Why
cannot India look China in the face as a manufacturing nation? These questions
call for the application of good minds — the best we can find. What is needed
is an enquiry commission of professionals: economists, engineers, chemists and
biologists.
Chambers of
commerce and industrial associations should be enlisted; they would be closer
to the problems of manufacturing industries. But they are intended and used for
lobbying, and their views are an average of their members’. So the views of
individual industrialists and firms should be equally sought. But it would be
as much an error to fill the commission with representatives of industry as
with friends of the government.
The answers are
likely to lie as much outside as inside manufacturing — for instance, in the
financial system. Too much of industrial finance flows through banks and is
fixed-interest, and too little flows through the stock market or venture funds
and is risk capital. Too much goes to a handful of large companies, and too
little to small and new businesses.
The last government did try to repair deficiencies,
especially of roads and ports. But one needs to think in terms of supply chains
from the manufacturer to the customer, and not of just one link, such as the
road. Also, because most of industry has got around the dysfunctional utilities
by generating their own electricity, we do not realise what a handicap state
electricity boards are. Broad-front industrialisation is not possible without
electricity available to any enterprise located anywhere, and it cannot be so
available as long as it is subsidised. Subsidies imply rationing.
No industry can
become internationally competitive if it receives heavy protection. Despite the
marathon measures of Manmohan Singh and Chidambaram as finance ministers,
Indian production remains far too protected.
These are
obvious, immediate and elementary answers. Better ones can be discovered if
intelligence goes into the search.
