FROM BUSINESS WORLD OF 24 AUGUST 2006
Getting it right
at the start
The Prime
Minister believes that India missed an opportunity to industrialize like its
eastern neighbours in the 1960s, and wants it not to miss it again. He looks to
manufacturing to create jobs, especially in rural areas, where he sees a great
opportunity in our large agricultural output waiting to be processed. Inspired
by this vision, he set up the National Manufacturing Competitiveness Council (NMCC)
when he took charge.
The NMCC has now
given a final shape to its National Manufacturing Strategy (NMS). It aims to
raise the growth rate of manufacturing from 7 per cent in 1995-2004 to 12-14
per cent. It was adopted by The High-Level Committee on Manufacturing (HLCM),
which connects the Council with the Prime Minister and other commanding heights
of the government, early in August. The Prime Minister has clearly absorbed the
Council’s message; last week, when he met trade union leaders, he stressed the
need to create jobs in manufacturing.
Thus, all those
involved in the exercise are charged up. But the government is expert at
adopting wrong and unworkable measures and spending the nation’s resources on
them. This is a good time to take a critical look at the NMS, before the waste
begins.
To increase the
growth rate of manufacturing, it is necessary either to raise the overall
growth rate or to find markets abroad for the surplus that would result. The
NMCC is intent on promoting labour-intensive and agro-intensive manufacturing;
such selective growth will cause an imbalance between supply and domestic
demand, and hence need for exports. Yet the NMCC has given hardly any thought
to how growing markets can be found for textiles, food products and leather
goods abroad, in competition with China, Brazil, Australia, Thailand and other
countries with proven comparative advantage.
Exports would
increase a payments surplus, for which the use at present is accumulation of
exchange reserves, invested by the Reserve Bank in low-yielding US securities.
Surely that is not why we want faster manufacturing growth. Our inexorably
growing reserves are proof that we are not growing at the rate that the
payments constraint allows. The NMCC’s proposed strategy would worsen our
underperformance.
The NMCC is
mistaken in thinking that interest rates cannot be low in a capital-scarce
country. The interest rate is just the price of money; a payments surplus
enhances money supply, and brings down the cost of money. This was demonstrated
by our own history in 2000-2004. Interest rates have recently been pushed up
because the balance of payments has worsened, and because the Reserve Bank has
been worried about inflation. This shows that the government has not mastered
macroeconomic management for high growth – a problem the NMCC is insufficiently
cognizant of.
The Council
cannot be accused of the same fault in respect of labour laws; it has
recognized what an obstacle they present to faster manufacturing growth. Yet,
when the Prime Minister met the trade union leaders, he was studiously silent
on the issue. His alliance with the leftists cannot be a one-way street. If he
defers to them on rural employment creation, reservations etc, he should also
ask for something in return; the most valuable thing he could ask for is
cooperation in making labour laws less dysfunctional.
The NMCC is
right to highlight the need for growing supply of skilled workers, but has
avoided the real issues – the government’s protection of a dysfunctional government-owned
education system, and the shackles it has consequently placed on competition
from the private sector. If we today have an internationally competitive IT
sector, it is because institutions such as NIIT and Aptech created a private
training resource virtually in defiance of the traditional engineering
colleges. If literacy is spreading across the country, it is because extremely
cheap private schools are mushrooming in defiance of state departments of
education. For better education, we need less government control.
The NMCC’s
approach to innovation is unimaginative and involves throwing government money
at hopefully innovative initiatives. As Lord Bhattacharyya said last week in
Madras, technology is portable and there is no such thing as intellectual
property. Manufacturers do not succeed on account of research and development.
They grow because they define a market niche, produce a product for it and make
or buy technology to produce it as they go along.
If manufacturing
is to grow at 14 per cent, GDP will have to grow at 10.5 per cent and output
per head at 9 per cent a year. To achieve such growth, competition will have to
be so intense that Indian companies would go and find markets all over the
world – and get technology from wherever it is available in the world. Create
the environment of freedom and competition, and our entrepreneurs will find the
rest.
