Policy or wish list?

One of the measures of a nation’s development status is the proportion of manufacturing in its GDP. Back in the Sixties, economist Nicholas Kaldor had enunciated that the higher the rate of growth of manufacturing in a country, the higher would be its rate of GDP growth.

India got a very early lead in Asia with respect to setting up modern industries thanks to the British regime establishing a railway infrastructure in the latter half of the 19th century and British engineering companies setting up shop here. Parsee moneybags as well as forward-looking royal houses like Mysore and Baroda followed suit in establishing factories.

When Independence dawned, India had, what one would call in F1 motor racing parlance, the pole position in manufacturing in Asia, barring Japan. This excellent lead was frittered away in the next 50 years thanks to a woolly ‘socialist’ industrial policy, enunciated in 1948 and reinforced in 1956, which totally restrained India’s nascent manufacturing sector from taking off.

 What we got instead, were inefficient behemoths of the public sector whose every movement was shackled by government diktat. So, instead of an engine of growth which should have propelled India into the lead in Asia, manufacturing in this country became an anaemic sector.

The revision of political and economic policies in the early Nineties which opened up avenues for the private sector and removed illogical growth barriers did turn the tide for Indian industry but the earlier decades of repression have left their mark and manufacturing still accounts for only 16 per cent of GDP. 

The major factors that are constraining the growth of manufacturing are well known: poor infrastructure, especially in the areas of power, ports and transport, a bureaucratic maze (a manufacturer has to comply with some 70 regulations and file 100 returns a year), costly investment capital, restrictive labour legislation, protracted delays in government approvals, difficulties in land acquisition, and shortage of skilled persons.

Since Independence, India’s population has grown almost fourfold. With availability of land for tilling being finite, agriculture can no longer sustain this enormous increase in numbers. Industry and services have to come to the rescue. Logically, the growth of industry should trigger growth of the services sector.  However, due to the constraints mentioned above, industry has not grown as it should have and India’s employment structure has become distorted with services accounting for a disproportionately higher percentage. This is an inherently unstable structure for a large country like India.

Clichéd framework

The Government of India has come up with a fresh manufacturing policy which envisages increasing its contribution to the GDP to 25 per cent and addition of 100 million jobs in that sector by the end of the next decade. Unfortunately, while the intention of the new policy is good, the framework is clichéd. It  repeats old formulae like special enclaves, single windows, concessions on labour laws, quick environmental clearances, tax breaks and the like which have often been mooted in the past but never successfully implemented.

Take, for instance, the proposal to set up National Investment and Manufacturing Zones (NIMZs)  of 5,000 acres each which will be manufacturing–friendly by having a different set of rules and regulations compared to the rest of the country regarding labour, environment  and taxation. This kind of a set up was mooted many decades ago with  the Export Processing Zones and recently with the Special Economic Zones. The so-called single window for quick clearances never materialised in them and the trade unions opposed any liberalisation of labour laws tooth and nail.

In fact, they have reiterated their opposition again as far as the NIMZs are concerned. Incidentally, SEZs who have actually acquired land, find that there are no takers now for their plots.

 It is also doubtful whether any state government can now acquire 5,000 acres of contiguous land these days, considering the widespread resistance by farmers to let go of their land. The fact that these manufacturing hubs should be close to major transport corridors or ports, in order to make them attractive, makes such land availability all the more difficult.

Possibly, the formulators of India’s new manufacturing policy got their ideas from the way China swiftly ramped up its manufacturing output by creating special industrial zones like Shenzhen in the southern province of Guangdong. But they forget two things: the capability of China’s political administration to ruthlessly acquire land for the purpose and the enormous investment made in providing the requisite  infrastructure for supporting the new manufacturing capacity.

 In India, we are miles behind in providing adequate infrastructure for even the existing industries. Look at the state of power availability, for example. There is a peak shortage of 13 per cent in terms of capacity and the coal-fired thermal power stations  are having to work below capacity due to coal supply shortages. In the 11th Five Year Plan (2007-2012) , the addition to capacity will be only 52 Gigawatts against a target of 78 Gigawatts.

Perhaps it would be a more fruitful exercise for the Government of India to work on how to eliminate infrastructural bottlenecks instead of conceiving  starry-eyed policies on expanding manufacturing.  

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