How India can rejig its industrial policy

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 How India can rejig its industrial policy

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    • Severe industrial lockdown: India has to quickly draft a strategy to fight the severe industrial slowdown happening right now. Policies that build new jobs and create genuine self-reliance are needed.
    • Good examples: After the second World War came the success of Japan. And then Korea and China emulated Japan. 
      1. Korea supported its top companies by closing down the local markets for imports of finished goods or investments, but not capital goods and tech tie-ups. It depreciated its currency also. So the producer got precedence over the consumer.
      2. China kept the currency depreciated. It pushed labour-intensive industries, and got FDI for it. It learnt from Russian experience, did real market reforms and changed its PSUs to compete globally. Russia had privatised the PSUs in early 1990s, a terrible decision. China supported its PSUs. China kept dangling the local market carrot for getting more FDI!
    • A grand strategy: China tried building at least one competitor for every major global corporation (Apple or GE). First they battled in local market, then they went global. China kept sponsoring thousands of its students to learn technology in the US, and return home (most Indians in US never do so). Today's China is built by these tech workers.
    • India's failed strategy: The pre-1991 self-reliance strategy through infant industry protection was like ASEAN's, with the single big difference that India pursued Industrial Licencing, that killed all local competition (ASEAN did not do it). ASEAN kept funding local firms to build good products and export to Western nations. Banks funded that. India's inward-looking economy lost the chance to integrate globally, just like the USSR.
    • Washington Consensus from 1991: The policy ideas in Washington Consensus were used by India in the reforms from 1991. Most was left to market forces, except the physical and social infrastructure that the State would take care of. Aggressive privatisation wasn't pursued. Many PSUs turned sick, due to poor leadership.
    • Market forces, not fully: While markets were opened up, the ease of doing business didn't improve, and production costs didn't go down. The closed economy (pre-1991) had higher taxes and cross-subsidies, and that cost structure continued. So, global competitiveness was not. Add to that (a) appreciating real exchange rate, (b) high real interest rates, (c) land prices, (d) costly energy, (e) regulatory risks, and (f) unskilled workforce. All are urgent risks to the economy. Producer must get primacy now.
    • Solutions:
      1. Give priority to labour-intensive sectors.
      2. Whatever is done, must be on scale. Small scale means little. Examples - interest subsidy in textiles, capital subsidies in ship-building, etc.
      3. Import duties are being raised now.
      4. Giving cheaper land, energy and common facilities for waste management is needed.
      5. For chipmaking, govt. equity investment is needed.
      6. Set a big target, use fiscal resources to pursue it, get consumers to pay more, support the producers.
      7. Must have a sunset deadline for support package.
      8. Start with electronics, toys, solar power, batteries for cars and grid storage, etc.
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                                                                                                                              PT's IAS Academy: How India can rejig its industrial policy
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