Besides looking the other way on rabble-rousers, the Bharatiya Janata Party’s key focus at the moment is boosting Indian manufacturing. On Monday, at a meeting of industrialists and secretaries, Prime Minister Narendra Modi added another set of amusing management acronyms to his already bustling catalogue – ABCD to ROAD. The government, he said, is bound in a culture of Avoid, Bypass, Confuse and Delay. Through Responsibility, Ownership, Accountability and Discipline, the prime minister resolved to create an “enabling environment” for manufacturing to thrive.
His concern is certainly not misplaced. At approximately 16% of the gross domestic product, manufacturing in India is far lower than what it ought to be. India, a nation of 1.2 billion people, rivals not China or Germany, but Mexico and Russia (with populations of 122 million and 144 million, respectively) in its existing manufacturing base. Even South Korea, with a population of only 50 million, has a larger manufacturing base than India.
Decades of trade liberalisation and economic growth based on service-fuelled exports and domestic credit expansion have ensured that jobs remain few, and India urbanises at a strutting pace. With a $2 trillion economy, India is still almost 70% rural.
Moreover, while such liberalisation has been associated with near-double digit growth, it has undoubtedly led to immense deindustrialisation in the country’s north because of the onslaught of Chinese imports. Plenty of small business houses have turned from “makers” to “importers” or “traders”.
Looking the wrong way
Therefore, manufacturing remains the hard nut India is yet to crack. This is what the government has essentially acknowledged through its steroid-fuelled marketing plan at convincing “investors” to “Make in India”.
But “Make in India” remains what it is – a marketing gimmick. The programme’s website, full of soundbites and fancy design, is more a brochure than the heap of statistics, reports and technology assistance documents that manufacturers really need to set up shop.
Otherwise, the government’s strategy is focused on somehow increasing the “Ease of Doing Business” index, easing land acquisition and environmental laws, and calling for foreign investment through an aggressive invitation to foreign investors to set up shop in India.
The logic is that once it is easy to register or start a business and get the basic infrastructure in India – the animal spirits of the economy would automatically revive, and the private sector (both domestic and foreign) will spill out cash in an orgy of investment, thereby taking India to a sustainable double-digit growth for the near future.
Success begets success
At best, this strategy is insufficient. Take for instance, the Ease of Doing Business Index. The factors that make up the index like ability to register a business, lower tariff rates, enforcing contracts and “getting electricity” are often a result of a country’s development than a cause of it. In other words, as a country gets richer, its bureaucracies eventually become less corrupt, its infrastructure improves and it does not require any protective tariffs (because its industry has become competitive).
But attaining a good ranking of “ease of doing business” cannot be considered the key to boosting manufacturing. If this were really the case, then United Kingdom (rank 8), which has a weak manufacturing sector, would not be higher on the index than Germany (rank 14), the rich world’s high-tech workshop and the world’s fourth largest manufacturing nation (by value of output). Russia (rank 64), with an economy based on exports of commodities, has a higher ranking than China (rank 90), which is the largest manufacturer and exporter in the world.
On a similar note, the focus on land and environment laws is appreciable but utterly insufficient. Land laws shall make it easier for manufacturers to get land and for infrastructure projects to take off, but they are not enough to drive businesses to invest.
Someone with practical experience in manufacturing will tell you that what manufacturers (and businessmen in general) really look for is an example of proven success and prospective demand or market. The other encumbrances are rarely a problem for those with an entrepreneurial bent. The local inspector raj of any kind can easily be colluded with through bribes or dealt with through a compliance department – both of which cost negligible amounts of money and time when compared to the overall toll of setting up a reasonably sized manufacturing plant.
Dearth of ideas
Foreign investment too will follow if the multinational corporations see an already thriving industry. The ability to make money, and not tax rates is what drives investment the most. This is not to suggest that other causes like regulation do not have any effect on prospective capital investors. Of course, extremely stringent regulation on private industry, the likes of which used to be present in Communist Bloc economies, will squelch growth. But its importance in boosting manufacturing is certainly exaggerated. The celebrated heterodox economist Ha Joon Chang once noted that that a manufacturer required 299 permits to set up a factory in South Korea in the early 1990s – yet the economy grew 10% annually.
Thus, for developing nations, what really works is an industrial policy: a close working of a capable bureaucracy, private industry, finance and associated intelligence bodies (think-tanks, technology institutes, etc.) to position the nation’s industrial base in the context of the world economy, and make it competitive. This means that some policies that defy the conventional wisdom like tariffs, state control over credit, and forcing domestic industrialists to enter manufacturing (which is unprofitable in the short-run, when compared to sectors like retail and services).
This is what China, Japan, Germany and practically every nation with a competitive industrial base has done. For instance, the Japanese would work with targeted sectors to promote mergers between too many small firms so as to eliminate excessive competition. This allowed the remaining firms to reap enough profits to be able to compete globally.
Yet, the real tragedy is that such policies are barely on the table for consideration much less adoption. The government, in its astonishing paucity of ideas, and scary acceptance of conventional wisdom, is wedded to neoliberal economists, who rely on models that predict that free trade between a stone-age society and present-day United States will eventually equate development in both the countries in the long run. In other words, models divorced from reality.
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His concern is certainly not misplaced. At approximately 16% of the gross domestic product, manufacturing in India is far lower than what it ought to be. India, a nation of 1.2 billion people, rivals not China or Germany, but Mexico and Russia (with populations of 122 million and 144 million, respectively) in its existing manufacturing base. Even South Korea, with a population of only 50 million, has a larger manufacturing base than India.
Decades of trade liberalisation and economic growth based on service-fuelled exports and domestic credit expansion have ensured that jobs remain few, and India urbanises at a strutting pace. With a $2 trillion economy, India is still almost 70% rural.
Moreover, while such liberalisation has been associated with near-double digit growth, it has undoubtedly led to immense deindustrialisation in the country’s north because of the onslaught of Chinese imports. Plenty of small business houses have turned from “makers” to “importers” or “traders”.
Looking the wrong way
Therefore, manufacturing remains the hard nut India is yet to crack. This is what the government has essentially acknowledged through its steroid-fuelled marketing plan at convincing “investors” to “Make in India”.
But “Make in India” remains what it is – a marketing gimmick. The programme’s website, full of soundbites and fancy design, is more a brochure than the heap of statistics, reports and technology assistance documents that manufacturers really need to set up shop.
Otherwise, the government’s strategy is focused on somehow increasing the “Ease of Doing Business” index, easing land acquisition and environmental laws, and calling for foreign investment through an aggressive invitation to foreign investors to set up shop in India.
The logic is that once it is easy to register or start a business and get the basic infrastructure in India – the animal spirits of the economy would automatically revive, and the private sector (both domestic and foreign) will spill out cash in an orgy of investment, thereby taking India to a sustainable double-digit growth for the near future.
Success begets success
At best, this strategy is insufficient. Take for instance, the Ease of Doing Business Index. The factors that make up the index like ability to register a business, lower tariff rates, enforcing contracts and “getting electricity” are often a result of a country’s development than a cause of it. In other words, as a country gets richer, its bureaucracies eventually become less corrupt, its infrastructure improves and it does not require any protective tariffs (because its industry has become competitive).
But attaining a good ranking of “ease of doing business” cannot be considered the key to boosting manufacturing. If this were really the case, then United Kingdom (rank 8), which has a weak manufacturing sector, would not be higher on the index than Germany (rank 14), the rich world’s high-tech workshop and the world’s fourth largest manufacturing nation (by value of output). Russia (rank 64), with an economy based on exports of commodities, has a higher ranking than China (rank 90), which is the largest manufacturer and exporter in the world.
On a similar note, the focus on land and environment laws is appreciable but utterly insufficient. Land laws shall make it easier for manufacturers to get land and for infrastructure projects to take off, but they are not enough to drive businesses to invest.
Someone with practical experience in manufacturing will tell you that what manufacturers (and businessmen in general) really look for is an example of proven success and prospective demand or market. The other encumbrances are rarely a problem for those with an entrepreneurial bent. The local inspector raj of any kind can easily be colluded with through bribes or dealt with through a compliance department – both of which cost negligible amounts of money and time when compared to the overall toll of setting up a reasonably sized manufacturing plant.
Dearth of ideas
Foreign investment too will follow if the multinational corporations see an already thriving industry. The ability to make money, and not tax rates is what drives investment the most. This is not to suggest that other causes like regulation do not have any effect on prospective capital investors. Of course, extremely stringent regulation on private industry, the likes of which used to be present in Communist Bloc economies, will squelch growth. But its importance in boosting manufacturing is certainly exaggerated. The celebrated heterodox economist Ha Joon Chang once noted that that a manufacturer required 299 permits to set up a factory in South Korea in the early 1990s – yet the economy grew 10% annually.
Thus, for developing nations, what really works is an industrial policy: a close working of a capable bureaucracy, private industry, finance and associated intelligence bodies (think-tanks, technology institutes, etc.) to position the nation’s industrial base in the context of the world economy, and make it competitive. This means that some policies that defy the conventional wisdom like tariffs, state control over credit, and forcing domestic industrialists to enter manufacturing (which is unprofitable in the short-run, when compared to sectors like retail and services).
This is what China, Japan, Germany and practically every nation with a competitive industrial base has done. For instance, the Japanese would work with targeted sectors to promote mergers between too many small firms so as to eliminate excessive competition. This allowed the remaining firms to reap enough profits to be able to compete globally.
Yet, the real tragedy is that such policies are barely on the table for consideration much less adoption. The government, in its astonishing paucity of ideas, and scary acceptance of conventional wisdom, is wedded to neoliberal economists, who rely on models that predict that free trade between a stone-age society and present-day United States will eventually equate development in both the countries in the long run. In other words, models divorced from reality.