For the past few years, I have regularly experienced déjà vu when reading the financial news between the months of September and November.
First, there is the release of the annual World Bank’s Doing Business report, which ranks 190 countries every year on regulations that enhance business activity and those that constrain it. India, predictably, ranks poorly every year. Second, pundits begin (again, predictably) to criticise the government for not moving fast enough on the blatantly impossible target of pushing India into the top 50 ranking by 2018. And soon enough, the so-called intelligent circles, depending on which side one is on, will furnish India’s ease of doing business ranking as the key reason behind every disappointing statistic on manufacturing, or as a rallying cry for an energetic renewal of policy approach. It seems that the Indian government’s inability to fix routine bureaucracy in Mumbai and Delhi (they are the only sample cities in the Doing Business survey in India) has deep repercussions in the discourse on ideas in India.
The wrong approach
However, the Modi government, which has staked its entire manufacturing policy on the gilded Make in India campaigns, and on improving India’s ease of doing business ranking, does find itself in the lurch.
With almost half its tenure over, there really is no real take-off in the manufacturing and industrial sector. Total exports in 2016 – the biggest indicator of manufacturing competitiveness – are likely to be less than in 2014, and nothing in India resembles the China take-off of the 1990s, the Japanese and German take-off of the 1950s or the South Korea take-off of the 1970s.
This has to be the time for the government to urgently revisit the core assumptions of its policy to promote manufacturing.
The current wisdom is that with the right loosening of regulations and provision of infrastructure, the magical combination of land, labour and capital – as modern economic theory assumes production to be – will materialise into a manufacturing boom employing millions. This explains the government’s utmost focus on pushing up India’s ease of doing business ranking and promoting Make in India with a media and public relations blitz.
But it is here where the government is wrong. The building blocks of modern capitalism are not markets, regulations, equilibrium prices, contracts and trade. These have always existed, and perhaps shall almost always continue to be a part of society. When political scientist Adam Smith wrote of the “invisible hand” in the Wealth of Nations, the industrial revolution in England had not meaningfully taken off. He observed the small-scale workshop economy that was a product of Renaissance Europe. Ancient Rome too had legal sophistication and extensive trade but no modern industry.
What uniquely characterises modern capitalism is the presence of technology, mass production, rational management, mass market and capital. In other words, capitalism’s soul exists not in the stock market (again an early 17th century invention with roots that go much before the industrial revolution) but on the rational management of the factory floor.
The government’s approach till now has been to worry about the first part (markets, regulations and trade) but have an almost wholly hands-off approach for the second part (technology, nurturing, scale, presence of a mass market), leaving this to the international and national private actors.
Nurturing young industry
If the government were serious about promoting manufacturing, it needs to go one step further and actively nurture young industries to take off. Why? Because technology and production know-how takes time to institutionalise. Usually manufacturing firms become better through a process of trial and error. But if they are already subjected to the whirlwind of international competition, they are unlikely to take root in the first place. The support can take many forms but is usually through subsidised loans, trade tariffs and other preferential policies.
It is for this reason that it is easy for me (a manufacturer) to set up a nutrition or a pharmaceutical factory in India, but not an electronics factory. The pharmaceutical industry has existed in India for long and it is reasonably competitive. Its ecosystem of trained managerial manpower, ingredient suppliers, and Good Manufacturing Practices consultants allow for an enterprising individual with capital to set up a workable factory unit. But similar conditions do not exist for the electronics industry. It is up to the government to allow for the development of similar conditions.
The news that India just improved its ease of doing business ranking by a single spot – from 131 last year to 130 – could not have come at a worse time. Taiwanese technology giant Foxconn just announced that it is putting the brakes on its promised, and extremely hyped $5 billion investment in Maharashtra. This, despite the fact that the Maharashtra government had allotted 1,500 acres for the project, and the bureaucracy was inordinate in assuaging Foxconn’s every concern.
The Maharashtra government made doing business for Foxconn as it easy as it can be. However, what really stopped Foxconn is not that it needs 100 licences to open its factory, but the most basic of capitalism’s problems – the absence of customers to sell products to.
But will the Indian or Maharashtra government use India’s burgeoning electronics market that is already addicted to Chinese imports – as leverage to force these private actors to manufacture electronics in India? Almost certainly not. The bevy of thinkers with a religious belief in free trade that advise this government shall prevent that from ever happening.
What we should think about is how on earth China became the largest exporter and manufacturer in history despite ranking 78 and 80 in the Doing Business report for the last two years respectively. But what will continue, however, is our collective scapegoating of India’s inability to improve its ease of doing business ranking to avoid confronting the real problems of Indian industry.
Akshat Khandelwal is a writer and entrepreneur based out of Delhi. His twitter handle is @akshat_khan.