1. India’s economic planning does not take tech transformation into account

India’s economic planning does not take tech transformation into account

India is far behind China and the US in terms of contribution of industrial production to GDP. In technology for sophisticated products also we are behind both, except perhaps in information technology.

By: | Published: October 5, 2016 6:15 AM
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The country lags in industrial production because of the short-sighted and restrictive policies of the 1960s, which continued till 1991.

India is far behind China and the US in terms of contribution of industrial production to GDP. In technology for sophisticated products also we are behind both, except perhaps in information technology. Services contribute a lot more in India, but this does not make us a better or more developed country.

The country lags in industrial production because of the short-sighted and restrictive policies of the 1960s, which continued till 1991. There have been some obvious let-ups in government regulation of industry.

Earlier, every aspect of industrial investment and production was subject to government approval: production capacities for each product; actual production; source(s) of technology by supplier and country; extent of technology to be bought; royalties that could be paid; foreign investment, foreign shareholding in that investment; importing to assemble and sending assembled items to the foreign manufacturer for further assembly into finished products; employing foreign nationals; remuneration that could be paid to them and other top managers; the quantum of labour to be employed, service conditions and wages; the distribution mechanism to be used. Moreover, all imports were subject to high import duties and there was no assurance of stability in the rates of excise and import duties which varied from year to year. There were many other restrictions, and violation of any was subject to penalties. Even producing more than what was licensed was a serious offence.

Each of these restrictions was turned into a “policy” developing a complex set of rules and procedures over the years. The bureaucrat familiar with these details was a sought after entity.

The reforms from 1991 were dramatic because they eliminated these broad policies. Thus, industrial licensing was abolished; imports became much easier; import and excise duties and income tax rates were drastically reduced; and foreign investment was made easier in selected areas. Most important, technology imports and royalty rates were left to the enterprise.

But foreign investment remained limited to certain areas as it was difficult to acquire controlling shareholding, and in many areas, it could not go to 100%. Employing foreigners was arduous. Contract assembly began, but was limited. The lower level bureaucracy that had implemented the web of rules, procedures, forms for approval, frequent inspections of facilities, continued with the style of functioning they were accustomed to.

Not surprisingly, India was regarded as a difficult place to do business. This was in contrast to Malaysia, Indonesia, Philippines, South Korea and China. South Korea and China in particular grew from being assembly line producers to original manufacturers, importers of technology to creators, minor industrial countries to ones that could compete with the best.

On the other hand, India thought that the reforms and the resulting rise in growth rates was enough to make us an industrialised country. We do need industrialisation, so that our population can become more prosperous. But for that to happen we must also halve the proportion dependent on agriculture and move the surplus population to industrial clusters. We must also provide for sanitation, hygiene, housing, education, adequate health facilities and teach them the skills needed in these industries. This government has programmes for this. But is committing a fallacy by fixing numerical targets and not setting quality parameters. For example, our education system has deteriorated at all levels, from primary to post-graduate and professional. Our research work is poor by global standards. And, yet we pay little attention to the basic imperative of hiring new faculty and upgrading the old. The need is to increase their numbers manifold. Instead, we have been cloning institutions like IIMs, IITs, AIIMS, etc, without thinking as to who will provide good teaching and research in these new institutes.

There are other obstacles to our rapid industrialisation pertaining to ease of doing business. The acquisition of land to start a new industry is a complex and time-consuming process. Labour laws make it unwise to go for labour-intensive technologies. Myriad government departments have to give approvals of all kinds. Once production starts there are frequent inspections. In the absence of the single goods and services tax, transportation and sale are also time-consuming.

All these procedures and dealing with bureaucrats at all levels, costs money which has to be paid as bribes.

Even if all these obstacles can be instantly removed by a magic wand, there is rapid technological change to consider. Smaller production scales are no longer a science fiction. The technology (of “printing”) is already in use in some countries in the West. This will mean a future with most manufacturing being on small scales and distributed widely over the country. Moreover, the skills required will be very different. Urban concentrations of populations centred around cities will give way to a much more spread out geography. This has its own implications for transport, trade, and other aspects of commercial life. Technologies to control machines from remote control locations already exist.

Another sector that will be transformed via technology is energy. It is now conceivable that electric cars will be common in a decade. For long periods when these vehicles are stationary, they will return the electricity to the grid. This will optimise the use of energy.

Remote-controlled machines, equipment and household appliances are other technologies which will optimise energy use. So will the ability to supply solar (including from household roof-tops) and wind energy to the grid and retract it when required.

These are only some examples of the changes that technology will bring in another decade or two. Our planning does not take this into account as our plans are based on the world we know and are used to. We must now think of adapting to a different world.

The author is former director general, NCAER, and was the first chairman of the CERC.

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