Where is the growth? Policymakers not able to make clear assessment of where India’s opportunities are

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Published: February 25, 2019 4:08:57 AM

Indian policymakers just do not seem able to make a clear enough assessment of where growth will occur, where India’s opportunities are, and how to create a playing field in which the most dynamic and well-run Indian firms can grow and prosper

India is going too slowly in creating the logistical infrastructure to allow India to connect to global—and especially regional—production networks. (Illustration: Rohnit Phore)

The notion of industrial policy is one that has been around for decades. Some economists think it is an idea that never worked, whereas others still see merit in the concept. India certainly had an industrial policy, conceptualised in terms of developing heavy industry through state-led efforts. It was the nature and quality of this implementation, rather than the idea of industrial policy itself, that let India down. Economists now often shy away from the idea that governments can “pick winners,” in crafting industrial policy. But again, the reality is not one-sided.

It still seems reasonable to argue that Japan got things right in developing its automobile industry almost seven decades ago. Apparently, this was considered unrealistic and foolhardy by some observers at the time, and it took Japan’s automobile firms over two decades and some luck (two oil price spikes in the 1970s) to make their presence felt in global markets. Whatever the challenges of implementation, the economic logic was clear: automobiles were a product with a high income elasticity of demand, and significant knowledge spillovers in production. As the consumer good with the most complexity in terms of production, if Japan could make them successfully, it was more than likely that it could also make a range of other manufactured products that required engineering expertise.

By contrast, India treated automobiles as a luxury good for its own population, did not consider exports as an option, and churned out a few obsolete models for decades. Perhaps automobiles were not the place for India to start its industrialisation path just after Independence, but there was little else where India’s policymakers charted a strategic vision and mapped out a supportive policy framework for industrial growth and dynamism. Even more labour-intensive products, with lower engineering complexity, did not become categories where India established world-class quality and globally-efficient scale.

There have been some successes after the economic reform process began, but almost three decades later, India is still struggling with upgrading and expanding its manufacturing sector, and that seems to be an obvious reason why it has not achieved double-digit growth rates to match those of the Japanese miracle or China’s later economic ascent. What is missing? One argument is a new version of the export pessimism that constrained economic policy thinking at the time of Independence, in India and many other developing countries. Now, the suggestion is that India missed that boat, and neither the global trading environment nor the pace of economic growth in advanced economies is as favourable as when Japan and China raced ahead.

But this seems to be a self-fulfilling form of pessimism, just as it was seven decades ago. Global growth is strong, just not necessarily distributed as it was in the past. Tariffs are not that high, despite short-run hiccups due to Brexit and the Donald Trump administration’s nationalist approach to international trade. Indian policymakers just do not seem able to make a clear enough assessment of where growth will occur, where India’s opportunities are, and how to create a playing field in which the most dynamic and well-run Indian firms can grow and prosper.

In terms of physical needs, India is going too slowly in creating the logistical infrastructure to allow India to connect to global—and especially regional—production networks. There are financing constraints as well as constraints in terms of expertise, but there seems to be little sense of urgency or strategic intent in this respect. Relaxing the constraints by tapping global capital and multinational expertise seems to be proceeding only fitfully, nor does Indian policymaking seem to think carefully enough about complementarities in various kinds of infrastructure for supporting industrial innovation and growth.

In terms of the technologies and the products and services that will matter over the next few decades, the candidates are obvious. Digital technologies matter everywhere, for making products and for delivering services. India’s software industry has proved its resilience and dynamism many times over, completely belying the pessimists who derided its start at the lower end of the digital value chain, and even called its employees “techno-coolies.” But India desperately needs to upgrade and extend its digital infrastructure, and increase the numbers and skill levels of those who will maintain this infrastructure, and those who will use it to deliver a continuing stream of new digital products and services.

There are other obvious areas of global growth. Technologies and products that combat global warming, and those that serve the needs of rapidly ageing populations in many countries, will be the opportunities for growth. Effective industrial policy will mean listening to innovators, and providing them with the conditions they need to serve new markets. India’s policymakers still seem to lack a full understanding of the private enterprise and how to encourage it. Continuing examples of corruption and incompetence among India’s corporate giants make matters even more difficult, but illegality has to be distinguished from honest mistakes and failures.

None of the above means a neglect of basic education and health, including sanitation infrastructure. India remains very unequal in these respects, and denying basic needs to all the citizens is as big a scandal as corruption among politicians and capitalists. But even after decades of economic planning, India’s policymakers still struggle to put all the pieces together, including industrial policy, for sustained growth at levels shown possible by Japan and China.

-The author is professor of Economics, University of California, Santa Cruz

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