Why India needs a reindustrialisation drive

Lessons for India from the American and German response to China’s rise

By Smita Purushottam

China’s global ascent, on the back of a well-planned economic and technological surge, has been met by a comprehensive American response, curbing Chinese freeloading on American technological capabilities. In fact, a report to the US President even calls for launching an ‘industrial policy’ in response to what is termed as Chinese economic aggression.

This is unprecedented, as the American Right is ideologically opposed to State intervention. Even the ordoliberal Germany has recently issued a draft National Industrial Strategy to meet the techno-economic challenges from China and other countries, followed by a Franco-German call for a 21st century European Industrial Policy.

This begs the question: Why doesn’t India have an industrial policy, given that even the neo-liberal bastions, its biggest critics, are seeing in it a viable response to the relentless Chinese challenge?

Instead, we are going in the reverse direction—with a 14% decline in our high-tech industry and the percentage of GDP devoted to research and development (R&D) decreasing from 0.85% in 2011 to 0.63% in 2015, an anomaly of serious dimensions in today’s technology-driven world.

India needs a reindustrialisation drive to create a level-playing field for the country’s private manufacturers and increase their R&D intensification. Consider this: The much-touted Indian services sector, which forms almost 61% of the economy, generates around $183 billion of exports, while the beleaguered manufacturing sector, the serial sacrificial lamb in trade negotiations (to save H1B jobs) with only 16%, generates $210 billion! It is clear which one is the most productive sector of our economy, and which ones creates more multipliers, jobs and domestic value-addition.

The foreign direct investment (FDI) policy also needs to be calibrated, invoking performance requirements, or at the very least limiting brownfield acquisitions of India’s top companies. These do not create jobs, and lead to hard currency outflows via dividends, profits, etc. Hence India’s national income is forever going to be lower than its GDP, as inflows are lower than foreigners’ income from assets held in India.

Similarly, if the government wants to create more jobs and value-addition at home, it must immediately formalise and implement the Draft Defence Production Policy (DDPP), which has some excellent ideas—such as “make India among the top-five countries in aerospace and defence industries” (God forbid!), and leverage military and civil aviation for indigenisation. However, since it calls for reducing imports, import lobbies have probably stalled its promulgation.

The defence production also needs to be prioritised over procurement. The ministry of defence’s procurement wing should be tucked firmly under the Department of Defence Production to prioritise the domestic defence industrial ecosystem. Funds for arms imports, to the tune of $18 billion from the US and many tens of billions of dollars from Russia, Israel and other countries, must be diverted to create a thriving domestic defence industry. We shall never climb out of the morass of low-tech development until we take this single hard decision, i.e. curtailing imports and channelling funds to India’s proven private high-tech companies, fuelling a take-off and creating jobs and prosperity at home.

Finally, defence offsets have been repeatedly diluted under foreign pressure, resulting in India having one of the world’s weakest offset regimes. It must be kept in mind that offsets have played a central role in stimulating the growth of defence industries in other countries. And the supposedly priority category of ‘indigenous design and manufacture’ has not taken off.

Meanwhile, some bureaucrats, both civil and military, in the defence and telecom/ICT sectors, clearly in collusion with import lobbies, continue to subvert the national interest and the well-being of the Indian people by tweaking tenders to exclude domestic companies, withholding payments to domestic firms, and exploiting loopholes in the ridiculously complicated import manual which masquerades as the Defence Procurement Policy.

These obstructive tactics, perfected over the last 70 years, are still rampant, and continue to damage genuine national security and economic prosperity in the defence and telecommunications sectors, undoing the good intentions of the government. Umpteen letters have been written by the Prime Minister’s Office (PMO), Department of Defence Production and the Department of Industrial Policy and Promotion (DIPP), but all to little avail as the entrenched import lobbies will not let go of the golden goose that is India’s import dependence.

Some positive measures have been taken. The Preferential Market Access policy has been strengthened on paper, and some excellent initiatives have been launched by the Department of Defence Production and the DIPP. A few contracts are flowing to the domestic industry, although the shortage of funds has led to the Make-I being placed on the back-burner, while the magnitude of the funds flowing to foreign defence industries dwarfs the paltry amounts doled to domestic industry.

However, there is a solution, and that is to (1) follow the German, Chinese and American examples in proclaiming an industrial policy, (2) implement the Defence Production Policy, (3) orient all government procurement towards the domestic industry, (4) ensure that foreigners, especially the Chinese, do not submit incongruously low bids in response to telecom and ICT tenders, and (5) reinstate defence offsets in defence procurement and civil aviation, and ensure synergies between the two which the draft Defence Production Policy calls for. But first and foremost, the government can start with a house-cleaning of the bureaucrats who are obstructing the development of the domestic industry. An expose is under preparation.

There is a golden opportunity to promote domestic industry in defence, telecommunications and civil aviation through the right policy combinations, leading to an economic and technological efflorescence. Indian companies are winning big telecom tenders abroad against Chinese competition. It is high time the government forge a compact with the good, high-tech, proven companies in the Indian private sector and focus on domestic high-tech industrial promotion and job-creation.

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