Relevance : GS Paper III
Theme of the Article
No major country has managed to reduce poverty or sustain economic growth without a robust manufacturing sector.
Why has this issue cropped up?
The contribution of manufacturing to GDP in 2017 was only about 16%, a stagnation since the economic reforms began in 1991.
Comparison with other Economies
The contrast with the major Asian economies is significant. For example, Malaysia roughly tripled its share of manufacturing in GDP to 24%, while Thailand’s share increased from 13% to 33% (1960-2014).
History of Indian Manufacturing
In India manufacturing has never been the leading sector in the economy other than during the Second and Third Plan periods.
Core to Growth
- No major country managed to reduce poverty or sustain growth without manufacturing driving economic growth.
- This is because productivity levels in industry (and manufacturing) are much higher than in either agriculture or services.
- Manufacturing is an engine of economic growth because it offers economies of scale, embodies technological progress and generates forward and backward linkages that create positive spillover effects in the economy.
International Scenario
- In the U.S. and Europe, after the 2008 crisis, the erstwhile proponents of neo-liberal policies started strategic government efforts to revive their industrial sectors, defying in principle their own prescriptions for free markets and trade.
- The European Union has identified sector-specific initiatives to promote motor vehicles, transport equipment industries, energy supply industries, chemicals and agro-food industries.
- The United Nations Conference on Trade and Development or UNCTAD finds that over 100 countries have, within the last decade, articulated industrial policies.
The case of India
India still has no manufacturing policy. Why have an industrial policy in India now?
- First, there is the need to coordinate complementary investments when there are significant economies of scale and capital market imperfections (for example, as envisaged in a Visakhapatnam-Chennai Industrial Corridor).
- Second, industrial policies are needed to address learning externalities such as subsidies for industrial training (on which we have done poorly).
- Third, the state can play the role of organiser of domestic firms into cartels in their negotiations with foreign firms or governments — a role particularly relevant in the 21st century after the big business revolution of the 1990s (with mega-mergers and acquisitions among transnational corporations).
- Fourth, the role of industrial policy is not only to prevent coordination failures (i.e. ensure complementary investments) but also avoid competing investments in a capital-scarce environment.
- Fifth, an industrial policy can ensure that the industrial capacity installed is as close to the minimum efficient scale as possible. Choosing too small a scale of capacity can mean a 30-50% reduction in production capacity.
- Sixth, when structural change is needed, industrial policy can facilitate that process. In a fast-changing market, losing firms will block structural changes that are socially beneficial but make their own assets worthless.
- Finally, manufacturing will create jobs; its share in total employment fell from 12.8% to 11.5% over 2012 to 2016.
Conclusion
Unfortunately, the potential role of industrial policy has been consistently downplayed in developing countries outside of East Asia ever since the early 1980s after the growing dominance of the orthodox paradigm with well-known consequences in much of India, Latin America and also sub-Saharan Africa.
