There is no substitute for an industrial policy

05 Jan 2024 4 mins Download PDF

Background: For decades, the role of government intervention in shaping economic development has been fiercely contested. While free-market proponents advocate for minimal interference, others argue for strategic government involvement to guide and accelerate industrial growth.

This discussion resurfaces in light of various challenges faced by economies globally. Issues like income inequality, technological disruption, and climate change raise important questions about the direction and composition of industrial development. Proponents of active industrial policy see it as a tool to address these issues, foster strategic sectors, and ensure equitable growth.

Important points:

• MII vs. Self-sufficiency: The author argues that MII is not a return to the self-sufficiency policies of the 1970s, which led to inefficiencies and shortages. MII focuses on export-oriented manufacturing and attracting investments through incentives.
• Concerns about Protectionism: There are concerns that MII, by raising tariffs and protecting domestic industries, could lead to inefficiencies and higher prices for consumers. The author cites the example of mobile phone components to illustrate this point.
• MII's Objectives and Performance: MII aims to make India a global manufacturing hub and create 100 million jobs. However, it has not achieved these goals so far. The new industrial policy (NIP) is on hold, raising questions about its role in boosting manufacturing and job creation.
• Focus on Labor-Intensive Manufacturing: The author argues that India should prioritize labor-intensive manufacturing to create jobs for its large workforce. PLI schemes are good for high-end manufacturing, but the informal sector and MSMEs need support to contribute to mass job  creation. China's success in manufacturing is attributed to its focus on scale and efficiency.
• The Debate: The statement highlights the ongoing debate about the most effective way to create jobs:
• Advocates of industrial policy: Believe it allows governments to directly target sectors with high employment potential, like labor-intensive manufacturing. They argue PLI, focused on high-end sectors, may not create enough jobs for India's vast workforce.
• Supporters of PLI: Acknowledge its limited employment impact but emphasize its benefits in building technological competence, attracting foreign investment, and boosting exports. They argue a broader industrial policy can complement PLI to address job creation.

Key Issues:

• Jobless growth: India's economic growth in recent years has not translated into sufficient job creation, particularly in the formal sector. This raises concerns about the effectiveness of existing policies.
• Shifting job landscape: Automation and technological advancements are changing the nature of work, necessitating policies that support skill development and adaptability in the workforce.
• Informal sector dominance: A large portion of India's workforce is employed in the informal sector, characterized by low wages and insecurity. Creating formal jobs and promoting transition from informal to formal work is crucial.

The Road Ahead:

Finding the right balance between PLI and a comprehensive industrial policy is crucial. A successful strategy may include:

• Targeting labor-intensive sectors: Prioritizing industries with high job creation potential, like clothing, food processing, and light manufacturing.
• Skill development: Investing in programs to equip the workforce with necessary skills for both existing and emerging job opportunities.
• Formalization of the informal sector: Implementing policies to incentivize and facilitate the transition of informal workers to formal employment.
• Effective implementation: Ensuring clear and efficient policy design, transparent administration, and robust monitoring mechanisms to maximize the impact of industrial policy on job creation. The challenge lies in designing a holistic approach that leverages the strengths of both PLI and broader industrial policy while addressing specific needs of the Indian economy and workforce. The ongoing debate, as the statement reflects, underlines the importance of finding this optimal balance for sustainable and inclusive economic growth.