- What is industrialisation?
- Approaches of designing industrial policy
- The way forward
A new approach to industrial policy
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- To achieve $5 trillion economy, India cannot rely only on its service sector as it needs industry and manufacturing to grow much faster to create jobs with good incomes.
- Hence, India needs a good policy to grow industry at this juncture in its economic history.
- India had avoided framing any industrial policy after the liberalisation of its economy in 1991 due to the Washington Consensus.
- The Washington Consensus refers to a set of free-market economic policies supported by prominent financial institutions such as the International Monetary Fund, U.S. Treasury etc.
- As per Washington Consensus, any deliberate attempt by the government to grow industry would always be counter-productive.
- However, the US, confronted with the growth of China’s industries, is feeling the need for an industry-cum-trade strategy to counter China.
- In these global circumstances, India cannot avoid the necessity for a good policy to grow its industries.
What is industrialisation?
- Industrialisation is a process by which a large system acquires capabilities to do what it could not do before.
- For instance, Japan became a global power in the automobile industry after the Second World War, as Japanese manufacturers learned rapidly to do what they could not do before.
- Beyond raw material resources, the only source of competitive advantage a nation has is its ability to learn and improve its competitive capabilities faster than all other nations.
- With a participative process facilitated by the government, Japan developed its steel, chemicals, and automobile industries, even though it did not have any raw material resources.
Approaches of designing industrial policy
- The industrial policy systems can be sorted into three models:
- Complex self-adaptive
- In an engineered system, the designer sits outside the system while designing it.
- This approach to designing an industrial policy will not work because the policymaker were not the participants of the dynamic system.
- This was the fundamental problem in India’s approach to its industrial policy until the 1980s. Industry, which was learning, found that the government was controlling without understanding what industrialisation was about.
- Then, government adopted ‘Washington Consensus’ ideology which resulted in the open-chaotic system in which, government leaves the development to the market without interfering in it.
- However, in 2008 when the financial crisis happened, US along with many countries began to realise that governments must interfere to grow industries and jobs in their countries.
The way forward
- The absence of interference of government led to the unregulated chaotic markets as the world realized in 2008.
- However, India will not want to go back to the ‘engineered-controlled’ model of industrial policy, which is inappropriate for a dynamic, learning process.
- Hence, India should adopt the ‘complex self-adaptive systems’, which is the appropriate model for industrial growth.
- India has a rich industrial ecosystem with competent industries in many sectors and millions of large and small enterprises.
- As a result, each constituent within the system will see the policy from its own perspective and will work for its own interests.
- Hence, it is essential for the policymaker to foresee the consequences of fixing any one part of the system on the other parts to avoid backfire.
- Inverted duty structures that harm industry, arise when changes are made to make life easier for one industrial sub-system but damage others.
- Labour reform to fire any employee can produce shorter-term benefits, harming longer-term processes of capability building.
- India has recognized the need for an industrial policy during the 12th Five Year Plan and by the previous government as well.
- The government should take a bold step soon if it wants to grow industries, create jobs, and take the Indian economy to $5 trillion and beyond.