How to make scale irrelevant

Last month I had written in this column about the need to de­link scale from the marginal cost of industrial production because it is scale that has enabled China to de­s­troy manufacturing in other co­untries, notably India. Its pursuit of scale has also devastated the environment. 

Specifically, I had asked “... does there, or could the­re, exist a new technology that makes scale obsolete? Or, can ‘increasing returns to scale’ be reversed so that we get ‘increasing returns to de-scaling’?”

The question is therefore this: Is scale intrinsic to declining marginal cost? Can an inversion be achieved?
 

Most of the new businesses in the services industry tend to be scale-neutral. Hence the question: What would make this sort of scale-neutrality happen in manufacturing?

What follows below is highly counter-intuitive because it stands received wisdom on its head. That’s the fun of it. I like poking economists in the eye. 

And in my view, there are two, not mutually exclusive, ways for India to, as it were, reverse the model. The first is to stop thinking in terms of an all-India market for manufactured goods. The second is to focus solely on technology. 

The single market approach is no longer necessary or desirable because each of India’s five regions — North, West, South, East and Central — now has enough people to cons­titute a continent-sized market. You can look up the population numbers. 

Adequate scale, in numbers if not income, is thus assured at least for wage goods, whose absence defines poverty and unemployment.  

Until 15 years ago everything that a low-income household needed was produced in highly localised production units, very cheaply. Most of it was destroyed by trade liberalisation and China, which is a master of predatory pricing. The Chinese practice is to target a market, see what the lowest price there is and then sell at half — or even less — that price. Costs are deemed irrelevant by the manipulation of the exchange rate. 

Hence my question: Does de-scaling via local production hold the key? I think so. Indeed it’s the only way to go after banning all wage goods imports from China. 

Chinese manufacturing, by the way, as everyone knows — but won’t say — is, in economic terms, globally the least efficient because it has too many unrequited costs and uses too much by way of resources per unit of output. 

A regional approach 

This means that we need regional rather than national economic policies. The one-size-fits-all approach has anyway never worked. It has also distorted everything — yes everything — in manufacturing. 

A regional approach to manufacturing of wage goods means that it is groups of contiguous states that must be the initiators and targets of commercial policy. The central government is no longer needed for that purpose. It has done its bit and is now merely in the way. 

Where purely commercial policy is concerned, it should confine itself to just taxation and clean technologies. That’s all. 

Or let me put it this way: Instead of the size of the market deciding the scale, which is the Chinese way, it’s the scale that should decide the size of the market. Think about it. 

At the micro level, this will also hugely reduce logistical costs, which can constitute up to 5-8 per cent of the total. This will increase the efficiency of the entire supply chain which is critical to developing efficient manufacturing. We have never paid enough attention to this aspect and its implications for costs.  
 

At the same time because Chinese pricing is independent of costs it is highly vulnerable to even small decreases in sales and that’s why it manipulates its exchange rate so determinedly. 

The second thing India must do relates to technology. The Centre should pay for the latest technologies that companies acquire. 

China saw the importance of technology but stole these technologies. We should buy them. Everyone will be happy. The developers will get paid and we will get what we need. But for this, it is essential that our well-meaning, but highly ill-informed, bureaucracy should not get involved. 

Indeed, technology subsidy is the only subsidy that is necessary. Land, labour and capital, all of which China subsidises by taxing agriculture — this is another story — can be bought at market prices because once this virus thing is over, there will be more than enough capital sloshing arou­nd, not to mention land and labour. 

Existing minimum price and wage laws will probably become pointless, too, and fall into disuse like so many other politically motivated commercial laws. 

Political arrangements

But these things can’t be done without the appropriate political arrangements. We have two models to borrow from. 

One is our own which we discarded when we adopted a unitary form of government. The other is the US model. 

I will discuss this aspect next month.