Suman Bery: First, do no harm...

Does India really need a National Manufacturing Policy?

As reported in the Press, the Indian government notified its National Manufacturing Policy last week. Presumably, it was timed to demonstrate that reform is alive and kicking before Parliament reconvenes later this month. The notification followed reports of a prolonged inter-ministerial wrangle between the Department of Industrial Policy and Promotion (DIPP) – the department, under the ministry of trade and commerce, sponsored the policy – and the Planning Commission, the ministry of environment and forests, and the labour ministry. The differences were finally resolved in the Cabinet in late October. With the final text now available on the DIPP website, it is possible to take a considered view of the goals of the policy, the means proposed to achieve them and the probability of success. It is also possible to speculate on the unintended consequences and possible collateral damage.

Let’s start by summarising the key objectives of the policy and the strategies proposed. The preface refers to “concern about the stagnant and low share of the manufacturing sector in India’s GDP” as providing prima facie justification for policy intervention. In the body of the policy, this goal is further justified by a reference to the superior manufacturing performance of other Asian countries, and by the employment challenges that India faces. In itself, it’s a rather dubious basis for intervention. Let’s see why.(Click here for graph)

Given this rationale, the quantitative target is to raise the share of manufacturing value-added in GDP from the current 16 per cent to 25 per cent by 2022, implying that manufacturing needs to grow appreciably faster than the overall GDP over the next decade. This will clearly become progressively harder as the share of manufacturing rises in the overall GDP. Given that the shares of agriculture, industry (of which manufacturing is the dominant part) and services must add up to 100 per cent, it is also not clear from the policy which of the other two sectors is expected to give way within an aggregate growth target of nine per cent. For this, we will have to wait for the 12th Plan document to be finalised early next year; presumably, much of the “space” would need to be ceded by agriculture.

The main positive instrument proposed to achieve this growth acceleration is the creation of national investment and manufacturing zones (NIMZs), to be developed as integrated industrial townships. The policy envisages that “the NIMZs would be large areas of developed land, with the requisite ecosystem for promoting world-class manufacturing activity”. In contrast to existing special economic zones (SEZs), with their focus on exports, such NIMZs are envisaged as industrial townships [under Article 243Q(c) of the Constitution], of a minimum size of 5,000 hectares (it is not immediately clear if these land parcels need to be physically contiguous).

Each NIMZ will be managed by a special purpose vehicle (SPV), which will exercise the powers conferred by the policy; the policy specifies that the CEO of the SPV must be a senior central or state government official. So these townships are to become publicly-run corporations for the benefit of the private sector in principle, free from the political and governance failures that plague our existing urban local bodies. The aim is to permit both clustering and concentration of infrastructure. In many ways, this is a return to the past (Jamshedpur and other steel townships come to mind), except that these townships are designed to facilitate manufacturing by a cluster of smaller units, rather than being dominated by a single large employer.

The first question that arises is whether this is a solution in search of a problem. The chart lists the 19 member countries of the G20 (the European Union is the 20th member), ranks these countries by gross national income (GNI) per capita and indicates the share of manufacturing in each country. Apart from India’s still stunningly low per capita income compared to all other G20 members (admittedly at market prices, rather than purchasing power parity), the chart suggests there is no tight linkage between levels of income and a “natural” share of manufacturing. It is true that our Asian peers – Indonesia, China, and South Korea – have a much higher share of manufacturing than we do, but there is little reason to think they represent a “norm” to which we should aspire.

Two conclusions follow. First, there is no analytical reason to conclude that our “low and stagnant” share of manufacturing reflects major distortions in our economy. Second, if we are to privilege manufacturing through special, potentially costly measures, such actions need to be justified for reasons other than merely to raise its share. By the same token, a blanket commitment to raise the share of manufacturing at any cost risks leading us into the same blind alley of interventionist industrial policy from which we have so painfully exited.

These concerns emerge from some of the statements in the policy not necessarily linked with the NIMZ. Particularly disturbing is the looseness of the formulation on trade and investment policy and government procurement (paragraph 1.22 of the policy), and the stress on specific industry verticals (paragraph 1.11 of the policy). By way of example, paragraph 1.22 contains the extraordinary statement on regional trade agreements that “it will be ensured that such agreements will not have a detrimental effect on domestic manufacturing in India”. What on earth is the point of such agreements if not to put competitive pressure on our domestic producers?

Surely the authors of the policy will cite the new wave of academic thinking associated with Hausmann, Rodrik, Stiglitz, Ann Harrison and the like to justify a return to activist industrial policy. I would remind them that this literature finds very little reason to favour manufacturing as such, but strongly supports the long-term productivity benefits of outward exposure.

Manufacturing is defined by the World Bank as industries belonging to divisions 15-37 of the International System of Industrial Classification

The author is Country Director, India Central, International Growth Centre. Views are personal.

Suman.bery@theigc.org