It has been reported that the government is in the final stages of setting up various funds with Rs 17,500 crore to provide venture capital to the telecom sector. The core objective is to facilitate the emergence of a domestic manufacturing base in a sector in which the large demand for equipment has been met predominantly by imports, to which China is a rapidly growing contributor. The importance of the sector to India's growth and inclusion aspirations does support the case for developing a technologically advanced, cost-competitive domestic capability. To continue to depend on imports, particularly from China, is a strategy fraught with risk. And, given the sector's strategic importance, who better than the government to provide the resources to develop, nurture and eventually commercialise new technologies?
In abstraction, this argument sounds very persuasive. But, for people who have forgotten history, some not-so-gentle reminders may be needed. Twenty-two years ago, the government finally bowed under the weight of overwhelming evidence and gave up on a 35-year-long endeavour with industrial policy, which had created a supremely inefficient industrial complex in the country. One of the minuscule number of government agencies to actually be shut down during the liberalisation wave was the infamous Directorate General of Technical Development (DGTD), which, in its heyday, was the final arbiter of the choice of technology by industrial ventures. The enduring lesson from the experience with DGTD is that the government should be kept far away from decisions involving choice of technology. That reality has not changed; if anything, while dealing with high-tech and rapidly growing sectors such as telecom equipment, a technologically challenged bureaucracy poses high risks in terms of making the wrong choices. Private venture capital is active in such sectors and is far more likely to back the right horses. The purpose would be far more effectively served if the government streamlined the regulatory and tax regime to create appropriate incentives for this source of funding investment in high-tech sectors.
But, beyond this, there is the broader philosophy of reforms that seems to have been forgotten in formulating this plan. A robust, competitive manufacturing base will not emerge from government actions targeted at one or a few sectors. It will come about as a result of removing the constraints that have plagued this sector since the liberalisation process began: the persistence of job security regulations in favour of workers and the inability to provide a variety of infrastructure services reliably and affordably. Industrial policy has its place in an environment plagued by market failures, but it certainly cannot be seen as a substitute for failing to deal with the fundamental issues.
The fact is that the Indian market, whether for telecom equipment or for many other manufactured products, offers enough long-term promise for companies to invest, both at efficient scales and with state-of-the-art technology. But, a combination of drag factors, with the two mentioned above playing a significant part, whittles away the profitability of these investments. Ventures promoted by the proposed government fund may gain some initial advantage, but will have to operate in the same hostile environment that causes so many of their peers to fail. Let the government focus on dealing with the right problems.
