Reservations RIP

On Friday, the government announced the de-reservation of 79 items from the list meant exclusively for manufacture by the small-scale sector. This leaves only 35 items on the list, down to almost nothing from the peak of over 1,000 items when the reform process got under way in 1991. Some 400 items have been de-reserved during the last three years, among them a significant number of textile products and processed food items, both sectors in which large-scale manufacturing contributes to both lower costs and better quality control. The next announcement should take care of the remaining items, thus putting to an end one of the most negative legacies of the earlier policy regime. It has taken a long time to shake off the burden, with the help of expert opinion based on evidence from several quarters that it was simply not working the way it was supposed to. But, even as the vestiges of the regime are cleaned up, the question needs to be asked: is it too late to make much of a difference?

The answer is that it depends. One important reason for reservation not being as binding a constraint as it could have been was that there were a number of other barriers to expanding scale and improving cost efficiencies in manufacturing. The problems with various infrastructure services and their impact on competitiveness are one such. Another is the job security regulations embedded in the Industrial Disputes Act, which have made it difficult for establishments employing over 100 workers to lay any of them off. In an environment of greater openness, the risks faced by any business increase, making it difficult for them to carry the burden of a permanent labour force. This problem is particularly acute in the textile sector, where, despite the elimination of restrictions on scale, India's competitiveness in segments such as men's outerwear has remained stunted by the fact that producers prefer not to hire large numbers of workers in the same establishment. Of course, over the past 15 years, the opportunity to establish a strong international presence in these and other segments such as toys, has been strongly grasped by China, which is the dominant presence in global markets, recent unfortunate events such as lead in paint notwithstanding. It is difficult to visualise Indian producers making up that substantial distance, particularly as infrastructure and job security constraints remain in place.

However, for all good policy measures, late is always better than never. Eventually, the infrastructure will improve and sensible labour market policies will be in place. China cannot remain a dominant producer for ever. Meanwhile, the freedom to choose their scales of production will give Indian producers the flexibility that they need in order to both compete in global markets and defend their turf against Chinese and other competitors in domestic markets. The current growth momentum is what it is because the manufacturing sector is kicking in strongly. The end of reservations will add one more booster to the dynamism of the sector and, consequently, to sustaining the economy's growth performance.