Get our factories going

Get our factories going

Stimulus package aside,escaping meltdown requires real reform

The second round of stimulus against the meltdown has been announced and,correctly,it is not just more spending,but reform. The stimulus very appropriately has financial packages for purchase of infrastructure at the state level,like buses. It also makes it easier to finance Indian investments abroad and from abroad. But reform is not just passing laws to get non-existent FDI into India. It is also true that the package by itself is not enough; at last there has been a weak admission at the highest level that the next year is not as rosy as the picture given to Parliament. Monetary measures are all in the right direction,but you can take the horse to the water but can’t force it to drink. This is the time to tone up the domestic economy Having basked in the glory of globalisation in the phase of expansion,it’s time to pay the price without cribbing.

Manufacturing can get going. V. Krishnamurthy chaired the PM’s Group on the Manufacturing Sector and drew a road map to turn adversity into advantage. Some very annoying facts provide the base to his edifice. The ’90s reforms saw the relative decline of manufacturing. Its share of global manufacturing value added,was a measly 1.36 per cent as compared to China’s 11 per cent. In terms of technological standing,China went up from 22.5 in 1993 to 82.8 in 2007. In 2007,the US was 76.1,Germany 66.8 and Japan 66.0. India at 22 was not only behind the OECD countries but also behind countries like Malaysia,Mexico and the Czech Republic,apart from Taiwan and Singapore. With case studies from S. Korea,China,Taiwan and Singapore,Krishnamurthy argues convincingly that the success stories had devised and implemented a manufacturing policy. To the economists advising the government in India in the ’90s,reform only meant the withdrawal of the state.

Krishnamurthy acknowledges that reform today can’t mean an activist state in the sense that existed in the early phase of manufacturing expansion in East Asia,such as discretionary policies on directed credit,selective protection and so on. Policy has to be WTO-compatible and nuanced approaches are anyway necessary in today’s fast-changing world. Successful countries adjusted manufacturing policy to these requirements. India did not. Technology policies,monetary and credit policies,FDI,trade and tariff policies and policies for small and medium firms and for strategic and security sectors are all doable as the core of the manufacturing policy we should follow. Manufacturing value added and employment should be the focus. A low-growing manufacturing sector meant labour was not shifted out of agriculture,and with deindustrialisation the Indian economy did not structurally change creating a lot of the problems we face,including pressure on land and BPL low-wage informal employment. The moral is to start now and to create a policy overview structure that will sustain the industrialisation process.

The best part is the details of action possibilities. Tax policy should be oriented to manufacturing value added and employment. Tariff policy must not lead to inverted protection. Infrastructure cannot be run the Indian way. Thank you for accepting a long-run energy policy. Now let’s get going on cleaning up the mess and the distortions in fertilisers,chemicals,transport and industrial energy costs. Okay,perhaps this one will wait till after the elections. But a lot can be done on small and medium industry in clusters. India must be the only country where economic policy advisers deny the employment impact on small industry of export collapse and only Jairam Ramesh talks of the adverse consequences at Tirupur. We had the sorry spectacle of diamentaries being asked to fend for themselves. Top diamond polishers have invested heavily in buying out about a fifth of retail space in the US diamond jewellers market and now have to bear the interest costs. In these cases,Krishnamurty would ask for a dedicated credit stream.

In technology not even a beginning has been made. Policies for strategic coupling of technology imports with domestic capabilities and institutions are doing well in Korea,China and elsewhere,but are non-starters for our 120 per cent FDI freedom mindset.

Krishnamurty keeps describing the policies and the actions being taken — sadly,elsewhere. He isolates strategic sectors where a lot can be done. Also policy for the verticals and the need for India to support acquisition of raw material bases abroad and of dedicated funds for this purpose for the frontiers of the private sector. By now,you are breathless; for here we had just been told by government economists that prices are falling and all is happy in wonderland,and it’s not that prices always fall in a deflationary economy. In all this,Krishnamurthy is sadly an outlier,for his focus is all the time on doables,with examples from current policies of successfully industrialising countries. Sorry,my friend,the Maruti 800 was three decades ago. I still drive one,leaving the new fancy car to the lady of the house. But maybe you will have your day and we pray somebody out there is listening.


The writer,a former Union minister,is chairman,Institute of Rural Management,Anand