05/08/2020 - Indian Economy | Mainstorming

IAS Parliament 4 years

KEY POINTS

· India needs to craft a strategy on how to reverse the lockdown-induced severe industrial slowdown. We need new policy instruments that steer market forces to deliver desired outcomes of creating jobs and achieving self-reliance in our open market economy.

· India, till the economic reforms of 1991, pursued self-reliance through infant industry protection, a strategy not very different from that of East Asian nations.

· One material difference which led to such disappointing results was that industrial licensing reduced competition in the domestic market.

· The East Asian nations, on the other hand, created competitive industry structures. The other material difference was the push to firms to export to Western markets. Success in global markets needed competitive prices and acceptable quality.

· On public sector enterprises, there has been ambivalence. Aggressive privatisation was what reformers have wanted, but the political leadership has been cautious. Strengthening these enterprises has not been seriously attempted.

· Continuing real exchange rate appreciation, high real interest rates, an asset price bubble in land, higher energy costs, regulatory risk and uncertainty, and an unskilled workforce with labour market rigidities have all been contributing to the lack of competitiveness.

Revamping policy

· Designing policy packages for a few key industries would be challenging. Labour-intensive sectors must get priority. Providing an interest subsidy to the textile industry is a good example where results have been below expectation.

· Capital subsidies given to ship-building have had, similarly, a modest impact. Raising import duties for many items is now under consideration.

· Concessional rates for leasing land, provision of cheaper energy, and public investment for common facilities of training, testing and waste management should all be options on the table.

· Selective government equity investments in areas where the risk perception is too high, as in the case of chip manufacturing, may be the only way to get such investment.

· Spending scarce fiscal resources or getting the consumer to pay more would be worthwhile only if a major breakthrough is the target. A sub-optimal effort is avoidable.

· This needs better closed-door and transparent dialogue with industry to put together an attractive package that should trigger private investment. An end date for the support package also needs to be settled at the outset so that after success, scarce resources can move on to some other sectors.