By Arun Maira, Member, Planning Commission
India's New Manufacturing Policy aims to create 100 million jobs in 15 years; grow manufacturing about 3% faster than GDP so that its contribution to GDP can increase from 16% to 25%; and increase technological depth and value addition in India's manufacturing to enable India to improve its trade balance which has been deteriorating with increases in imports (including large volumes of manufactured goods) exceeding exports. How will these ambitious goals be achieved?
The concept of Industrial Policy - the deliberate management of a nation's industrial growth - had been banished with the Washington Consensus' faith in free markets and distaste for government intervention in industry.
With the reforms of the 1990s India has also been following the path of cutting the government's role. Overall its economy has grown: with many quips that India's economy grows only when its government sleeps.
However manufacturing has not been an engine of this growth. The need for an Industrial Policy has now appeared even in the USA to stimulate the growth of its manufacturing sector and create jobs.
India cannot carry on the way it has in the last two decades when several developing countries - Thailand, Malaysia, and of course, China - have grown their manufacturing sectors much faster than ours, even though India had a stronger manufacturing base than them in the 1980s.
The urgent question is, what is government's role in accelerating growth of manufacturing? Studies of the approaches taken by the countries mentioned, and the strategies adopted by others earlier, especially Japan and Germany, who continue to sustain their manufacturing strengths, reveal the nature of effective industrial policy.
Good industrial policy is not about micro-managing industry, which was the stifling way of India until the 1980s. Nor is it about 'picking winners' - particular firms and technologies to bet on - a risky approach that has worked sometimes in other countries but failed often too.
Sound industrial policy is the process of accelerating learning within a country's industrial eco-system that enables enterprises within it to improve their competitiveness faster than enterprises in other countries.
Therefore the role of government is to stimulate a vibrant eco-system of private and public producers, with the institutions that provide public goods such as education and business regulations.
Since an eco-system consists of several interacting policies and institutions, the participants in it must come together to understand what the constraints in it are and devise a way out of them. Deng Xiaoping described this process as, 'Feeling the stones underfoot as one crosses the stream'.
Each developing country enters the stream of technological and industrial growth from its own starting point and must chart its own path forward, as Dani Rodrik explains in One Economy: Many Recipes. The implication of these insights are that the countries in which the components of the eco-system work together more effectively, thereby learning and changing faster, will overtake others.
Thus new industrial powers emerge. The thrust of an effective industrial policy must be to improve processes of inter-institution collaboration and learning, rather than to pick winners, or try to manage a complex input-output matrix of resources.
Change is necessary in many areas for India's manufacturing sector to reach its goals: industrial relations, land acquisition, the regulatory framework and so on. These improvements must happen widely around the country, not only within the proposed New Investment and Manufacturing Zones, for the country to realise its ambitious overall growth and employment targets.
Action will have to be taken in the states, where local laws and conditions must change. For changes in the industrial relations' climate and labor laws, the involvement of unions is essential.
For changes in land acquisition and environmental laws, concerned civil society organisations must be involved. So, the implementation of the policy requires involvement of many participants.
A systemic and collaborative process of implementation, involving producers, stakeholders and many ministries of government, in the centre and the states is required to accelerate manufacturing growth. Therefore the plan for industry, for the 12th Plan and beyond, has been prepared with extensive involvement of industry and other stakeholders.
In the past 10 months, a steering process guided 26 working groups who analysed constraints within India's manufacturing eco-system; 16 working groups, each composed of the industry associations concerned and the responsible ministry, prepared growth plans for their respective sectors. Ten working groups examined ways around constraints across sectors, such as human resource development and improvement of the business regulatory framework.
Finally the steering group concentrated on the overall process for implementation. Processes by which other countries have successfully implemented industrial policy were examined. Successes and failures within India in achieving alignment amongst stakeholders were also studied. With these insights, the institutions and processes required to implement the Plan have been laid down. The engine of manufacturing growth will move along three rails.
One is the rail of action: to follow-up and do the tasks in the Plan. The second is the rail of stakeholders: involving the right people at the right time to build support for some difficult decisions to be taken. The third is the rail of learning. There will be mistakes and successes.
These must be examined periodically to distil insights from them and put the learning into practice. Thus the feet that feel the stones will learn to move faster and more confidently towards the ambitious goals for India's manufacturing sector.