Does India really need a National Manufacturing Policy?

Author: Suman Bery, IGC

The Indian government presented its National Manufacturing Policy (NMP) to the nation in early November.

Presumably, the announcement was timed to demonstrate that reform is alive and kicking before parliament reconvenes later this month. With the final text now available on the Department of Industrial Policy and Promotion website, it is possible to take a considered view of the policy’s goals, the means proposed to achieve them and the probability of success. It is also possible to speculate on the unintended consequences and possible collateral damage.

The preface of the NMP refers to ‘concern about the stagnant and low share of the manufacturing sector in India’s GDP’ as providing prima facie justification for policy intervention. In the body of the policy, this goal is further justified by reference to the superior manufacturing performance of other Asian countries, and by the employment challenges that India faces. This is a rather dubious basis for intervention.

On this rationale, the quantitative target is to raise the share of manufacturing value-added in GDP from the current 16 per cent to 25 per cent by 2022, implying that manufacturing needs to grow appreciably faster than overall GDP over the next decade. This will become progressively harder as the share of manufacturing rises in overall GDP. Given the shares of agriculture, services and industry (of which manufacturing is the dominant part) must add up to 100 per cent, it is also not clear from the policy which of the other two sectors is expected to give way within an aggregate growth target of nine per cent. This information will only become available when India’s 12th Five-Year Plan is finalised early next year; presumably, much of the ‘space’ will be ceded by agriculture.

The main positive instrument proposed to achieve this growth acceleration is the creation of national investment and manufacturing zones (NIMZs), to be developed as integrated industrial townships. The policy envisages that ‘the NIMZs would be large areas of developed land, with the requisite ecosystem for promoting world-class manufacturing activity’. In contrast to existing special economic zones, with their focus on exports, such NIMZs are envisaged as industrial townships of a minimum size of 5000 hectares.

Each NIMZ will be managed by a special purpose vehicle (SPV), which will exercise the powers conferred by the policy. The policy specifies that the SPV’s CEO must be a senior central or state government official. So, in principle, these townships are to become publicly run corporations for the benefit of the private sector, free from the political and governance failures that plague India’s existing urban local bodies. The aim is to permit both clustering and concentration of infrastructure. In many ways, this is a return to the past, except these townships are designed to facilitate manufacturing by a cluster of smaller units, rather than being dominated by a single large employer.

Is this a solution in search of a problem? Apart from India’s still stunningly low per capita income compared to all other G20 members, it seems there is no tight linkage between levels of income and a ‘natural’ share of manufacturing when G20 countries are compared. It is true that India’s Asian peers — Indonesia, China and South Korea — have a much higher share of manufacturing than India, but there is little reason to think they represent a ‘norm’ to which India should aspire.

Two conclusions follow. First, there is no analytical reason to conclude that India’s ‘low and stagnant’ share of manufacturing reflects major distortions in its economy. Second, if it is to privilege manufacturing through special, potentially costly, measures, such actions need to be justified for reasons other than merely to raise its share. By the same token, a blanket commitment to raise the share of manufacturing at any cost risks leading India into the same blind alley of interventionist industrial policy from which it so painfully exited.

These concerns emerge from several of the policy’s provisions that are not necessarily linked with the NIMZs. Particularly disturbing is the looseness of the formulation on trade and investment policy and government procurement, and the stress on specific industry verticals. By way of example, paragraph 1.22 contains the extraordinary statement on regional trade agreements that ‘it will be ensured that such agreements will not have a detrimental effect on domestic manufacturing in India’. What on earth is the point of such agreements if not to put competitive pressure on India’s domestic producers?

The policy’s authors will undoubtedly cite the new wave of academic thinking associated with Hausmann, Rodrik, Stiglitz, Ann Harrison and the like to justify a return to activist industrial policy. I would remind them that this literature finds very little reason to favour manufacturing as such, but strongly supports the long-term productivity benefits of outward exposure.

Suman Bery is Country Director, India Central, International Growth Centre. This article first appeared here in the Business Standard.