What is the issue?

• India has witnessed extraordinary growth in the information technology (IT) sector in the recent decades.
• In this context, it is essential to understand, in comparison, the manufacturing sector - the shortfalls, potentials and the measures needed.

What led to the IT sector's growth?

• There is a widely-held myth that growth in the IT sector was possible as the sector had no intervention from the government.
• But in reality, the government, at the outset, did the necessary things, needed for IT' sector's success.
• Internet - The government spent public money in creating high-speed internet connectivity of global standards with the U.S. for the IT software parks.
• This was done years ahead of telecom modernisation in India.
• Creating islands of high-speed connectivity for a nascent industry independent of the telecom system was a bold move then.
• This enabled the seamless integration of the Indian IT industry into the US market.
• Trade - The government brought trade in services into the regulatory framework of imports and exports.
• It allowed the IT industry to import duty-free both hardware and software.
• It also gave it all the incentives that were being provided to exporters of goods.
• This enabled the Indian IT industry to get integrated in the dynamic US market without any disadvantage.
• Regulations - In addition to the above, the IT industry was able to function under the Shops and Establishment Act.
• It was, therefore, not subject to the over 40 laws relating to labour and the regulatory burden that these impose.
• Human capital - Further, the IT sector had the benefit of low-cost high-value human capital.
• This was actually created by the investments made a generation earlier in higher scientific and technical education.

What do these imply?

• Certainly, the IT success story was possible only because of planned government interventions and did not happen all on its own.
• So the key lesson is that the state can take steps to nurture competitive advantage in a sector; in manufacturing too.
• But there is a false ideological divide of ‘state’ verses the ‘market’ and a growing faith in the latter.
• In effect, this argument is hampering the task of replicating the IT success for manufacturing.
• In comparison, to boost manufacturing, China created world class infrastructure.
• This included Special Zones along the coast and even housing for workers.
• It supported them in getting foreign and domestic investment in manufacturing.
• Within a few years, it started becoming the factory of the world and now becoming an economic superpower.

What is the challenge in India?

• In India, development of industrial areas has been the responsibility of the States.
• But there exists the political need to spread scarce resources equitably across regions.
• So the creation and maintenance of globally competitive infrastructure for manufacturing remains a challenge.
• The Central government did recognise this problem, but efforts at addressing this have been feeble.
• Moreover, the efforts are constrained by an excessive faith in the potential of private investment.

What are the shortfalls in the approach?

• SEZs - The Special Economic Zones (SEZs) were conceived and promoted from the year 2000.
• These had a zero import duty regime along with no taxes on profits.
• With these, the government provided a favourable regulatory regime.
• But it assumed that the private sector would develop these zones successfully.
• The private sector succeeded in the IT sector as the land and investment needed were modest.
• But other than the IT SEZs, only few manufacturing ones with scale really took off.
• The private sector did not have the scale to create globally competitive physical and social infrastructure for manufacturing to be competitive.
• Here, if the Centre in partnership with the States had taken the lead in assembling land and investing adequately, the outcome could have been quite different.
• The private sector could have been roped in only where it had the potential to.
• Industrial Corridor - In 2005, the ambitious Delhi Mumbai Industrial Corridor was set up.
• The initial decision was to get the private sector to invest and develop industrial areas along the Delhi-Mumbai Dedicated High Speed Freight Corridor.
• But it was eventually found that private investment on the scale needed would not be forthcoming.
• The need for Central government financing for the trunk infrastructure was soon realised, but is yet to be developed.
• This is the case with Kolkata-Amritsar and Bengaluru-Chennai Industrial Corridors as well.
• The same applies to the recently proposed idea of developing large economic zones with world-class infrastructure around sea ports.

What should be done?

• A successful IT park equivalent for manufacturing will have to be developed.
• The physical and social infrastructure should be comparable to the best in the world and help connect to the global markets seamlessly.
• Workers’ housing which is key to productivity should become an integral part of industrial area development.
• [The software SEZs having housing and workplaces within walking distance had contributed significantly to its success.]
• In addition, such an industrial area needs to be large enough to have the critical mass for generating positive externalities and the increasing returns to scale that follow.
• This has been the key to China’s success - such economies of scale have resulted in unbeatable prices for a wide range of manufactured products.
• India needs to build new and large world-class manufacturing areas speedily, especially in the industrial corridors and along the ports.
• These are critical for the competitiveness needed for being part of the global manufacturing supply chain.
• The economic returns and job creation from such investment will be tremendous.