Concerns:

India still has no manufacturing policy. Focussing (as “Make in India” does) on increasing foreign direct investment and ease of doing business, important though they may be, does not constitute an industrial policy.

Significance of the Manufacturing sector:

• Manufacturing is an engine of economic growth because it offers economies of scale, embodies technological progress and generates forward and backward linkages that create positive spillover effects in the economy.
• No major country managed to reduce poverty or sustain growth without manufacturing driving economic growth. This is because productivity levels in industry (and manufacturing) are much higher than in either agriculture or services.

Need of the hour:

There is a need for government intervention in the case of market failures. Specific instances of market failure require a government-driven industrial policy: deficiencies in capital markets, usually as a result of information asymmetries; lack of adequate investments inhibiting exploitation of scale economies; imperfect information with respect to firm-level investments in learning and training; and lack of information and coordination between technologically interdependent investments. These are good reasons why an economy-wide planning mechanism is needed in India.

Why have an industrial policy in India now?

• There is the need to coordinate complementary investments when there are significant economies of scale and capital market imperfections.
• Industrial policies are needed to address learning externalities such as subsidies for industrial training.
• The state can play the role of organiser of domestic firms into cartels in their negotiations with foreign firms or governments — a role particularly relevant in the 21st century after the big business revolution of the 1990s.
• The role of industrial policy is not only to prevent coordination failures (i.e. ensure complementary investments) but also avoid competing investments in a capital-scarce environment.
• An industrial policy can ensure that the industrial capacity installed is as close to the minimum efficient scale as possible.
• When structural change is needed, industrial policy can facilitate that process. In a fast-changing market, losing firms will block structural changes that are socially beneficial but make their own assets worthless. East Asian governments prevented such firms from undermining structural change, with moves such as orderly capacity-scrapping between competing firms and retraining programmes to limit such resistance.