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India’s Industrial Policies in ‘State’

Context

A draught of a new industrial policy for India, titled ‘Industrial Policy 2022—Make in India for the World,’ was recently circulated for public comment.

Relevance:

GS Paper -3: Effects of Liberalization on the Economy, Changes in Industrial Policy and their Effects on Industrial Growth.

Mains Questions

Why is it so difficult to develop and implement a strong industrial policy for economic development? Propose solutions to these problems. (150 Words)


Key Highlights

  • India’s first industrial policy was presented in 1948 by India’s Minister of Industries, Shyama Prasad Mukherjee.
  • India’s most recent industrial policy was the Industrial Policy of 1991, which paved the way for LPG reforms.
  • The brief framework for designing robust industrial policies is contingent on the state’s ability to achieve two goals: facilitate economic performance while also disciplining stakeholders toward industrial policy goals.

What exactly is Industrial Policy?

  • Industrial policy is a set of interventions that seek to extract economic performance from firms in exchange for government subsidies/benefits.
    • The role of governments is critical in developing appropriate industrial policy interventions.
  • The main goals of the government’s industrial policy are: o to maintain sustained productivity growth o to increase gainful employment o to achieve optimal utilisation of human resources
    • Achieve international competitiveness
    • To transform India into a major global partner and player.

Why is it so difficult to get it right?

  • When we move from a macro perspective to micro implementation, we realise how difficult it is to design workable industrial policies.
  • The key issue here is to incentivize (guide) firms toward achieving performance targets that are critical to the economy’s overall growth and development.
    • Subsidies, incentives, or concessions may be provided to firms based on their ability to meet those performance targets.
  • Another issue here is the conflicting interests of economic stakeholders.
    • Three key stakeholders’ interests must converge: governments, capital, and labour.
    • Each of these stakeholders has their own interests, which may or may not coincide with the goals of economic performance.
    • This is where governments at all levels must take on the responsibility of coordinating and disciplining stakeholders in order to achieve the necessary synergy and achieve the goals of industrial policy.
  • Another critical issue is the mechanism for achieving economic performance through the provision of subsidies and concessions.
    • Ideally, the state should be able to allocate resources ex-ante to the set of firms with the potential to meet those targets while also being able to withdraw resources when underperformance becomes apparent. This sounds simple in theory, but it is extremely difficult to achieve in practise.
    • The institutional structure in charge of implementing industrial policies drives the functional implementation of this mechanism.
  • This would include project monitoring, mapping of performance targets, releasing subsidies contingent on meeting these performance targets, and finding ways to reduce financial exposure to the exchequer in cases of project default.
  • Each of these functions has its own elements, which further limits the state’s ability to achieve the necessary institutional synergy for industrial policy implementation.
  • Furthermore, given the structure of India’s federal system and the separation of subjects between the Centre and the States, achieving this synergy becomes all the more difficult.

State-level industrial policy design

  • There is empirical evidence to suggest that states with robust industrial policies also make the greatest contributions to the national economy’s overall growth performance.
    • For example, Tamil Nadu, Maharashtra, Gujarat, or Karnataka contribute the majority of India’s output in various sectors.
  • As a result, designing industrial policies at the State level by carefully understanding the structural bottlenecks that impede industrial performance would be a first step toward extracting economic performance from underperforming States.
    • This would necessitate a revamp of the current institutional setup in charge of implementing industrial policy in these states, as well as the establishment of necessary institutions in the absence of such institutions.
    • One of the most important aspects would be to establish an institutional structure that reduces turnaround time and limits the number of departments or agencies in charge of implementing industrial policy.
    • To that end, the establishment of a State Industrial Policy Authority (SIPA) with overarching jurisdiction over all aspects of industrial policy design and implementation can be pursued.
  • This will shorten the timelines for project scrutiny, approval, monitoring, and subsidy disbursement while also assigning the necessary responsibility and accountability to a specific body.
  • It will contribute to the achievement of the two most important prerequisites for successful industrial policy: institutional synergy and state discipline.
  • SIPA must include three key components: a planning authority, a network of nodal agencies that communicate the vision of industrial policy to stakeholders, and an organisational structure with the necessary skill sets and acumen to facilitate and extract performance from firms.
  • State-level industrial policy must revolve around mapping comparative advantages and disciplining stakeholders toward the goals of a coherent policy.
    • The ability of the state to direct capital towards productive enterprises and extract performance from firms with a designated sectoral focus is one of the key facilitators for capitalising on this comparative advantage.
    • This is essential for any version of industrial policy in a developing state, which places a central role for governments at multiple levels, national, federal, and regional, to carefully design and implement a set of coherent interconnected initiatives.
  • Policies must be simple and stable in order to make long-term projections.

Conclusion

The vision of a developmental state, which India aspires to be by 2047, is built on the shoulders of strong industrial policies, so India’s new industrial policy, ‘Industrial Policy 2022—Make in India for the World,’ will help the country achieve this goal.


February 2023
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