Written by Gulzar Natarajan
December 29, 2014
The more important concern is the difficulty faced by informal firms in accessing credit. But this is more a matter of informality than access to credit.
The prime minister has declared his goal of “Make in India” with “zero defect” (quality) and “zero effect” (on the environment). As a vision statement, there could not be anything more appropriate. But walking the talk is, arguably, the challenge.
India’s manufacturing has been a puzzle. Since the late 1970s, even as its peers in East Asia have greatly diversified into manufacturing, the sector’s share has stagnated at around 15 per cent of the GDP. It is not that past governments have not tried to revive manufacturing. For decades now, not just the Centre, the states too have had an industrial policy. At some time or the other, many states have even pursued it vigorously. Some of these policies have also been well designed. But the results have been universally disappointing.
This alone should be adequate to chasten us about the task at hand. The revival of our stagnant manufacturing sector is arguably the biggest economic challenge India is facing. Unfortunately, the problem is complex and intractable, demanding several, often diffuse, sets of solutions.
So what is holding back India’s manufacturing? The potential candidates are obvious, though their relative importance is contentious. Sorely deficient infrastructure, inhospitable business environment, corruption, poor quality of human resources, problems with access to timely and adequate credit, difficulty of getting land, high burden of taxation and restrictive labour regulations would figure prominently on any list.
In an ideal world, public policy would be tailored to address all these problems. But in the real world, governments have limited resources and face serious administrative and political limitations. Further, many of these are intimately linked to the country’s stage of development.
One way to prioritise among them is to do a differential diagnostic of the various constraints facing the sector to identify those primarily responsible for holding back manufacturing growth. In other words, such binding constraints are those factors whose relaxation generates the greatest bang for buck. This approach was popularised by economists Dani Rodrik, Andres Velasco and Ricardo Hausmann in the early 2000s and has since been embraced by many countries across the world in designing their industrial policies. In their own words, growth diagnostics is simply “a strategy for figuring out the policy priorities”. Simple as it sounds, in the context of India’s manufacturing sector, it is a formidable exercise. Here is a simplified diagnostic analysis of the sector.
Infrastructure tops the list of most surveys on doing business in India. In particular, chronic deficiencies in transportation and power impose prohibitive costs and lower business competitiveness. Multiple enterprise surveys have identified electricity as the biggest constraint. Further, India lags behind on every measure of transport connectivity. Though there have been considerable recent successes spurred by private participation, much needs to be done.