Tuesday, September 10, 2019

Making in India for the World - Industrial Policy for India's car manufacturing industry

Faced with contracting sales, Indian car manufacturers are lobbying for measures to bailout the industry, including lowering of GST.

BVR Subbu (HT: Ananth), former President of Hyundai and one of the most respected industry veterans, has rubbished their claim,
Has anyone totted up the gross profits of India's top three car makers and the top three 2-wheeler manufacturers over the last ten years? If I recall right just the top three 2-wheeler manufacturers made more Rs 12,500 crore in gross profits last year. One would imagine that an industry that has had such an unprecedented and extended run of profitability for almost a decade, would have enough cash reserves to tide over a dip in fortunes of the sort that we are presently witnessing. Not a meltdown by any standards, what we are seeing is merely a reduction in profitability that is sought to be painted as an apocalypse scenario.
Never mind the several possible reasons, the doomsday scenario painted is clearly self-serving. 

Vivek Dehejia and Roopa Subramanya makes the right diagnosis,
Indian automobile makers are characterized by low productivity, as compared to other comparable car-producing countries. According to a 2016 research report by the World Bank, labour productivity in India in the automobile sector is only one-third of that in China, with correspondingly lower rates of productivity growth in India than in China over the years. Due to low productivity and an inefficiently low scale of production, in general, Indian automobiles are uncompetitive in the global market. It is a telling fact that a country which is the sixth largest automobile manufacturer in the world has barely 1% of global exports, and is largely absent from well-established global value chains (GVCs).
But their prescription to lower import duties and invite foreign competition, and thereby force the local firms to get competitive, is questionable. This is a regurgitation of the economic orthodoxy on how liberalisation can unleash competition and boost productivity among domestic firms. But where is the evidence of this having worked?

On the contrary, in his excellent chronicle of the so-called East Asian miracle, Joe Studwell (review here) has highlighted the contrasting fortunes of North and South East Asian economies with their car and other manufacturing industries. All the North East Asian economies protected the local manufacturing with very high tariffs, but had policies which incentivised local manufacturers to export and promoted export competition among them. In contrast, the South East Asian economies, in the absence of export competition policies, failed to develop automobile manufacturing competitiveness. Those who followed the textbook liberalisation and lowered import tariffs (Philippines) became export dumping grounds for multinational car makers which completely obliterated local manufacturing capacity. And those with high tariffs ended up fostering automobile sectors characterised by inefficiency and crony capitalism (Indonesia and Malaysia).

Sample Studwell,
The capacity to export told politicians in Japan, South Korea and Taiwan what worked and what didn’t and they responded accordingly. Since exports have to pass through customs, they were relatively easy to check up on. In Japan, the amount of depreciation firms were allowed to charge to their accounts – effectively, a tax break – was determined by their exports. In Korea, firms had to report export performance to the government on a monthly basis, and the numbers determined their access to bank credit. In Taiwan, everything from cash subsidies to preferential exchange rates was used... North-east Asian politicians then improved their industrial policy returns through a second intervention – culling those firms which did not measure up... Japan, Korea, Taiwan and China, the state did not so much pick winners as weed out losers... Such ruthless bureaucratic support of domestic manufacturing was aided in each state by the concentration of key industrial and foreign trade policy decisions in a single government agency: the Ministry of International Trade and Industry (MITI) in Japan; the Economic Planning Board (EPB) in Korea; the Industrial Development Bureau (IDB) in Taiwan; and the National Development and Reform Commission (NDRC) in China.
In other words, low import duties and resultant foreign competition is hardly a recipe for making in India. Tariffs, high or low, are a red herring. Instead, we need to have policies that promote making in India for the world

In fact, given the precedents in other sectors, including mobile phones or heavy equipment, if import duties are lowered, not only is it unlikely to boost exports, but also most likely even the existing manufacturing capacity would not have come up. 

It is perhaps an opportunity for the Government of India to re-examine its concessions and incentives to the automobile industry, and calibrate them towards export performance and fostering export competition among the different domestic manufacturers. How about an industrial policy that promotes Making in India for the World?

Perhaps the only problem with this approach would be that, with the global trade expansion plateauing, the export-based manufacturing growth ship may have to navigate strong headwinds. 

In any case, this is one more example of how Indian capitalists, who lose no opportunity to blame the government for the country's problems (and for sure, the government has enough to be blamed for), have themselves largely failed India.

Actually, if you read Studwell, one cannot but not come out with the feeling that if India had embraced the free market in the sixties or seventies, we would have followed more or less the South East Asian trajectory. While not holding a brief for the policies we adopted, it is only a cautionary note to those who simplistically today argue that India would have been much better off if we had embraced capitalism after independence.


soliton said...

Very nice analysis sir. Would love to know your views as to how can our auto manufacturers improve their productivity at par with East Asian and European economies

Tirumala Venkatesh Kaggundi said...

Agree. Usually the doomsday picture painted by the auto firms work. It worked to create a tariff structure that suited development of (inefficient?) domestic auto manufacturing setups during late 90s, despite WTO. The pressure worked again while signing FTAs with Thailand and ASEAN. And on and on it went with various support and concessions. The fiscal constraints may now bind the hands of Govt., but then what's the way out? Exports certainly are a possibility, and despite all headwinds, we still have enough market left in the world (e.g. Africa/Latin America/Eastern Europe) to displace others and thrive.
Interestingly, in a parallel development, the mobile phone manufacturing in India has picked up in last couple of years to touch more than a billion dollars of exports last year (from a fourth of it three years ago). Same strategy of structured tariff with more import tariffs on finished products and lower tariffs on inputs worked. Some additional handholding by the Govt. helped. And yes, economists cried foul when these moves were made in successive budgets.
Usually not a fan of govt. intervention (air India is a drag), I believe that when it comes to industrial policy, Government needs to use a visible hand while trying to get the priorities right.