The economic orthodoxy on industrialisation has it that once governments put in the enabling requirements - liberalised regulations, ease of doing business, low taxes, and infrastructure - industrial growth will follow. But both the history and realities of industrial transformation show that this is hardly a sufficient condition for industrial growth. Several other considerations and factors determine the trajectory of industrial growth. These require an active government role.
For a start, there’s the controversial argument on providing a level playing field for domestic businesses. The history of policies with this objective tending to degenerate into protectionism and inefficiency does not take away from the requirement for a level playing field. All advanced countries of today and the North East Asian economies have extensively used such policies in their development trajectories. For a massive country like India, ensuring that its labour-intensive manufacturing sectors are not swamped by cheap imports is an essential requirement.
In this context, the competition from cheap Chinese imports is especially relevant. In the last three decades, we have seen that globally across industries cheap Chinese imports have squeezed out competitors. Even manufacturers from the advanced economies struggle to be competitive against the Chinese. It’s therefore compelling to argue that if India had embraced orthodoxy and lowered tariffs across the board, the Chinese imports would have swamped the domestic market and seriously eroded the country’s manufacturing base. Even with the higher tariffs, Chinese imports have seriously dented local manufacturers in several sectors. Active government role, even with all its risks, is unavoidable.
Then there’s the process of getting large investors, especially foreigners, into making the actual investments. Let’s be clear, no large investor is going to invest just because the business environment is great, especially when they have global choices. In the context of India with its fierce competition among states, no investor is going to walk in and invest just because you are the top-ranked state on ease of doing business or has superior logistics. States court investors aggressively. So if you are not doing the same, no matter how robust the business environment, there’s little chance of getting the investment.
This is where things get interesting. The decision point for a state government is this - what’s the most cost-effective strategy to convince the investor to choose the state over others?
A few things would be essential requirements like land, expedited statutory permissions, the provision of utilities (like electricity, telecommunications, and water), and access to connectivity infrastructure like roads, airports, and ports. The differentiators would revolve around tax concessions, input subsidies, ease-of-doing business (EoDB) facilitators, and proactive engagement. The EoDB facilitators would also include the strength of the state’s manufacturing base.
States choose to present a package that combines these elements. This choice presents some problems.
What’s the least expensive combination that can help swing the investment decision? What’s the most attractive combination of business environment facilitators that’s both credible and generates enough confidence? Can the EoDB attractions and high-level courting offset some of the financial incentives?
I’m inclined to argue that for the bigger states, a strong EoDB offering and aggressive high-level courting of the investor are sufficient to make up for any lower financial incentives. The important thing here is the quality of the EoDB offering and the credibility and commitment of the investor engagement. States should be encouraged to pursue this strategy instead of the current ruinous bidding wars with financial incentives.
In any case, whatever the combination of offerings, this strategy is front-and-centre about picking winners - both the sectors and the specific firms in those sectors to back - and pursuing them aggressively. It runs contrary to economic orthodoxy.
There’s another aspect to the realisation of actual investments. Large manufacturing investments require some pre-existing manufacturing base or an ecosystem. But India’s limited manufacturing base means it’s not blessed with many such ecosystems. They have to be created (I think it’s fair to say that almost all industrial clusters of today were created through active government role in triggering and sustaining their initial growth). And this too requires active industrial policy and co-ordination by the government.
Tamil Nadu is a good example. Its initial successes with its automotive manufacturing base have provided a strong foundation for its recent achievements in attracting Apple’s iPhone contract manufacturers, electric vehicle investments etc. It has at least three or four such well-developed clusters with ecosystems that are attractive enough for large investors. And to the state’s credit, it has been building on these strengths.
The creation of new ecosystems is hard. A realistic strategy to create the ecosystem is to have a large investment and build the ecosystem around it. However large investors are reluctant to invest in areas without the manufacturing base. There’s a chicken-and-egg gridlock. It then is a massive leap of faith from the investor to make the investment decision. This, in turn, will require both financial incentives as well as huge confidence in the state’s business environment and also the commitment of the host government.
It’s especially in such investments where proactive government engagement can swing things. Several examples from across the country of such successes exist where large global firms have chosen to invest in areas without the ecosystem. Governments have actively partnered with the investors to create the ecosystem and make the investment successful. Such investments generally end up creating some kind of an industrial cluster in the area.
Apart from generous financial incentives, such successes require a combination of both the highest level of political commitment (in terms of the Chief Minister’s interest) and strong bureaucratic leadership and painstaking follow-up.
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