India Needs To Reimagine Its Industrial Policy In Response To Global And Technological Challenges

The renewed interest in industrial policy is largely driven by geopolitical rivalries, trade wars, supply chain disruptions, green energy transition, security concerns on semiconductors, and the advent of a new technological churn which has been dubbed "Industrial Revolution 4.0".

There is also a global consensus that China immensely benefited from robust and state-supported industrial policy and has emerged as a global economic powerhouse. China’s rise in high-tech industries such as semiconductors, solar modules, and electric vehicles is supported by the active participation of the state and its industrial subsidies.

This has also motivated many developing economies to emulate China’s industrial policy in their development models.

The rapidly changing global economic landscape, coupled with geopolitical flux, compelled many developing economies to pursue industrial strategies similar to those in the late 1980s.

Self-Reliant India 

Industrial policy is back in India under 'Self-Reliant India' to shore up domestic manufacturing.

This underlines the importance of both vertical and horizontal policies in stimulating structural transformation. Vertical policies focus on sector-specific interventions, such as subsidies and import protection. An example of such policy-making is the production-linked incentives (PLI) offered in selected sectors.

On the other hand, horizontal policies emphasise improving the economy-wide business environment by abolishing obsolete rules, regulations, and processes that undermine both domestic and international investments.

By its sheer nature, the policy of Self-Reliant India must bring back protection or subsidies in one form or the other. 

India’s industrial policy stance under 'Self-Reliant India' has garnered traction because of its initial success in scaling up the production and export of mobile and electronic goods. However, there are also views that industrial policy misses crucial areas of intervention that are far more critical for structural transformation and industrial upgrading.

In this context, three areas prominently deserve attention: technological leapfrogging, policy coordination, and the growing importance of services in manufacturing.

Technological Leapfrogging

The absorption, adaptation, and diffusion of technologies in manufacturing systems is a dominant feature of industrialised economies to climb the technological development ladder. The role of industrial policy in the country needs to facilitate technological leapfrogging. 

Participation in international trade through value chains is considered one of the most important paths to technological learning and leapfrogging. 

For India, climbing up the technological ladder is not a matter of imitating, following, and learning from industrialised economies. It is necessary to focus on the depth and breadth of technological advancement in the manufacturing value chain. It requires understanding the emerging facets of technological change and exploring possible paths for advancing through innovation.

To achieve technological leapfrogging, the role of industrial policy is to promote public investment in higher education and science research to build foundations for technological development. This should be complemented by creating an institutional mechanism that enhances technological capacity at the economic level.

For example, the Patent Act of 1970 did not encourage product patents but emphasised only process patents, which in turn, supported pharmaceutical firms’ engagement in reverse engineering. This has helped the country emerge as a hub for global pharmaceutical manufacturing.

Policy Coordination

The coordination of economic policies and institutions is vital to speeding up the process of structural transformation. There is a need for policy coordination at the macro, meso, and micro levels.

The success of Asia’s industrialisation is largely attributed to greater coherence and convergence among policies. The inability to promote coordination of policies and institutions could potentially create the risk of “coordination failure”—a situation where two or more parties are not able to coordinate their plans. This undermines the potential benefits of coordinated operations.    

India’s industrial policy under 'Self-Reliant India' needs to recognise the importance of coordination in economic policies. India’s efforts to galvanise domestic manufacturing through the PLI scheme are aimed at reversing the early trends of premature de-industrialisation, but this may not be sufficient.

This needs to be supported by promoting the coordination of policies. The success of industrial subsidies, such as the PLI scheme in a particular sector, requires complementary investments and regulatory changes for efficient operation.

The task of industrial policy is to ensure greater coordination between policies and institutions to create an enabling environment for firms. This underpins the importance of fostering convergence among macro, meso, and micro policies. These include trade, investment, competition, industrial credit, infrastructure development, investment in human capital, exchange rates, ICT, and innovation policies.  

Servicification Of Manufacturing

Services have emerged as an integral part of global manufacturing, thereby demonstrating the emerging trends of “servicification of manufacturing”. Services contribute significantly to global production, GDP, employment, and international trade.

The inextricable relationship between manufacturing and services has raised serious concerns regarding the traditional nature of industrial policy. 

Given the interdependence between the manufacturing and service sectors, it is crucial to understand that industrial policies are less likely to be successful in isolation. There is a need to promote services-centric industrial policies to harness synergies between manufacturing and services.

Service-oriented industrial policy creates the potential scope for providing financial support to many services, such as logistics and ICT, which are critical to upstream inputs to downstream manufacturing.

Financial incentives help manufacturing firms diversify into the production of related services and facilitate them to differentiate their products from competitors while graduating on the value chain ladder.

India’s industrial policy focuses on the manufacturing sector and does not recognise the role played by services in enhancing the value added in manufacturing exports.

In 2018, the value-added share of service inputs constituted 13 per cent of gross exports of manufactured goods in India, while the value-added share of domestic services contributed 8 per cent to gross exports of manufactured goods.

Industrial sectors covered under the PLI scheme require efficient and price-competitive access to different types of services to become globally competitive. The growing importance of ICT and professional services at a certain scale and low cost is crucial to making production structures more sophisticated in PLI-targeted sectors, such as automobiles, medical devices, pharmaceuticals, and electronics.

The PLI scheme in select manufacturing sectors in the country may be more productive if it also covers associated services in the manufacturing value chain. This accentuates the importance of formulating a hybrid industrial policy that takes into account the growing synergies and increasingly thin dividing lines between manufacturing and services.

The scope for extending financial incentives to manufacturing-oriented services is enormous because of the absence of legally binding rules at multilateral levels. This will help in boosting the global competitiveness of the domestic manufacturing sector.

Lastly, policymakers need to understand the role of industrial policies beyond scaling up domestic production. Industrial policy needs to be viewed as a process of experimentation and evaluation, which enables large firms to advance technologically, capitalising on their foundations of higher education in science, industrial goods, and institutional mechanisms, in addition to enhanced policy and institutional coordination.

(Surendar Singh is an Associate Professor (International Business) at Jindal School of Liberal Arts and Humanities, O.P. Jindal University, Sonipat. Views expressed are personal)