Why the New Industrial Policy is Bad Economics?

Why the New Industrial Policy is Bad Economics?

By Ajaz Ahmad Rather

The new industrial policy momentarily generated a heated debate in the state, to the effect that there is official affirmation to revisiting some controversial clauses. The main objection to the policy is the clause related with leasing of land to non-state subjects discussed in Chapter Two of the official document under the subheading, ‘Private industrial estates/parks members (2.11.2). The relevant part of the clause discusses the provision of land to non-state subjects for a maximum period of 90 years. This has been supposed to be an affront to an already weakened special nature of the state. Since BJP also figures in the framing of the policy, it smells even more foul. The chief minister has carefully avoided a new outcry by promising a revision of the clause. However, the scale of industrialisation envisaged by the document does fundamentally count upon foreign players and in all likelihood it needs a largescale remodelling in case they are discounted.
However, the posturing of the debate along political lines has covered an even more detrimental mindset that exists within the policy apparatus. The entire policy document is an excellent outline of coarse outsourcing of industrialisation. The government essentially wants itself to be in the balcony enjoying a view of industrial transformation materialised by industrialists with least official muddling apart from provision of an easy legal and infrastructure roadmap. Consequently, non state actors with huge capital base or access to capital market are wooed by easy establishment procedures and myriad incentives with the expectation that this will lead to industrialisation in the state. However, whether such an approach makes economic sense and is at all corroborated by some historical experience needs serious rethinking. In fact, India itself is a victim of a particular variety of industrialisation that has had relatively little welfare effects on the laity, and this in all likelihood seems in the process of replication as per the new policy.
To begin with, industrialists expected to invest, unless cajoled by heavy concession and incentives, have little reason to do so in our state in comparison to the rest of India. There are various reasons for this. Flourishing of industries is contingent on some advantages in particular localities. These include cheap labour, access to capital market, presence of a good product market where the produce can be sold, as well as necessary infrastructure. However, all of these needful ingredients for successful industries are present outside than in the state. With the added disadvantage of conflict, assuming outside firms will take the unnecessary trouble is rather preposterous.
Take the case of manual labour. Thousands of Indians throng the state in order to get employment in construction and agriculture related jobs. Obviously, they are available in their states at even cheaper rates. In our state this influx of labour can be treated as shortage of labour at prevailing wage rates. The rates that the new firms need to pay to attract the local population as such have to be much higher, which makes little sense for the investing companies. Similar is the case with capital market as well as product market. To supply products from our state to other states, logistic costs are definitely higher than other states, because of its extreme location and bad infrastructure. Not to mention that even till now railways do not connect the two capitals of the state.
Further, the firms that will invest here need some basic infrastructure, security, and regular source of energy. Will the state provide these to them? If yes, then there will be huge costs involved. Since it has to be subsidised to attract them, and its impact on the public exchequer will be measurable if not massive. Secondly, the state suffers from deficits which impact domestic industries. Thus, if the state has made up its mind to furnish such facilities, why not to domestic producers? It makes little sense that basic needs for the industrial sector will be provided if outsiders invest, while the same will not be done when it comes to domestic ones. Bad power supply is, particularly in winters, a regular and pestering issue for state industries. The state is not able to fix the issue, for alleged want of lack of resources. What will be the source of energy, assuming new firms to pay all the expenses, if new high consumption industries invest in the state? Similar is the case with infrastructure. Assuming all or part of it will be recovered from the firms is quite unreasonable. In India, if they already find a better infrastructure to rely on, why should they bother to incur unnecessary and avoidable costs? The firms obviously will do some basic cost benefit analysis to look into the suitability of investment, and unless they find their cost levels lower in the state they won’t commit themselves.
The problem with the industrial policy does not end here. Its very conceptualisation is based on deeply flawed assumptions and bogus economic reasoning. The document itself is a masterpiece of crony and coarse capitalism that considers firms an elixir to all economic problems while ignoring the all-important role of government in creating the necessary enabling environment, while disregarding direct and indirect welfare implications. Importantly, it seems to lack a sense and recognition of the last sixty years of development history, not only of developing countries as a whole as well as of the sub-continent but even that of the state itself. For example, the document does take into its ambit the problems encountered by the state in the process of industrialisation. Neither does it take into consideration the limitation of the approach from a historical perspective. An effective industrial policy demands a research based approach that takes into consideration history, constitutional framework, resource endowments, dynamics of operation and impacts on different stakeholders.
For instance, since, the industrial policy largely rests on a desire to somehow replicate the Indian industrial story in the state, there is a need to think about the type of industrialisation that is taking place in India. Any attempt at a blind replication of the Indian example is not healthy economics. These industries may provide a boost to economic growth, that by any standards however never means there will be significant job creation in the state, particularly for locals. Consequently, the benefits may accrue to industries and different direct and indirect costs will be borne by domestic economy.
This apprehension comes from the fact that Indian industrialisation has largely been capital intensive. That is the reason that even after 65 years of planning for industrialisation, according to the latest employment-unemployment survey, agriculture still employs 50 percent of the Indian labour force. Industry which has been growing reasonably well after reforms has not been able to absorb a continuously increasing labour force. Thus, growth of economy has not been accompanied by growth of employment. As per the Economic Survey, the growth rate of labour force during 2001 to 2011 was 2.23 percent in comparison to the 1.4 percent growth rate of employment. Further employment elasticity of growth has shown progressive deterioration from the first decade of the current century. As per the twelfth five year plan document of the Planning Commission “the employment elasticity in India in the last decade declined from 0.44 in the first half of the decade 1999–2000 to 2004–05, to as low as 0.01 during second half of the decade 2004–05 to 2009–10.”
The overall employability of the Indian economy has lately weakened even more sharply. For example, the employment creation in eight labour intensive industries of textile, leather, metals, automobiles, gems and jewellery, transport, IT/BPO, and handloom/power loom for which quarterly surveys are carried out since October 2008 reached a low in first three quarters of 2015. In 2009 these industries created 8.89 lakh jobs with a best of 9.30 lakh in 2011. Even during 2014, employment creation was 4.21 lakh. However, for the first three quarters of 2015, it has reduced to 1.55 lakh, which may turn out to be around 2 lakh for the entire year, less than half of the previous year. The gravity of the employment challenge become more pronounced when one considers President Pranab Mukherjee’s statement, who in March this year, said that India needs to create 115 million non-farm jobs over the next decade.
As such, to bank on industrialisation as a process of employment generation is less realistic in India. The source of dependable employment demands a restructuring of the entire industrialisation discourse and prioritisation of enabling environment by enhancing general infrastructure, transparency, and skill development at the grassroot level, where people can comfortably contribute to output by engaging in production as per their suitability in the spectrum of industries. The point is that when we fail to protect and enhance world class industries like, apple, walnut and handicrafts where we retain a great natural advantage, how can we embark on outperforming others where we have substantial disadvantages?
Apart from the employment potential of industrialisation, the impact of these potential industries on the domestic ones has not been taken into consideration. Will these industries encourage domestic industries or debilitate them? Because, those industries that are currently in operation in the state may turn out to be the more profitable ones and as such the basic target of the foreign ones. It may not only principally deindustrialise our economy but result in pilling up of the unemployment stock even further. For example, a large firm with advanced machinery may displace many small labour intensive ones. Even if it employs the required number of people the displacement can be even larger.
Another issue of substantial importance is the impact of prospective industrialisation on the environment in the state. Countries like China, India, Saudi Arabia, among other fast-industrialisation-economics, have messed up their environment seriously. No wonder, people in some Chinese cities are now buying clean air for breathing. The regulatory mechanism in the state of Jammu and Kashmir is very weak. Once high profile industries take root, they can also ‘buy’ officials and flout environmental norms.

—The writer is a lecturer in Economics

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