Writing on the wall - Ashok V. Desai
After having his fill of sushi, the prime minister is back home and in the saddle, and has renewed his campaign to revive industry. This is a departure from his predecessor’s approach of laissez faire. Another change is that Narendra Modi has invited manufacturers from abroad to come and make things in India. That is a bit surprising. His party has always believed in Little India. Indian industrialists have been its supporters; they cannot be enthusiastic about competition from foreigners bringing the latest technology and building brand new factories in India. But Modi must have done his political homework; let me concentrate on how best he can achieve his aim.
According to UNCTAD, India produced about 2½ per cent of the world’s manufacturing output in 2012. The countries above India but close to it, producing about 3 per cent of the world output, were Italy, France and Britain; the leaders were the US (21 per cent), China (18 per cent), Japan (11 per cent) and Korea (7 per cent). India’s ambition should be to leave the Europeans behind and join the Big Four in the next decade. To do so, Indian industry would have to grow at about three times the world growth rate — at 10-12 per cent a year. It is achievable, considering the last decade’s industrial growth rate of 8 per cent. But it would be inconsistent with India’s current GDP growth rate of 4-5 per cent since most of the demand must come from the domestic market. Modi must also address the causes of the downturn and stimulate overall growth. In this column, however, I will confine myself to manufacturing.
A good deal of this growth will be in industries where India has competitive strength. It is revealed by exports. India is the world’s largest exporter of cut gems and jewellery. Since India’s market share is 55 per cent in terms of value, 80 per cent in terms of volume and 90 per cent in terms of carats, it is unlikely to rise much; exports cannot rise much faster than world demand. But if India is to overcome competition from Chinese and East Asian gem-cutters, it must rid gem exports from bureaucratic hurdles and corruption. In particular, it must remove the import duty of 10 per cent on gold and gems, plus various cesses. Self-righteous bureaucrats will say that it would encourage wasteful consumption; but Indian citizens do not consider it waste, and they are the masters.
The next most important industrial export, surprisingly, is vehicles; last year, India exported close to two million scooters and motorcycles, half a million cars, three lakh autorickshaws and 80,000 trucks and buses. The international market for vehicles is highly competitive; some of our biggest manufacturers are foreign companies. They would quickly switch production abroad if they did not find India competitive enough. The basic strategy must remain keeping trade in vehicles free of duties and stopping customs from harassing exporters and importers. But it must also involve keeping our car parts industry competitive. The government must talk frequently with the exporters to resolve their problems quickly.
Electrical equipment and components are India’s third biggest industrial export item; but in the global market, India is a pygmy. The big guys in exports are China (16 per cent), Germany (12 per cent) the US (9 per cent) and Japan (7 per cent). Power equipment — rotors, transformers, capacitors, switchgear, cables, etc — is not difficult to produce; but Indian manufacturers cannot be competitive unless the government fixes and introduces competition into the power supply industry, which is largely a set of monopolies of state electricity boards. The UPA government tried two tactics to make the SEBs behave: it tried to use the power it generated itself to get some purchase on them, and it tried to induce private operators to set up mega power plants. Both tactics failed. The new government has to try out something else. It already has a bad idea, namely the Ultra Modern Super Critical Coal Based Thermal Power Technology, that Arun Jaitley floated in his budget. I criticized it in my column of July 11, and suggested that the government should, instead, look at the floating power plants that Wärtsilä has built for Jamaica and the Dominican Republic. It can move them from port to port, and sell power to only those states which reform their power sector and introduce competition in power generation. Gujarat has done so, so the Central government can sell it as much power as it wants from floating plants; Gujarat can then export the power to Sind and make some money as well as friends in Pakistan.
Last April, Narendra Modi said in an election rally in Jamshedpur, “The government in Delhi is such that it exports iron ore but imports steel. If you run your business like this, how will the country’s steel industry survive?” I think he was mistaken. India imposed a 30 per cent export duty on iron ore in 2011; more recently it has imposed a 5 per cent duty on pellets. The Indian steel industry has survived despite iron ore exports; so have the Brazilian and Australian industries. It is not particularly uncompetitive. Steel imports and exports are roughly the same — about $5-6 billion a year. In addition, we export steel products worth about as much.
The big problem is not foreign competition, but shortage of coal. Coking coal has been so short that no steel plants have been built in recent years; most of the industry’s expansion has come from sponge iron, which can be made with any coal. Coal India is the dominant coal producer and supplier. It is finding it difficult to increase coal production because the remaining reserves are in ecologically sensitive tribal areas. Coal is available abroad, but bringing it in would require considerable port capacity. Instead of making quick and naïve judgments, the prime minister should consult more widely and get some deeper, objective studies done in this area.
The Patents Act of 1970 abolished product patents in pharmaceuticals; that led thousands of small firms to copy foreign patents, and created a low-cost pharmaceutical industry which also found a big market abroad. That boom ended when India signed the Uruguay Round agreement and reintroduced pharmaceutical product patents in 2005. The smaller producers are still following the strategy of making patent drugs, but to keep out of trouble, many are now producing drugs whose patents have expired. Drug exports will continue, but they cannot grow much faster.
The last export industry of importance is engineering. India has low costs of inputs in this industry, but has only a 0.8 per cent share in world exports; it shows its technological backwardness. This is where Modi’s invitation to world manufacturers could make a difference. But before it can, the government would have to dismantle the niggling, detailed controls operated by the department of industrial policy and promotion on foreign investors. This is one department that survived and held out against all the reforms; aside from abolition of import licensing, it liberalized virtually nothing. The commerce and industry ministry is the one Modi should target and shake up; the gentle hand of Nirmala Sitharaman will not suffice. Modi has done well to announce to the world that Delhi has changed and foreigners are welcome. But words are not enough: action is necessary to dismantle the barriers that remain, which can only come from him.
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