Will an industrial policy, where a handful of people think they know what’s best for the nation, work in India today?
The old way of thinking about industrial policy was with distrust of markets and belief in the ability of a few smart people — mostly men — to figure out how resources ought to be used. We know in India they created a lot of inefficiencies.
But it wasn’t all bad. It also created a new business class. It created certain capabilities on which a lot of current growth is really based.
As most countries have found, it’s a mixture of providing support to industry when they need it along with sufficient market discipline.
But it also created rent seeking, the effects of which we can see even today.
Of course. But show me a country that has never had rent seeking and I’ll show you a country that has never developed. This was how the west developed. Development is a messy process. The idea that if you simply get markets to work and the rest will take care of itself is an idea that’s been disproved by historical evidence many times over. The successful countries are ones that are able to channel the rents in a productive way.
The real debate is not whether to have an industrial policy but how to improve it. It cannot be a top-down process but a process of collaboration, coordination, dialogue with the private sector where the government understands that the necessary information is all out there in businesses. A lot of this is going to happen regionally, at the state level.
The other issue is of low productivity of industry in India…
That’s primarily because India has a large labour that is unskilled. So, even though you have highly skilled people in business services, most people don’t have the kind of skills needed to be productive. You need education, infrastructure, skills to develop. This is going to take time.
But should the Indian government be wasting time on industrial policy or on providing education and healthcare that helps a large mass of people?
Governments do many things. The issues you mention, I would put them under social policy. They also should have growth policies. The question is what should your growth policy be?
If you tell me that growth policy is to get out and let markets do what they do, that hasn’t really worked very well.
So, is the theory of free markets now over?
As a matter of theory it is. But as a matter of practical policy it still exerts a lot of pull on policymakers’ mind. Countries that have done the best are the ones that have creatively combined markets and collective action.
How will that apply to India?
India needs to enhance the quality of institutionalised dialogue with business, like that between CII and the government but that needs to go deeper. The second thing is to learn from experimentation that has gone in the states of India.
Everybody points to Gujarat as a state, where because of the identity of the chief minister, it’s an environment where a lot of things are happening as he can work out deals whereby new investments can take place. And the third thing is to have a competitive currency. Without it, no amount of industrial policy can do any good.