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INDIA’S INDUSTRIAL POLICY: BEYOND PROTECTIONISM

Relevance: GS 3 – Effects of liberalization on the economy, changes in industrial policy and their effects on industrial growth.

Why in the News?

• The recent critique of India’s industrial policy highlights its perceived protectionist nature.
• Critics overlook the historical context where various countries, both developed and developing, have implemented protectionist measures.
• Protectionism has been utilized by nations to safeguard domestic industries and promote economic growth.
  • Critics fail to acknowledge that protectionist policies have been a common strategy for countries aiming to develop their industrial sectors.

Historical Evolution of India’s Industrial Policy

• India’s Industrial Policy Resolution was introduced in 1948, followed by subsequent refinements in 1956, 1973, 1977, 1980, 1990, and 1991.
• These policies, sometimes in the form of resolutions and at other times as statements, reflect the evolving economic priorities and challenges faced by the nation over time.

Purpose and Need for Industrial Policy

• Industrial policy serves as a guiding framework for government intervention in the economy, particularly in the industrial sector.
• Industrial policy serves to guide government intervention in the economy, often involving sector-specific incentives.
• The absence of a clear policy framework can either inadvertently facilitate or hinder economic developments, as evidenced by the Y2K software boom in India.
• However, singling out sectors for incentives can distort resource allocation, raising questions about effectiveness.

Components and Focus of Industrial Policy

• Traditionally, India’s industrial policies have encompassed various measures such as reservations for the public sector and small-scale industries, licensing for the private sector, import duties, export promotion subsidies, and incentives for balanced regional development.
• Despite the term ‘industry,’ the primary focus of industrial policy is often on manufacturing activities.
  • The etymology of ‘manufacture’ from Latin (‘manu factum’) suggests a process involving manual labor or craftsmanship.
  • India’s relatively abundant labor force provides a cost advantage, potentially making manufacturing competitive.
  • The presence of numerous skilled and unskilled workers implies the potential for efficient manufacturing processes without requiring extensive interventionist policies.

Perspectives on Industrial Policy

• The traditional argument for interventionist industrial policy includes import-substituting industrialization and protection of infant industries.
• Such policies may stem from distrust of the private sector, especially larger private entities, in fostering inclusive industrial growth.
• The debate surrounding industrial policy often intertwines with issues of private sector distrust and concerns over economic competitiveness.
• Global Adoption of Interventionist Policies:
  • Import-substituting industrialization and infant industry protection have been pursued by numerous countries worldwide.
  • This approach to industrial policy has been observed across different economies, including developed nations, highlighting its historical prevalence.
• Common Trajectory in Industrial Policy:
  • The historical trajectory of industrial policy, including interventionist measures, is not unique to any single nation.
  • It’s evident that many countries, irrespective of their development status, have traversed similar paths in industrial policy formulation and implementation.

Transition to LPG Policies

• Pre-1991, India faced criticism for its interventionist policies as the costs began outweighing the benefits.
• The advent of LPG (Liberalization, Privatization, Globalization) marked a shift towards more market-oriented economic strategies.
• Following liberalization in 1991, traditional industrial policy themes became obsolete as market forces gained prominence.

Impact of WTO Agreements

• WTO agreements like TRIMs (Trade-related investment measures) and SCM (Subsidies and countervailing measures) challenged traditional industrial policy tools such as local content requirements and export subsidies.
  • Tariff bindings and reductions under these agreements undermined efforts to protect infant industries.

Challenges in Sector Selection

• Choosing sectors for incentives often relies on static comparative advantage, which may not align with dynamic market realities.
• Static comparative advantage can lead to misallocation of resources in a rapidly changing global economic landscape.
  • Industrial policy must adapt to changing economic conditions and global trends to remain relevant.
  • Static comparative advantage alone may not suffice in guiding industrial policy decisions; a dynamic approach is essential.
• Sector-specific tax breaks may contradict the broader trend of removing exemptions.
• Across-the-board improvements and reforms, such as in infrastructure and labor laws, may render special economic zones (SEZs) and national investment and manufacturing zones (NIMZ)
  • While these zones may have been established to attract investment and stimulate manufacturing, their efficacy could be questioned in the presence of general improvements and reforms.

Criticism of India’s Industrial Policy

• Critics argue that India’s industrial policy, which emphasizes attracting foreign direct investment (FDI) without substantial tariff reductions, is protectionist.
• Some critics advocate for a laissez-faire approach, echoing the principles of Adam Smith, David Ricardo, or the Washington Consensus (an expression coined by John Williamson in 1989).
  • The complete French expression is ‘laissez faire, laissez aller, laissez passer’—allow to do, to go and to pass.
• Developed countries, particularly after the global financial crisis of 2007-08, have also engaged in formulating industrial policies for strategic purposes.
  • This broader approach challenges the notion of strict adherence to laissez-faire principles.
• Intellectual backing for state intervention in the economy is not lacking and can be traced back to historical debates such as those between physiocrats and mercantilists.
  • The dichotomy between state intervention and laissez-faire policies has deep roots in economic thought.

Keynes’s Evolution on Free Trade

• Initially, Keynes, like many Englishmen, upheld free trade as almost a moral law, viewing departures from it as imbecilic and outrageous.
• However, Keynes’s views evolved, as evidenced by his 1933 essay “National self-sufficiency,” where he delves into the reasons behind his shift in perspective.
• Reasons for Keynes’s Change of Mind:
  • Keynes’s change of stance on free trade was influenced by changing economic conditions and new evidence.
  • He famously remarked, “When the facts change, I change my mind. What do you do, sir?” indicating his willingness to adapt his views based on new information.

Intellectual Support for Interventionist Industrial Policy

• Critics who selectively criticize India for protectionism often overlook the strong intellectual tradition supporting interventionist industrial policy.
• Economists like Alexander Hamilton and Georg Friedrich List advocated for state intervention in economic affairs, challenging the pure laissez-faire doctrine of Adam Smith and David Ricardo.
• Relevance of Historical Economic Thinkers:
  • Hamilton’s “Report on the Subject of Manufactures” and List’s “The National System of Political Economy” provide valuable insights into the rationale for interventionist industrial policy.
  • List’s distinction between individual and national objective functions highlights the complexities of economic policy-making at the national level.

Implications for Welfare and Global Dynamics

• While interventionist industrial policy may lead to welfare losses on a global scale, the impact on individual countries’ welfare depends on various strategic and dynamic considerations.
• Kaldor-Hicks-Scitovsky compensations may not be feasible in the real world, complicating assessments of policy impacts.
• Broadening Perspectives
  • Critics and commentators should expand their reading lists to include diverse economic perspectives, enabling a more nuanced understanding of India’s policies.
  • India’s policy decisions may possess a rationale that goes beyond narrow interpretations of trade theory, emphasizing the importance of considering historical and intellectual contexts.

Source: https://www.newindianexpress.com/opinions/2024/Mar/14/sauce-for-goose-should-be-sauce-for-gander-too

Mains question

Discuss the evolution of industrial policy in India, analyzing the shift from protectionism to liberalization with respect to global dynamics and welfare implications. (250 words)