The slow growth of the manufacturing sector has been a matter of concern for quite some time. The Congress government ceremoniously inaugurated a national manufacturing policy in 2011. When he fought the 2014 general elections, the current prime minister coined the slogan, "Make in India". Although he did not specify what he wanted people to make, it was implicit that he wanted to attract more industry to India. It has not happened in these three years; industrial growth continues to languish below 5 per cent a year. What can be done about it?
Before that question can be answered, a more basic question needs to be addressed, namely, why has India's industrial growth been so slow? Isabelle Joumard of OECD did a good bit of work on this and related problems before she moved on recently to other things. She and her colleagues found that productivity of labour employed in Indian industry was low. Chinese productivity is 1.6 times as high; in Brazil, it is almost three times India's. Productivity in industry is even lower than in services within India: manufacturing would find it difficult to compete for labour with services, which have grown much faster.
This low productivity is closely connected with the predominance of the 'unorganized' sector - more specifically, firms employing 10 or fewer workers. They account for almost two-thirds of industrial employment in India, against 9 per cent in Brazil and 14 per cent in OECD. Everywhere, successful firms grow bigger; the strange thing is that small firms in India do not grow. Non-agricultural employment grew by 51 million between 2004-05 and 2011-12; but only 6 million of it was in manufacturing, and almost all of it was in small firms. It looks as if even successful firms in India concentrate on staying small; if an industrialist makes a lot of money and decides to expand, he will set up another small firm.
OECD calculated countries' revealed comparative advantage from the balance of trade in various product groups. It found that out of 12 groups, India had comparative advantage in just two groups. One was, predictably, textiles; the other, surprisingly, was construction, which is not an export industry. In comparison, China had comparative advantage in seven groups; even Thailand had comparative advantage in five.
The low productivity is also due to the poor standards of education and training. India has done consistently badly in PISA scores; they are 300-400 in Himachal Pradesh and Tamil Nadu, against 400-500 in OECD countries and 500-600 in China. Indian governments do not let private owners of schools make profits, so owners minimize costs and employ cheap and unskilled teachers who give low-quality education.
Wages in India are low; but strangely, manufacturing in India is more capital-intensive than in comparable countries. It is as if industrialists avoid employing cheap workers and prefer to use machines.
One cause of low productivity is poor infrastructure. India's expenditure on infrastructure in 1999-2011 was about 5 per cent of its GDP; China spent almost double as much as proportion of its GDP, which was itself four times India's. Transmission and distribution losses in India are more than 20 per cent - higher than in any comparable country. State-owned power companies are inefficient and cannot supply electricity round the clock; they give priority to domestic consumers, and the brunt of power shortages falls on industry. A quarter of the power produced is unaccounted for - generally stolen. Industry cannot get enough electricity from the public power supply, so it supplies itself electricity from small, high-cost captive oil-based generators
One obstacle to industrialization is well known: red tape. It was recognized long ago; the solution the government homed in on was special economic zones. The first SEZ was set up in Kandla in 1965; 579 SEZs were sanctioned, 160 of which were exporting. And the total employment in them was a million - in a country with 1,250 million people and 600 million workers. Recognizing that SEZs had failed, the government decided in 2011 to go in for national investment and manufacturing zones: they would in effect be self-governing towns of at least 5,000 hectares with first-class infrastructure and transport connections. They would be free of the constraining labour laws. Of these zones, 17 have been sanctioned - eight of them along the Delhi-Bombay industrial corridor.
World Bank studies have repeatedly found India to be low in ease of doing business. This is not because of outdated laws; there are states and cities in India which are efficient in one form of administration or other. Bombay allows pretty quick setting up of new businesses, and Patna's procedures for doing so are quite efficient. Ahmedabad issues building permits pretty quickly, and it is easy to close a business in Hyderabad. But government is expensive in India: a small, honest businessman would pay over 60 per cent of his profits in various taxes in India, against 20-40 per cent in Canada, Indonesia or South Africa.
Labour laws are made by both the Centre and the states; they are so complex that it is generally easier to bribe labour inspectors than to comply with all the laws. The Centre and the states between them have fixed 1,171 minimum wages. If a worker is dismissed and goes to court, his chances of reinstatement are quite high. Provident fund contributions add a quarter to the wage - almost as much as in many industrial countries. Consequently, even in the 'organized' sector, the proportion of workers employed on contract, and hence not protected by labour legislation, is 70 per cent.
India has invested too little in transport infrastructure. Everywhere, water transport is the cheapest, rail transport next, and road transport most expensive; in India, 60 per cent of freight and 85 per cent of passengers move by road. Almost a quarter of the freight in China moves on water, against none in India; half of the freight in the United States of America moves by rail, against 37 per cent in India. Indian railways are quite efficient, but India has just not invested enough in them, or in coastal shipping.
Based on their observations, summarized above, Isabelle Joumard and her colleagues prepared a list of 19 things to do. They go beyond industry; if implemented, they would make India a well administered country. Of them, India has moved only on goods and services tax; there too, complexities were introduced at the last moment which will make it pretty useless. Is it because India's democratic rulers cannot even read an IMF paper in simple English? Is it because the good ideas did not come from an indigenous mind? Is it because it is more fun to have a fight about the script in which names of railway stations are to be written? Whatever the reason, it is difficult to avoid the suggestion that our governance is not improving itself; some reform might make it work better. The reform must carry the rulers with it. One way of doing it may be a third administrative reforms commission. But seeing how little the first two commissions changed things, that is not very promising. Unless there is a will within the government, recommendations, however well conceived, will achieve very little.
