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Fahad Hasin's avatar

I agree with much of this while continuing to believe Industrial Policy is fraught with issues. I feel that the title is more provocative than the proposal. Much of what you are proposing is sound-headed factor reforms, as opposed to 'Industrial Policy'.

My definition of IP is government trying to forecast the key industries of the future, pick the winning sectors, and invest heavily with subsidies in those sectors & even specific firms. Labour reforms, policy coordination, and free trade are all general-purpose reforms that I very much support. R&D investment, I believe, is a part of innovation policy and I very much agree with what you are proposing if govt funds a broad spectrum of research in universities & private industries (see https://www.youtube.com/watch?v=4gqPR0veij0).

The two things that would qualify my definition of IP are PLIs and SEZs. Both exist in the Indian context, which means that India already _has_ an industrial policy, and it has hardly worked so far. I still have some hope from SEZs if they are done in a more decentralised manner (so much so that, at some point in 2022, I left my job to join 'Foundation for Economic Growth' which aims to help govt do this well - a story for another day!). See Yuen Yuen Ang's book on China escaping the poverty trap. It was a highly decentralised affair. The central government gave a broad mandate to raise private investment, and local governments went all out.

I think in the level of importance/impact, PLIs come last among these. I don't have very strong feelings about it. I have a slight non-preference for them given our poor state capability, but I'm fine with some trial and error. But these trial & errors make sense when there's action on the other 4 things also - in isolation, they can't do much. PLIs in India are currently a compensation/refund for the inflated cost of doing business. How about going to the root cause and fixing the indirect taxes? I know that's a long road and I'm ok with PLIs as an interim measure as long as there's some progress on other factor reforms.

You've hit the nail with SSRP. Note that this was also a particular kind of industrial policy (a bad one, yes). Which brings me to my larger point - I would argue that it shows that it wasn’t a lack of good Industrial Policy per se that held India back; rather, it was an active shackling of the markets. It was this belief that we can forecast what's and act on creating better outcomes for the poor in the economy (which is strangely the assumption in doing good IP also). So I think unshackling will pay a high dividend: land, labour, fixing the indirect tax mess, etc.

I also don't agree that “not having an IP is equivalent to having an IP for the current structure of the economy.” This doesn’t seem correct to me. Markets do change the structure of the economy when allowed to operate (even without IP).

As a side note, check out Rajan & Lamba's book "Breaking the Mould", where they argue that India should double down on services. I don't have a view, but plugging a review I had done for the book: https://open.substack.com/pub/fahadhasin/p/rethinking-indias-growth-path. Also, Ajay Shah & Amit Varma's recent ep on Industrial Policy: https://www.youtube.com/watch?v=lP1GIFO5ED8

Thanks for writing this much-needed piece. I hope it reaches the right people, like how your earlier piece may have influenced Surjit Bhalla :)

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Md Nadim Ahmed's avatar

Industrial policy often receives disproportionate attention in the media and policy discussions, even among those who acknowledge its necessity. This focus can be misleading, as it often overshadows more fundamental issues that require urgent attention.

It is unsurprising that Indian politicians are more interested in impressing foreigners and Non-Resident Indians (NRIs) than addressing the core problems of their own country. Instead of chasing the latest trends in industrial policy, India should prioritize creating an efficient and predictable legal system. This involves ensuring law and order by investing in law enforcement and devolving power to local cities. Additionally, liberalizing the electricity and agriculture sectors is crucial for fostering growth and development.

India must avoid getting sidetracked by Western fads and concentrate on solutions that offer the most significant impact. While hiring more judges or addressing teacher absenteeism in schools may not be as glamorous as discussing industrial policy with American friends, these are the initiatives that truly matter for the country's progress. A nation that cannot maintain the rule of law and simplify its tax system has little hope of success, regardless of the relevance of industrial policy.

The sophistication of India's export basket is more a testament to the pathologies of its policymakers than to any success in industrial policy. If India had enabled low-skill manufacturing and agriculture to flourish, it would have achieved much greater success. A case in point is Bangladesh, my home country, where despite a more incompetent and despotic political class, per capita income is comparable to India's, even though Bangladesh started from a lower base and has a lower average IQ.

By focusing on the fundamentals—rule of law, efficient governance, and strategic liberalization—India can build a stronger foundation for sustainable growth and development.

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