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).
Pretty much agree with everything. Factor level reforms are sorely needed.
I am still exploring research here, but I am still leaning into the whole government picks winning industries/tech. China did the same thing with their 16 Megaprojects with good amount of success.
I think IP is a case of trying to throw everything at the wall and see what sticks. And with no IP, your IP tends to be what is dictated by the global market. So if China decides to pursue overproduction, unless you respond correspondingly your manufacturing is getting decimated. Check out Matthew Klein's "Trade Wars are Class Wars" for an elaboration of this argument. There are more nuanced arguments for this as well, but that book is a good start. See this article by Michael Pettis for a different perspective: https://carnegieendowment.org/china-financial-markets/2024/07/which-country-should-design-us-industrial-policy. That's US specific, but a modified argument could be made for India too.
I do kinda agree with Rajan & Lamba on their service strategy. This aligns with Joe Studwell's experience in his book "How Asia Works". Basically, export anything that you can, be it manufacturing or services. That gives you a competitive edge in international markets. And the flip side is that manufacturing is no longer as labor intensive as it was earlier because of all the automation -- other than industries like textiles.
Agree on the PLIs compensating for inflated cost of doing business. Nothing much to say there.
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.
That's an unfair criticism. I don't think anyone disagrees that fundamental issues are more urgent. But reforms of such things in a country as big and diverse as India requires time.
Focus on IP pays dividends. State led industrialization was modestly successful even though India was poor after independence. If labor laws were less stringent, there might be even more successes. This would occur in the same environment where the same fundamental issues existed.
Creating an efficient legal system is riddled with political minefields. As much as everyone wants it, there are constitutional challenges among others. So what do you do? Just keep waiting until the legal system is fixed? Something like a SEZ allows you to leapfrog that challenge for some time at least.
Again, why do you think that teacher absenteeism isn't being worked on? Uttar Pradesh saw the biggest jump in its learning scores after the new government cracked down on teacher absenteeism. While these issues are being resolved, attracting industry must occur concurrently. Even the tax system has been simplified with the GST. It should be simplified more, but it is an improvement over what existed just 7-8 years ago.
The fundamentals are always important, but they're a continuous work in progress.
> Creating an efficient legal system is riddled with political minefields. As much as everyone wants it, there are constitutional challenges among others. So what do you do? Just keep waiting until the legal system is fixed? Something like a SEZ allows you to leapfrog that challenge for some time at least.
Indian SEZs are nowhere near as radical as the Chinese ones. The Chinese were allowed to do whatever they want except for national security stuff. Indian SEZs still have to interface with the Indian legal system. The Modi government also abolished the ability for third country arbitration which had a chilling effect on FDI.
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 :)
Pretty much agree with everything. Factor level reforms are sorely needed.
I am still exploring research here, but I am still leaning into the whole government picks winning industries/tech. China did the same thing with their 16 Megaprojects with good amount of success.
I think IP is a case of trying to throw everything at the wall and see what sticks. And with no IP, your IP tends to be what is dictated by the global market. So if China decides to pursue overproduction, unless you respond correspondingly your manufacturing is getting decimated. Check out Matthew Klein's "Trade Wars are Class Wars" for an elaboration of this argument. There are more nuanced arguments for this as well, but that book is a good start. See this article by Michael Pettis for a different perspective: https://carnegieendowment.org/china-financial-markets/2024/07/which-country-should-design-us-industrial-policy. That's US specific, but a modified argument could be made for India too.
I do kinda agree with Rajan & Lamba on their service strategy. This aligns with Joe Studwell's experience in his book "How Asia Works". Basically, export anything that you can, be it manufacturing or services. That gives you a competitive edge in international markets. And the flip side is that manufacturing is no longer as labor intensive as it was earlier because of all the automation -- other than industries like textiles.
Agree on the PLIs compensating for inflated cost of doing business. Nothing much to say there.
Oh, and this piece got picked by Swarajya :)
https://swarajyamag.com/economy/tariffs-and-protectionism-are-not-a-plan-india-needs-robust-industrial-policies
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.
That's an unfair criticism. I don't think anyone disagrees that fundamental issues are more urgent. But reforms of such things in a country as big and diverse as India requires time.
Focus on IP pays dividends. State led industrialization was modestly successful even though India was poor after independence. If labor laws were less stringent, there might be even more successes. This would occur in the same environment where the same fundamental issues existed.
Creating an efficient legal system is riddled with political minefields. As much as everyone wants it, there are constitutional challenges among others. So what do you do? Just keep waiting until the legal system is fixed? Something like a SEZ allows you to leapfrog that challenge for some time at least.
Again, why do you think that teacher absenteeism isn't being worked on? Uttar Pradesh saw the biggest jump in its learning scores after the new government cracked down on teacher absenteeism. While these issues are being resolved, attracting industry must occur concurrently. Even the tax system has been simplified with the GST. It should be simplified more, but it is an improvement over what existed just 7-8 years ago.
The fundamentals are always important, but they're a continuous work in progress.
> Creating an efficient legal system is riddled with political minefields. As much as everyone wants it, there are constitutional challenges among others. So what do you do? Just keep waiting until the legal system is fixed? Something like a SEZ allows you to leapfrog that challenge for some time at least.
Indian SEZs are nowhere near as radical as the Chinese ones. The Chinese were allowed to do whatever they want except for national security stuff. Indian SEZs still have to interface with the Indian legal system. The Modi government also abolished the ability for third country arbitration which had a chilling effect on FDI.
Exactly my point. The SEZs could be improved a lot more which is a form of industrial policy.