It is a puzzle that during India’speriod of higher catch-upgrowth, the share of manufac-turing remained around the

mid-teens. In most countries, dur-ing similar transitions it increasedto about 30 per cent. Our large po-tential market, demographic ad-vantage and ability to improviseand adjust (jugaad) have not so farresulted in higher manufacturinggrowth rates. What is changing?

During the post-Independenceimport-substituting regime Indianmanufacturing settled into a com-fortable high-cost, low-quality out-come in a protected market. Liber-alisation was an importcompetition regime that manufac-turing found diffi��cult to survivegiven its high costs and unfair gov-ernment subsidised competitionfrom China. After experimentingwith these unproductive extremes,the economy seems to be settlinginto a more sustainable regime,which I call ‘export competition’.

Manufacturing has to export,compete internationallyand, therefore, become ef-fi��cient. But it will be pro-tected from unfair com-pletion and helped todevelop economies ofscale under a broad set ofpolicies that lower costsof doing business.

For example, the various freetrade agreements (FTAs) that Indiahas entered into with East Asianeconomies have resulted in largenet imports into India. They are be-ing retooled for easier exports ofgoods and services in which Indiahas comparative advantage, even as

the general costs of production arebrought down.

Costs of doing businessThe focus on ease of doing businesshas seen India steadily climbing theWorld Bank rankings, althoughdeeper improvement is required.India’s advantages in technologycan be leveraged for this. E-gov-ernance helps coordinate acrossgovernment departments and re-duce logistics costs.

The compliance burden remainsvery high for Indian industry due tomultiple regulators but moves tocreate automatically populatedcentral repositories of informationthat all regulators can access can re-duce the burden. This is one-win-dow compliance.

Cross subsidisation is a majorsource of high costs for industry; inelectricity charges, rail freight orwater. Reforms are in progress thatwould replace price distorting sub-sidies with direct benefi��t transfersand income support for the poor. Aslower costs allow industry to ex-pand employment, the need for in-come support should fall.

India’s per capita income in 2017reached the level beyond whichprice-based interventions that dis-tort resource allocation are nolonger compatible with its WTO ob-ligations. Neither is industry spe-cifi��c support. Improving conditionsfor all industries is WTO compat-

ible. So, policy has to per-force shift into this mode.

GST led domestic integ-ration into one marketand continuous improve-ment in infrastructurelowers transport costs.There is systematic workon reducing the cost of

all factors of production for in-dustry. Labour law reform givesmore freedom in decision-makingand by reducing an unwieldy set oflaws into four codes again simpli-fi��es compliance. Eff��orts towards re-ducing the cost of capital have beencontinuing over the last decade.

The fi��nancial sector has reached alevel of reform and diversifi��cationwhere multiple sources of fundingare available and interest costs arecoming down.

Improvements in corporate gov-ernance and disclosure, which arein industries hands, are necessaryto further revive the corporatebond markets. After Covid liquidityis going to be plentiful, and there isno need for anyone to hoard it. In-dustry must pay supplierspromptly.

Trust mattersThe non-performing asset cycle to-gether with suspicions of publicfunds and resources beingsiphoned off�� by private promoterslead to sustained investigationsover the last decade that vitiatedthe atmosphere for industry. Buttoday while the Indian bankruptcycode has improved the credit cul-ture, the distinction between com-mercial and criminal losses is in-creasingly being understood andenshrined in law. For example, thePrevention of Corruption Act (1988)that defi��ned criminal misconductby a public servant to include ob-taining a pecuniary advantage for

anyone where no public interest isinvolved put many bankers underinvestigation. But it was modifi��edin 2018 so that a case is only possibleif assets are disproportionate to in-come. The 2013 Company Act hasalso been amended in 2020 to re-place criminal off��ences by civil onesthat can be settled with a fi��ne. Theaim is for policy certainty, withoutfl��ip-fl��ops such as retrospective taxa-tion. The government is committedto providing a broad smooth roadfor industry to run on.

More generally the Covid shockhas shifted policy-makers perspect-ives. They are ready to work with in-dustry to revive the economy. Aidfrom the government and regulat-ors can address current as well asold wounds, revive trust and helpsociety pull together once more.But it will be a combination of dis-cipline and support, not the old-style lobbying and special favours.

The world has realised that de-pending on one country is danger-ous. Diversifi��cation of supplychains from China is an opportun-ity for India. More generally, the ten-sions on the border are leading in-dustry and government to worktogether to build local clusters and

economies of scale, for example inthe pharma industry to reduce de-pendence on China. There is alsosome consumer boycott of cheapChinese goods.

Opportunities after Covid-19Covid presents challenges but thereare also opportunities for manufac-turing. Work-from-home can savecosts as can faster adoption of di-gital processes. Many new productshave been introduced in home ser-vices, consumer goods, edutech,and local startups. There is a switchfrom a service to a product — res-taurant meals to packaged food,barber services to electric hair trim-mers. The restructuring of the pub-lic sector towards providing publicgoods while business activities areprivatised will give many opportun-ities, as will agricultural reforms,for example in food processing .

But for the opportunities tomanifest industry has to act re-sponsibly to build a vibrant ecosys-tem. It has to invest in labour skillsand well-being, in local communit-ies through its CSR obligations,build supplier clusters with up-front payments to smaller fi��rms aswell as develop environmentallysustainable practices with zerowaste. When jugaad is no longeragainst obstacles, but part of a non-zero sum game in a growing eco-nomy, it can release a burst of cre-ativity and productive innovation.

The persistence of the virus is anunknown negative. Some indus-tries cannot recover until it passes.But micro-containment strategiesand gradual unlocks are keepingthe curve of infections down. Arbit-rary lockdowns that did the mosteconomic damage are less likely.Unlock 4 in early September clari-fi��ed there will be no restrictions oninterstate movement, so supplychains have a chance to recover.

The writer is professor IGIDR, Mumbai.This is an edited version of an addressto CII Northern Region on 25September. Views are personal

Despite current problems, there are a number of trends that suggest Indian manufacturing may be at the cusp of a turnaround

Hot and happening That’s the target for manufacturing in post-Covid times

Is there a manufacturing turnaround?

ASHIMA GOYAL