Industrial policy must focus on small and medium-scale firms,
- The industries need to be very carefully selected.
- Many of the industries currently chosen to be under PLI (production linked incentives) are highly capital- and skill-intensive. So the goal of job creation for our massive numbers of unskilled workers is unlikely to be met.
- Even in Japan and South Korea, where industrial policy has been otherwise successful, it has often mainly helped large firms. But for creating jobs, the focus has to be on small and medium-scale firms.
Goal of industrial policy
- Job creation or even economic growth may not always be the main goal of industrial policy.
- In a world of geopolitical conflicts and supply chain disruptions, national security is often considered a major goal.
- Processing silicon downstream would have been more consistent with India's productive capacity and would have also created more jobs.
- For many years even the US has concentrated more on chip design than on fabrication of advanced chips.
Major players
- South Korea and Taiwan used the discipline of success in export markets to prod the firms supported by their industrial policy to keep to intemational standards of quality and cost-con- sciousness.
- They followed a stick-and-carrot policy: The stick of export market discipline and the carrot of generous credit subsidies.
What changes are required?
- Soft industrial policies need to be customised to local decentralised contexts, particularly when you want to help small and medium sized firms. Unfortunately, Indian politicians and bureaucracy are more comfortable with "top- down" over-centralised policies.
- Nevertheless it is important to reiterate that the usual objection of trade and other economists that industrial policy involves "picking winners" and that it is impossible for a government bureaucracy to do so is quite misleading.
Conclusion
- In the presence of uncertainty, it is inevitable that some projects backed by the govemment will fail. In this respect, the government is no different from the private sector. The relevant question is whether enough of the projects backed by the government will succeed and produce the social surplus to pay for the failures.
- Apart from renewable energy technologies (solar, wind and geothermal power) both in generation and storage, the focus needs to be on examples like bioplastics, decentralised miniature electric grids, technologies of drip irrigation and rainfall harvesting, the reinforcement of sea walls, green energy-powered three-wheeler public transportation, and so on.
- So support for industrial policy has to be nuanced, multi-faceted and vigilant in its disciplining functions.