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A New Industrial Policy for Building Back Better

COVID-19 and the containment policies adopted to address it have imposed a significant cost on the Indian economy. GDP is estimated to have contracted by 7.3 per cent in 2020-21. The loss of employment and incomes, as documented by multiple surveys such as the CMIE’s Consumer Pyramids Household Survey and the Azim Premji University Survey (2021), are a cause of significant concern. Importantly, the impact of the COVID-19 shocks has not been uniform across the workforce. A disproportionate burden of the shock has been by borne by those engaged in low paying, precarious and unstable work arrangements in the informal sector. In addition to loss of employment, the pandemic is likely to have resulted in a significant deterioration in the quality of employment.

Resolving the jobs challenge calls for a radical reorientation of India’s growth strategy to make the growth process more employment intensive and inclusive. This requires focusing on industries and activities that are critical for job creation. Whilst it is widely believed that growth is the principal instrument of job creation, the Indian experience has demonstrated that the sectoral composition of the growth process determines the quantum and nature of employment opportunities created. India’s idiosyncratic structural transformation marked by a shift straight from agriculture to service led growth, leapfrogging the phase of manufacturing growth has generated relatively limited opportunities of well-paid employment or good jobs for those at the bottom of the education and skills ladder. As we navigate out of this pandemic, a focus on creating good jobs for this category of workers must occupy centre-stage. Facilitating the structural change required for this purpose calls for an industrial policy.

For India, which has not had an industrial policy since the implementation of the economic reforms of 1991 that marked a transformational shift from the ‘command and control’ stance of economic policy, the timing for an industrial policy appears opportune. Broadly, this would entail a set of policies designed to encourage the development and growth of certain sectors of the economy with the objective of generating productive employment opportunities. Identification of relevant sectors is critical for the success of industrial policy and cannot be done in an ad-hoc manner. It requires a structured framework. For instance, Albert Hirschman’s (1958) proposal of emphasizing specific industries which have particularly strong backward and forward linkages with the rest of the economy may offer such a framework. Additionally, to design an effective industrial policy, governments need to understand their competitive position with respect to other countries and the rest of the world. They need to identify products and industries that are in line with their current endowment structures (supply side factors) and those where there is a growing demand, both domestically and internationally.

Targeted public investment in infrastructure (roads, bridges, ports, airports, transit and rail, universal access to affordable broadband) coupled with investments in technologies and innovation which would enhance productive capacity across sectors would need to be a key pillar of an effective industrial policy.

One goal of industrial policy should be to encourage economies of scale by encouraging small firms to grow and become larger enterprises. Amongst other things, this will require effective cluster development strategies that allow clustering firms to derive ‘collective efficiency’ from local external economies.

While outlining the design and shape of a 21st century industrial policy for India is indeed an ambitious exercise, it is certainly one that merits greater attention in the policy discourse today. Questions around how policy makers can craft an industrial policy that is forward looking and welfare-oriented and one that not only addresses the good jobs challenge but also some of our most pressing social and environmental challenges deserves careful consideration.

This is an abridged version of the article by Dr Radhicka Kapoor, Senior Visiting Fellow, ICRIER. It first appeared in the June 2021 issue of CII Economy Matters. Click here to read the complete article.