Replicating The IT Success In Manufacturing

One of the widely-held myths about the extraordinary growth achieved by the information technology sector in India has been that this was possible as the sector remained below the radar the government and, therefore, left alone. The truth, however, is the exact opposite.

Information technology (IT) succeeded because the government, at the outset, did the necessary things, needed for success. Drawing lessons from this experience is essential when trying for comparable success in manufacturing. What did the government do right then?

The government spent public money in creating high-speed internet connectivity of global standards with the US for the IT software parks. This was done years ahead of telecom modernization in India. Creating islands of high-speed connectivity for a nascent industry independent of the telecom system was a bold move.

This enabled seamless integration of the Indian IT industry into the US market. For the IT value chain, Indian firms could as well have been located in the US.

The government then brought trade in services into the regulatory framework of imports and exports. It allowed the IT industry to import duty-free both hardware and software and also gave it all the incentives that were being provided to exporters of goods.

This enabled the nascent IT industry to get integrated in the dynamic US market without any disadvantage, especially in terms of hardware and software costs.

In addition, the IT industry was able to function under the Shops and Establishment Act. It was, therefore, not subject to the over 40 laws relating to labour and the onerous regulatory burden these impose.

Further, the IT sector had the benefit of low-cost high-value human capital created by the investments made a generation earlier in higher scientific and technical education. Without all these, the IT success story would not have occurred.

The key lesson is that the state can take steps to nurture competitive advantage. The false ideological divide of ‘state’ verses the ‘market’ and growing faith in the latter has been coming in the way of India replicating this for manufacturing.

China created world class infrastructure, including housing for workers, in its Special Zones along the coast. It supported them in getting foreign and domestic investment in manufacturing. Within a few years, China started becoming the factory of the world. It is now becoming an economic superpower.

Feeble effort

In India, development of industrial areas has been the responsibility of the States. Given the political need to spread scarce resources equitably across regions, the creation and maintenance of globally competitive infrastructure for manufacturing remains a challenge. The Central government did recognize this problem. But its efforts to address it have been feeble and constrained by an excessive faith in the potential of private investment.

First, the Special Economic Zones (SEZs) were conceived and promoted from the year 2000. These had a zero import duty regime along with no taxes on profits. While the government provided a favourable regulatory regime, it assumed that the private sector would develop these zones successfully. But other than the IT SEZs, few manufacturing ones with scale took off.

The private sector succeeded in the IT sector as the land and investment needed were modest. But the Indian private sector just did not have the scale to create globally competitive physical and social infrastructure, including workers’ housing, for manufacturing to be competitive.

If the Centre in partnership with the States had taken taken the lead in assembling land and investing adequately and had got the private sector to come in only where it could, the outcome could have been quite different.

In 2005 came the ambitious Delhi Mumbai Industrial Corridor. Here again, the initial decision was to get the private sector to invest and develop industrial areas along the Delhi-Mumbai Dedicated High Speed Freight Corridor. It then took some years to find out that private investment on the scale needed would not be forthcoming and to accept the need for Central government financing for the trunk infrastructure.

Even in the most advanced project under the Corridor, it would still be a while before the first industrial unit would get going. In addition, Kolkata-Amritsar and Bengaluru-Chennai Industrial Corridors were also announced. More recently, the idea of developing large economic zones with world-class infrastructure around sea ports was mooted by the former Vice-Chairman of the NITI Aayog.

Still in the works

A successful IT park equivalent for manufacturing, where the physical and social infrastructure are comparable to the best in the world and one that helps connect to the global markets seamlessly, is still by and large work-in-progress.

Workers’ housing, the key to productivity, is yet to become an integral part of industrial area development, whereas software SEZs have housing and workplaces within walking distance. In addition, such an industrial area needs to be large enough to have the critical mass for generating positive externalities and the increasing returns to scale that follow. This has been the key to China’s success, where such economies of scalehave resulted in unbeatable prices for a wide range of manufactured products.

India needs to build new and large world-class manufacturing areas speedily, especially in the industrial corridors and along the ports. These are critical for the competitiveness needed for being part of global manufacturing supply chain. India can and must find the resources for this. The economic returns and job creation from such investment will be tremendous.―The Hindu Business Line