India has witnessed extraordinary growth in the information technology (IT) sector in the recent decades.
In this context, it is essential to understand, in comparison, the manufacturing sector - the shortfalls, potentials and the measures needed.
What led to the IT sector's growth?
There is a widely-held myth that growth in the IT sector was possible as the sector had no intervention from the government.
But in reality, the government, at the outset, did the necessary things, needed for IT' sector's success.
Internet - The government spent public money in creating high-speed internet connectivity of global standards with the U.S. for the IT software parks.
This was done years ahead of telecom modernisation in India.
Creating islands of high-speed connectivity for a nascent industry independent of the telecom system was a bold move then.
This enabled the seamless integration of the Indian IT industry into the US market.
Trade - The government 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.
It also gave it all the incentives that were being provided to exporters of goods.
This enabled the Indian IT industry to get integrated in the dynamic US market without any disadvantage.
Regulations - In addition to the above, 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 regulatory burden that these impose.
Human capital - Further, the IT sector had the benefit of low-cost high-value human capital.
This was actually created by the investments made a generation earlier in higher scientific and technical education.
What do these imply?
Certainly, the IT success story was possible only because of planned government interventions and did not happen all on its own.
So the key lesson is that the state can take steps to nurture competitive advantage in a sector; in manufacturing too.
But there is a false ideological divide of ‘state’ verses the ‘market’ and a growing faith in the latter.
In effect, this argument is hampering the task of replicating the IT success for manufacturing.
In comparison, to boost manufacturing, China created world class infrastructure.
This included Special Zones along the coast and even housing for workers.
It supported them in getting foreign and domestic investment in manufacturing.
Within a few years, it started becoming the factory of the world and now becoming an economic superpower.
What is the challenge in India?
In India, development of industrial areas has been the responsibility of the States.
But there exists the political need to spread scarce resources equitably across regions.
So the creation and maintenance of globally competitive infrastructure for manufacturing remains a challenge.
The Central government did recognise this problem, but efforts at addressing this have been feeble.
Moreover, the efforts are constrained by an excessive faith in the potential of private investment.
What are the shortfalls in the approach?
SEZs - 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.
With these, the government provided a favourable regulatory regime.
But it assumed that the private sector would develop these zones successfully.
The private sector succeeded in the IT sector as the land and investment needed were modest.
But other than the IT SEZs, only few manufacturing ones with scale really took off.
The private sector did not have the scale to create globally competitive physical and social infrastructure for manufacturing to be competitive.
Here, if the Centre in partnership with the States had taken the lead in assembling land and investing adequately, the outcome could have been quite different.
The private sector could have been roped in only where it had the potential to.
Industrial Corridor - In 2005, the ambitious Delhi Mumbai Industrial Corridor was set up.
The initial decision was to get the private sector to invest and develop industrial areas along the Delhi-Mumbai Dedicated High Speed Freight Corridor.
But it was eventually found that private investment on the scale needed would not be forthcoming.
The need for Central government financing for the trunk infrastructure was soon realised, but is yet to be developed.
This is the case with Kolkata-Amritsar and Bengaluru-Chennai Industrial Corridors as well.
The same applies to the recently proposed idea of developing large economic zones with world-class infrastructure around sea ports.
What should be done?
A successful IT park equivalent for manufacturing will have to be developed.
The physical and social infrastructure should be comparable to the best in the world and help connect to the global markets seamlessly.
Workers’ housing which is key to productivity should become an integral part of industrial area development.
[The software SEZs having housing and workplaces within walking distance had contributed significantly to its success.]
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 - such economies of scale have 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 the global manufacturing supply chain.
The economic returns and job creation from such investment will be tremendous.
