[Editorial Analysis] To replicating the IT success in manufacturing

Mains Paper 3: Economy

Prelims level: Special Economic Zones

Mains level: IT success in manufacturing

Context

• 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.

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.

Implication

• 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.

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.

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.

Way forward

• 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.

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Prelims Questions:

Q.1) LCA Tejas, is a/an indigenously designed

a) Combat aircraft

b) Electric motor vehicle

c) High Performance Diesel

d) Solar Cell

Correct Answer: A

Mains Questions:

Q.1) Explain the replicating the IT success in manufacturing. Comment.

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