Building World Champion Brands: Time for a recalibration of our industrial policy?

What role should the government play in supporting private-sector firms? One school of thought is that it should do nothing. That view has gone out of fashion recently with the return of industrial policy. Globally, governments are using all kinds of intervention from subsidies to equity investment to support prices to favour some firms (most often, domestic against foreign). India has had an interventionist government since Independence. The world has returned to industrial policy but we never quite left it.

For all its use of industrial policy over the decades, India has been unable to substantially raise the share of manufacturing to GDP to anywhere near the aspirational level of 25 per cent. And it has not succeeded in creating a world-beating manufacturing sector. The secret to global competitiveness is cost. If the basic factors of production—land, labour and capital—are expensive, industry will not be competitive. In India, policy intervention has made all three unnecessarily pricey. The free market wallahs are right on fundamentals—land, labour and capital markets need to function freely without government intervention. Only competitive markets deliver a cost advantage.

The alternative interventionist strategy would require government to control all three markets and repress them. Authoritarian China and perhaps Vietnam use that strategy. But, in a democracy, no government can force farmers to sell their land for a pittance, or disallow labour from organising or keep interest rates artificially low which makes savers suffer. The competitive markets option is the only realistic path.

There is another factor that affects cost, namely scale. As a general principle, the larger a firm, the lower its costs. It is this which has prompted a return of industrial policy. If certain firms or industries become very large and cost competitive on that account, it is difficult for new entrants to even try and compete. In the real world, China has built such massive scale across industries—whether it is engineering goods, automobiles, solar power infrastructure, processing of critical metals—that firms from other countries are unable to compete. That China has used all forms of government support to achieve such scale makes others believe that industrial policy is the only way forward.

There may be an element of truth in this for some industries. But it is important to keep in mind that industrial policy can end up creating white elephants at a great loss to an economy. In order to succeed, it has to be well targeted and has to subject beneficiary firms to strict discipline. The fact is that only one kind of industrial policy succeeds: the one which forces firms to compete in global markets. China, Korea, and Taiwan have shown this in no uncertain terms.

Indian-style industrial policy is more focused on protecting domestic firms from import competition. Or at promoting firms in non-tradable sectors, like infrastructure. Both sets of firms only seek to conquer the Indian market. The closest India has come to global ambition is through the PLI scheme which encourages scale but that is limited to lower value-added goods in a very few sectors, not products or brands.

If India wants to use industrial policy effectively it must focus on either the capture of global markets or the scaling of technological frontiers. For the latter, government can support funding R&D. China’s government invested hugely in carmaker BYD’s innovation. For the former, it can give financial incentives subject to a firm showing a growing market share overseas (not just in India). Of course, neither of these will yield results without accompanying reform of factor markets.

India needs its own Samsungs, BYDs and TSMCs. National champions must become world champions. For that, a recalibration of our industrial policy approach may be necessary.