THE REVOLUTION WE MISSED

Times of India, Apr 18, 2004

With each passing day we continue to watch China 's mesmerising success in creating millions of low-end manufacturing jobs through the export of toys, shoes, clothes, and all the things we need to live our daily life. We also observe the striking success of Indians in exporting knowledge services to the global economy.

Seeing these phenomena some Indians insistently ask, are we going to skip the industrial revolution and jump from an agricultural to a services economy? The question, not surprisingly, frightens people because the rest of the world has evolved from agriculture to industry to services, and India appears to have missed the middle step.

Karl Marx predicted that the railways would usher in India 's industrial revolution as they did in many Western nations. They didn't. After Independence , Nehru attempted an industrial revolution via the state. He didn't trust private entrepreneurs, so he made the state the entrepreneur, and not surprisingly, he failed. Today, whether our fast growing services can transform the lives of our millions is debatable, but the desirability of creating manufacturing jobs is not. It is a pity that we are losing the opportunity because of bad policies.

It is especially heartbreaking because we have come a long way since 1991 in improving our competitiveness -- there has been a telecom revolution; interest rates have come down and capital is plentiful; our highways and ports are improving; real estate markets are becoming transparent. It's also true that a few large companies in a few sectors have become globally competitive, but that's not enough to create a revolution. Hence, our exports are a paltry $55 billion compared to China 's $400 billion.

There are many reasons for our industrial failure, but the silliest and most hurtful one is that 670 industries in India are still reserved for small (SSI) companies, and they are unable to compete against the large firms of our competitor nations. They make simple things like pencils, boot polish, candles. We now import these products freely, but we don't allow our big companies to make them. We could create millions of new jobs by exporting these products, as the Far East nations have done. But the government is afraid to touch the ‘‘SSI holy cow'' as it fears a powerful lobby. The truth is that this vested interest faded long ago and there is little incentive left in being an SSI. In recent years, around 150 industries have been de-served and there was no adverse reaction from anyone. The only vested interest left is the department of small-scale industries.

Certainly, our entrepreneurs face other problems: electric power is less reliable and costlier than in competitor nations; octroi/check nakas keep our trucks waiting for hours; excise and import duties may have come down, but their cascading effect (tax on tax) burdens Indian manufacturers; our labour laws continue to destroy our work ethic and scare entrepreneurs from hiring workers -- if you can't fire a bad worker and can't close your factory then you will be hopelessly uncompetitive. Finally, ‘‘licence raj'' may have gone but ‘‘inspector raj'' is well and alive; the ‘‘ midnight knock'' from an excise, customs, labour, factory inspector haunts many an entrepreneur.

Some of these obstacles are more daunting, such as labour reform and power, and will be more difficult to overcome. But scrapping SSI reservations is an easy thing to do, and should be in the manifesto of all parties. Whoever wins this election and removes this silly anachronism could create India 's industrial revolution and go to glory.