Government of India should not Make in India

Samir Saran|Vivan Sharan

The government should remain a licensor, regulator and adjudicator where neither capital nor technology are in constraint and should not make in India

 Make in India, Horse, Parade

Make in India during the Parade

Source: TopCount

Make in India’s greatest threat is the ubiquitous government-run enterprise itself is recording historically high investments in technology-oriented industries such as telecom and over the top (OTT) services that ride on telecom networks such as financial technology and e-commerce.

The latest infusion of Rs47,700 crore by UK-based telecom giant Vodafone Plc. into its Indian arm is indicative of the fact that the Indian market remains much coveted despite the headwinds to global growth. Manufacturing investments are also targeting the tech-hungry Indian consumer.

Chinese telecom giant Huawei will begin manufacturing smart phones in India this year, the 40th such manufacturing investment in the country in the past two years alone. With such investments and parliamentary consensus on the GST, one may be tempted to conclude that ‘Make in India’ is on track. This may be premature.

India’s transition from an agricultural economy to a service economy has posed a conceptual challenge for many who see industrialisation as the only way to create jobs. Industrialisation requires best-in-class infrastructure, cheap energy and a skilled workforce, all impossible prerequisites to fulfil in the short or medium term. But the ‘digital economy’ offers a way out.

While productivity gains from automation and digitisation have driven industrial growth in advanced countries over previous decades, their effects are not fully felt here.

The digital economy can potentially mobilise millions of Indians, constituting the ‘informal workforce’, bringing them within a more productive fold. India’s biggest challenge is also its best opportunity: it has a large, young and untrained workforce that can intuitively understand applied technology, if given early exposure.

In fact, India can extract greater relative gains from the digital economy than its advanced country counterparts. Real income growth in advanced countries requires sustained and fundamental innovation whereas India can harness incremental innovation towards higher rates of growth (mostly owing to a favourable demographic).

But continued innovation support through private sector investments is not inevitable. Many policymakers mistakenly believe that India cannot be ignored as an investment destination. Nothing is inevitable.

Conversely, Make in India’s greatest threat is the ubiquitous government-run enterprise itself. And this is borne out in a number of technology-oriented industries; which is worrying as successive governments have first created favourable conditions for investments and then jeopardised them.

For instance, the telecom industry, often cited as an example of successful liberalisation, finds itself at a crossroads. It is dependent on falling voice call revenues despite enough global precedent to show that data revenues are the future. The industry lacks the bandwidth to deliver affordable data.

And there is policy inertia to address this, partly due to the existence of BSNL. Policymakers have hesitated from undertaking comprehensive reforms around key challenges such as Right of Way regulations, hoping that BSNL’s networks will save the day. And BSNL has not delivered the goods: the quality of its Internet infrastructure and service ethic are reminiscent of the pre-liberalisation era.

Instead of harnessing a well-designed ‘ring network’ as was originally conceptualised in ‘BharatNet’, India has to settle for optic fibre cables thrown on electricity poles, barely resilient enough to withstand a windy day.

Another competitive technology industry, broadcasting, is another example. While most advanced countries have public broadcasters, few have created legacy issues as profound as Prasar Bharati has here.

The private broadcasting industry has been haemorrhaging money owing to high cost of ‘carriage’ and regulatory restrictions on deriving more revenues. Prasar Bharati has been on the wrong side of both these issues—not readily relinquishing spectrum to private operators which could help lower carriage costs, and forcing private operators to circumscribe their lifeline advertising revenues by applying Mandatory Sharing regulations on high value content such as sports broadcasts. Policymakers have conflated national interest with consumer choice.

The result is that broadcasting investments have been muted over the past decade despite progressive liberalisation of FDI caps. The larger lesson to draw is that governments should not be both regulators and competitors. This is not the easiest pill to swallow, particularly when sentimentality accompanies the notion of government-run enterprise.

The introduction of RuPay cards by the National Payment Corporation of India, which is heavily guided by the Reserve Bank of India, indicates that the government is tempted to enter markets to disrupt perceived monopolies even in the digital economy.

Ironically, India is a party to the US-led dispute with China at the WTO on the Chinese variant of RuPay, called UnionPay. India’s approach therefore is neither consistent nor wise. It is a legacy of the past, wherein the government created markets for ‘old economy’ industries such as energy and infrastructure.

While public enterprises have succeeded, to an extent, in traditional industries, they are not optimized for the new economy which requires constant innovation and high standards of service delivery.

The government should remain a licensor, regulator and adjudicator and let consumer choice select winners in markets where neither capital nor technology are constraints.

This commentary was originally published in Mint

 

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