Automotive slump & industrial policy

The sector is needed as a growth engine and a risk of collapse needs to be averted

Mention “industrial policy” and there are strong reactions: An angry buzz from free-market enthusiasts, or approval from the diminishing ranks of believers in government intervention. But as economist Dani Rodrik observed over a decade ago, reality has not been kind to either set — neither the belief that the way forward (for developing economies) is through strong government interventions, nor the belief that it is best for the government to stay entirely away from the economy. Although there were successes sometimes with import substitution, planning, and state ownership (a case in point is Indian Space Research Organisation), these practices were often overdone or became inflexible, leading to failures and crises. Likewise, liberalisation benefitted some sections of the economy such as exporters, financial intermediaries, and some skilled workers, but often fell short of economy-wide growth.1

Another topic on which opinions differ strongly is whether development should focus on comparative advantage based on factor endowments, or if structural changes should be attempted through the support and extension of infant-industry protection, as for example in manufacturing electronics and telecom (ICT) equipment in India. In 2009, the Overseas Development Institute in London organised a debate between Justin Yifu Lin, then chief economist at the World Bank and formerly the director of the China Centre for Economic Research at Beijing University, in favour of comparative advantage, and Cambridge University’s Ha-Joon Chang speaking for infant-industry protection.  Interestingly, both favoured strong government intervention, although in different ways.2 Mr Lin was for facilitating comparative advantage, while Mr Chang was for treating comparative advantage as a base line to be defied for a country to upgrade its industry.

Industrial policy has many interpretations. There is the “horizontal” notion of basic infrastructure, that is like a rising tide for all aspects of the economy (although the sheer location, proximity and form of infrastructure itself create biases for the favourably affected and against those that are not). The opposite is state planning and control for verticals (picking winners). In between is a mix of degrees of enabling government regulations and support (tax incentives and disincentives, labour regulations, financial consideration, land allotment/zoning or acquisition) and of coordination with the private sector. These can be limited to industry and manufacturing, or more broadly, extend to all economic activity, including agriculture, dairy farming, and services.

Historically, a degree of industrial policy has been practiced everywhere. In the US for example, in the Reagan years (1980s), the Defense Advanced Research Projects Agency (DARPA) created consortiums of government and private sector participants for coordinated action. One was the Semiconductor Manufacturing Technology (SEMATECH) consortium with companies such as Intel and Texas Instruments, to revitalise the US semiconductor industry by reducing manufacturing costs and product defects.  Another was The National Center for Manufacturing Sciences (NCMS) for the development of an advanced machine tools and automation industry. Another, Project Socrates3, was a classified programme to ascertain the causes for America’s declining competitiveness, and to develop solutions to re-establish US dominance. Their conclusion was that the US was losing its technology-based ability to compete, because decision-making after World War II transitioned from technology-centric planning to finance-centric planning. Success for the latter is measured by financial returns, whereas for technology-based planning, the objective is to use technology to gain competitive advantage and satisfy customer needs (which presumably leads in the long run to better returns). The Bush administration terminated Project Socrates in 1990, as it was considered an interventionist industrial policy (picking winners) when free-market ideology was ascendant.

Industrial planning and India’s automotive sector

In 2006, the Ministry of Heavy Industries embarked on an initiative conceived in 2002 in consultation with the automotive sector. The Automotive Mission Plan (AMP) 2006-2016 was a programme across government agencies, industry participants, and academics, to make India a global hub for the automotive industry.  It was successful despite the slumps of 2008 and 2013-14, and employment increased from 10 million to 32 million by 2016.  The next phase is under way through AMP 2016-2026 (http://www.siamindia.­com/cpage.aspx), aiming to increase exports more than double to 35-40 per cent of output, and employment by 65 million. Momentum has declined in the last year, however, because of a number of adverse factors. These include confusion and uncertainty regarding policies on diesel and electric vehicles, trade tensions, slowing gross domestic product (GDP) growth here and abroad, higher costs from mitigation strategies and taxes, and funding constraints arising from problems in the financial sector.

With a slowing automotive sector and reports of possible layoffs in large numbers, is urgent policy intervention needed? Some observers think so, while others dismiss the slowdown as cyclical, and reports of distress as exaggerated, to seek concessions to improve profits. Let us recognise that India isn’t comparable to Organisation for Economic Co-operation and Development (OECD) markets. For instance, car ownership in India was under 27 per 1,000 in 2017, compared with several hundred in the OECD countries. That’s the potential for employment to grow, provided industry stays profitable, and investments happen as planned (without denying the downsides: Of mitigating for environmental impact, fuel imports, and having to build more roads).  

There is little doubt that India needs the automotive sector as a growth engine.  Given its impact on employment in manufacturing and the economy through all the feeder industries and ancillaries, if there is a risk of collapse as in telecommunications, construction, and finance, it needs to be averted if possible. With corporate profits down to 3 per cent of GDP in 2018 from 7.8 per cent in 2008, the government needs to deal with ground realities. The facts must be evaluated to take corrective action if necessary.

There are relevant case studies on possible corrective action, such as a report on steps the USA, France and China took after 2008: “Shifting Gears: Industrial Policy and Automotive Industry after the 2008 Financial Crisis”.4 Our primary requirement is a stable and supportive regulatory environment.  Changes, such as policies for electric vehicles or for diesel vehicles, need to be through collective consultation processes.  The automotive sector has the Automotive Mission Plan 2016-2026.

1. Rodrik, Dani: “What’s Driving Populism”, Project Syndicate, July 9, 2019,

2. Lin, Justin and Chang, Ha-Joon: “Should Industrial Policy in Developing Countries Conform to Comparative Advantage or Defy it? A Debate Between Justin Lin and Ha-Joon Chang”, Development Policy Review 27 (5), 2009, pp 483-502, 
 

3. See private sector successor corporation

4. Seung-Youn Oh: