Beyond de-reservation

A day before the Budget announcement, the government announced the de-reservation of 87 products that had till then been reserved for production by the small-scale industrial sector. Post the announcement, there are 239 products left for exclusive manufacture by small-scale industries. However, there is a broad consensus that it is only a matter of time before that list is pruned down to virtually nothing. Considering that at its peak, the list contained more than 800 items, the progress on ending this obsolete policy has indeed been significant, even if slow. Whatever one's position on the merits of reservation in a highly protected economy might be, it is quite obvious that it has no place at all in an open one. Since the mid-1990s, when non-tariff barriers virtually disappeared and tariff rates on most of these products came down significantly, it made little sense to persist with these restrictions when the same goods could be imported freely and at attractive prices. But government being government, the irrefutable logic of this argument has been translated into action at snail's pace. Well, better late than never is always a justification but those in authority should pause to think about what this delay has cost the economy in terms of improving its competitiveness in products that are, by and large, relatively labour-intensive and which could therefore have made a significant contribution to employment growth in the manufacturing sector.

Be that as it may, it must be pointed out that, while de-reservation is a critical component of industrial policy reform, it will accomplish little in and of itself. There are a number of factors that will determine the rate of investment in large, cost-efficient capacities to manufacture the now de-reserved products. One of them is clearly infrastructure. Large investments are more vulnerable to failures in infrastructure supply, unless of course they make their own investments in this, which is feasible in some sectors but not in the kind of manufacturing that is being spoken about here. In other words, while small-scale production may be cost-inefficient, it is less risky. This partly accounts for the very large presence of small establishments in the manufacture of products that are not reserved.

Another is labour regulation. The industrial sector in this country bears the burden of providing job security in establishments that employ over 100 workers. While businesspersons have worked out various by-passes to minimise this burden""short-term hiring, contract labour, outsourcing and the like""the fact remains that these regulations are a deterrent to expanding capacities in products that are relatively labour-intensive. Staying under the regulatory radar screen is one of most important attributes of entrepreneurship in this country.

So, while the government deserves praise for continuing to phase out this pointless policy instrument, let it not be under any illusions that a sharp increase in efficient capacity and employment will ensue. An effective programme of industrial policy reform will need to address the various bottlenecks and deterrents to investment simultaneously in order to induce a favourable response from entrepreneurs and investors. Beyond the two major concerns referred to above, the government needs to move away from the temptation to discriminate fiscally, some signs of which were visible in the Budget towards a regime that helps entrepreneurs get started, facilitate mechanisms that serve collective interests""clusters are a good example, but not the only one""and then leave them to fight it out in a competitive marketplace, domestic or global. This will accomplish in a few years what reservation couldn't in decades.