The government is worried about the sluggishness in industrial growth. The finance minister has called together the nation's leading industrialists for a discussion today. One possible cause that is bound to be mentioned is import competition. One industrialist after another will recount how much lower import prices are than even his input costs. Stories will be told of the most "inessential" items "�"� olive oil, grape juice, eye liner"�"�entering the country with impunity, and wiping out hardworking Indian businessmen. Dumping by China will be mentioned. The finance minister will nod sympathetically, and will promise to do the obvious "�"� raise import duties to the maximum allowed under the Uruguay Round agreements, and when that is not enough, to impose anti-dumping duties.
That sounds reasonable "�"� except that he has been doing it ever since he took over. He will remember the hot water he got into over steel in his early days "�"� how sheet producers were given protection far above their need, bankrupting sheet users, what sordid intrigues went on in the room next to his to rescue Essar Steel, how they led finally to the unceremonious exit of his closest adviser. Every act of protection will not lead to a scandal; some cupboards are better for storing skeletons. But all protection hurts consumers. If they are poor, ordinary consumers, everything is all right; if they are powerful producers, they raise hell.
The lesson is blindingly clear "�"� the government must use a more neutral instrument of protection, namely the exchange rate. It has been unobtrusively letting the exchange rate slide down. That is obviously right.
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Depreciation will protect industry and discourage imports, but it will do nothing to encourage exports. Exports cannot be increased without importing inputs, and although exporters can in theory import inputs duty-free, the customs and the DGFT between them have tied up duty-free imports in such thick red tape that most potential exporters do not even try. The only remedy for bureaucratic obstruction and venality is abolition of import duties. Hence reduction of all duties must accompany depreciation.
The real handicaps
In fairness, industrialists do not all seek protection; they also point to the very real handicaps they face in this country. It is not only the trade-related bureaucracy that is a hurdle to business. Labour inspectors constitute an even more ubiquitous and vexatious obstacle. They keep walking into the offices of software exporters and haul them up because their employees work more than eight hours a day, because they have not whitewashed their staircases, and so on. But labour legislation is the bane of all industry, not only that of software. The government may not be strong enough to repeal the existing labour legislation, but it can certainly legislate to ensure that voluntary contractual agreements governing labour retrenchment would override legal restrictions.
The industrialists will also point out, for the thousandth time, the absurdly high cost of power to industry. Despite pussyfooting about power sector reforms for eight years, the government has done precisely nothing to reduce power costs. What needs to be done is very simple "�"� allow new producers in without any restrictions, give them access to the grid at cost, and let them sell power to anyone they want. That will hasten the state electricity boards towards the graveyard, but only the threat of their extinction will force state governments to reform them. The World Bank-inspired reforms, which bifurcate and trifurcate sclerotic SEBs without introducing real competition, will not reduce power costs in a century.
Policy on small sector
Then there is the exorbitant cost of our policy towards small industry. Since independence, small industry has given large firms tough competition; in the process, it has grown, and generated employment at a time when labour laws made the large companies paranoid about employing people. But in the past decade, as delicensing made large firms more aggressive, small industry has fallen on hard days; and the government, in response, has become more protective towards it. The strange thing is that while our small industry struggles to survive, it is Chinese small industry whose products are sweeping across the world, including now India. The difference is due to government policies. Whereas our government rewards small industry for remaining small and withdraws its privileges if it grows, the Chinese government actually encourages its small industry to grow, mechanise and increase its productivity. And whilst our government prevents large and foreign companies from owning small firms, the Chinese government encourages them, especially foreign investors, to take stakes in small firms. It is credit and equity from foreign buyers that finance Chinese small firms and focus them on exports.
The industrialists will complain about our banks and financial institutions "�"� how unsympathetic they are to industry's woes and how hard-hearted. This too is a story the finance minister has heard all too often; in this area too, overzealous assistants, forcing bank chairmen to lend to favoured parties, have earlier landed him in trouble. He has repeatedly stressed his policy of non-interference. But he cannot ignore the structural weaknesses of the financial sector. It has been goaded to improve its capital adequacy and reduce its bad debts; as a result it has become increasingly incapable of financing the newer, riskier and more promising businesses. For a time it looked as if the capital market could take over the function. But after the bubble of 1992-96, the Indian investor has become extremely risk-averse. As a result, India is stony ground for new, innovative firms.
This is the key. Old industries, companies and businesses are dying, and not enough new ones are replacing them because our institutions "�"� the bureaucracy, the financial institutions, the political parties "�"� are raging gerontophiliacs. The finance minister will have a suitably morbid post-mortem with some of the old guard; he will accede to some of their demands. But thereby he will make it even more difficult for the unborn generations of enterprise. Before he does so, however, he should pause, and his government should think. For the stakes are no less than India's position in the world a couple of decades from now.