There are three models that policymakers must apply to strengthen the limping trajectory of Indian manufacturing
A radical transformation of government processes for making policies and implementing them is necessary to change the limping trajectory of Indian manufacturing. India’s index of industrial production (IIP) numbers are in a yo-yo. Two months up; one month down. One month up; two months down. The numbers are straws on the surface. Economists and analysts clutch at them to gauge the condition of India’s ailing manufacturing sector. They would have more solid evidence of where India’s manufacturing stands if they could feel the ground underfoot.
Policymakers must get beneath the surface to the fundamentals on the ground. Deng Xiaoping’s famous dictum, “You must cross the river by feeling the stones underfoot", explains very well what the nature of policy processes must be. Signals to the policymaker’s head must come from the experience of feet on the ground, not from numbers in the air. I will return to Deng’s metaphor of the river later. There are three models that policymakers must apply to strengthen Indian manufacturing.
Policymakers, doctors and gardeners, whose objective is to improve the condition of the organism in their care, require three models to guide them. The first is a good model of the organism itself—what are its constituents and what functions do they perform. We would not trust the care of our body to a doctor who did not know the locations of the complex organs inside it. Nor would we leave a plant in the care of a gardener who had no knowledge of what functions its roots, stems, and leaves perform. Human bodies and plants are not merely a lot of stuff put together. It’s the unique way in which the stuff works that gives them their lives. In the same way, a manufacturing enterprise is not merely a sum of factors of production such as capital and labour. These factors interact with each other in complex ways inside a manufacturing enterprise, and insights into those interactions are necessary to understand the essence of manufacturing.
Industrialization is a process of societies and economies learning to do more complex things they could not do before. Industrial nations evolve from agricultural societies and producers of primary materials when they are able to convert materials into more complex products. Advanced industrial nations are those that have learned to design and produce even more complex products than developing nations. The learning that stimulates industrial development takes place in these countries’ manufacturing enterprises. A manufacturing enterprise is not merely a list of resources to be summed up in an accountant’s balance sheet—capital, machinery, land, labour and knowledge (patents or other units of knowledge). Rather, it is a living, learning system. This is the first model that any policymaker, at the corporate level or national policymaking level, wanting to improve the performance of manufacturing must adopt.
The second model explains how the system improves itself. All doctors must know how bodies function. The best doctors also understand how bodies heal themselves. Their interventions are very effective because they know what to prescribe to assist the body’s own healing process. Similarly, a gardener with “green fingers" has a touch with which to help the plant to revive and grow. In the same way, the masters of manufacturing improvement, such as the developers of the Total Quality and Kaizen movements in Japan, and their counterparts in the industrial engineering disciplines in Germany, understood where the keys to enable manufacturing enterprises to speed up their pace of improvement lie. The keys are in the processes by which these enterprises perform, and they are in the minds and motivations of human beings in these enterprises. These leaders know that a manufacturing enterprise is a “system" and that the Total Factor Productivity (TFP) of a system can be increased by improving the interactions among its parts. Therefore, the keys to performance improvement are in the design of production processes and the quality of relationships among the people in the enterprises.
TFP, the economists’ holy grail, lies in the “residual" that cannot be explained by accounting for the quantities of resources used in the system. TFP rises by improving the interactions between the resources in the system. Economic models are built on production functions, such as y = f(a,b). Where y, a and b are quantities, and f is the transformative function that must be changed to improve the productivity and the competitiveness of the economy and its enterprises. For an economist, the transformative function may be a “given". For a manager, it is not. In fact, the innovative manager’s job is to improve the transformative function by learning and experimentation. Indeed, to sustain their competitiveness, economies and enterprises must keep improving their TFP—their transformative functions—faster than others.
I return to Deng’s metaphor of the river crossing to explain the third model for the policymaker. Enterprises and economies when they are changing and improving are learning to do what they have not done before. Without a precise map to connect them from where they are to where they want to go, they must find their way across the river by feeling the stones underfoot. Manufacturing enterprises are the feet of a nation’s manufacturing industry. They are trying to improve their competitiveness by learning and innovating. The national policymaker is in the head of the body. The policymaker has to be very sensitive to the signals from the feet, to shift the weight of the whole body and enable safer and faster movement forward.
Let me summarize the essence of the three models required to accelerate growth of India’s manufacturing sector. First, what is “manufacturing"? It is a system of learning at an enterprise level to carry out more complex activities competitively. Second, how does a manufacturing enterprise (and a manufacturing nation) advance? By improving the quality of processes and relationships between people within the enterprises and across them. And third, how does a policymaker help the manufacturing sector to accelerate improvement of its productivity and competitiveness? By listening very well to signals from the ground and changing national policies accordingly.
Since the industrial reforms of the 1990s, India’s manufacturing sector has failed to deliver what was expected. It has not been a driver of economic growth, which the service sector was. More worryingly, it has so far failed to create jobs in the large numbers it now must to absorb the burgeoning population of Indian youth. Following Albert Einstein’s dictum that you cannot solve the problem you have with the same mindset that created the problem, the Planning Commission undertook a soul-searching examination, in the run-up to the 12th Plan, of its processes of formulating and implementing industrial policy. For this, it also took the help of some of the world’s leading industrial economists to understand the policymaking processes of successful industrial countries.
The conclusion of this study was that India’s policymaking process for manufacturing has been weakened by a “missing middle". From numbers and opinions (quite often those of economists, rather than persons with hands-on manufacturing knowledge) the policymaking apparatus jumps down to devise schemes and rules. This is analogous to an inexperienced doctor prescribing surgery after merely reading numbers on a scanner. What has been missing mostly in India’s manufacturing policymaking is the middle: a systematic process of connecting the heads and numbers in the air with the producers with their feet feeling the stones on the ground. What has passed for “consultation" is generally pro forma, a ticking of boxes, and a barely disguised lobbying for sectoral interests.
Growth of Indian manufacturing will require many reforms, in addition to improvement of the country’s transport and power infrastructure; reforms of the business regulatory environment which is among the most cumbersome in the world; reforms of antiquated labour laws; improvement of manufacturing management practices; reorientation of policies for the MSME sector, etc. These “whats" that must be done are now well-known. Rather than repeating them again and again in seminars and papers, the government and producers must move on together to the “how" and get them done.
India’s manufacturing sector cannot be allowed to muddle along much longer with weak policymaking and implementation processes. Too much is at stake. The next part of this article will explain the most essential “whats" to accelerate Indian manufacturing’s growth and the “hows" of getting them done. These “whats" and “hows" have been developed by the most extensive and systematic process of consultation between the government and producers undertaken so far in the country. The good news is that several of these initiatives are already underway. What is required now is much wider support for them and better alignment amongst stakeholders.
This blog post appeared on livemint on January 6, 2014.