It’s time for economists and policymakers to take a wider view of our national assets and growth drivers

Despite pressure from the West to abandon its industrial policies, China continued to build depth in its industry. Until the 1980s, India’s capital goods production sector was as strong as China’s. Now India’s service and manufacturing sectors are dependent on imports of Chinese hardware and machinery. Even the US is alarmed by the strength of China’s electronic hardware and capital goods production.

India’s economy has arguably been left weaker than China by a bias against industrial policy since 1991, which for long laboured under a mistaken view that India’s economy could leapfrog manufacturing and go from agriculture to services. Beneath these ideological conflicts lies a fundamental accounting problem.

Capital goods are not consumption goods. Their costs cannot be recorded as inputs in corporate accounts and must be charged as depreciation in line with sales growth over several years. This complicates computations of input tax credits under ‘value added’ regimes such as India’s GST. Capital goods and consumption goods must be treated differently: our GST regime recognizes this. But the service industry complains that GST, even after its recent reforms, does not provide it full tax relief for the capital goods it uses, which crimps its growth.

These issues became vivid in 2012, with the implementation of the Ultra-Mega Power Projects policy. It was designed to increase the production of low-cost electricity in a few large-scale power plants. Private promoters of these projects were provided large tracts of land by the government, privileged access to coal resources and duty-free imports of power generation equipment.

Some Indian businesses were persuaded by the government to produce power equipment domestically with the best foreign technology, and they did: L&T with Mitsubishi, Bharat Forge with Toshiba and BHEL with Siemens. Their equipment was technically superior to Chinese imports and these three domestic companies also had good track records on industrial goods.

However, they could not compete with large Chinese manufacturers, which offered Indian projects attractive financing schemes and hawked their equipment here at lower cost than elsewhere to grab our market.

Indian equipment producers that had invested large sums to build domestic capacity appealed to the government to support their sales with favourable financing, which the government was unable to do, and to raise import duties on Chinese suppliers to level the playing field.

Indian promoters of power plants complained that this would increase their project costs and thus the cost of power for consumers. Calculations showed that the small increase in import levies on Chinese equipment that Indian players wanted would increase power production costs by only about 3%, on account of the marginally higher annual depreciation cost of imported equipment.

Since non-renewable fuel inputs were a major cost in power production, if local producers could improve their fuel-to-electricity conversion efficiency by 3-4% with better plant management, not only would they reduce pollution, but could also afford India-made equipment and reduce India’s import dependence.

Sadly, the pro-free trade, anti-‘protectionist’ lobby within both industry and the government prevailed. Indian equipment manufacturers did not get the level playing field they needed.

The 1991 shift derailed our industrial and trade policies to favour importers and traders over domestic industry. Soon afterwards, India signed up for the World Trade Organization’s ‘trade in services agreement’ in 1995; China followed only in 2001. India was also a founding signatory to the Information Technology Agreement (ITA) in 1996, whereby all signatories agreed to eliminate customs duties on a wide range of IT products (computers, telecom equipment, etc).

This suited India’s emerging IT software industry, because it could import Western hardware (later Chinese) with zero duty, but harmed India’s own smaller domestic producers. China joined the ITA later, in 2001, but continued to build its domestic tech hardware industries.

Now India must recover lost ground against China, as the US is also trying to do. This will require a substantive shift in our growth strategy from consumption to production economics, with a reorientation of our trade and industrial policies to build more in India and acquire more intellectual property. Economic growth that does not create more value-adding industrial jobs within the country and intellectual property within its tech services companies is not sustainable.

Here, a word of caution about expanding global capability centres (GCCs) for foreign companies in India as a way out of US immigration and H1-B visa policies that reduce the employment of Indians in the US. While GCCs will employ more people in India, foreign firms will also own the intellectual property created by these and use it to their own advantage. India gains only jobs.

Economists and policymakers must distinguish between assets and resources in national accounts. GDP is an aggregation of all economic activity within an accounting period—a year or a quarter. It does not distinguish assets from resources. For example, environmental assets, just like human assets, appear in national and corporate accounts only when they are used, but not in a balance sheet of assets that must be built and sustained.

Treating forests, rivers and soil, and human beings, as only resources in our accounts does not do justice to the economy’s potential. For clarity on growth that can be sustained over the long-term, we need clarity on our actual balance sheet of assets.

The author is the author of ‘Reimagining India’s Democracy: The Road to a More Equitable Society’