Reviving Industrial Growth

As the economy is going through an unprecedented crises due to the pandemic and the subsequent lockdown, strategies to revive growth in a phased manner are attracting attention. While the current debate on the projected rate of growth for the fiscal year 2020–21 has some merits, these can only be viewed, at best, as a set of scenarios. The more important issue, however, irrespective of the precise rate of growth of gross domestic product (GDP), is to outline an approach to put the economy back on track. It is here that a deeper understanding of the current crisis is necessary as the economy had started to slow down much earlier. The consequen­ces of the present crisis are reflected, at best, at the sectoral level, as aggregation masks the enormity of the problem. Hence, a departure from the conventional analysis of the supply-side factors that hinder growth could enhance the possibility of formulating more realistic policies towards growth revival. A structural analysis could provide useful insi­ghts as it emphasises on the sectoral features of the economy, that need to be taken into account in designing policy responses. This can be done by assigning an important role for the state in faci­litating changes in the existing structure at the sectoral level.

An economy’s structure of factor endo­wments, defined as the relative composition of natural resources, labour, human and physical capital, is given at each stage of development and differs from one stage to another. Hence, the optimal industrial structure of the eco­nomy will differ at different stages of ­development. Different industrial structures imply, in addition to differences in capital intensity of industries, differences in optimal firm size, scale of production, and complexities in transactions. However, each industrial structure requires corresponding soft and hard ­infrastructures to facilitate production and exch­ange. Post-COVID-19, the structure of factor endowments would change, driven by changes in physical capital as private investment growth, which is already sluggish, is likely to slow down even further. This warrants a revitalising of the industrial structure in light of the current ­developments. This is accentuated by the trends in industrial growth, which suggest that the fluctuations and decline in growth had started much earlier. Thus, in a sense, the post-crisis industrial growth trajectory had already started to take shape earlier. This makes the task of reviving growth even more daunting as the policy responses have to factor in the structural issues along with the ­cyclical problems.