As concerns over India’s poor growth performance deepen one cannot help but notice the changed commentary on the domestic economy. Not so long ago we heard such statements as, “India will grow by 8 per cent despite the government.” Today, this has been replaced by the statement, “India is not growing because of government inaction.”

Within the overall economy, the manufacturing sector has been worst hit. As a part of this sector, I have observed it falling sharply with growing alarm over the last few years. Several committees have been set up and many more papers and policies have been written on the subject. I have read and re-read that the Government wishes to increase the share of the manufacturing sector in the GDP; which will, in turn, increase manufacturing’s potential to absorb the large domestic labour force. How possible is this one can argue endlessly, but most of us will at least agree that manufacturing has to grow at a respectable rate.

One may well ask, if our goal is so obvious and commonly agreed upon, what is constraining us from achieving it? In this article I argue that the answer lies in understanding the details of government policy and action taken. The government’s actions have so far been contrary to its stated objectives. I take manufacturing’s sub-sector fertilizers, particularly the urea segment, as my case study to show the disconnection between policy and action, and the problems with the existing policy which are disallowing proper action to be taken; as has been witnessed over the last decade in the urea segment of the fertilizers’ industry. Before proceeding I must add a disclaimer that this exercise is not to promote any particular objective for the fertilizers’ industry. It is merely to highlight what I feel is missing to push growth in manufacturing. We have not added any significant capacity in the fertilizers segment, and worse, we have turned from being a self-sufficient country, to being dependent on imports. The fertilizers sector is important for the government and it has a separate department just to deal with it. Yet, it has become an example of all that is hindering growth in the domestic industry.

This exercise is not to promote any particular objective for the fertilizers’ industry. It is merely to highlight what I feel is missing to push growth in manufacturing

There is no clearly stated objective for the fertilizers sector, which has several important determinants that are common to all. They are the following:

• First, they all require large investments – it is USD 1 billion to set up an economic size plant; the plants have long lives; and require very small replacement investments;
• They are capital-intensive with a capital-output ratio of about three times and therefore, very sensitive to the cost of capital;
• The feedstock is natural gas and therefore, a long-term, stable natural gas policy framework is crucial;
• Being critical for the agricultural economy, the price and distribution of fertilizers is controlled by the Government; the Government declares the price at which urea has to be sold to farmers and pays the difference between the manufacturer’s price and the farmer’s price as subsidy;
• They require a large piece of land, and is an environmentally-sensitive industry; and
• India is one of the largest consumers of urea in the world and the industry is primarily aimed at meeting domestic demand.

Concluding from the above, the competitiveness of this industry is primarily determined by natural gas prices and capital costs (both investments and cost of capital). Keeping this in mind it should be simple to gauge what policy to pursue for this sector, that is, whether to promote local manufacturing or be largely dependent on imports? If it is the former, which it largely is in India, the policy must have enabling provisions that will strengthen fertilizers’ competitiveness with regard to natural gas prices, the quantum of investments, and the cost of capital. All three must be accorded equal consideration in the policy. Moreover, the policy should apply nationally, and not just serve the purpose of a particular sector or an individual entrepreneur.

A stable policy will reduce the risks attached with investing in a project, and reduce the cost of capital. It will also enable investors to tie up long-term agreements for feedstock

Steps needed to strengthen competitiveness First, the biggest requirement to strengthen competitiveness which only the government can meet is to provide a stable national policy framework that can be relied upon for a considerable length of time. Investments of the magnitude involved in a fertilizer plant cannot be recovered in a three-to-five-year timeframe. This is why the investor must have a fair degree of confidence that the rules of the game will not change frequently, so that he can invest. A stable policy will therefore, reduce the risks attached with investing in a project, which will, in turn, reduce the cost of capital - both debt and equity. It will also enable investors to tie up long-term agreements for feedstock which will provide further stability. Second the government must provide a framework for the project to be implemented faster than any other country. This will mainly require co-ordination between the different arms of the government, and simpler methods to do the following: First, if the strategy is for local production of fertilizers, then issues surrounding the environment and land availability, among others, will have to be thought through very clearly at the initial stage; and second, the government policy must state which industries will be permitted in specific zones, and how land will be made available, among others. These aspects are not new to the country. In fact as far back as the 1960s and 1970s the government would incentivise the completion of projects in record time.

Why has the strategy response been so poor?

First, the government policy does not clearly identify the source of adequate, long-term supplies of urea at an economical cost. Instead, it has mixed up urea production, which is urea availability, issues, with that of distribution, which is the price at which urea will be sold to farmers. The Government should have first identified and strengthened its source of adequate, long-term supplies of urea, to be had at an economical cost. This would involve comparing the costs of availability from different sources. At every step it would be guided by a well thought-out national urea policy. Urea distribution which, in our case, involves deciding the price the farmer will pay and the quantum of subsidy the Government will pay, would then get worked out on the basis of this economically priced long-term supply of urea. Now, if we form the considered view that the cost of domestic urea is cheaper than imported urea over the long term, then the Government must encourage domestic urea, and its efficiency or value add has to be measured in terms of its competitiveness vis-a-vis imported urea. The resulting reduction in overall costs of availability will automatically reduce the subsidy, if the farmer’s price is kept constant.

The Government’s one-sided view of focusing on just distribution issues, the farmer’s price and the subsidy amount it has to pay, has resulted in a step-motherly treatment towards domestic production of urea. This is resulting in the country becoming heavily import dependent and has pushed up the overall costs of urea, borne by the country. Whether the farmer bears the cost of this or the Government is a secondary issue. We have to first deal with producing urea at the most economical cost.

The third issue is that we do not have a framework to develop a holistic approach on any issue. Such a framework necessarily requires open dialogue with all the concerned parties with the intention of developing a solution which is best for the country. We however, continue to demand that our individual and our sector’s interests be taken care of at the cost of the whole nation. This is why the government is only engaged in balancing the interests of various participants rather than crafting a well thought out national policy and ensuring that it is implemented with the proper checks and balances. For this to happen, the government must spend time and effort to determine logically and rationally which sectors the country should focus on, and how the country will maintain and strengthen its competitiveness in the chosen sectors.

Conclusion The key ingredients of a good national policy then are for the government to first identify the sectors in which it wants the country to become competitive in; what will drive the competitiveness of these sectors; and what the government can do to strengthen and preserve their competitiveness. The policy so framed must be done with the government’s full commitment to take all actions required to develop these sectors; it must include all key strategies and imperatives for its growth, and address all aspects in detail. The other key ingredient is that once a policy is decided the government must take steps to support the policy and ensure its continuance over the longer term. It should not be tinkered with every now and again.

The key ingredients for a good national policy are that the government first identify the sectors it wants the country to become competitive in and what will drive their competitiveness

Unfortunately, most actions taken by successive governments in the past few years have been against these very principles. First, the government’s credibility with respect to a policy lasting its full term, and adhering to its rules and regulations, is very low; second, competitiveness is getting eroded with the move to price everything at the landed cost of imports; labour costs are rising without any significant improvements in productivity and the skill sets; the project cost is rising significantly with issues of cost and time involved in land acquisition and project approvals; and capital costs are rising, partly because of the high level of risk within the country.

The old ways of working and decision making at the Union and state government level, and at the industry and government level are being questioned. But lacking in vision and with the dialogue process non-existent, there is a lack of fresh ideas and new thinking. The government must go back to the drawing board and clearly define its objectives and then engage in dialogue with all the participants at the earliest to develop a vision and strategy to achieve the same. It must diligently follow up on its strategies, thereafter.