Changes to Industrial Policy in India –Explained, Pointwise

According to IMF, “Industrial policy” refers to government efforts to shape the economy by targeting specific industries, firms, or economic activities. This is achieved through a range of tools such as subsidies, tax incentives, infrastructure development, protective regulations, and research and development support.

Industrial policy was widely used before liberalization and globalization by the governments to protect and promote their domestic industrial sector. Liberalization and globalization of the world economy saw the rollback of restrictive Industrial Policies as it hindered the growth of world economy and global supply chains.

However, the path of Industrial Policy is rolling back to the pre-liberalization era. Governments across the world are convinced that by using restrictive industrial policy they can successfully steer their economies towards a greener, more resilient and more industrial future in the post-COVID world.

Recently Indian Government imposed licensing requirements on the import of computers. This is being seen as the return of restrictive Industrial policy in India in a new form. Return of restrictive Industrial Policy is not the case of India alone, it is being practiced globally today.

What has been the history of Industrial Policy in India?

Industrial Policy Resolution 1948 introduced state control over Indian industrial sector. These state control over the industrial sector was further strengthened by Industrial Policies in 1956,1977 and 1980.

But in 1991 with the introduction of Liberalisation,Privatisation and Globalisation(LPG) reforms state control over the industrial sector were relaxed. There was delicensing, dereservation and removal of regulations over the Industrial sector.

However, Industrial Policy of India in the post-COVID world is returning to the pre 1991 period with state exercising its control over the industrial sector once again.

What are the changes in Industrial Policy in India?

India is putting into a place an architecture of production-linked incentives (PLIs). This ₹1.97 trillion production linked incentive (PLI)scheme is focused on incentivizing companies to increase domestic production across 14 sectors rather than manufacture products outside India.

India is imposing controls over the terms of foreign investment and use of arbitrary tariffs (such as on white goods) and outright bans and licensing (such as on laptops).

India is using export duties regime in agricultural sector. Recent decision of India imposing export duties of 40% on the export of onions. This marks the return of restrictive industrial policy in the agricultural sector.

India has increased average tariffs on imported products.WTO in its review of India’s trade policy for 2021 pointed out that the country’s simple average tariff rate had increased from 13% to 15.4% since 2015.

What are the changes in Industrial policy globally?

Return of restrictive Industrial Policy has become a global trend. Given the commitments to the WTO, governments cannot raise import tariffs at will. Import tariffs have become less important as a tool compared to earlier decades. Governments have been using various policy interventions as part of industrial policy apart from tariffs.

Policy interventions being used by the countries as part of changing Industrial policies

Loan guarantees, trade finance, loans from the state and outright grants by the richer middle income and poorer countries to lower the cost of production for companies.

Use of non-tariff barriers to trade like governments setting minimum quality standards for imports.

Use of government budgets as subsidies and tax concessions in sectors like green energy and electric mobility sector. Among poorer countries, textiles and apparel figure prominently as sectors targeted for incentives.

How is the changing ‘new’ Industrial Policy different from the earlier industrial policies?

‘New’ industrial policies are less inward looking. These are today aimed at promoting exports rather than blocking off imports.

‘New’ Industrial policy uses quid-pro-quo FDI policy forcing foreign companies for technology transfer. New Industrial policy also uses trade finance to promote exports.

‘New’ industrial policy involves close working relationship between state and industry. There is a constant feedback mechanism between the two sectors.

What are the arguments in favour of the changes in Industrial trade policy?

Proponents of the return of restrictive industrial policy argue that the government has both the ability and the duty to structure the economy in the national interest since the free market may fail to do so. For example, manufacturing industries provide broad societal benefits such as stable and well-paid employment.

Proponents argue the need for a restrictive Industrial policy to ensure domestic supplies of critical goods such as medical supplies or military equipments for national security reasons.

Proponents also argue that restrictive Industrial policy aims to maintain steady growth in productivity, to create more employment opportunities and match the level of international standards and competitiveness.

What are the arguments against the changes in Industrial trade policy?

Critics of the return of restrictive Industrial policy counter that the government is worse at identifying successful firms than the free market and may lead to crony capitalism. (Maruti controversy in license raj India).

Critics argue that restrictive Industrial policy could lead to an even greater concentration of corporate power and would stifle innovation and harm national security.

Critics argue that restrictive Industrial Policy would bring back state capitalism and would stifle the growth of world economy and would break global supply chains. (For ex- Demand of semiconductor chips has increased due to inward looking industrial policy of China and Taiwan).

What lessons should India incorporate in its industrial policy from the successful Industrial Policy of East Asia?

India’s Industrial policy must have greater state capacity and expertise. India must have specialists in our industrial policy formulation. For example, Japan’s International Trade and Industry that oversaw industrialization and commerce had over 12,000 employees in the ministry in 1960 majority of whom were active in policy and administration.

India’s Industrial policy must have an open and transparent policymaking process that involves experts. Japan has had experts in its committees on industrialization with very less govt representation.

India’s Industrial policy must allow the domestic private sector to collaborate, and access shared basic research and technology. For example, Japanese conglomerates collaborated and shared the costs of large-scale technological upgrade projects. Very Large-Scale Integration project launched in 1975 helped Japan take the pole position in semiconductor production from the United States.

India’s industrial policy must have high intra and inter-sector labour mobility. India must learn from the South Korean experience of ensuring high labour mobility (keeping only the youth in manufacturing and letting older ones go to service sector) which increased their productivity.

India’s Industrial Policy must be supported by high levels of savings.India can explore the option of crypto taxes on bank deposits and keeping real interest rates higher as was done in east Asian economies.

India’s Industrial Policy must have depoliticized private sector. India must learn from the East Asian economies experience to avoid the Asian economic crisis of 1997.

What should be the way forward for the changing Industrial Policy?

All governments use industrial policies, and they always will. The questions should really evolve around what policies to use,what sectors to target and how to set up a mechanism by which governments learn from the experience of private industry and adapt.

“New’ Industrial policy must put its focus away from the manufacturing sector to service sector as manufacturing sector’s contribution in both GDP and employment has been falling.