India’s new Industrial policy is a replay of socialist era follies

Source: Live Mint

Relevance – An analysis of govt’s Industrial policies.

Synopsis: It took decades for India to shift from its inward-looking and uncompetitive manufacturers. Now the government is again giving importance to inward-looking and uncompetitive companies to produce for the domestic market.

Background:

• One of this government’s first promises was to revive the manufacturing sector.
• India had been de-industrializing since the early part of the century.
• Only mass manufacturing could create enough jobs for a workforce growing by a million young people a month.
• The ‘Make in India’ slogan quickly developed into a full-fledged government program.
• Further, the government is focused on increasing foreign direct investment and improving the business climate to attract multinational companies. It increased India’s rank in the World Bank’s Ease of Doing Business indicators in the five years.

What are the remaining issues?

• Firstly, in 2019 the share of manufacturing in India’s gross domestic product stood at a 20-year low.
• Secondly, failure of Make in India.
  • Most foreign investment has poured into service sectors such as retail, software, and telecommunications.
• Thirdly, even 30 years after the liberalization of the private sector, the government is again handing out subsidies and licenses while putting up tariff walls.
  • The government shut down the 1950s-era Planning Commission, still, bureaucrats are directing state funding to favoured sectors.
  • It is done through new ‘production-linked incentive’ schemes, in which companies receive extra funding from the state for five years in return for expanding manufacturing in India.
  • Such incentives were originally meant to support domestic mobile phone production.
  • Another issue is that a government that has held off on income support during the covid pandemic has budgeted roughly $27 billion for these industrial subsidies.
• Fourth, the only thing worse than socialism with central planning is an industrial policy with no planning at all. There’s no logical coherence to the sectors chosen.
• Fifth, India’s haphazard industrial policy will fail, just as ‘Make in India’ did.
  • A scheme like PLI is not leading to job growth, leading to more economic dependence on China.
• Sixth, all the major problems of India’s socialist-era past are returning.
  • The excessive closeness between bureaucrats and the beneficiaries of industrial policy.
  • India’s top civil servant recently called for an “institutional mechanism” that provides “hand-holding” for companies.
  • Companies that just began receiving subsidies are already asking the government to relax their production quotas.
• Lastly, the government’s manufacturing push never went much further than gaming the World Bank’s indicators.
  • No investor believes structural reforms have gone deep enough.
  • India has a large workforce but few skilled workers.
  • The rupee is overvalued.

Way forward:

• Subsidies should be limited to sectors where China dominates supply chains, as part of a broader, China-focused trade policy that partners with the United States, Australia, and others.
• Invest in cutting-edge sectors.

Meanwhile, it’s hard-wiring into the economy the kind of connections between industrial capital and policymakers that are nearly impossible to disentangle.