Niti Ayog to issue blueprint for India’s economic policy

Context:

• NITI Aayog has recently issued a set of three documents which give us a fair idea about where national economic policy is headed in the coming years.

Introduction:

• NITI Aayog has come up with action plan on three sectors – trade, industry and services for creating a well paid jobs.
• NITI Aayog, after making a strong case for export-led re-industrialization, argues, “India needs a focused strategy for creating an environment in which export competitive firms can emerge, especially in labour-intensive sectors.”

Objective of the Action Plan proposed by NITI Aayog:

The broad objective of the Action plan for trade, industry and services are as under:

• First, employment generation and/or underemployment reduction In previous action plans, employment generation was an additional rather than exclusive goal.
• Second, exports rather than the domestic market is to be the engine of industrial growth.
• Third, there is a shift from small enterprises to large companies as the main vehicle of export growth.
• Fourth, there is a parallel shift in focus towards expanding the formal and organized sectors of the economy.
• Fifth, export zones are to be seen as hubs for employment rather than just investment.

What are the implicit policy shift proposed by NITI Aayog:

• The focus on the power of exports due to rising fears about protectionism in our major trading partners.
• The larger organized sector firms have been recognised as facilitators of exports.
• NITI ayog has emphasised that the export potential of Indian industry can be realized only if we manage to create large corporations across sectors which can compete globally, and generate jobs to absorb the growing labour force.
• The “SMEs (small and medium enterprises)-for-exports” perception is being phased out steadily, howsoever employment-intensive it might be on paper.
• NITI Aayog has also recognised that the goal of rapid employment generation cannot be attained unless labour laws are reformed and there is progress in the ease of doing business.
• There are three essential ingredients in the strategy to promote labour-intensive and export-oriented industrialization that pulled the countries of East Asia out of the poverty trap—the coastal economic zones (CEZs) strategy; labour law reforms; and action in specific manufacturing (apparel, food processing, gems and jewellery, electronics) and services sectors (finance, tourism and culture, and real estate).

What needs to be done:

• The socio-political realities and processes such as land conversion, hiring of labour, utilization of natural/community resources, need to be anticipated.
• The solutions need to be carefully thought of to ensure that the wider community of stakeholders does not feel short-changed.
• A recent World Bank report, covering 34 industries across 61 countries, concludes that global value chains (GVC) integration enhances domestic value addition. The domestic policy environment is a critical catalyst for translating the positive effects of GVC integration into domestic value added. Therefore, the focus of most industries should be to enter GVCs, and how to move up the value chains because overwhelming majority of global trade is carried out via international production networks, or GVCs.
• Recent research demonstrates that the rise of GVCs has radically changed the landscape of international organization of production, placing the specialization of countries within GVCs centre stage. India should follow the footsteps of many Asian countries to facilitate the entry of companies into GVCs via specific policy measures.
• The NITI Aayog document draws heavily on many Chinese experiments, experiences and policy initiatives. It should also take note that some of China’s production, especially labour-intensive, is migrating to other low-cost and competitive locations.

Conclusion:

• Indian policymakers need to seize these opportunities, which will stimulate and induce Indian industry to compete in the global market.
• There are also enormous opportunities for SMEs in GVCs. GVCs allow companies to specialize in a small part of the entire supply chain, thus giving SMEs more opportunities to engage in global trade and international marketplaces.
• India needs to nurture region- and sector-specific SMEs to enter GVCs and serve global markets.
• While NITI Aayog lays justifiable thrust on the export competitiveness of Indian industry, the operational aspect of GVCs is missing. The policy package for the “Make in India” programme also needs to incorporate a GVC strategy, and integrate it with foreign direct investment policies across sectors.