Perspectives on industrial policy

Source: The post is based on the article “Perspectives on industrial policy” published in “Business Standard” on 24th August 2023.

Syllabus: GS3- Effects of liberalisation on the economy, changes in industrial policy and their effects on industrial growth.

News: In this article, author discusses India’s protectionist policies in manufacturing and electronics, contrasting them with targeted approaches in the US and EU. They emphasize the benefits of trade liberalization, using Asia’s success in electronics as an example, and suggest India should integrate more with global value chains for competitiveness.

Why is India adopting protectionist policies?

Promotion of Domestic Manufacturing: India has introduced import restrictions on electronic goods like laptops and tablets. These restrictions add to already high tariffs, which are the highest among competing economies.

Boosting Industries with Financial Support: Through the Production-Linked Incentive (PLI) scheme, India aims to financially support and enhance the growth of its electronics sector and other industries.

Broad Protectionism in India vs. Targeted Global Strategies: While the US and EU have targeted strategies for specific sectors, India’s protective measures span across 14 sectors. Some of these sectors, like textiles and food processing, don’t seem to have a strategic basis.

Electronics Sector’s Rapid Evolution: The electronics sector is marked by swift technological changes. India’s protective measures in this sector reflect the challenges of domestic manufacturing keeping pace with global advancements.

How do other economies approach industrial policy?

US’s Targeted Industrial Strategy

The US introduced the CHIPS and Science Act to promote domestic research and manufacturing in semiconductors and electric vehicles. This billion-dollar initiative aims for “strategic autonomy,” reducing dependence on countries like China and Russia. The US-Mexico-Canada Agreement (USMCA) further boosts regional economic integration.

EU’s Green Agenda

The EU unveiled the Green Deal Industrial Plan, targeting carbon neutrality by 2050. A key tool, the Carbon Border Adjustment Mechanism (CBAM), imposes taxes on imports from high carbon-output sectors, affecting major exporters like China and Russia.

Selective Protectionism in Developed Economies

Both the US and EU employ selective protectionist measures. While the US focuses on technological advancement and reducing geopolitical risks, the EU emphasizes environmental sustainability. Their strategies are designed with specific goals, such as combating climate change or ensuring technological advancements, unlike India’s broader approach.

What should be done?

Embrace Open Trade in Electronics: The electronics sector’s rapid technological pace makes import substitution challenging. Given the sector’s global value chains and the success of top exporters also being top importers, India should consider more open trade policies for easier cross-border movements.

Learn from Asian Economies: Countries like China and Vietnam integrated into electronics global value chains with open trade policies. China’s dual trade regime allowed duty-free entry for parts and components, boosting exports. Adopting such strategies can benefit India.

Combine Incentives with Trade Liberalization: Historically, countries like South Korea thrived after shifting from import-substitution to export expansion. India should merge its financial incentives with trade liberalization to expose producers to competition, promoting efficiency and innovation.