India must get its manufacturing policy right this time

Context: India needs to strengthen its local production by fixing incentives for the policy of self-reliance, to achieve its objectives of creating an Atma-nirbhara Bharat.

Indian manufacturing sector: an analysis

• Potential of India: a large potential market and also, a large workforce to produce for the world market.
• Comparison with china: both India and China have more than 1 billion population.
  • In 1990, India's manufacturing sector was comparable with China's; Since then, it's manufacturing sector has grown almost ten times larger, and it's capital goods and machine-tool by 50 times
  • China has also developed high-tech manufacturing capabilities in electronics, telecom, power equipment and machine tools.
• Concerns with Indian manufacturing sector:
  • Lack of sufficient depth in the Indian manufacturing sector: which results in three challenges:

1. 1. 1. lack of security against foreign threats.
      2. Poor competitiveness in international markets.
      3. Insufficient wage growth for workers.

• • Issue of promoting protectionism policies through Atmanirbhar Bharat and Make in India.
    • A report ranks countries on a 'protectionist index' between 2018 and 2020 Show the US, on top with 591. Then Canada, 450; Germany, 436; the UK, 272; China, 209: India, 166.
    • More trade is good, but the pattern of trade and the composition of growth matter even more for all-round development.

Improvements needed in Production Linked Incentive (PLI) scheme:

• Incentives must be tied to progressive increases in value addition: within the country and not just assembly of various parts. (which provides fewer incentives for low-level manufacturing)
• Incentive should be defined on a minimum threshold: so that companies with track records of growth get benefits. (Currently determined by the percentage increase in production over a base year)
• Research and development (R & D) should be incentivised as it essential for the absorption of technology and acquisition of sustainable competitiveness and results in greater return on investment.
• Reserve 50% of the incentive for domestic companies: to ensure that both Foreign Direct Investment (FDI) and domestic industries are equally promoted.
• A company or a country must become faster learner to catch up with their Chinese counterparts, to ensure sustainable competitive advantage.

Conclusion: India's policymakers must also become much faster learners, and not remain stuck in the theoretical paradigm of free trade that has not served India too well.