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

Context: The State direction of resources is back, but it lacks strategic coherence.

Critical analysis of ‘Make in India’:

• Significance:
  • To keep in check India’s de-industrialisation and unemployment: India had been de-industrialising since early century, and only mass manufacturing could create enough jobs for a workforce growing by a million young people a month.
  • Ease of doing business: Careful targeting of the World Bank’s Ease of Doing Business indicators raised the country 79 positions in the five years after the implementation of the scheme.
• Failure: Manufacturing push never went much further than gaming World Bank’s indicators.
  • Structural reforms, particularly to the legal system, failed to go deep enough.
  • In 2019, the share of manufacturing in India’s GDP stood at a 20-year low. 
  • Most foreign investment has poured into service sectors such as retail, software and telecommunications.

Significance of ‘Production-Linked Incentive’ (PLI) scheme

• Inspiration: Following the Chinese model of selectively subsidising the manufacturing sector.
• Strategy: Companies receive extra funding from the state for five years in return for expanding manufacturing in India.

Issues in PLI scheme

• Concerns over policy priority: A government that has held off on income support during the covid pandemic has budgeted roughly $27 billion for these industrial subsidies.
• Incoherence in the selection of sectors: Originally meant to support domestic mobile-phone production, now being expanded to a multitude of sectors from batteries to food processing.
• Lobbying plays a major role over logical rationale. 
• If job growth is the intention, subsidies shall be directed towards labour-intensive sectors, or if economic independence from China is objective, policy should target sectors where China dominates; no such a policy level clarity is evident in the implementation of PLI scheme.
• Returning of the socialist era: Excessive closeness between bureaucrats and the beneficiaries of industrial policy in the name of an “institutional mechanism” that provides “hand-holding” for companies.
• Endlessly shifting targets: Companies that just began receiving subsidies are already asking the government to relax their production quotas.
• Anti-competitive: As the government is giving cash to new, inward-looking and uncompetitive companies to produce for the domestic market.

Conclusion: India’s haphazard foray into industrial policy [looks set] to fail, just as ‘Make in India’ did. And it’s likely to cost the country billions along the way.