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PLI and the concept of laissez-faire state

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As part of the Atmanirbhar Bharat Abhiyan, the announced extension of the production-linked incentive (PLI) to 10 more sectors, with an additional outlay of about ₹1.46 trillion over the next five years, is a step in the right direction — if it can be implemented smartly, and without becoming yet another bureaucratic trap for industry. This scheme had been introduced for mobile and pharmaceutical manufacturing earlier this year. Now, the 10 sectors to be covered under PLI are pharma, automobiles and auto components, telecom and networking products, advanced chemistry cell battery, textile, food products, solar modules, technology products, white goods, and specialty steel. The scheme envisages that fresh investments leading to higher production would be getting cash incentives at the rate of 4-6% of incremental sales.India liberalised its economy in 1991, and reduced its applied trade-weighted real tariffs from 56.4% in 1990 to 7.33% in 2015 and to 4.88% in 2018 — well below India’s WTO threshold levels, through several waves of tariff reduction. But, since then, several rounds of tariff increases were announced, and the trade-weighted tariff for 2019 jumped to 10.3% — still below WTO thresholds.One argument for these import tariff increases is that India liberalised too rapidly, hurting industrial development, and its trade deficit widened. The trade deficit with China reached a peak of $63 billion in 2017-18, and has since declined to $53.56 billion in 2018-19 and $48.66 billion in 2019-20 after considerable efforts to reduce it through tariffs and non-tariff barriers against China linked to dumping. Now that the Regional Comprehensive Economic Partnership (RCEP) negotiations are over, a review of the free trade agreement (FTA) with Asean, with whom India also has a rising deficit, should also be expedited.But using import protection to manage trade deficits is a double-edged sword. Post-liberalisation, India also saw not only high GDP growth but an explosive increase in exports too. With a benign global environment during 2000-13, non-oil exports grew by 18% a year and GDP growth exceeded 8% a year, its fastest growth ever. The benefits of this policy, however, had run its course. India’s non-oil exports reached around $250 billion in FY2011-12, but have since plateaued out, showing some revival in 2018-19 to about $280 billion.To revive exports, India needs to maintain its share in traditional exports and move into new export lines. It has largely missed out of the trade in networked products (NPs), where it exports only $25 billion (0.5% of global trade in NPs), both in assembled export products ($15 billion) and in parts and components ($10 billion). Against this, China’s share is 20%, South Korea’s 5%, Singapore’s 3.5 %, Malaysia’s 2%, Thailand’s 2% and Vietnam’s 1%.But in several key exports for India — engineering goods and mining, etc — import tariffs increase the costs of production and hurt their growth. And in many products the PLI scheme targets, upgrading technology and imported inputs will be a key to its success. And a 5-10% depreciation in the real effective exchange rate would have achieved the same level of import protection across the board, and encouraged exports as well. So, other than corrections for an inverted duty structure, let us not think import tariffs and other trade barriers are the right solution for ‘Make in India’.Instead, the new PLI scheme, along with a 10-year plan in each of the selected sectors for support, is the right way forward. India’s earlier success in pharma, auto assembly and parts didn’t come without selective industrial policy. Like in autos, India could become a preferred destination for assembly of electronics, telecom hardware, electrical machinery, computers and office machines if it made a similar strategic plan to increase its exports from $15 billion to $150-200 billion by 2025, especially as China looks to move out many of these. It will need much better logistics, skilled mid-level management, predictable power supply and R&D.India has become somewhat of a hub for aeronautics and automobile parts through a conscious effort to attract foreign direct investment (FDI) — not foreign portfolio investment (FPI) — but with an offset policy which requires that 30% is domestically sourced. India could be a parts and components supplier for a range of industries, and could increase its exports from $10 billion to over $100 billion in developed markets and enter global value chains (GVCs) with a strategic plan.A key to the ‘banal-sounding’ PLI scheme’s success will be transparent and smooth implementation. A more streamlined system with automatic approvals done hand-in hand with relevant industry bodies can make it a success. It is the first concrete measure to ‘Make in India’ and ensure industry a level playing field. It could become a game-changer along with other reforms and better logistics. PLI signals the recognition that laissez-faire won’t work in a fiercely competitive global market, where everyone else — especially China — aggressively uses industrial policy.(The writer is distinguished visiting scholar, Institute of International Economic Policy, George Washington University, US)

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