India has undertaken steps towards exports-centric manufacturing and has kickstarted its own industrial policymaking, suggesting that India’s industrial policy is beginning to mature
Following the launch of the “Make in India” initiative in 2014, there was palpable excitement about India finally developing a competitive manufacturing base. Except, it took the government no less than six years to come up with a substantive industrialisation strategy. With the launch of the Production Linked Incentives (PLI) Scheme in March 2020, India not only took a consequential step towards exports-centric manufacturing but also kickstarted its own industrial policymaking. Now, over the past year, there are clear signs suggesting that India’s industrial policy is not just working, but also beginning to mature.
In a nutshell, industrial policy involves prioritising certain sectors over others, and this support is conditional on their export performance. Thus, it is a dynamic process, and the learning process, whether by the government or firms, is one of the key ingredients of success. There is no one ideal industrial policy model that all catch-up states can follow.
With the launch of the Production Linked Incentives (PLI) Scheme in March 2020, India not only took a consequential step towards exports-centric manufacturing but also kickstarted its own industrial policymaking.
Rather, in East Asia “successful [industrialisation] strategies only emerged through a process of trial and error and learning by doing that were always to some extent sui generis,” writes Stephan Haggar in his book “Developmental States”. And recent signs suggest that the Indian policymakers too are beginning to learn from their industrial policies and amend them as they go along.
Schemes such as PLI include production incentives for 14 sectors, with a total outlay of nearly US$24 billion over the next five years or so. The basic idea here is to pick sectoral winners and provide them with incentives. Among these, sectors such as electronics, especially smartphone assembly, medical devices, and pharmaceuticals have done remarkably well—resulting in a substantive increase in foreign investments and exports. Meanwhile, in other sectors, either the results have been disappointing—such as textiles—or the gestation period has been much longer than expected, such as in solar photovoltaic (PV) modules, and Advanced Chemistry Cell (ACC) batteries.
Given the excitement around PLI schemes, there was a clamour among several central ministries to further expand them to sectors that had been left out. Ministries such as ports, shipping, inland waterways, heavy industries, steel, and mining were actively demanding new PLI schemes that would include their sectors.
Here, the maturing of India’s policymakers becomes evident. After careful deliberation, they decided against expanding the PLI schemes. “Right now, the kitty is sufficient, and this government feels the allocation is sufficient,” remarked Rajesh Kumar Singh, the Secretary of the Department for the Promotion of Industry and Internal Trade, after the decision. “The output of PLI schemes this year (2023) is not as high as we expected, but the performance in terms of sales and exports has been reasonably good.”
This kind of adaptability is a vital aspect of industrial policymaking. “The more successful East Asian economies were willing to quickly and/or significantly adapt their policies to changing internal and external conditions,” writes Robert Wade in “Governing the Market”.
“The output of PLI schemes this year (2023) is not as high as we expected, but the performance in terms of sales and exports has been reasonably good.”
Consider the case of South Korea, which through the 1960s had successfully facilitated labour-intensive manufacturing in sectors like garments, shoes, textiles, wigs, and stuffed toys. But recognising the upward pressure on wages, the government under its new ruler Park Chung-hee, embarked on a bold new industrial policy. Starting in 1973, the government shifted its focus to the Heavy and Chemical Industry (HCI). Even though this industrial policy ended with Chung-hee’s assassination in 1979, it resulted in the rise of South Korea’s HCI sector as a global exporting hub.
Another important part of industrial policymaking is measurement. One of the fundamental differences between a command economy and industrial policy is performance-based support for industries. This is what makes measurement crucial. Even here, Indian policymakers are beginning to learn. For instance, when it comes to PLI schemes, there have been periodic reviews by the Empowered Committee (EC) on PLI and other stakeholders within the government. These review meetings have often been chaired by the Cabinet Secretary, Rajiv Gauba or the Minister of Commerce and Industry, Piyush Goyal—reflecting the high-level political interest in conducting such reviews.
Industrial policy is a collaborative exercise between the government and the firms, and this is exactly what Goyal said during a workshop on PLI a few months back. He asked government officials of all the implementing ministries to hold regular “consultations” and “roundtables” with PLI beneficiaries to facilitate a “conductive” business environment.
Industrial policy is a collaborative exercise between the government and the firms, and this is exactly what Goyal said during a workshop on PLI a few months back.
More substantively, a well-functioning industrial policy also requires the economic bureaucracy to exhibit “embedded autonomy”. This means that this bureaucracy is constantly in contact with the firms and the industry. This allows the bureaucrats to understand specific roadblocks, market failures, and externalities that the firms face. In turn, this proximity also allows the bureaucrats to discipline the firms, as and when required. The regular inputs from firms and subsequently, tweaking the policy for better results is at the heart of successful industrial policymaking.
Trade policy is one of the foundations of an industrial policy. And for very long, the government has been criticised for its slide towards trade protectionism. While several commentators, economists and even industry stakeholders have argued that this has hurt India’s prospects of integrating with global value chains, it does not affect the actual policy. But as India’s industrial policy is beginning to mature, we might be seeing some shift on the trade policy front as well—which seems to stem from consultations with firms. A few recent instances reflect that we might be in the early stages of embedded autonomy.
First, a recent report suggests that India’s trade officials are finally looking to lower tariffs on several goods as a part of their trade negotiations with developed countries such as the United Kingdom (UK), EU, Australia, and others. “Things are moving in the direction where tariffs cannot be a source of revenue. Tariffs contribute to revenue but a free trade agreement cannot be accessed based on tariffs because when free movement of goods and services happen, the overall economic growth is immense,” said an anonymous government official.
Second, the Indian government is in the advanced stages of negotiation with Elon Musk’s Tesla, to facilitate the EV giant to move some of its production to India. And several reports suggest that the Indian government is considering reducing import duties on electric vehicles and parts in a bid to bring Tesla to India. A lot of these policy changes might come as a part of a larger shift—a new EV policy.
While several commentators, economists and even industry stakeholders have argued that this has hurt India’s prospects of integrating with global value chains, it does not affect the actual policy.
Third, and relatedly, the government has told domestic auto manufacturers, that a reduction in EV duties is inevitable given India’s ongoing trade negotiations with the UK. Using international obligations to reduce tariffs domestically, is one of the classic ways of facilitating trade liberalisation. This shows how the government is also disciplining the industry when required.
For a very long time, commentators have argued that what ails India is a fundamental lack in state capacity. Even this author has argued that a lack of capacity restricts India from carrying out an effective industrial policy. But now there are clear signs that India’s industrial policymaking is coming of age. In this regard, it is important to remember one of the key lessons from East Asia’s developmental states: State capacity is developed alongside industrial development; it does not necessarily precede it.
Srijan Shukla is a Delhi-based political economy and risk analyst. He was previously with ThePrint and has studied at McGill University and New York University.
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Srijan Shukla is a Delhi-based political economy and risk analyst. He was previously with ThePrint and has studied at McGill University and New York University. ...
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