On track, warts and all

THE ‘Make in India’ initiative, launched by the Narendra Modi government soon after it came to power in 2014, sought to sharply boost manufacturing activity in India, critically enabled by a rise in foreign investment in manufacturing. This was spelt out in three objectives — increase the manufacturing sector’s annual growth rate to 12-14 per cent, create 100 million new jobs by 2022, and raise the manufacturing sector’s contribution to the GDP to 22 per cent by 2022, later revised to 2025.

Advertisement

‘Make in India’ initiative: ‘Make in India’ is a double-edged sword. The initiative needs to be handled cautiously to spur economic growth

In seeking to project the initiative as a success, the government has highlighted the increase in foreign direct investment from $45 billion in 2014-15 to $85 billion in 2021-22. Employment in the manufacturing sector increased to 62 million in 2019-20 from 57 million in 2017-18. As against these positives, the sector’s contribution to GDP has gone up only marginally — 17 per cent in 2022 from 15 per cent in 2017.

To take forward the ‘Make in India’ initiative, the government has launched the Production-Linked Incentive (PLI) scheme under which incentives are given on incremental sales from domestic production. Along with raising manufacturing output, the aim is also to boost exports. The scheme focuses on large-scale manufacturing of electronics goods, such as mobile phones and microprocessors (chips in common parlance) through all the stages — from assembly to testing to fabrication. The part of the scheme for IT hardware was recently revised and the budgetary allocation was more than doubled.

As one of the aims of the ‘Make in India’ initiative is to raise exports along with domestic manufacturing, the key issue which needs addressing from the policy angle is whether the scheme is appropriately designed to ‘Make for the world’. Domestic manufacturing can be stepped up by raising tariff and non-tariff barriers to curb imports so that domestic consumers are forced to buy costlier domestically produced goods instead of cheaper imports.

If this happens in a pronounced manner and stays put over time, the country will turn into a high-cost island and Indian products will be outpriced in global markets. So, it will be shortsighted to keep domestic manufacturing protected indefinitely behind high tariff barriers. Once domestic manufacturing capacity has been established, the aim must be to make it globally cost-effective.

This is because along with the rise in domestic manufacturing, import of components and sub-assemblies will inevitably increase as in modern-day electronics manufacturing, it is impossible for a country to have the entire supply chain within its borders. Such imports, most likely in hard currency, will have to be paid for from export earnings and these will not be forthcoming unless Indian manufacturing is cost-effective by global standards. Exports can, in the short run, be boosted by subsidies, but if manufacturers become dependent on them, such exports will not have a long-term future. Also, a large export subsidy bill will point to an indirect devaluation of the rupee and traders will seek to bid it down in foreign exchange markets.

A key issue here is how domestic manufacturing can be temporarily protected. There are three tools available for this: phytosanitary standards (cannot be used indefinitely with a protectionist mindset), tariffs and import licensing. Absolutely, the worst is permanent recourse to import licensing as it is a discretionary tool and opens the door for bureaucratic meddling. The country has moved away from licensing — be it for manufacturing or imports — ever since economic liberation started in the 1990s. Unfortunately, the government has decided to introduce import licensing for computing devices — from laptops to mainframes — in order to curb imports and give a boost to domestic manufacturing. This is going down the wrong path, particularly when the country is engaged in free trade negotiations with a range of countries which are meant to make it easy for the parties to access each other’s markets. Import licensing just does not go with ‘Make in India for the rest of the world’ as extensive recourse to it will inevitably lead to retaliation.

The government has put off the rollout of the licensing regime, which was initially supposed to commence with immediate effect, till November. What it needs to do next is to reassure Indian manufacturers and the country’s trading partners that this is a temporary measure and will not be extended to other categories of imports.

The bottomline is that in electronics and most other manufacturing sub-sectors, the global scene today is marked by elaborate supply chains, with each country specialising in a small part of it. A country imports a lot of items and exports value-added products, which become the inputs for manufacturers in other countries. The US, for example, focuses on intellectual property and chip designing and Europe on manufacturing machines to make chips. These are passed on to the Chinese, who export the manufactured goods to the US and Europe. The US, in particular, gets products at prices which it will not be able to deliver as its wage costs are higher. In the process, US consumers get affordable manufactured consumables. China’s large presence in the electronics value chain lies at the root of India’s burgeoning imports as it seeks to up its mobile phone output and get into the manufacture of microprocessors.

While the introduction of licensing for laptop imports appears to be a retrogressive step, the government has taken a forward-looking measure in the same sector. Last year, it launched the Design-Linked Incentive (DIL) scheme that encourages domestic startups to come up with applications for the development and design of integrated circuits that lie at the heart of chips. It is putting together a package to encourage investors and players to go into the development and ownership of intellectual property in chip designing and chipmaking. It has just announced a collaboration with Arm, a leading semiconductor IP (intellectual property) company based in Cambridge. It has a programme which gives free access to Arm IPs, tools and training so that young entrepreneurs can create innovative designs that aid import substitution and value addition in the electronics sector.

For the success of the ‘Make in India’ initiative, the government is moving in the right direction by providing incentives to both electronics design and manufacturing, the odd misstep like licensing laptop imports notwithstanding.