Industrial Policy: Don’t Micro Manage by AJIT RANADE -JK Latest News

 Industrial Policy: Don’t Micro Manage

By AJIT RANADE

editor@thebillionpress.org

It is inevitable that with too many conditions, India’s industrial policy will become incoherent and inconsistent

Nokia was once the leader of the 

world in mobile phone handsets. 

Its largest manufacturing plant 

was located in Sriperumbudur 

in India as part of a special economic 

zone. In a six-year period it produced 

more than 500 million handsets, much 

of them exported. Nokia employed a 

workforce of more than 30,000 includ-

ing indirect employment, and it had a 

big share of women employees. Nokia 

was indeed the rock star example of 

what it means to make India a manu-

facturing hub for the world. It stood 

for a high-quality product and high 

quality employment, of a global brand, 

adding to the then brand of ‘Made in 

India’. But much before ‘Make-in-

India’ became a slogan, the Nokia plant 

was shut down. It has now become a 

case study in business schools of the 

opposite of a Cinderella story, of how 

a successful dream-like story can go 

kaput.

This is not the place to discuss the 

demise of the Indian factory in all its 

gory details. A part of the blame goes 

to excessive zeal shown by India’s tax 

authorities, bordering on tax terror-

ism, and also the broken promises. 

Blame must also be apportioned to 

Nokia’s own failure to anticipate the 

global revolution in smart phones, 

leading to being stuck with a large 

scale capacity in low-cost feature 

phones. With hindsight it can be safely 

said that much of this woeful story was 

avoidable, and an alternate glorious 

future could have been written for 

Nokia as well as India’s prowess in 

mobile phone manufacturing for the 

global market.

More importantly what have we 

learnt from the Nokia story? Stories of 

excessive zeal of the taxman continue. 

Despite lowering the corporate tax rate 

to East Asian levels, and for new manu-

facturing facilities down to 15 percent, 

the mindset is still extractive. India’s 

tax regime, including the GST system 

is still burdensome and inhibits com-

petitiveness. We have been successful 

in attracting Apple to make its iconic 

phones in India, so that is something to 

be celebrated. But as compared to the 

of scale of a 100 million phones annual 

production, achieved by Nokia, Apple 

is tiny.

The Apple story was success-

ful thanks to an approach called the 

‘production linked incentive scheme’ 

which gives incentives related to vol-

umes. That has been extended to 13

sectors, including mobile phones, 

drugs, battery cells, man-made textiles, 

auto-components and solar panels. The 

total budgeted outgo on incentives is 

nearly 2 trillion rupees over the next 

fi ve years. The PLI scheme seems to 

be supported by protection via import 

tariffs. This is an old school econom-

ics textbook approach, that to attract 

investment in the country, you raise 

tariff walls, and hence a foreign player 

can access India’s vast consumer 

market only by jumping across that 

wall, that is, being forced to invest 

in India. This is not the lesson which 

Nokia or Sriprumbudur taught us. 

That plant came to India not by jump-

ing tariff walls, but by being attracted 

by low cost labour and skills, as well as 

ease of doing business in an SEZ. If we 

promote domestic production by rais-

ing import tariffs, it increases costs 

for the domestic buyer signifi cantly. It 

also acts like an export tax, for entre-

preneurs who are using imported com-

ponents to re-export their products.

Unfortunately, India reversed 

its two-and-half-decade old progress 

in tariff reduction in 2018. Since 

then India’s average import tariff 

on industrial products has gone up 

from 13 percent to 18 percent, and 

has been applied to nearly one third 

to one half of all 10,000 odd product 

lines. Remember, high import duties 

increase domestic costs, and are a 

de facto export tax as well. Addition-

ally, the PLI scheme’s approach is 

to pick winners and champions. In 

some sectors this makes sense. For 

instance, India’s import dependence on

China for advanced pharmaceuti-

cal intermediates (API) is 68 percent 

and that needs to go down. It is also 

a strategic sector since it is in health-

care. But India’s status as a leading 

bulk drugs exporter to the West is 

also dependent on the import of API’s 

from China. 

So, while a PLI for APIs 

is good, it will take some time to wean 

away from China dependence. But in 

general the government cannot, and 

should not be in the business of choos-

ing winners and champions, and least 

of all future trends in technology. 

Imagine if the government had a PLI

scheme for Nokia to produce low cost 

2G phones in very large quantities, it 

would have been stuck paying for an 

obsolete technology. And if it abrupt-

ly discontinued it, then it would have

been guilty of breaking a sovereign 

promise.

Such are the perils of incentivising 

production in fast technology indus-

trial fi elds. Another hazard of the 

PLI scheme is that the government 

specifi es too many details and tries

to micro-manage. This may be due 

to the government’s bureaucratic 

approach, or excessive caution in 

preventing abuse of subsidies. One 

example of this overkill is that the 

bid document for the auto sector for 

those who wish to apply for PLIs is 187 

pages long! Imagine the compliance 

cost. No wonder so far not many big 

players have stepped in, either for auto 

or for pharma. Thus, industrial policy 

which is too intrusive, too prescrip-

tive, too keen to pick and choose win-

ners, and far too based on protection-

ism is bound to get tangled up and not

succeed.

The recent case of BSNL is illustra-

tive. Forced to break away from a con-

fi rmed tender to Chinese suppliers for 

its 4G network, it found that the new 

bidders were 89% more expensive, and 

had no proven track record in produc-

ing at scale. Another anomaly is in solar

panels, where on one hand we want 

to achieve 100 gigawatt solar capacity 

but have put tariff barriers on foreign 

suppliers. This will increase the cost of 

domestic production of solar power. It 

is inevitable that with too many con-

ditions, India’s industrial policy will 

become incoherent and inconsistent. 

The best approach is one which gives 

private and foreign investors stabil-

ity, predictability and continuity in 

a broad policy stance. Leave out the 

micro specifi cations if you want to 

succeed.

(Dr.Ajit Ranade is an economist and Senior 

Fellow, Takshashila Institution) 

(Syndicate: The Billion Press)