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