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

     Industrial Policy: Don’t Micro Manage

    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)

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