Author: Aasheerwad Dwivedi, Delhi University

Historical experience presents ‘structural transformation’ as a necessary condition for achieving high economic growth in any country. The typical transformation path involves people moving from agriculture towards industries and then services, from low to high productivity sectors, and from villages to cities. To the sorrow of millions, India missed the bus in the 1960s and — unlike its Eastern neighbours such as China — followed its own atypical path.

India’s latest attempt to move up the value chain is the ‘Make in India’ initiative introduced in 2014, which emphasises creating world-class infrastructure, minimising red tape, promoting innovation-friendly policies and improving the ease of doing business. Its timing was seemingly perfect amid the trade opportunities ostensibly created by souring China–US trade relations.

Seven years after its introduction, the euphoria is low. The manufacturing sector’s share of Indian GDP is merely 15 per cent, despite the initiative targeting 25 per cent by 2022. The growth rate of manufacturing averaged 4.5 per cent from 2014–2021 — meaning the scheme is similarly unable to deliver the 100 million manufacturing jobs promised by policymakers. Although FDI has doubled since 2014 (US$81.72 billion in 2020–2021), most investment has flown into services and computer software or hardware.

Indian exports increased from US$310 billion in 2014 to just US$313 billion in 2020, with their composition largely unchanged. The EU-28 is still India’s main export destination, followed by the United States and other Asian countries (together comprising one-third of the total exports).

While failing to produce any significant result on the trade front, the scheme has had some success in attracting investment in mobile manufacturing, automobile and pharmaceuticals. Global brands like Samsung, Hitachi, Kia, Apple and PSA have started manufacturing in India, with India’s share of smartphone manufacturing doubling from 10 per cent to 20 per cent between 2017 and 2020.

To provide additional thrust to the ‘Make in India’ initiative, a ‘production-linked incentive’ was introduced in March 2020 to improve local supply chains and spur investment in high-tech production. To increase economies of scale, the government is subsidising manufacturers to invest in technology and supply chain improvements if they produce above a certain threshold.

The scheme covers 13 sectors, including pharmaceuticals, mobile phones, auto-components and textiles, with a total outlay of US$26.48 billion. Since the scheme is aimed at making domestic producers competitive and reducing import dependence, it is tailor-made for a post-COVID-19 world in which the benefits to a diversified manufacturing base are amplified.

Yet the hurdles to government-led manufacturing lie in policy inconsistency and poor sectoral targeting. Once the state provides protection, it is difficult to withdraw and difficult to discern what will happen in the absence of protection. India’s protectionist past is evidence of this difficult balancing act.

While the Indian government has rolled out policies to promote exports, trade policy is more inwardly oriented. The ‘Make in India’ initiative ignores the decades-long geographical fragmentation of the global production process, a reality that increases the import dependence of exports. The correlation between Indian imports and exports in the post-reform period stands as high as 0.75. Export growth requires India’s greater integration into global value chains — a feat achieved by China and Vietnam, where there is 40 per cent foreign value added in garment exports.

India’s average MFN tariff declined from 125 per cent to 13 per cent between 1991 and 2014, then increased from 13 per cent to 18 per cent from 2014 to 2018. This inward outlook can be explained by India’s signing of 11 free trade agreements between 2004 and 2014 — but none since then. India did not join the Regional Comprehensive Economic Partnership (RCEP), but is actively consulting with the United Kingdom over a free-trade agreement and is in advanced trade discussions with Australia, the UAE and Canada.

While it is too early to draw firm conclusions about the production-linked incentive scheme, an initial assessment indicates it suffers from poor targeting. There is enormous potential to increase labour-intensive exports in India, but only three out of the thirteen sectors targeted by the scheme — automobiles and auto components, mobile…

Source link