For a self-reliant India, one needs generic policies that will enhance overall competitiveness. One needs to adopt modern chemistry
The process of converting baser metals into gold was attempted by alchemists centuries ago. The via media for this process was to invent the elusive Philosopher’s Stone. Government of India has attempted exactly that for Atmanirbhar manufacturing. In April 2020, it announced Production Linked Incentive (PLI) scheme for manufacturing mobiles and electronic components. Soon, the scheme was extended to medical equipment followed by ten other sectors — from automobiles to air-conditioners, graphics tablets to telecom equipment, and food processing industry.
Cumbersome administrative process
A project management agency (PMA) is established in each ministry to implement the PLI scheme. The PMA, in turn, will recommend to an empowered committee (EC) to give subsidy to the identified firms. The EC consists of the secretaries from various government departments and the CEO of NITI Aayog. A subsidy of 4 per cent to 6 per cent will be given each year on the incremental sales of a firm compared to the base year sales of 2019-20. Moreover, a technical committee (TC) may also be constituted to give recommendations on technical matters. Finally, the disbursements cannot be rolled out unless the Union Cabinet approves the same.
The approvals process has many conditions. Firms from different industries have different minimum incremental sales requirements and minimum incremental and cumulative investment requirements. R&D investments are considered as incremental investments but a firm needs to get a certificate from a statutory auditor identifying cost of intellectual property rights (IPRs).
Incremental investments are expected to be greenfield. However, if new investments are made in the brownfield facility, separate records are to be maintained for the same. Spending on land and buildings does not qualify as incremental investment. From among the eligible firms, a few will get selected for subsidy. For example, only the top 5 firms each, in terms of their global sales, will qualify from large-size mobile phone firms and domestic mobile phone firms. There is also a cap on total disbursements in each sub-scheme. Application fees are very steep and if excess disbursements are made, recovery is to be made with interest.
However, there are no penalties to the government for delays in processing and/or insufficient disbursements. Clearly, the teeth-to-tail ratio of this administrative process is ominously large.
The taste of the pudding is in the eating. Already, many firms, including Foxconn, have approached the government to delay the starting of the first-year conditionalities on additional sales and investments. Firms have claimed that there have been inordinate delays in land acquisition. They are also claiming paucity of trained manpower and that demand for their products is not likely to pick up. And, while these issues are being raised, new industries are canvassing with the government to extend the PLI Scheme to them. Where will this stop?
A scheme costing more than ₹2 trillion would need all the efficiency the government can muster. In competitive markets, only efficient firms remain in the market. Politicians too compete and the fear of losing election makes them attempt positive changes. However, government agencies are monopolies. Civil servants are talented but they neither face competition nor do they have knowledge of technology and the markets. They may not appreciate nuances of incremental investments, incremental sales, and blends of greenfields and brownfields.
Businesses set up to take advantage of the government licences are prone to suspect accounting practices and shoddy equipment procurement. For schemes like PLI, administrative structures get burdened and management gets passed from efficient to uninterested bureaucracy. Unintended consequences follow — plant raids, litigation, and corruption. Competitiveness cannot be increased by such Licence Raj.
The competitiveness of a nation depends upon the enabling government policies which lower cost for standardised commodities and fetch premium prices for innovative products. For starters, there is a scope for harmonisation of the Goods and Services Tax (GST). A blanket 10 per cent GST rate will be efficient for tax administration and it will also lower costs across industries.
Competitiveness through reforms
India’s electricity is one of the costliest. Distribution companies (discoms) all across India should be privatised first, fuel-for-electricity market next, followed by electricity generation firms. Importantly, electricity subsidy should be replaced with direct benefit transfers (DBTs) into the Jan Dhan accounts of eligible farmers. These reforms would lower electricity cost all industries.
Due to significant contribution of non-tradables, rupee exchange rate does not change in tandem with the ratio of domestic and foreign inflation. Hence, rupee has remained overvalued for a few years now. This erodes the competitiveness of Indian products. Through managed float, government could facilitate depreciation of rupee by about 10 per cent. This policy, particularly in the current times of recession, would be consistent with the expansionary monetary policy which would help bring cost of capital down.
While firms can be exempted from long-term capital-gains tax when funds are directed to R&D activities, government may also facilitate procurement of high-technology equipment for defence and space industry from domestic players. Moreover, government may focus on research through competitive grants to universities rather than financing stand-alone research institutions which do not have the cheap source of R&D – Ph D students. Skilling of labour force through private ITI-like training institutions will also improve shop-floor productivity. Furthermore, foreign direct investment (FDI) may be directed towards global value chains (GVCs).
For Atmanirbhar Bharat, one needs generic policies that will enhance overall competitiveness. PLI scheme looks like the elusive philosopher’s stone which an alchemist tries to seek. One needs to adopt modern chemistry.
The author teaches economics at IIM Ahmedabad