India’s decision to introduce import restrictions on personal computers, laptops, and a range of goods, has set up a furious debate over the shape of India’s industrial policy. Critics think of these restrictions as a throwback to the days where the Indian economy was hobbled by the licence permit raj and ruled by arbitrary, imperious and corrupt bureaucrats. Citizens were condemned to scarcity, second rate goods or subverting government regulation. The way in which the government announced the scheme, then revised the deadlines, certainly raised the familiar worry about bureaucrats “breaking first and asking questions later”. On the other hand, advocates of the policy argue this was long overdue. Whatever the other successes of India’s liberalisation, the fact is that India failed to build a manufacturing base, and prematurely de-industrialised. No country in the world has industrialised merely by deregulation. Industrial policy is necessary for the structural transformation of the economy. Well-chosen import restrictions can be an element in that policy arsenal. The global context requires serious industrial policy. Every other country is resorting to it, and the nature of geo-politics and security requires that we take manufacturing seriously.
The debate over industrial policy needs to be rescued from two different kinds of mistakes. On the one hand, theoretical simplicity. Critics of industrial policy argue that India needs to focus on the general features that make an economy competitive — the state should not be in the business of picking winners and losers. But this theoretical logic is often too simple. Industrial policy can create positive externalities, it can solve coordination problems and create agglomeration effects. For an economy stuck in a low level equilibrium, it can generate demonstration effects that are a powerful signal of credibility. But, there is a different kind of danger, where the weight of historical analogies condemns you to fighting battles that were over decades ago. The right analogy is not India in the Sixties or Seventies.
In the past Indian industrial policy yielded tepid results at best. But historical conditions have changed. Energy, logistics, human capital and global geopolitics are not such binding constraints on India as they were before. The size of the market, in some areas, gives India more leverage than before. There is also an evolution in state capacity. This current form of import restrictions is very different from what we experienced in the Sixties. Those restrictions were more far reaching. Your entire architecture of imports and production was regulated in a way that hobbled domestic productive and allocative efficiencies. The aim here is not to reduce dependence on imports tout court, it is to change their structure a bit. So long as we can credibly make this distinction we do not have to repeat the tragedy of previous industrial policy. All you are doing is providing a little stick for investments that are already viable. It is too simplistic to say that such sticks should not be necessary if your economy is competitive. But the weight of evidence makes it difficult to argue that even with many of those conditions in place, state resolve and intervention is not required to attract investment.
Second, arguably these restrictions are being introduced in sectors where we have prospects of success. India has experimented with this model in the case of mobile phones. Outright failure in industrial policy is easier to understand; what counts as success is harder to define. For critics of the scheme, the relevant yardstick is value added in exports. Eminent economists like Rohit Lamba and Raghuram Rajan, are sceptical of PLI on the grounds that not much value is added in India. There has been much debate over the data on value added and jobs created in the case of mobile phones. Let us concede for a moment that some of their criticism is correct. But it is still not clear that India is worse off in any way. For starters, given India’s deeply sub optimal equilibrium, even assembly without high value added manufacturing puts us in a better position than its absence, both in terms of jobs and learning capabilities. Second, our assessment will depend on what we think are the feedback loops from getting companies to assemble in India: Are there spillover, agglomeration and demonstration effects that benefit the economy in the medium run? If so, forcing companies to manufacture can work.
But equally, it has to be said that for advocates of import restrictions, and PLI more generally, there are four questions. First, notwithstanding growth in state capacity, the political economy of bureaucratic arbitrariness should not be underestimated, especially in a context where the state heavily favours particular companies over others. Second, the Indian states’ Achilles’ heel has always been exit: Will it be able to exit from these subsidies and modest protections?
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Third, we know that the most important thing about Chinese and East Asian industrial policy was their export orientation. Unless you are benchmarking yourself in competition with the best and most demanding in the world, you will never be at the frontier. But India’s orientation to exports is challenging in two respects. China and East Asia pulled off both industrial policy and maintained access to an open world trade system. India is in a contradictory position. Export orientation will require an open trade system. But support for an open trade system is diminishing globally. India cannot be an effective advocate for that system if it itself turns protectionist. So there is a risk that modest sectoral success comes at the cost of undermining the broader conditions of an export economy.
India has had some success in exporting mobiles. But in other cases, automobiles for example, made and assembled in India, even by multinationals, are not competitive on the quality curve. It is possible that you can relocate assembly and manufacturing, but India will not be at the edge of the quality curve. So it is important to configure industrial policy in a way that it becomes a push for exports, not another import substitution scheme.
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And finally, with the government there is the penchant for showmanship. We are, for instance, making much of the Micron deal, with the government providing 70 per cent of the investment. Yet at the same time we forget that chip companies are relocating manufacturing to far more expensive places with less subsidy. But the important thing is that in the debate over industrial policy we should not be hostage to showmanship, theoretical simplicity or misleading historical analogies. We will require careful analysis of our circumstances and capabilities. We do need an industrial policy where the benefits of laptops are for more than the laptop class.
The writer is contributing editor, The Indian Express
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