Industrial policy eyes forex pile for finance

Experts have welcomed the proposed industrial policy, but are sceptical about leveraging India’s forex reserves to set up a DFI.
Experts have welcomed the proposed industrial policy, but are sceptical about leveraging India’s forex reserves to set up a DFI.

Summary

The draft ‘Industrial Policy 2022—Make in India for the world’ has been circulated for consultations.

The ministry of commerce and industry is working on a new industrial policy and is exploring the creation of a development finance institution (DFI) that may use India’s forex reserves to provide low-cost finance to companies and set up a technology fund to help them move up the value chain, two people familiar with the matter said.

The draft “Industrial Policy 2022—Make in India for the world" has been circulated by the Union ministry of commerce and industry for consultations with other ministries.

India’s industrial policy has undergone a significant transformation over the years, moving from a predominantly socialist approach to a more capitalist orientation in 1991.

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The industrial policy of 1991 provided the blueprint for a more liberalized regime that focused on attracting foreign investments and reducing regulations.

The industrial policy being developed now aims to boost companies’ access to finance for rapid industrial growth.

The policy includes a proposal to establish a technology fund that would incentivize pioneer companies in advanced technology areas and identify them for acquisitions.

While experts welcomed the proposed industrial policy, they remained sceptical about leveraging India’s forex reserves to set up a DFI.

“Currency reserves are not assets to be used. This issue (of using forex for financing industrial growth) comes back and forth. You cannot invest forex anywhere you want," said N.R. Bhanumurthy, vice-chancellor of Dr B.R. Ambedkar School of Economics University, Bengaluru.

The proposed industrial policy focuses on several key areas, including improving competitiveness, achieving international scale, integration with global supply chains, facilitating the movement of the local industry up the value chain, becoming an innovative knowledge economy, improving the ease of doing business, and creating skills and employment. The policy also includes a plan to develop mega clusters that can integrate with global supply chains and serve the needs of key sectors such as heavy engineering, electronics, food processing, drugs, semiconductors, and automobiles.

Under the new industrial policy, one of the proposals is to help small businesses access the corporate bond markets.

“The biggest concern for MSMEs is financing. Banks seek collateral to provide funds to a growing medium-scale industry that eats into the working capital of an MSME, and most of them are not in a position to provide collateral over the years," said V.K. Agarwal, former president of the Federation of Indian Micro and Small and Medium Enterprises and current chairman of its policy committee.

The proposed policy also suggests tapping pension funds. While the government is optimistic that industry-friendly reforms will help drive India’s industrial push, concerns, including high logistics costs and regulatory burdens, remain.

“For India, the timing is right. And features like setting up a DFI, establishing a technology fund, helping MSMEs to tap the bond market and reviving the industrial clusters are ideas that are welcome. But the devil lies in the details, i.e., how these ideas will be implemented. Implementing them through public-private partnership and with greater consultation with MSME entrepreneurs will be key," said Deepak Mishra, chief executive at the economic think-tank ICRIER.

Queries emailed to the spokespeople for the ministry of commerce and industry, finance ministry, and the Reserve Bank of India on Monday evening remained unanswered till press time.

Eleven industrial clusters, including the Delhi-Mumbai Industrial Corridor, Chennai-Bengaluru Industrial Corridor and Hyderabad-Nagpur Industrial corridor, have been developed to further boost the manufacturing sector.

“When you do this kind of (industrial) cluster development, the government decides where the location should be. But that is not necessarily where people wish to locate. So it is better to look at existing clusters and see if you can strengthen and widen them," said Pronab Sen, a former chief statistician of India.

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