Rahul Jacob: Grab the chance to reset India’s industrial policy

Less emphasis on the PLI scheme ought to create room for a new industrial policy. Let’s call it ‘NIP’ as a marker of the speed needed in rethinking our approach on several issues that bedevil the economy. These include India’s overvalued exchange rate, which should be routinely measured against a basket of our export competitors’ currencies, and concluding key bilateral trade treaties over which negotiations have dragged on for years.

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The Reuters report suggests governments need to avoid the temptation of becoming venture capitalists. To be fair, there is hardly a major economy that hasn’t made a similar effort to pick winners and determine what is strategic. Every large economy is seeking to boost manufacturing, even as Beijing games the global trading system to its benefit. In response to the Reuters article, the government said that the PLI scheme had been a success and that participating firms had produced $163 billion worth of goods, or 90% of the target for 2024-25.

Since its inception, however, the PLI scheme has seemed like a kind of creaky time-machine to travel back to India’s socialist 1970s that we thought we had left behind. In January 2021, I wrote in Mint that PLI procedures to evaluate the eligibility of companies ran the risk of ushering in a limited licence raj. Given the track record of India’s bureaucracy dating back to the 1950s, several commentators had similar views.

In a prescient piece for Takshashila Institution five years ago, Pranay Kotasthane pointed out that “the PLI scheme for the electronics sector has specific eligibility criteria both on incremental investment and incremental sales a company needs to commit over the next five years" and that this would be evaluated by a project management agency under the ministry of electronics and information technology.

In turn, these recommendations would be checked by a powerful panel comprising the CEO of Niti Aayog and several ministry secretaries. Kotasthane observed, “The committee is empowered to revise anything—subsidy rate, eligibility criteria, and target segments." He warned there was a risk that “reasonable regulation drifts toward overregulation." In addition, the scheme has come to include home appliances, food products and textiles. None of these can be deemed strategic and this mission creep overburdens government capacity.

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There is now an opportunity to go for a new industrial policy by making the ease of doing business a genuine goal rather than a cliché. Instead, there is a legal case currently before the Bombay high court in which the customs department accuses Volkswagen of bringing in knocked-down kits of cars and labelling them as spare parts, which attract lower tax rates. These alleged malpractices started in 2012 and the government is seeking $1.4 billion in back taxes.

The court will decide who is wrong, but it is hard not to wonder why something that dates back more than a decade has come to light recently. A similar $601 million tax demand of Samsung was revealed this week. These risk generating international headlines at a time when foreign direct investment into India has been weak.

Then there are our bilateral trade agreement discussions with the EU, which began in 2007. Progress has reportedly been so slow astonishingly because of an impasse over imports of European cars and wine. Meanwhile, Bangladesh and other countries that have preferential trade arrangements have increased their global share of garments and apparel exports.

It would have been more strategic from a job-creation perspective to have speedily concluded a trade agreement years ago than for textile companies, for instance, to be covered by the PLI scheme. Swarajya magazine this week argued that India’s trade bureaucracy is understaffed, with some 150 officers, compared with more than 800 in the US.

Interventionist trade policies could have adverse outcomes, however, as companies and consumers in the US will learn on 2 April as the Trump administration goes ahead with tariffs. This is statist industrial policy by another name.

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A tariff favouring one influential domestic company usually hurts many others that suffer costlier inputs. India, for instance, has several hundred quality control orders (QCOs) playing havoc with supply chains while reducing competition at home.

These put foreign factories that export to India under a microscope and subject to inspections. R.P. Goyal, trade advisor to Shahi Exports, India’s largest apparel exporter, observes that while QCOs may be well-intentioned, a thorough assessment of the impact on all stakeholders must be done before they are applied. “Foreign suppliers are often not interested in going through the rigours of providing detailed information, conducting inspections and complying with irritating formalities," Goyal said. “As a result, supplies (dry) up, and manufacturing activities in India suffer."

The author is a Mint columnist and a former Financial Times foreign correspondent.