Strategic interventions take time to bear fruit

PLI is a bold scheme, albeit with systematic reviews over an extended period of time for significant results.

There is a renewed interest in industrial policy once again, it is now well recognised that the manufacturing industry’s growth in countries such as South Korea, Taiwan, Vietnam and Singapore, and even larger economies like Japan and China would not have been possible without their respective government’s strategic support. Even the advanced economies are no exception. ‘America first’, ‘Europe first’, etc, were interventions by governments in the areas of strengthening scale economies, support for technological upgradation, preferential purchases from domestic units and incentives for domestic production. There was also a deliberate attempt in East Asia to create national champions and national brands. It is indeed true that the competitive game has to be played at the firm level, nevertheless, strategic interventions by the government can create a more conducive environment for attracting investments, linking to global value chains and maintaining competitiveness in export markets over an extended period of time.

Building Blocks

It is in this context that, ‘Make in India’, production-linked incentive (PLI) schemes and our renewed interest in bilateral trade negotiations become important. These are all building blocks of supportive strategic thrust from the government, which may be more flexible and forward-looking than an overall industrial policy masterplan. Current research shows that government interventions for strengthening competitiveness and export growth are not without positive results, the effect plays out in the long run. Two interesting examples of these are the growth of the heavy chemical industry in South Korea and the shipbuilding industry in China.

Given this, it is important to recognise that government support for the electronic industry, auto components or other engineering industries may not show results in the next 1-2 years but over the next 5-10 years. This requires a necessary commitment to incur budgetary expenditure for further industrial growth incentives, employment and exports. PLI is a bold scheme, largely World Trade Organization (WTO) compatible but has to be continued, albeit with systematic reviews over an extended period of time for significant results. Systematic reviews will provide opportunities for revisiting import tariffs, till then one may have to depend on exchange rates for adjustments. The real effective exchange rate needs to be monitored closely.

There was a time not so long back when the thrust of industrial growth was solely linked to globalisation. The emphasis seems to have shifted across economies and the focus is back to domestic manufacturing growth and quality job creation. After all, for every economy confronted with the problem of lack of quality employment (unemployment and underemployment), inclusive growth is quite important. Given this scenario, there is an added emphasis on textiles including ready-made garments, leather and shoes, gems and jewellery, toys, etc. Many of these have the potential to benefit from an export thrust linked to PLI interventions.

China Plus One Opportunity

The world trade is expected to grow at 1.7 percent in 2023, both GDP growth and trade growth are coming down and inflation continues to remain firm across countries leading to monetary tightening. All this has been exacerbated by recessionary trends in Europe and geopolitical tensions. The downswing in the Chinese economy and spikes in fuel and food prices across the world have added to the economic difficulties, this is certainly not the best environment for export growth. India’s share in world trade is around 2.4 percent, and the country’s share in high-value exports (like power generation equipment, electrical machinery, vehicles and transport equipment, telecom equipment, etc) would be around 1-2 percent of world trade in these areas. Secondly, India’s participation in global value chains is still not significant. In order to expand our share in high-value exports and take advantage of China plus one and ‘friend-shoring’ requirements, entering into bilateral trade arrangements would be important. It is indeed true that a part of the interest in signing new bilateral treaties is guided by geopolitical interests. India has to keep in mind its emerging economic and industrial structure. For new FTAs, India has selected countries that have resource endowments different from ours. This is a development very different from what happened when FTAs with ASEAN countries were signed. There are a lot of complementarities with the countries with which we are keen to develop bilateral economic relationships currently.

There are three key features in terms of complementarity that are important for India and its new bilateral partners. Firstly, it is scale. India’s large domestic market can attract multinationals to set up enterprises for domestic markets and exports. Secondly, the export profile of India is quite different from that of the UK, EU, Australia and the UAE, albeit there could be some industries wherein complementarity is missing. These product lines like dairy can be kept out of the negotiations. Thirdly, many of these countries are following China plus one strategy for their supply chains. Indian manufacturing provides the scope for mitigating the risk of dependence on China for these economies. As many of the bilaterals are in the nature of the Comprehensive Economic Partnership Agreement (CEPA), one can explore the opportunity of attracting FDI in the high-value export sectors such as electronics, machinery building, auto components, electrical equipment, chemicals, defence and aerospace.

At one point in time, Indian trade policy was too dependent on relative comparative advantage-based product identification for exports. However, that kind of list of items will play a limited role in the coming years. Future exports will be guided by the emerging architecture of the Indian industry spurred by PLI. Another aspect of bilateral agreements is to focus on inputs for domestic and export-linked manufacturing. Both the UAE (fuel) and Australia (minerals) can be major suppliers of inputs for the future.

The reform process in the areas of industrial interventions by the government needs to link Make in India and PLI with trade policy and bilateral negotiations (CEPA). At the same time, the success of these policies needs to be buttressed by lower logistics costs due to better infrastructure, technological upgradation and improved trade facilitation. Finally, for the success of the government’s strategic interventions in industry and trade, we need a long-term framework that needs to be monitored periodically.

Siddhartha Roy is the former Economic Advisor of the Tata Group. Views are personal, and do not represent the stand of this publication.