Date: 17/09/2022

Relevance: GS-2: Government policies and interventions for development in various sectors and issues arising out of their design and implementation; development processes and the development industry.

Key Phrases: Manufacturing and services sectors, sunrise sectors, government policies to boost manufacturing, Production-Linked Incentive (PLI) Scheme.

Context:

• Recently a former Governor of Reserve Bank of India (RBI) argued that the union government’s production-linked incentive (PLI) scheme was not beneficial for consumers as it undermined their interests.

Need of promoting a sector of economy through policy interventions

• The government can’t do everything for the economy but prioritizing certain sectors that have higher job creation or greater industrialization is good for the economy.
• Many highly industrialized developed and developing countries have achieved high growth by promoting development of industries through policy interventions.
• Recently various governments across the globe are promoting a particular industry such as the 2022 CHIPS [and Science] Act in the U.S.
  • Under which about $50 billion in incentives will be given to American companies to develop or to strengthen their semiconductor industry.
• Even the East Asian countries such as Japan, South Korea, China and Vietnam have become a manufacturing powerhouse running consistent trade and current account surpluses through strategic policies and state interventions.

Challenges of promoting a particular sector of economy

• Choosing a particular sector of the economy for promotions is a challenging task as it is hard to understand and anticipate which sectors of the economy will do well in the future.
• It is not feasible for officials in bureaucracies to look at the industrial landscape and make predictions because they do not have the necessary information or forecasting ability.
• The officials also lack motivation as they don’t get incentives vis-a-vis the private sector to implement such out of the box ideas.
• Also there is a risk of legal complexities such as investigation by the Central Bureau of Investigation and the Enforcement Directorate if their forecasts go wrong.
• Usually the free market and private players decide which policy is going to be successful or not which puts the government’s moves on the back burner thus making it just an agency to create a broad enabling environment.

Should India focus on manufacturing over services?

• Although Services’ share of the economy has gone up to over 50% of the GDP, the sector has not been able to create enough jobs in a commensurate manner.
• Agriculture still continues to sustain nearly half of India’s workforce i.e. 15% of GDP is supporting some 45% of the workforce.
• Since the manufacturing of all productive sectors has the highest backward and forward linkages
  • It has huge potential to generate high productivity jobs and many direct and indirect jobs which may help in shifting the labour force from agriculture.
• Manufacturing could be leveraged but there are many limitations such as state capacity, bureaucratic capacity, the incentives of policymakers, the capabilities of policymakers, etc.
  • It may affect the effective policy implementation and may harm the economy so there should be extensive deliberations before implementing such policies.

Is the PLI scheme prone to the risk of cronyism?

• Although, it is possible that the PLI may lead to some kind of cronyism but the subsidies are linked to performance and thus there is little room for discretion.
• Also there are objective criteria and certain provisions which can be used to check on cronyism such as
  • Subsidy is based on improved production of the previous year
  • Third-party audit of performance can be used to minimize misuse.
  • Further, tighter norms of export performance, competitiveness and innovation can be used.
• In addition, there are other dimensions which are considered by businesses such as the way the Companies Act works, the way Indian capital controls work, the way income tax works, the way GST works, etc. which acts as a check against cronyism.
• If structural problems are addressed in their entirety then the cronyism can be checked with the support of a well-placed public policy for industries.

Shouldn’t the government liberalize all sectors?

• Industries benefiting from schemes such as PLI have not been randomly chosen, rather chosen based on an opportunity to create new industries or reduce the dependence on imports, or where there are high linkages to other sectors.
• It includes some of the new sunrise sectors, such as the semiconductor industry, which are highly import-dependent and we want to manufacture in India as a part of a domestic industrialization drive.
• Although such schemes for selected sectors whose results are yet to be seen come with a great monetary cost to exchequer, an open economy needs such a policy to compete with other countries.
• Also the government can’t sponsor or incentivize all the sectors so the forecasted sunrise sectors are the only choices it can make.

Conclusion

• A policy can be evaluated only when it has been implemented for a certain time period.
• To revive the economy and boost exports we need to invest in capital expenditure which is not possible by the government itself and needs support of the private sector which demands incentives.
• Therefore to compete with other economies in a globalized world and open economy, the PLI scheme is a right step, and the current focus of the government to promote the manufacturing sector, is the right thing to do at this moment.

Source: The Hindu

Mains Question:

Q. Production-Linked Incentive (PLI) Scheme which was meant to generate employment and boost domestic production of critical items is prone to the risk of cronyism, Discuss. Also suggest measures to overcome challenges in implementation of the PLI scheme. (250 words).