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GS Paper: GS3-12.Effects of liberalization on the economy, changes in industrial policy and their effects on industrial growth

  • Indian IT industry must seize the opportunity of Chinese tech exit

    The article analyses the significance of the Indian ban on Chinese apps. The ban also presents Indian IT companies with unique opportunity.

    Context

    • The current India-China border standoff has entered into cyberspace.

    How China took lead in IT

    • The Chinese government censored and banned several popular Western websites and applications years ago.
    • In the intervening years the Chinese Internet market exploded and has grown to over 900 million users.
    • The Chinese government insulated Chinese entrepreneurs from Big Tech in Silicon Valley.
    • Home-grown apps at first were faithful reproductions of Silicon Valley, but soon morphed into distinctly Chinese applications tailored solely to the home market.
    • According to the 2016 White House report, the Chinese have leapfrogged even the U.S. in AI research.
    • In this case, the intellectual property being produced actually belongs to China and is not a faithful duplicate of someone else’s product or technology.
    • This has far-reaching implications.

    Significance of India’s ban

    • India now has the lowest Internet data costs in the world.
    • In its attempt to dominate the rest of the world, the Chinese Internet industry desperately needs India’s 500-plus million netizens to continue to train AI algorithms they put together.
    • The ban on apps in India is not only a geopolitical move but also a strategic trade manoeuvre that can have a significant economic impact.
    • Ban on Chinese apps allows our home-grown IT talent to focus on the newly arrived Internet user.
    • However, India’s focus remains on exporting IT services while paying little attention to servicing our own nation’s tech market.
    • India spent the last two decades exporting technology services to developed countries in the West, the vacuum created as the Indian Internet grew has been filled by American Big Tech and by the Chinese.
    • After the removal of more than 118 Chinese apps, Indian techies have started trying to fill the holes.

    Way forward

    • The primary Indian IT objective must shift from servicing others to providing for ourselves.
    • Focus should not be simply to replace what the exiting firms have so far been providing.
    • Focus should be on providing services and products of high quality that will be used by everyday Indians across the country.
    • The aim of providing netizens with the same services across diverse markets is overarching — regional barriers created by language exist within our own nation.
    • The fundamental focus of the new digital products should be to provide for hyper-regional necessities and preferences.
    • Hyper-local and hyper-regional services with great accessibility that are also portable across our linguistic diversity, are likely to succeed in creating one of the strongest Internet markets in the world.

    Consider the question “What are factors responsible for the lack of innovation in the Indian IT industry? How the ban on Chinese apps provide the IT industry with the opportunity to fill the vacuum?”

    Conclusion

    Indian IT companies must seize the opportunity provided by the exit of Chinese IT companies and come up with products transcending regional barriers and allowing accessibility.

  • [pib] Ranking of States on Support to Startup Ecosystems, 2019

    The Results of the second edition of Ranking of States on Support to Startup Ecosystems were recently released by Minister of Commerce & Industry.

    About the Ranking

    • The Department for Promotion of Industry and Internal Trade (DPIIT) has conducted the second edition of the States Startup Ranking Exercise.
    • The key objective is to foster competitiveness and propel States and Union Territories to work proactively towards uplifting the startup ecosystem.
    • It has been implemented as a capacity development exercise to encourage mutual learning among all states and to provide support in policy formulation and implementation.

    7 focus areas

    1. Institutional Leaders
    2. Regulatory Change Champions
    3. Procurement Leaders
    4. Incubation Hubs
    5. Seeding Innovation Leaders
    6. Scaling Innovations Leaders
    7. Awareness and Outreach Champions

  • [pib] ARISE-ANIC Initiative

    Atal Innovation Mission (AIM), NITI Aayog, has launched Aatmanirbhar Bharat ARISE-Atal New India Challenges, to spur applied research and innovation in Indian MSMEs and startups.

    The name ARISE typically sounds some social sector or HRD related initiative. This is where one has to be cautious.

    ARISE ANIC Initiative

    • The program is a national initiative to promote research & innovation and increase the competitiveness of Indian startups and MSMEs.
    • Its objective is to proactively collaborate with esteemed Ministries and the associated industries to catalyse research, innovation and facilitate innovative solutions to sectoral problems.
    • It also aims to provide a steady stream of innovative products & solutions where the Central Government Ministries / Departments will become the potential first buyers.
    • It is in line with the PM’s mandate of “Make in India”, “Startup India”, and “Aatmanirbhar Bharat” to fast track the growth of the Indian MSME sector.

    Its implementation

    • The programme will be driven by ISRO, four ministries—Ministry of Defence; Ministry of Food Processing Industries; Ministry of Health and Family Welfare; and Ministry of Housing and Urban Affairs.
    • It will support deserving applied research-based innovations by providing funding support of up to Rs 50 lakh for speedy development of the proposed technology solution and/or product.

  • E-commerce rules 2020

    The article analyses the various restrictions under The Consumer Protection (E-Commerce) Rules, 2020 to regulate all commercial transactions and issues with such restrictions.

    Context

    • The recent rules relating to e-commerce, issued by the ministry of consumer affairs, food and public distribution, under the Consumer Protection Act, 2019 needs some changes.

    What the recent rules specify

    • The Consumer Protection (E-Commerce) Rules, 2020, notified on July 23, regulate all commercial transactions sold over a digital or electronic network.
    • The e-com rules currently recognise two e-commerce business models, namely, marketplace model and inventory-based model.
    • The rules have separate specified provisions for marketplace- and inventory-based entities.
    • The e-com rules require that all information on the return, refund, exchange, warranty and guarantee, delivery and shipment of the goods or services being sold, including their country of origin, be provided on the platform.
    • Such details enable consumers to make an informed decision.

    What the new rules seek to achieve

    • The country of origin requirement is significant as India and several other countries are currently re-negotiating their free trade agreements.
    • E-com rules prohibit unfair trade practices by entities and sellers on marketplaces and manipulation of price.
    • The entities are prohibited from manipulating the price of the goods or services to gain unreasonable profit by imposing unjustified price or charges on consumers.

    Issues with the rules

    • It remains unclear as to what would constitute price manipulation.
    • It also remain unclear how the e-commerce entities and sellers are expected to navigate these roadblocks without falling foul of such provisions.
    • Both the marketplace entity and sellers are now required to set up a grievance redressal mechanism, small businesses may not be in a position to comply.
    • The rules also prohibit an e-commerce entity from levying a charge for cancellation post confirmation.
    • While the provisions may be intended as safeguards that ensure a level-playing field, some of these conditions are impractical.
    • Applying identical rules does not convey a business-friendly approach.

    Investment restrictions

    • The Foreign Exchange Management (Non-debt Instruments) Rules, 2019 currently recognise the marketplace and inventory model.
    • It permit 100% FDI under the automatic route to marketplace entities as also to those engaged in single-brand retail.
    • Foreign investments, up to 51%, are permitted in multi-brand retail with prior government approval.
    • As per the non-debt rules, entities engaged in single-brand retail are permitted to undertake retail trading through e-commerce.
    • However, single-brand retail trading through e-commerce has to open a brick-and-mortar store within two years from the date it commences online retail.
    • Retail trading, in any form, by means of e-commerce, is not permissible for entities engaged in inventory-based multi-brand retail trading and having foreign investment.

    Consider the question “What are the objectives sought to be achieved through The Consumer Protection (E-Commerce) Rules, 2020 to regulate commercial transactions? What are the issues with the rules?”

    Conclusion

    The commercial sector is anxious for India to consider relaxing some of these requirements, or extending the time period for compliance, given that brick-and-mortar operations may not be possible in the foreseeable future.

    Source-

    https://www.financialexpress.com/opinion/e-commerce-rules-a-one-size-fits-all-approach-some-need-to-be-relaxed/2071953/

    Back2Basics: Invenetory model and marketplace model

    • Marketplace model of e-commerce means providing of an information technology platform by an e-commerce entity on a digital and electronic network to act as a facilitator between buyer and seller.
    • The main feature of the market place model is that the e-commerce firm like flipkart, snapdeal, amazon etc. will be providing a platform for customers to interact with a selected number of sellers.
    • Inventory model of ecommerce means an ecommerce activity where inventory of goods and services is owned by e-commerce entity and is sold to the consumers directly.
    • The main feature of inventory model is that the customer buys the product from the ecommerce firm.

  • Aiming for wider consumer base and directing public spending accordingly

    The article suggests the widening of consumer base rather than increasing consumption. To augment that, the government should also direct the spending towards such sectors which would help in broadening of the base.

    Prescription for long term growth: Broadening the consumer base

    • India entered the pandemic with declining growth and limited scope for a conventional and large fiscal stimulus.
    • The NSS 68th round consumption survey indicates that in urban India, the top 20 per cent of the population accounted for nearly 55 per cent of discretionary consumption and 45 per cent of all consumption.
    •  The narrow consumption base coupled with uncertainty over the demographic dividend could belie India’s long-term investment attractiveness.
    • With or without the pandemic, the prescriptions for long-term growth remain the same — broaden the consumer base.
    • This broadening of the consumer base should happen through empowering the low and middle-income consumers.

    Why can’t the government just spend to revive growth

    • 1) Temporary incomes coupled with job/income uncertainty will induce precautionary savings without any impact on growth.
    • 2) With revenues declined, funding of additional expenditure is through higher borrowings.
    • Any incremental debt should be seen in the context of future investments being hampered due to current consumption.
    • India’s public debt/GDP will likely reach around 85 per cent and the consolidated gross fiscal deficit to GDP ratio could be around 12.5 per cent this year. 

    Way forward

    • India needs to broaden its consumer base beyond the top 10-20 per cent of the population to improve long-term growth prospects.
    • To achieve this we will need well-paid employment for the bottom and middle segments.
    • The “safe” group of India’s workforce is extremely small.
    • The PLFS 2018-19 report places around 24 per cent of the workforce in the regular wage/salary category.
    • Within this segment, around 40 per cent do not have a written contract, paid leaves, or security while 70 per cent do not have any written contract.
    • These sharp skews in consumption and labour become a substantial risk for a consumption-led growth in the aftermath of a crisis.
    • The PLFS 2018-19 report indicates that around 50 per cent of the rural non-agriculture workforce.
    • 35 per cent of the urban workforce is engaged in the construction and manufacturing sectors.
    • The rebuild and recover phase should aim for a wider consumer base with infrastructure and manufacturing as the two pillars.
    • To make manufacturing easier, the focus should be on labour reforms, fewer/quicker approvals, reducing the compliance burden, and promoting export-oriented sectors.
    • Policies should not become too inward-looking such that export promotion becomes difficult.

    Directing public spending and policies appropriately

    • Most public spending should be directed towards roads, railways, infrastructure, healthcare and educational facilities.
    • To promote infrastructure creation along with private sector participation, the government needs to charge an economic price for goods and services such as power, irrigation, and public utilities.
    • Establish the rule of law with minimal interference in pricing, streamline processes for quick approvals and ensure timely payments to private operators.
    • The government should also signal its vision along with a financing strategy through sharper expenditure management, enhanced market borrowings, setting up of a Development Financing Institution, and an asset monetisation programme.

    Conclusion

    To achieve economic growth of 7-8 per cent the government needs to start addressing large infrastructure deficit, the weak financial sector, archaic land and labour laws, and the administrative and judicial hurdles.

  • Despite the messaging, it is still advantage China

    The article examines whether India has been proving a favourable alternative to China or not.

    Is India becoming alternate supply source and investment destination?

    • Despite media reports and strong messaging from Washington, fewer U.S. companies than predicted might quit China.
    • Companies focused on the Chinese domestic market rather than as a base for exports will likely remain, at least for now.
    • Those that do leave may not choose India as a relocation destination.
    • Many U.S. companies with experience working with China are not convinced that India has China’s established industrial base and expertise.
    • They also see other Asian countries as more competitive.

    India’s strengths

    • Democracy: India’s identity as a democratic “un-China” is one of its strongest selling points.
    • Strong IPR: There is no threat of stealing of intellectual property rights.
    • No coercive tactics: Foreign companies in India are not subject to coercive tactics as in China.
    • Institutions: India’s open and vibrant press, an independent judiciary, and other advantages of democratic governance also provide a contrast to China.
    • Domestic market:India’s well-off domestic market also attracts foreign investors.

    Why China is a favoured destination

    • China offers many advantages, such as a manufacturing infrastructure and skill level that allows innovations to move quickly from prototype to product.
    • China’s specialised industrial zones are massive, collocating companies, factories, logistics, and even research and universities.

    Way forward

    1) Focus on the States

    • India can start by focusing development in those Indian States that have already demonstrated the ability to produce and export in key sectors.
    • Foreign capital could also greatly increase infrastructure funds beyond government spending alone.
    • India might also usefully build up new industrial centres with an eye to geography. [for instance-linking the southeast of the country to supply chains in Southeast Asia]

    2) Focus on the policy framework

    • India should take two great steps-
    • 1) Reduce the number of investments needing approval by the Centre.
    • 2)To increase intra-Ministry coordination on foreign direct investment policies.
    • The same coordination could be extended to the appointment of a high-level official or body in the Prime Minister’s Office.
    • This will ensure that all proposed economic policy changes are consistent with the goal of attracting foreign investment.

    Conclusion

    A policy framework that is transparent, predictable, and provides increased consultations with existing and potential foreign company stakeholders before introducing new Indian economic policies, will play a crucial role in determining India’s foreign investment outlook.

  • Implications of World Bank halting ‘Doing Business’ report for India

    India’s ranking in the World Bank’s ‘Ease of Doing Business’ index has improved spectacularly. However, the World Bank recently halted its publication and announced decision to review and assess data changes for last five years.

    Background

    • Citing irregularities of data for a few countries, the World Bank halted its annual publication ‘Doing Business’ report.
    • It will conduct a systematic review and assessment of data changes that occurred subsequent to the institutional data review process for the last five Doing Business reports.

    Why India should be concerned

    • Through improved ranking India sought to attract investments to achieve the targets set for ‘Make in India’.
    • India’s success in boosting its ease of doing business ranking is spectacular, to 63rd rank in 2019, up from the 142nd position in 2014.
    • Policymakers celebrated it to signal India’s commitment to “minimum government and maximum governance”.
    • The World Bank decision to audit the ‘Doing Business’ report for the last five years may soon cause discomfort by shining a spotlight on the sharp rise in India’s ranking.
    • Study at the Center for Global Development found that the improvement in India’s ranking was almost entirely due to methodological changes.
    • During the same period, however, Chile’s global rank went down sharply, from 34th position in 2014 to 67th in 2017.
    • The contrasting experience of Chile and India casts doubts on not just the country-level data but also the changes in underlying methodologies.

    Does ease of doing business have predictive power?

    • While India’s rank drastically improved, it has meant nothing on the ground.
    • The share of the manufacturing sector has stagnated at around 16-17% of GDP, and 3.5 million jobs were lost between 2011-12 and 2017-18.
    • Annual GDP growth rate in manufacturing fell from 13.1% in 2015-16 to zero in 2019-20, as per the National Accounts Statistics.
    • India’s import dependence on China has shot up.
    • In case of Russia, ease of doing business rank jumped from 120 in 2012 to 20, but without becoming a magnet for investment inflows.
    • China, on the contrary, attracted one of the highest capital inflows but its ease of doing business ranking was low and hovered between 78 and 96 for the years between 2006 and 2017.

    Other flaws in the Index

    • The Indicators used for the index are de jure (as per the statute), not de facto (in reality).
    • The data for computing the index are obtained from larger enterprises in two cities, Mumbai and Delhi, by lawyers, accountants and brokers — not from entrepreneurs.
    • The World Bank’s own internal watchdog, the Independent Evaluation Group, in its 2013 report, has widely questioned the reliability and objectivity of the index.
    • The World Bank conducts a global enterprise survey collecting information from companies.
    • There is no correlation between the rankings obtained from ease of doing business and the enterprise surveys.

    Lack of theoretical basis: Major flaw

    • There is little in any major strand of economic thought which suggests that minimally regulated markets for labour and capital produce superior outcomes in terms of output and employment.
    • Economic history shows rich variations in performance across countries and policy regimes, defying simplistic generalisations.
    • Such simplistic basis is used under a seemingly scientific garb of the quantitative index to the disadvantage of workers.
    • To meet the ease of doing business targets, safety standards of factories are compromised.
    • For instance, in 2016, the Maharashtra government abolished the annual mandatory inspection of steam boilers under the Boilers Act of 1923 and the Indian Boilers Regulation 1950.
    •  However, no factory has complied with self-certification or submitted the third party certification.

    Consider the question “Examine the issues with the World Bank’s ‘Ease of Doing Business Index’?  What are its implications for India?”

    Conclusion

    It is time the World Bank rethinks its institutional investment in producing the ‘Doing Business’ report. India should do some soul searching as to why the much trumpeted rise in global ranking has failed miserably on the ground.

  • GIS-enabled Land Bank System

    A prototype of the National GIS-enabled Land Bank System was e-launched by Commerce and Industry Ministry for six States based on which land can be identified for setting up industries.

    Try to answer this question in short:

    Q.Discuss the benefits of digitizing land records in India.

    Land Bank System

    • The system has been developed by the Integration of Industrial Information System (IIS) with state GIS (Geographic Information System).
    • IIS portal is a GIS-enabled database of industrial clusters/areas across the states.
    • On the system, more than 3,300 industrial parks across 31 states/UTs covering about 4,75,000 hectares of land have also been mapped out on the system.
    • The information available on the system will include drainage, forest; raw material heat maps (horticulture, agricultural, mineral layers); multilayer of connectivity.
    • IIS has adopted a committed approach towards industrial upgrading, resource optimization, and sustainability.

    Various stakeholders

    • The initiative has been supported by the National e-Governance Division (NeGD), National Centre of Geo-Informatics (NCoG), Invest India, Bhaskaracharya Institute for Space Applications and Geo-Informatics (BISAG), and Ministry of Electronics and Informational Technology.

  • Boosting manufacturing

    The article analyses the issues of increasing manufacturing in India while dealing with the constraints faced by it. It also suggests the important role States can play.

    Why companies are expected to exit China

    • In the aftermath of the pandemic manufacturing companies are expected to exit China due to three primary reasons.
    • 1) Realisation that relying heavily on China for building capacities and sourcing manufacturing goods is not an ideal business strategy due to supply chain disruptions in the country caused by COVID-19.
    • 2) Fear of Chinese dominance over the supply of essential industrial goods.
    • 3) The growing risk and uncertainty involved in operating from or dealing with China in the light of geopolitical and trade conflicts between China and other countries, particularly the U.S.

    Where India stands in comparison with China

    • China ranks first in contribution to world manufacturing output, while India ranks sixth.
    • Against India’s target of share of manufacturing in Gross Domestic Product (GDP) to 25% by 2022, its share stood at 15% in 2018, only half of China’s figure.
    • Industry value added grew at an average annual rate of 10.68% since China opened up its economy in 1978, India’s grew at 7% after India opened up its economy.
    • Next to the European Union, China was the largest exporter of manufactured goods in 2018, with an 18% world share.
    • India is not part of the top 10 exporters who accounted for 83% of world manufacturing exports in 2018.

    Constraints faced by manufacturing sector in India

    India faces numerous constraints in promoting the manufacturing sector.

    • They chiefly include infrastructure constraints, a disadvantageous tax policy environment, restrictive trade policies, a non-conducive regulatory environment, rigid labour laws.
    • Constraints also include high cost of industrial credit, poor quality of the workforce, Low R&D expenditure, delays and constraints in land acquisition, and the inability to attract large-scale foreign direct investment into the manufacturing sector.

    What role States can play?

    • They  can  contribute land: Federal government system in India demands the participation of States for the lasting solution to the constraints on the sector.
    • An important requirement for the development of the manufacturing sector is the availability of land area.
    • This could be one of the reasons why manufacturing activity is mainly concentrated in Maharashtra, Gujarat, Tamil Nadu, Karnataka and Uttar Pradesh.
    • However, what is of concern is that some States that also have large land area contribute disproportionately little in manufacturing GSDP.
    • These states include Andhra Pradesh, Bihar, Chhattisgarh, Madhya Pradesh, Odisha, Rajasthan, Telangana, and West Bengal.

    Way forward

    • Identify reasons: The reasons for less manufacturing activity in these States have to be carefully examined.
    • State-specific industrialisation strategies: Based on such reasons, State-specific industrialisation strategies need to be devised and implemented in a mission mode with active hand-holding by the Central government.
    • State specific reforms: Policy actions on the part of individual States would improve India’s overall investment climate, thereby boosting investments, jobs, and economic growth.
    • Policy actions of the Centre and the States should  be well coordinated: Strategy Group consisting of representatives from the Central and State governments along with top industry executives to instil teamwork and leverage ideas through sharing the best practices of the Centre and States could be formed.

    Consider the question “What are the constraints faced by the manufacturing sector in India? Suggest the ways to deal with these constraints highlighting the important role States can play in boosting manufacturing.”

    Conclusion

    Both the States and the Central government needs to work in tandem to boost the manufacturing in India and transform the economic landscape of India.

  • The missing large in MSMEs

    MSMEs in India has huge untapped potential. This article suggest the ways to tap it and make the MSMEs major contributor to India’s growth.

    What is an issue with MSMEs

    • Despite MSME contributing 20% of the GDP and employing about 110 million workers,  we have failed to make bold policy-moves to make it more productive and competitive.
    •  MSMEs are not becoming ‘larger’ and more dynamic, with 99% of the estimated 60 million being micro-enterprises with limited aspirations.
    • At the core of this lack of competitiveness is a structural issue.

    Addressing the structural challenges

    Size

    • Consider  India’s largest textile cluster vs Bangladesh’s largest.
    • More than 70% of the units in Tirupur are micro-enterprises with less than 10 employees while only 20% of the units in Narayanganj in Bangladesh have less than 10 employees.
    • This factor makes the cluster in Bangladesh more competitive and helping Bangladesh’s exports grow faster than India’s.
    • Though  Bangladesh has other advantages also, but this structural difference is critical.

    Relation between size and productivity

    • Productivity data from manufacturing MSMEs in OECD show that the productivity of medium firms (50-250 people) could be as much as 80-100% higher than that of micro firms (<9 employees).
    • Growth in scale allows them to invest in people to improve skills, in better technology & processes, and in innovation.
    • The most-competitive of them grow from their small beginnings to become world-beaters.
    • This push to grow and improve capabilities and productivity is central to dynamism of any country’s industrial structure.
    • This dynamism of micro-enterprises has been one of the less-reported policy levers behind China’s rise as an industrial powerhouse.

    What stops MSMEs in India from growing?

    • Our policy-legacy of highly restrictive asset-based definition which has only recently been relaxed, coupled with a mindset, and, policies, to support the ‘small is beautiful’ narrative.
    • Overly complex regulatory regime doesn’t differentiate enterprises on their scale, other than the really tiny ones, in terms of compliance needs.
    • For example, if a unit has more than six employees, the trade union law becomes applicable, If a unit has more than 10 employees, the Factories Act is applicable.
    • Small enterprises thus face the same multitude of regulatory requirements as larger ones, and end up having compliance costs account for a higher percentage of revenue.
    • For the tiny/micro units, there is simply no incentive to grow and enter the formal economy.

    Policy intervention needed

    1) Getting MSMEs into formal credit system

    • To do this, we need to adopt an approaches that can help banks and NBFCs move away from asset-backed lending, towards some form of cash-flow-based lending.
    • Small retailers are outside the formal credit system, unable to invest, modernise and grow, given they lack fixed ‘assets’.
    • But, all of them are linked to, and sell, brands of well-known, large companies.
    • If banks and NBFCs work with these companies and use anonymised data on sales and credit-performance to develop credit-scores for lending to them?
    • Similar innovative ways could help cover other micro-unit segments.

    2) Simplified tax and regulatory regime

    • The second policy intervention needed is to de-average and implement a simplified tax and regulatory regime for MSMEs.
    • This would also reduce the cost of compliance.

    3) Development of digital platform

    • The third intervention, appropriate for digital era, is to develop a comprehensive ‘digital platform’ for the sector.
    • This will call for a mandatory, unique identifier for all.
    • The platform will have to be linked to different relevant databases.

    Consider the question “MSMEs in India continues to play an important role in India’s development yet it suffers from structural challenges which hinders it from fueling India’s growth. In light of this, examine the challenges MSMEs faces and suggest the policy interventions.” 

    Conclusion

    As India launches the Atmanirbhar Bharat Abhiyan to reignite growth of the economy for a post-COVID world, building such a globally-competitive MSME has to become one of the initiative’s core pillars. Only then can our industry improve and sustain its global competitiveness.

    Source-

    https://www.financialexpress.com/opinion/the-missing-large-in-msmes-a-globally-competitive-indian-mittelstand-is-the-need-of-the-hour/2063155/