Explained: Why an industrial policy is crucial

Mains Paper 3 : Effects Of Liberalization On The Economy, Changes In Industrial Policy and their effects on Industrial Growth |

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not Much

Mains level : Need for an comprehensive industrial policy in India



News

Background

  • The contribution of manufacturing to GDP in 2017 was only about 16%, a stagnation since the economic reforms began in 1991.
  • In India manufacturing has never been the leading sector in the economy other than during the Second and Third Plan periods.

Manufacturing sector: A prime moving force

  • Manufacturing is an engine of economic growth because it offers economies of scale, embodies technological progress and generates forward and backward linkages that create positive spillover effects in the economy.
  • No major country managed to reduce poverty or sustain growth without manufacturing driving economic growth.
  • This is because productivity levels in industry (and manufacturing) are much higher than in either agriculture or services.

Market Failures urges govt to intervene

  • The specific instances of market failure that require a government-driven industrial policy are:
  1. lack of adequate investments
  2. imperfect information with respect to firm-level investments in learning and training and
  3. lack of information and coordination between technologically interdependent investments
  • These are good reasons why an economy-wide planning mechanism is needed in India.
  • However, the India should steer clear of the “command and control” approach that harks back to pre-1991 days.

Lack of Policy measures in India

  • The United Nations Conference on Trade and Development or UNCTAD finds that over 100 countries have, within the last decade, articulated industrial policies.
  • However, India still has no manufacturing policy.
  • Focussing (as “Make in India” does) on increasing FDI and ease of doing business, important though they may be, does not constitute an industrial policy.

Urgent need for a comprehensive Policy

I. Promoting investments

  • There is the need to coordinate complementary investments when there are significant economies of scale and capital market imperfections.

II. Subsidization and providing stimulus

  • Industrial policies are needed to address learning externalities such as subsidies for industrial training, on which we have done poorly.
  • However, a lack of human capital has been a major constraint upon India historically being able to attract foreign investment (which Southeast Asian economies succeeded in attracting).

III. Govt. role as facilitator

  • The state can play the role of organizer of domestic firms into cartels in their negotiations with foreign firms or governments — a role particularly relevant in the 21st century.
  • It rose after the big business revolution of the 1990s with mega-mergers and acquisitions among transnational corporations.
  • In fact, one objective of China’s industrial policies since the 1990s has been to support the growth of such firms.

IV. Efficient Capacity Management

  • The role of industrial policy is not only to prevent coordination failures (i.e. ensure complementary investments) but also avoid competing investments in a capital-scarce environment.
  • Excess capacity leads to price wars, adversely affecting profits of firms — either leading to bankruptcy of firms or slowing down investment, both happening often in India (witness the aviation sector).
  • Price wars in the telecom sector in India which hampers investment in mobile/internet coverage of rural India where access to mobile phones and broadband Internet, needs rapid expansion.

V. Reservation of products

  • An industrial policy can ensure that the industrial capacity installed is as close to the minimum efficient scale as possible.
  • The missing middle among Indian enterprises is nothing short of a failure of industrial strategy.
  • It includes products exclusively for production in the small-scale and cottage industries (SSI) sector from India’s 1956 Industrial Policy Resolution onwards.
  • By the end of the 1980s, 836 product groups were in the “reserved” category produced only by SSIs (which encouraged informal enterprises).

VI. Preventing structural failures

  • When structural change is needed, industrial policy can facilitate that process.
  • In a fast-changing market, losing firms will block structural changes that are socially beneficial but make their own assets worthless.
  • East Asian governments prevented such firms from undermining structural change, with moves such as orderly capacity-scrapping between competing firms and retraining programmes to limit such resistance.

IT Sector: A self taught lesson for Policy Makers

  • If evidence is still needed that the state’s role will be critical to manufacturing growth in India, the state’s role in the success story of India’s IT industry must be put on record.
  • The government invested in creating high-speed Internet connectivity for IT software parks enabling integration of the Indian IT industry into the U.S. market.
  • The government allowed the IT industry to import duty-free both hardware and software. (In retrospect, this should never have continued after a few years since it undermined the growth of the electronics hardware manufacturing in India.)
  • The IT industry was able to function under the Shops and Establishment Act; hence not subject to the 45 laws relating to labour and the onerous regulatory burden these impose.
  • Finally, the IT sector has the benefit of low-cost, high-value human capital created by public investments earlier in technical education.
  • These offer insights to the potential for industrial policy when a new government takes over soon.

Way Forward

  • The East Asian miracle was very much founded upon export-oriented manufacturing, employ surplus labour released by agriculture, thus raising wages and reducing poverty rapidly.
  • The growing participation of East Asian countries in global value chains (GVCs); manufactured consumer goods to more technology- and skill-intensive manufactures for export, was a natural corollary to the industrial policy.
  • India has been practically left out of GVCs.
  • Increasing export of manufactures will need to be another rationale for an industrial policy, even though India has to focus more on “make for India”.
  • In this quest for increased exports, economies of scale (a proportionate saving in costs gained by an increased level of production) are critical.
Industrial Sector Updates – Industrial Policy, Ease of Doing Business, etc.

RBI asks NBFCs to appoint Chief Risk Officer

Mains Paper 3 : Indian Economy |

Note4Students

From UPSC perspective, the following things are important :

Prelims level : CRO and its terms of reference

Mains level : Curbing NPAs



News

  • The RBI has asked the non-banking financial companies (NBFCs) with assets of more than ₹5,000 crore to appoint a chief risk officer (CRO).

Why such move?

  • With the increasing role of NBFCs in direct credit intermediation, there is a need for NBFCs to augment risk management practices.
  • RBI’s move comes in the wake of ongoing rating downgrades of non-banks which has raised fears of another liquidity crisis.
  • Following a series of defaults by Infrastructure Leasing and Financial Services Ltd (IL&FS) last year, mutual funds with exposure to debt papers of the company had to write off a chunk of their holdings.
  • This, and the ensuing defaults by some non-banking financial companies (NBFCs), had led to the liquidity crisis.

Terms of Reference for Chief Risk Officer (CRO)

  • The primary role of the risk officer will be identification, measurement and mitigation of risks.
  • All credit products (retail or wholesale) shall be vetted by the CRO from the angle of inherent and control risks.
  • The CRO’s role in deciding credit proposals shall be limited to being an adviser.

Reporting by CRO

  • RBI has mandated that the CRO shall report directly to the MD and CEO or the risk management committee (RMC) of the board.
  • Moreover, in case the CRO reports to the MD and CEO, the risk management committee or the board shall meet the CRO in the absence of the MD and CEO, at least on a quarterly basis.
  • The CRO shall not have any reporting relationship with the business verticals of the NBFC and shall not be given any business targets.

Appointment and Transfer

  • The CRO shall be a senior official in the hierarchy of an NBFC and shall possess adequate professional qualification or experience in the area of risk management.
  • The CRO shall be appointed for a fixed tenure with the approval of the board.
  • There shall not be any ‘dual hatting’ i.e. the CRO shall not be given any other responsibility.
  • The CRO can be transferred or removed from his post before completion of the tenure only with the approval of the board.
  • And such premature transfer or removal shall be reported to the department of non-banking supervision of the regional office of RBI under whose jurisdiction the NBFC is registered.
NPA Crisis

Masala Bonds

Mains Paper 3 : issues relating to planning, mobilization of resources |

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Masala Bond

Mains level : Masala Bond


News

Kerala state first to issue Masala bonds

  • The Kerala Infrastructure Investment Fund Board issued Masala Bonds to raise funds from the overseas market.
  • It has become the first Indian state to tap into the market for masala bonds.
  • The proceeds from the bond issue are slated to be used to part-finance the rebuilding of infrastructure in Kerala that was devastated by last year’s floods.

Masala Bonds

  • They are rupee-denominated bonds i.e the funds would be raised from overseas market in Indian rupees.
  • According to RBI, any corporate, body corporate and Indian bank is eligible to issue Rupee denominated bonds overseas.
  • While companies can raise funds through these bonds, there are limitations for the use of such proceeds.
  • RBI mandates that the money raised through such bonds cannot be used for real estate activities other than for development of integrated township or affordable housing projects.
  • It also can’t be used for investing in capital markets, purchase of land and on-lending to other entities for such activities as stated above.

Minimum maturity of masala bonds

  • According to RBI, the minimum maturity period for Masala Bonds raised up to Rupee equivalent of USD 50 million in a financial year should be 3 years.
  • And for bonds raised above USD 50 million equivalents in INR per financial year should be 5 years.
  • The conversion for such bonds will happen at the market rate on the date of settlement of transactions undertaken for issue and servicing of the bonds, including its redemption.

Where can these bonds be issued and who can subscribe?

  • The bonds can only be issued in a country and subscribed by a resident of such country that is a member of FATF and whose securities market regulator is a member of International Organisation of Securities Commission.
  • While residents of such countries can subscribe to the bonds, it can also be subscribed by multilateral and regional financial institutions where India is a member country.
Capital Markets: Challenges and Developments

[op-ed snap] External woes

Mains Paper 3 : Effects Of Liberalization On The Economy, Changes In Industrial Policy and their effects on Industrial Growth |

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Trade deficit

Mains level : Falling exports should be a cause of worry for policy makers.


CONTEXT

The estimates for foreign trade showing a sharp slowdown in merchandise export growth in April, to 0.64% from a year earlier, ought to add to concerns about the economy.

Condition of exports

Contraction in exports –

  • If one were to strip away the 31% surge in shipments of petroleum products to overseas markets, India’s export of goods actually contracted by over 3% in dollar terms last month.
  • In contrast, overall merchandise exports had expanded 11% year-on-year in March, with the growth in shipments excluding petroleum products exceeding that pace by about 50 basis points.

Widespread contraction –

The slump in exports was fairly widespread, with 16 of the 30 major product groups listed by the Commerce Ministry reflecting contractions, compared with the 10 categories that had shrunk in March.

Decline in strong sectors  –

Worryingly, shipments of engineering goods declined by over 7% after having expanded by 16.3% in March, while the traditionally strong export sectors — gem and jewellery, leather and leather products, textiles and garments and drugs and pharmaceuticals — all weakened.

Impact of contraction in exports –

  • These are all key providers of jobs and any protracted pain across these industries will impact jobs, wages and consumption demand in the domestic market.
  • While the contraction in gem and jewellery exports widened to 13.4% in April, from 0.4% in March, the slump in the leather segment broadened to 15.3% from 6.4%.
  • And the pace of growth of garment exports decelerated to 4.4% from 15.1% in March.

Coupled with an increase in imports

  • Imports grew by 4.5% to $41.4 billion in April, accelerating from March’s 1.4% pace as purchases of crude oil and gold continued to increase.
  • While the 9.3% jump in the oil import bill, from March’s 5.6%, can partly be explained by the rise in international crude prices (Brent crude futures, for instance, advanced 6.4% in April), India’s insatiable appetite for gold, as reflected in the 54% surge in imports last month, must give policymakers cause for reflection.
  • Excluding oil and gold, however, imports shrank by more than 2% last month, signalling that import demand in the real productive sectors is largely becalmed.
  • As a result of merchandise imports outpacing exports, the trade deficit widened to a five-month high of $15.3 billion.
  • The widening trade shortfall will add pressure on India’s burgeoning current account deficit, which at a provisional $51.9 billion in the first nine months of fiscal 2018-19 had already surpassed the preceding financial year’s 12-month shortfall of $48.7 billion.

Conclusion

  • With stronger headwinds ahead in the form of an escalating trade war between the U.S. and China, and its knock-on impact on global growth, the outlook for export demand is far from reassuring.
  • Add the rising military tensions in West Asia and its potential to further push up oil prices, and the scope to contain the trade and current account deficits seems significantly challenging.
  • Clearly, this would be one more pressing concern for the new government to address.
Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

Poly-Di-Ketoenamine (PDK): New plastic that could be fully recycled

Mains Paper 3 : Awareness In The Fields Of It, Space, Computers, Robotics, Nano-Technology, Bio-Technology |

Note4Students

From UPSC perspective, the following things are important :

Prelims level : PDK, Polymerization

Mains level : Utility of PDK as advanced material


News

  • The scientists have created a next-generation plastic that can be fully recycled into new materials of any colour, shape, or form, without loss of performance or quality.

Poly-Di-Ketoenamine (PDK)

  • A team of researchers at the US Department of Energy’s Berkeley National Laboratory has designed a recyclable plastic called PDK.
  • The monomers of PDK plastic could be recovered and freed from any compounded additives by placing the material in a highly acidic solution.
  • It helps to break the bonds between the monomers and separate them from chemical additives.
  • The recovered PDK monomers can be remade into polymers, and those recycled polymers can form new plastic materials without inheriting the colour or other features of the original material.
  • They could also upcycle the plastic by adding additional features, such as flexibility.

Why most plastics cannot be recycled?

  • Most plastics are made of polymers, chains of hydrogen and carbon which are chiefly derived from petroleum products like crude oil.
  • Polymers are composed of shorter strands called monomers and the process is called polymerization.
  • To give plastics certain characteristics like toughness, flexibility or color, certain chemicals are added which from strong bonds with the monomers.
  • While many polymers are thermoplastic, meaning they can be melted down and reused, the additives bonded to them can interfere with the process.
  • So when plastics are ground up and mixed together for recycling, all those additives make the final product unpredictable and lower quality.
  • That’s why most recycled plastic is “downcycled” or turned into items like handbags or benches instead of completing the recycling loop.
Waste Management – SWM Rules, EWM Rules, etc

[op-ed snap]Charting a clear course in the Indo-Pacific

Mains Paper 2 : Bilateral, Regional and Global Groupings and agreements involving India |

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Nothing Much

Mains level : Indo pacific approach overhaul is a welcome step in foreign policy relations.


CONTEXT

Though the term Indo-Pacific has been gaining traction in Indian policy circles for some time now, it achieved operational clarity after the Indian vision was presented by Prime Minister Narendra Modi in his keynote address at the Shangri-La Dialogue in June 2018. His speech underscored that for India the geography of the Indo-Pacific stretches from the eastern coast of Africa to Oceania (from the shores of Africa to that of the Americas) which also includes in its fold the Pacific Island countries.

Many mechanisms regarding Indo Pacific

  • India’s Act East policy remains the bedrock of the national Indo-Pacific vision and the centrality of ASEAN is embedded in the Indian narrative.
  • India has been an active participant in mechanisms like the Indian Ocean Rim Association (IORA), in ASEAN-led frameworks like the East Asia Summit, the ASEAN Defence Ministers’ Meeting Plus, the ASEAN Regional Forum as well as the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation and the Mekong-Ganga Economic Corridor.
  • India has also been convening the Indian Ocean Naval Symposium, in which the navies of the Indian Ocean Region (IOR) participate.
  • Through the Forum for India-Pacific Islands Cooperation, India is stepping up its interactions with the Pacific Island countries.

 

The approach towards Indo Pacific

  • Inclusiveness – Inclusiveness, openness, and ASEAN centrality and unity, therefore, lie at the heart of the Indian notion of Indo-Pacific.
  • Security – Security in the region must be maintained through dialogue, a common rules-based order, freedom of navigation, unimpeded commerce and settlement of disputes in accordance with international law.
  • Connectivity – More connectivity initiatives impinging on respect for sovereignty, territorial integrity, consultation, good governance, transparency, viability and sustainability should be promoted.

The idea behind setting up Indo Pacific Wing

  • The setting up of the Indo-Pacific wing in the Ministry of External Affairs (MEA) in April 2019 is a natural corollary to this vision.
  • Major powers defining their vision – Given how the term Indo-Pacific has been gaining currency and how major regional actors such as the U.S., Japan and Australia are articulating their regional visions — including this term in their official policy statements — it was becoming imperative for India to operationalise its Indo-Pacific policy.
  • Renaming by the USA – The renaming of the U.S. Pacific Command to U.S. Indo-Pacific Command as well as the Asia Reassurance Initiative Act in December 2018 showcase Washington’s more serious engagement with the Indo-Pacific.
  • Huge geographical spread – Given the huge geography that the Indian definition of Indo-Pacific covers, there was a need for a bureaucratic re-alignment to create a division that can imbibe in its fold the various territorial divisions in the MEA that look after the policies of the countries which are part of the Indo-Pacific discourse.
  • Focus on IOR – The integration of the IORA means that attention will continue to be focused on the IOR.

 

Challenges ahead

  • Integrating quadrilateral with Indo-Pacific – There are  challenges for India, especially how it will integrate the Quadrilateral initiative which got revived in 2017 with its larger Indo-Pacific approach.
  • Commerce and connectivity – Commerce and connectivity in particular will have to be prioritised if India is to take advantage of a new opening for its regional engagement.
  • The balance between the interests – .While India has been consistently emphasising “inclusiveness” in the Indo-Pacific framework, it will be challenging to maintain a balance between the interests of all stakeholders.
  • Difference in vision –There are differences between India’s vision and the U.S.’s strategy for the Indo-Pacific even as countries like China and Russia view the Indo-Pacific with suspicion.

Conclusion

As geopolitical tensions rise between China and the U.S., the MEA’s new division will have its task cut out if India’s long-term political and economic interests in the region are to be preserved. A bureaucratic change was indeed needed, but going forward the challenge would be to see how effectively this change manifests itself in managing India’s growing diplomatic footprint in the Indo-Pacific.

Foreign Policy Watch: India-ASEAN