[op-ed snap] Don’t pick and choose

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 : Nothing Much

Mains level : Whether incentives by government work in propelling industries' growth


CONTEXT

Should the government be in the business of “picking winners” — identifying particular industries that it sees as worthy of promotion and offering special incentives targeted at these?

Categorisation of industries

  • The latest Union Budget has sought to do this in respect of certain “sunrise” and “advanced technology” sectors.
  • Thus, it is proposed that global companies will be invited to set up mega-manufacturing plants for semiconductor fabrication, solar photovoltaic cells, lithium storage batteries and computer hardware.
  • Such investments will be allowed income tax exemption against capital expenditures incurred.
  • Electrical vehicles (EV) – Equally significant is the focus on leapfrogging and making India a “global hub” for manufacturing of electrical vehicles (EV).
  • Not only will the goods and services tax rate on EVs be reduced from 12 to 5 per cent, consumers will be provided income tax deduction of up to Rs 2.5 lakh on the interest paid on the loans taken to purchase these vehicles.
  • High import cost – On the face of it, there are persuasive arguments for such industry-specific schemes. In 2018-19, electronic items accounted for $55.47 billion out of India’s total imports of $514.03 billion, next only to petroleum ($140.92 billion).
  • Balance-of-payments – Emphasis on greater domestic manufacture of the former, and giving a fillip to renewable energy and battery-powered vehicles in the case of the latter, certainly makes sense from a balance-of-payments standpoint.
  • Success elsewhere – The East Asian tiger economies, China and Japan, have all used “industrial policy” — via a mix of subsidies, tax breaks, directed bank lending and even import protection — to achieve global leadership in core sectors.
  • Examples – Japan’s steel industry, South Korea’s shipbuilders, Taiwan’s chip foundries and China’s solar panel or telecom equipment makers are products of such targeted government intervention.
  • Phased manufacturing programme (PMP) – India’s auto industry — the country’s exports of vehicles and components/parts added up to $14.28 billion in the last fiscal — is equally the result of a phased manufacturing programme (PMP) that forced the likes of Suzuki to raise local content in their cars by developing a domestic vendor base.

Arguments against it

  • Ineffective Modified Special Incentive Package Scheme – The idea of attracting “mega” investments in electronic manufacturing is old wine: There’s already a Modified Special Incentive Package Scheme from 2012, under which not a single project has taken off the ground.
  • PMP is an exception – The success story of PMP is an exception that only proves the general rule at least in India — about the government’s limited ability to promote select industries through a time-bound programme of incentives, without risking return of protectionism or capture by special interests.

Conclusion

  • The government should stick to providing public goods (education, health, law and order, contract enforcement etc) and extend investment-linked deductions across sectors.
  • The job of “picking winners” is better left to private industry. EVs are now 50-100 per cent costlier than regular vehicles.
  • Continuous technology innovation will ensure they will, like solar power, get cheaper.
  • And consumers will definitely buy when there is reliable charging infrastructure.
Industrial Sector Updates – Industrial Policy, Ease of Doing Business, etc.
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