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Steps needed to achieve Comparative advantage in Manufacturing

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much

Mains level : Paper 3- Policy approach for industrial development

The article suggests the policy approach to achieve industrial growth while avoiding the isolationist approach in pursuit of AtmaNirbharBharat.

Issue of policy binary

  • The goals of the Make in India initiative and now the AatmaNirbharBharat Abhiyan are driving a major shift in policy.
  • Import duties are being raised.
  • Production-linked incentives are being offered to firms across a wide canvas of 10 priority sectors.
  • At the same time, there is considerable unease at the rolling back of trade liberalisation.
  • This binary is not very useful.

Steps needed to gain competitive advantage

1) Infrastructure

  • It would still take India many years to develop its physical infrastructure to the levels required for international competitiveness.
  • Until then, large industrial parks for textiles, electronics, toys or shipbuilding need to be developed by state agencies with soft financing.
  • Competitive logistics are essential.
  • This was critical for the success of the information technology (IT) industry where world-class infrastructure was created within the software parks.
  • High-speed broadband real-time connectivity to the US market was provided through public investment.
  • This was done well before general telecom modernisation began.

2) Closing the financing gap

  • Long-term financing for world-class infrastructure is still a gap.
  • The central government can either use one of its existing financial institutions or create a new development financial institution to provide long-term low-interest rate debt.
  • The sovereign needs to provide risk-mitigation through an implicit guarantee. It can afford to do so.

3)  Prevent real exchange rate appreciation

  • Before considering specific increases in import duties, real exchange appreciation should be undone.
  • This would have the effect of raising tariffs across the board.
  • It is high time the government and the Reserve Bank of India (RBI) agreed on this objective.

4) Change the regime for SEZ

  • Allow SEZ to sell into the domestic area with import duties at the lowest applicable rate with any trading partner and the same value-addition norms.
  • Tax exemption on profits could be dispensed with while continuing to provide a duty-free import regime.
  • This would create a level-playing field for production vis-à-vis competitive locations overseas.
  • Large zones would have to be developed by the state.
  • The private sector can be partners in the process, but achievement of scale is only possible by the state.
  • Production for the domestic as well as the global market would become easier.

5) Encourage domestic value addition

  • Domestic value-addition can be incentivised by-
  • 1) Reducing duties to zero for all primary raw materials and inputs.
  • 2) then progressively higher rates for intermediates with the highest rate for the finished product.
  • In short, have just the opposite of the inverted duty structure we have had for computers.
  • This would change investment and production decisions if other costs of production in India have been made competitive.

6) Commitment of procurement of full production

  • In some industries, commitment of procurement of full production for a few years would suffice to get investment.
  • Bids could be invited for solar panels, or for battery storage for the grid, for annual supply for, say, five years with the condition that full value-addition has to be done in India.
  • Such commitment would provide for amortisation of the capital investment and make it a risk-free investment.
  • If the bid size is large enough, the best global firms would come and invest.
  • If the bids are repeated, prices would come down and a competitive industry structure would be created.

7) Encourage public investment

  • Public investment in firms should not be ruled out altogether.
  • In some cases, it may be the best way to create competitive capacity.
  • Maruti Suzuki is a good example in India.
  • Volkswagen was set up by a state government in Germany, which is still a substantial shareholder.
  • This is a policy instrument that can be used to create competitive advantage.

8) Creation of fund

  • There should also be willingness to create a fund that looks at modest returns, but aims at creating national and global champions through start-ups.

Conclusion

The foundation of China’s incredible success was laid by Deng Xiaoping with the maxim on economic policy that one should not bother about the colour of the cat as long as it caught mice. India’s policies have tended to be doctrinaire. We need a heavy dose of pragmatism to achieve our full potential.


Source:-

https://www.financialexpress.com/opinion/industrial-growth-the-right-policy-mix-for-success/2136735/

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