Industrial policy agenda for the new government
By Nagesh Kumar | Jul 08, 2024
The NIP should leverage foreign direct investment and MNC presence. It should lay out a framework for fostering innovation-based rivalry between firms.
With the new government sworn in, the focus should now be on adopting a new industrial policy (NIP). The policy thrust at present is on manufacturing, given the need to create decent jobs. It is also driven by the realisation that a high degree of dependence on imports can compromise the country’s strategic autonomy. Though the external economic environment is now less benign than before when it comes to fostering manufacturing — a flat growth of world trade, rising protectionism, and sluggish world economy as globalisation turns into “slowball-isation” — the global supply-chain restructuring provides India an opportunity.
To facilitate localisation of production, the government recently took several measures, including raising tariffs and providing incentives for incremental output in 14 specified sectors under the Production-Linked Incentives (PLI) scheme. The revival of industrial policy in India after giving primacy to market forces since the 1991 reforms is part of a global trend. The United States (US) has led the revival of industrial policy most aggressively, with hundreds of billions of dollars in subsidies, tax breaks, and other protectionist measures for reviving its industry under the CHIPS and Science Act, the Inflation Reduction Act, and the Infrastructure Act. The European Union has followed the US playbook apart from coming up with its own protectionist measures such as the Carbon Border Adjustment Mechanism. Such steps by the leading industrialised nations could suck India into an incentive war to attract investments. But they also provide legitimacy to the industrial policy. Other than PLI, India’s industrial policy has included measures to improve industrial and logistical infrastructure, reduction of the compliance burden to enhance the ease of doing business, lowering of corporate tax rates, a focus on skill development, and sectoral missions. India’s recent emergence as a net exporter of mobile handsets and toys inspires confidence in its industrial policy. A framework to put these interventions in perspective to guide industrialisation is needed.
The Industrial Policy Resolution of 1956 laid down the framework for the licensing system and import-substituting industrialisation with the public sector set for the “commanding heights” of the economy. The 1991 Industrial Policy Resolution unleashed reforms through liberalisation. Together with commitments under the post-Uruguay Round of the multilateral trade regime, trade liberalisation, while strengthening the competitiveness of some sectors, also led to some deindustrialisation — to illustrate, the demise of the electronic hardware industry.
But today’s context is different. India is the fastest growing economy and the fifth largest in the world. The external context for industrialisation has changed dramatically. Industry 4.0 and the digital revolution are shaping a new world of work, offering a lot of opportunities and challenges. Net zero goals demand more sustainable industrialisation. The demographic and geopolitical sweet spots India enjoys can help it integrate with the friend-shoring of supply chains.
The NIP, therefore, should provide a framework to accelerate industrialisation and help India become a developed country by generating jobs in an inclusive and sustainable. It should set guiding targets such as doubling India’s share in global manufacturing (value-added and manufactured exports) by, say, 2030. It should articulate broad principles such as the primacy of localisation of jobs and value addition, entrepreneurship, and locally anchored technological capabilities in a World Trade Organisation (WTO)-consistent language. It could also incentivise pioneer industries, as many late industrialisers do, and foster MSMEs. The NIP should identify the sectors to target for building leadership, depending on our endowments, such as an abundance of labour, skills, and natural resources. It could do this for dynamic, high-value-add sectors (consumer durables, electronics), strategic areas (capital goods, semiconductors), and sustainability (electric vehicles, solar photovoltaics, or green hydrogen).
The NIP should leverage foreign direct investment and MNC presence. It should lay out a framework for fostering innovation-based rivalry between firms. Similarly, it should foster opportunities for green industrialisation, including through sustainable corporate practices and retrofitting. More importantly, it should provide a framework to support manufacturing through multilateral, regional, and bilateral trade negotiations focused on obtaining market access for Indian products and leveraging certain strategic interventions — for example, performance requirements to integrate MSMEs with global value chains and public procurement. Exchange rate management has been another critical factor in building a competitive manufacturing sector and should not be overlooked. Given the limitations of commercial banks for term-lending due to asset-liability mismatches, it may provide for a new national industrial development bank besides the development of the corporate bonds market.
Finally, the NIP should provide a high-powered architecture for coordinated implementation in a whole-of-the-government approach.
Nagesh Kumar is director and chief executive of the Institute for Studies in Industrial Development. The views expressed are personal