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The Government has introduced the production-linked incentive (PLI) scheme in select sectors such as automobiles, pharma, advanced battery cells, telecom equipment and specialty steel among others. The PLI scheme is an integral part of the India’s broader industrial policy that focuses on augmenting the capacity, competence and capabilities of the domestic manufacturing sector.
The key question for a country embarking on a path of industrialisation is whether it should use policies that conform to or defy its comparative advantage. Conforming strategies eschew government interventions and limit the role of state to a facilitator, while defying strategies advocate government interventions and support infant industry protection.
Industrial policy practice in India, by and large, supports strategies that defy its comparative advantage, given the usage of policy instruments such as import tariffs, licensing requirements, quality standards, import restrictions and subsidies to protect and support the domestic manufacturing industry.
Capital-intensive thrust
The PLI scheme is biased towards capital-intensive industries such as automobiles, pharma, advanced battery cells, telecom equipment and specialty steel. Despite having comparative advantage in labour-intensive manufacturing activities, India’s policy priorities have resulted in the commodity composition of exports becoming biased towards capital- and skill-intensive products. This is particularly true in the case of semiconductor manufacturing.
India needs to identify specific areas in the semiconductor value chain where it has comparative cost advantage. This requires making the industrial policy in accordance with the country’s endowment in terms of the relative abundance of labour, skills, and capital.
There is a need to develop a coherent industrial policy that aims at increasing the domestic value-addition, creating links between the foreign firms and domestic suppliers and facilitating technological upgrading and spillovers from FDI. It is important policymakers expand the scope of the PLI scheme and include labour-intensive sectors such as leather, garment, light engineering goods, toys, and footwear. This is critical to scale up domestic manufacturing, generate employment and build industrial capabilities.
The role of government is to foster an enabling environment, so that firms and sectors are able to leverage the country’s comparative advantage.
This allows firms to expand and advance organically. As firms become more competitive, they make efforts to capture market share, generate maximum economic surplus through profits and earnings, and reinvest to earn the highest possible return — if the industrial structure is consistent with the endowment structure.
India’s industrial strategy needs to ensure that that financial incentives are extended to sectors or firms that foster strong domestic inter-sectoral linkages and facilitate industrial upgradation. These sectors or firms will generate a real economic surplus for the broader economy which will also contribute to the effective utilisation of factors of production.
Such a strategy will ultimately deepen domestic manufacturing capabilities, thereby creating possible opportunities for plugging into global production networks.
If done strategically, PLIs could foster domestic champions, but it is important for Indian policymakers to make sure that the sunset clauses are clearly stipulated in the PLI scheme with a reasonable timeframe.
There is also a need to revisit industrial policy with respect to the use of policy instruments, making it more coherent with comparative cost advantage that lies in its factor endowments.
Singh is an Associate Professor at FORE School of Management, New Delhi. Banga is a Research Fellow at the Institute of Development Studies, UK. Views are personal
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