‘The torment of precaution often exceeds the dangers to be avoided’, said Napoleon Bonaparte in 1823. He did not have the semi-conductor supply chains in mind. But his comments still ring true 200 years on. Governments and companies now say they want to protect themselves from vicissitudes of global markets. After the end of the Cold War, it looked like the world really might be becoming a fabled global village. Motivated by a belief in the power of markets, globalisation took off in the 1990s and people believed in the ‘death of distance’. Governments loosened controls on investment and trade. In 2001 China acceded to the WTO, turbocharging trade between Asia and the West. The changes brought in many benefits, reducing poverty. And then the US subprime crisis happened in 2007-2009, Britain voted for Brexit, then America and China embarked on a trade war. Now a radical alternative is taking shape, and homeland economics is striking roots, to reduce risks presented by vagaries of markets, unpredictable shock such as pandemic or Xi and Putin phobia.
Homeland economics is a response to four big shocks. Firstly, if the financial crisis of 2007-2009 broke the confidence in the infallibility of globalization, the global recession of 2020 soured that optimism. A system that once delivered with efficiency, and convenience turned in to a source of instability. Second, the geopolitical shock of America and China sparring with increasing ferocity, using a variety of economic sanctions and the Russian roulette in Ukraine. Gone is the notion that economic integration would lead to political integration. Third, the energy shock unleashed by Putin. His weaponisation of hydrocarbon supplies has convinced many politicians that they must secure alternatives, not just of energy but of strategic commodities in general. Fourth shock: generative AI, which may pose a threat to workers. This has compounded a sense that the modern economy is heavily stacked against the average person.
But the real focus is elsewhere. Drawing on the European experience of the 1950s and 1960s, many governments are hoping to build up champions in strategic industries like computer chips, electric vehicles and AI. They are implementing huge subsidies and domestic content requirement to encourage production at home. Under President Biden, America has implemented the CHIPS Act to help the domestic semiconductor industry. EU wants 20% of world’s semiconductor to be made in the bloc. India has set up a big ‘production linked incentive’ (PLI) scheme for many sectors , including manufacturing of solar photovoltaic modules and advanced batteries. Under the K-CHIPS Act, South Korea offers tax breaks to semiconductor firms. Taking a cue from the Made in China scheme 2015, there is now Made in India, Made in Europe, Make in India, Made in Canada Plan.
The change in industrial policy and its successes are few and far between. Boosters say that industrial policies can work, if appropriately designed. The country in question is South Korea. The impact of South Korea’s seminal industrial push- the Health Chemical and Industry drive of 1973-79, in which the government introduced policies including cheap credit to boost production and exports. In the 20 years after 1973, South Korea’s real GDP per head went up by 349%! Since 2015, under Xi Jinping the Chinese state has played an even more active role in directing economic activity. Government subsidies as a share of profits of Chinese listed companies rose from 2% in 2012 to 5% in 2020. The number of tax support measures supporting high tech industries has jumped, as per a paper published by Goldman Sachs.
In case of India’s PLI scheme, where government pays 6% subsidy on invoice price, supporters boast that following the introduction of the scheme, exports of mobile phones have soared. From an export value of $334 m in FY 2018, the export value of mobile phones has gone up to $11 billion. But in a recent paper Rahul Chauhan, Rohit Lamba and Raghuram Rajan, the three economists point out that mobile phone imports also jumped. Producers are reexporting phones via India in order to get subsidy. It is an enormous and misdirected transfer of public resources to large domestic and foreign firms. Rajan in an interview also clarified that it is a subsidy on finished product and not on value addition. In another perceptive paper Prof Prasanna Mohanty bring out how both the PLI and DLI (Design Linked Incentive) scheme have come in the backdrop of India’s lamentable record in manufacturing and poor job addition.
It may be recalled that the in the Nicholas Kaldor growth model ,higher the growth of manufacturing output, the more significant is the GDP growth rate. It also establishes a deterministic relation between the growth of manufacturing productivity and manufacturing output growth. The NIMZ policy (2011) therefore set a target of increasing India’s share in manufacturing of GDP from 16% to 25% by 2021. Concomitantly, it forecast an addition of 100 million jobs in a decade’s time. India’s high GDP has been driven by the service sector, rather than the manufacturing sector. Employment generation has been rather tepid. Prof Mohanty brings out that manufacturing value was 17.3% in 2105 and has moved to 17.7% by FY 2018. One of the objectives of the PLI scheme is to add 60 lakh additional jobs in five years’ time. Rajan aptly notes that manufacturing jobs have remained flat because of poor value addition.
The GOI has earmarked around 2.06 lakh crores for the PLI scheme and 76000 cr for the DLI scheme where 50% of project cost will be subsidized. In a review by the Ministry of Commerce it has transpired that there no takers for PLI in six sectors, like steel, textiles, battery, white goods and solar panels. The electronics sector was disbursed Rs 2900 cr only in FY 2023 . As regards the DLI scheme the Vedanta Fox Conn JV has fallen through as they have not been able to get a technology partner to make 28 nanometre chip. The lessons of South Korea and China, how industrial policies are designed and whether it creates enough value addition or a vehicle for integration as in India become salient. The erosion of the multilateral trading system and loss of credibility of Western countries as champions of free trade will encourage more protectionism. The politics of globalisation are now toxic, laying the ground work for more protectionism and homeland economics.
The National Manufacturing Zone Policy Committee under Mr V Krishnamurthi had underlined the need to look at defence manufacturing sector as a subset of national manufacturing policy. He was cognizant that there were many dual use items in sectors like aerospace, shipping, communication and surveillance where homeland defence economics must not make not create silos between Military Industry Capacity and Make in India initiatives. Be it semiconductor, microelectronics the PLI and DLI initiative are as salient in defence manufacturing as in civil sector. In fact, our Self Reliance Quotient in propulsion, Weapons and Sensors being very low is due to our design limitations in these state of art subsystems. DLI, in particular can be very helpful in getting key technology collaboration in areas like passive seekers, focal plane arrays, Active Electronic Scanned Array radars and stealth technology. This would need abdication of protectionist regime in defence manufacturing and embrace Joint Ventures with OEMs and Joint Design & Development collaboration with reputed global design houses. In the 1970s, the tide turned in favour of free markets. The task before the classical liberals is to create a new consensus in an interconnected but fractious world; that openness and free trade should be the norm and gates the exception. It will not be easy in the face of rivalry between America and China. India has to come out of rhetoric and make sober stock taking of its homeland economics and create global manufacturing and design hubs in India, like China, Russia, South Korea and Germany who are nurturing dual technology.