Professor Raghuram Rajan, has stirred a hornet’s nest by attacking the grandiose PLI scheme which aims at making manufacturing in India globally competitive; calling it a myopic and policy shortcut, by overlooking the long-term challenges to improve human productivity. He has cited the example of Iphone 13, which sells at Rs 92,500 in Chicago and Rs 1,29,000 in India due to the imposition of 20% custom duty on the import of mobile phones. He brings out how the scheme will hurt the consumers by having an unhealthy amalgam of custom duty and subsidy of 6% on incremental sales, even if the domestic manufacturers import all the parts and assemble them in India! This is clearly manifested in a significant increase in import bills from $2.7 Billion in 2019 to $5.2 billion in 2021. The domestic cost will not be globally competitive unless our value addition in manufacturing improves substantially. This in turn will depend on a combination of productivity, innovation and application of high-end technology.
The latest National Accounts Statistics have brought out how India’s Gross Value Addition (GVA) has come down from 17.4% in 2011-12 to 15.1% in 2019-20. The year 2011 was a watershed year in terms of public policy when Mr. Krishnamurti unveiled the National Manufacturing Zone Policy which sought to increase the share of manufacturing in GDP from 15% to 25% in a decade’s time. More importantly, it is expected to add 100 million jobs at the rate of10 million per year, as against the specter of’jobless growth’ noticed during the high noon of India’s growth story from 2000-2014 because of our thrust towards services-led growth.
The National Investment and Manufacturing Zone’s (NIMZs) were to be operated through a Special Purpose Vehicle by galvanizing training and skill development through ITIs , improving labor productivity, developing infrastructure, clustering, technology acquisition& development, innovation, and FDI inflow. NIMZ Policy was sector neutral. He had also suggested that the Military Industry Complex (MIC), instead of pursuing a stand-alone manufacturing policy must be integrated with the overall mosaic of the National Manufacturing Policy.
Mr. Vijay Kelkar had earlier also strongly pitched for a Public Private Partnership (PPP) policy in defense manufacturing and providing a level playing field to the private players The NIMZ policy was deeply influenced by Nicholas Kaldor’s seminal three growth laws viz; growth of GDP is positively related to the growth of manufacturing, productivity is positively linked to manufacturing, and production in nonmanufacturing is positively linked to manufacturing. A study of 63 middle-income and high-income countries from 1990-2011 has clearly vindicated the two growth laws of Kaldor.
The story of global manufacturing hubs of China, South Korea, Germany and Japan, with 30-35% of GDP coming out of manufacturing, with a consistent surplus balance of trade, is a testimony to the positive correlation between productivity, manufacturing, employment generation, and GDP growth. Sadly India has been an outlier in this manufacturing-propelled growth and export-led growth experienced by countries like Japan in the 60s, China in the 80s and Korea in the 90s. The PLI policy recognizes India’s dismal track record in terms manufacturing sector’s stagnancy in contribution to the GDP (16%), poor infrastructure, inflexible labor laws, tardy progress in land acquisition and low Human Development Index (HDI). It notes that India’s manufacturing productivity is about 30% less than China’s. The PLI scheme attempts to monetize the productivity deficit by a combination of import duty and subsidy on incremental sales.
Unlike the NIMZ, PLI is sector biased and has identified 13 sectors like Pharma, Semi Conductors, Air Conditioners, Mobile Phones and ACC batteries. Last year’s budget had earmarked 1.97 lakh crore to provide subsidies in incremental sales, cash subsidies for new sales of goods manufactured in India, and incentives tied to incremental investments made. The policy intends to eliminate sectoral handicaps of these buoyant sectors, promoting the economy of scale and bolstering efficiency. It would be useful to look at the government’s initiatives in some of these sectors. The Pharma industry presently accounts for a global value share of 3-4% which PLI wants to increase to 10-20%. Dr Reddy Laboratories has pleaded for some participation of government funding in their investment. In the AC Market, the government is pitching for an increase in production from 25 million units to 320 million units by 2037. It recognizes that critical parts like compressors, valves and coils are being imported from Original Equipment Manufacturers (OEMs) like China, Thailand, Malaysia and Japan. PLI scheme must not degenerate into the assembly of these imported parts, but how to manufacture indigenous substitutes of similar quality.
Another criticism of the PLI Policy in this sector is that there is no provision for boosting the manufacture of super energy efficient ACs. In the case of electronic vehicles, which the government wants to encourage as part of its Paris Summit commitment, 50% of the cost is accounted for by the ACC batteries, which are imported. India’s trade deficit in products like ACC batteries, medical devices, Solar Photo Voltaic (PV) and Semiconductors is as high as $41 billion. That takes us to the Vedanta- Foxconn Joint Venture to be set up at Gujarat for setting up a display fabrication and semiconductor facility where they intend to invest $20 billion and PLI assistance would be $10 billion over a period of five years. The semiconductor is an important component in the electronic value chain (50%), used in automobiles, mobile phones, TV, and washing machines. Presently the import intensity is 85%.
A study reveals that the lack of focus on R&D by the Indian private industry is the major structural weakness, with only 0.5% of total turnover is spent on R&D. The Integrated Chip (IC) design takes place within the MNC R&D center with patents right kept abroad. The largest share of value addition accrues in this sector to the patent owners. For harnessing benefits under the PLI scheme, it is necessary to link incentives to companies to companies investing 5-6% of their turnover in R&D. Further, organizations like Centre for Development of Telematics (C-DOT) and Centre for Development of Advanced Computing (C-DAC) must develop indigenous technologies and license them to indigenous companies for commercial production.
In India’s Military Industry Complex, our Self Reliance Index is as low as 30%. In propulsion, sensors and detectors we are almost fully dependent on imports. Major PSUs like HAL have become assemblers of subsystems imported from OEMs. A case in point is fourth-generation aircraft like SU 30. DRDO, which is our prime design and development agency, has a poor track record in coming up with an indigenous version of gas turbine engines, Active Electronically Scanned Array (AESA) radars, passive seekers, Focal Plane arrays, Ring Laser Gyros, communication sets on battlefields, air to air missiles, lasers & UAVs. Israel which exported only $1 million in 1995 to India crossed the $1 billion mark in 2005, by exporting a wide array of products like eyes in the sky (UAVs), communication sets (TADIRAN), and anti-material rifles. This was possible because of Israel’s relentless pursuit to excel in some technologies and investing handsomely in R&D (6% of GDP). Quite clearly the PLI scheme pays scant attention to the role of R&D in developing indigenous technology as substitutes for imports and the inescapable imperative to improve our value addition, instead of being mere assemblers. India spends a measly 0.7% of its GDP on R&D, as against 4.8% by S Korea and 3.45% by the USA. India’s per capita spending is as low as $ 43 as against $173 by Brazil and $283 by Russia as per NITI Ayog.
Even the big private sector companies spend very little on R&D, with government funding as high as 85% of R&D expenditure in India. It is further hamstrung by our poor design capability in critical subsystems like detectors, microelectronics, and semiconductors as alluded to above. Make in India through technology transfer is also handicapped by our poor technology absorptive capability. Poor design capability and low productivity because of poor skilling are the root causes of our tendency to be assemblers and integrators rather than value adders. Industry 4.0, which is the way forward, expects substantial investment in AI, IoT and machine learning. The SME sector which contributes 50% of manufacturing output and 40% of our export, is hugely handicapped in terms of access to high-end technology, low-cost capital from formal sources and economy of scale. They are unlikely to reap benefits from the PLI scheme.
The Vedanta Fox Conn JV raises the bogey of crony capitalism against the Modi dispensation. By not paying adequate attention to proper skilling, and bolstering indigenous capability through substantial spending in R&D, our protectionist policy has the potential of hurting the consumers with high costs by protecting the inefficiency of indigenous industries by subsidizing them. Though defense manufacturing has not been highlighted by the PLI policy, it must be recognized that many of their products are of dual-use nature, like surveillance, aerospace, lasers, fiber optic material, and semiconductors. The government’s PLI policy must look at manufacturing on a holistic basis, instead of a pick and choose policy, which puts a premium on a shortcut, rather than taking a long-term approach to realize the Kaldorian postulate of melding manufacturing with productivity, employment, and GDP growth.
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