Another industrial policy misstep

The Union Cabinet has decided on a major new production-linked incentive (PLI) scheme aimed at reviving and transforming the automotive sector in India. The planned outlay of government funds for the scheme is in excess of Rs 26,000 crore — not an insignificant sum, albeit considerably lower than the original plans as reported previously. There are two aspects to the scheme: One targeted at original equipment manufacturers and the other at the components ecosystem. They should be evaluated independently of each other for their potential, their design, and their effectiveness. The O.....
The Union Cabinet has decided on a major new production-linked incentive (PLI) scheme aimed at reviving and transforming the automotive sector in India. The planned outlay of government funds for the scheme is in excess of Rs 26,000 crore — not an insignificant sum, albeit considerably lower than the original plans as reported previously. There are two aspects to the scheme: One targeted at original equipment manufacturers and the other at the components ecosystem. They should be evaluated independently of each other for their potential, their design, and their effectiveness.

The OEM scheme focuses in particular on electric vehicles and those powered by hydrogen fuel cells. Several manufacturers have already made significant investment in this sector, and others have plans that are well advanced. The idea that a transformation of the automotive sector towards zero-emission vehicles will serve India well is undeniable. The OEM scheme must also be seen in the context of attempts to mobilise demand in the direction of zero-emission vehicles, especially the FAME-II scheme. Yet the reaction of legacy automakers may not be as expected. Maruti, in particular, which has about half the country’s market share in four-wheelers, has not been enthused by the zero-emission sector in the past and the PLI scheme does not seem to have changed the company’s mind. Yet the fact is that investment in zero-emission vehicles was already in the pipeline. If the PLI scheme for OEMs has not changed Maruti’s mind, then it is clear that the bottleneck for transformation lies elsewhere. Perhaps the government must once again revisit its timetable for the tighter regulation of emissions if market conditions are to be changed sufficiently to induce additional investment.

 
The aspect of the PLI scheme focusing on advanced component manufacturing — from sunroofs to automatic transmission mechanisms — is somewhat more puzzling. The Indian component industry is fairly effective in responding to demand from automakers. There is also no shortage of access to research and development and to capital. Clearly, there must be problems other than margins — perhaps the availability of skilled labour — that are the constraint. In this case, the government’s objectives must also be called into question. It is clear from official statements that the impetus for the scheme is not some sort of future-proofing or transformation, but simple import substitution — the desire to move aspects of the supply chain onshore. This should not be a direct government objective. It can be an indirect objective, achieved through improving business conditions sufficiently so that purchasers make their own commercial decisions to contract with more advanced components manufacturers within the country rather than outside.

Unfortunately, therefore, this aspect of the scheme fits in with the broader criticism of the government’s recent industrial and trade policy that many economists have been making. Using taxes to provide incentives for the private sector in order to minimise imports is but steps away from the full-fledged licence-permit raj. The purpose of industrial and trade policy must be to integrate further with global value chains, not to dissociate from them. Yet the manner in which the government evaluates industrial incentive schemes as well as free trade agreements reveals that it intends exactly the opposite: Dissociation from global supply chains. This attitude will leave the private sector unproductive, drain the public exchequer, hurt consumer welfare, and do nothing for India’s growth trajectory.


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