Marching alone

One of the realizations, home-spun by Covid in India, is that there is value to “atmanirbharta” (ANB) or self-reliance – the capacity to march alone, if necessary. An admirable attribute except that “aloneness” creeps up silently on you like a habit, difficult to shake off. Looked at more cheerily, it is not so different from the Rolls Royce motto of fail-safe service no matter what – another desirable objective. But it comes at a cost – just like Rolls Royce and it is not clear who in India is willing to pay for it. 

Shades of “Atmanirbharta- Self reliance”

ANB also comes in multiple avatars – some more nimble and efficient than others. ANB as collaboration to reduce “Defence” costs and extend reach, as demonstrated by the Indian Navy sailing under the mutual-security cover of the Quad (US, Japan and Australia) is a good example. ANB as not joining the RCEP is a shade worse because it imposes costs on economic growth. ANB as building a wall of import tariffs to protect domestic industry is even worse for economic growth but at least it increases our revenue from import taxes. The latest variant “Production Linked Incentive (PLI) Scheme” tops the scale for having more negatives than positives. 

Clouded objectives

Initially gazetted in April 2020 for electronics manufactures at an outlay of Rs 400 million (over the next five years) the scheme proposes to compensate the investor for the “disabilities” entrepreneurs suffer in India estimated between 8.5 to 11% versus competitors overseas. Pause here for the first contradiction. The “disability” argument has some validity for an export-oriented scheme. But PLI is not one such. It seeks to enhance investment and reduce the burden of imports – like schemes prevailing more than three decades ago when forex was scarce. Today RBIs forex reserves equal nearly one years’ import and the current account is in surplus. 

Possibly the ANB rationale is just rhetoric to give domestic investors a break. Nothing wrong with that, except why not give a break to all manufacturers and consumers by lowering the GST rates rather than pick and choose? 

PLI expanded and deepened

In July, it was extended to the manufacture of Active Pharma Ingredients or “Bulk Drugs” (which we mostly import from China to produce branded drug formulations) and the manufacturers of Medical Devices, at an outlay of Rs 64 billion subsequently increased in September to Rs 90 billion. 

Now it is proposed to significantly expand the scale and scope of the scheme to include ten additional sectors at an outlay of Rs 1.4 trillion over the next five years. Further extensions of the scheme to other products cannot be ruled out in the now familiar “serial reform in drips” tactic. 

Winners luck

The scheme proposes to pay an “incentive” ranging from 4 to 20% of sales value, net of imports, against documented claims submitted annually. Companies must apply and must be selected through a “beauty context” on predetermined metrics. Minimum annual investment norms serve to exclude “frivolous proposals” and ensure that existing capacity remains ineligible thereby limiting the potential for scams where incentives are claimed for recycled hot air – existing production presented as incremental output. 

Back to the 1980s

The scheme is to be administered by an empowered committee of top bureaucrats aided by another committee of top-level technocrats. This presages a great deal “grunt-work”, heartburn from discretionary application of rules and delays in accessing the promised cash incentives. See “The difficulty of decoding business incentive schemes” Pradeeep Mehta, Livemint, November 19, 2020.  

Incentive or reward?

Even the administrative complexity is bearable if the cause was worthy. But is it? Take for instance the scheme for mobile manufacture. The global share of India in electronics manufacture more than doubled from 1.3% in 2012 to 3% in 2018- an increase in output value of 25% per year. It can grow to Rs 17 trillion by 2024-25 at this rate. But the electronics industry has targeted sales of Rs 26 trillion by that date leaving a gap of Rs 9 trillion and hence, the scheme states, the need for an incentive. 

This logic is less than convincing. Surely industry needs to factor in a slowing global economy till 2025. The global semi-conductor market is expected to expand at 9% and the global printed circuit board market at7% per year between 2020 to 2025 – say a global electronics industry growing at 8% per year till 2025. Even on a business as usual basis our global share would increase from 3% to 9% in the next five years.    

A three year Payback for investment in electronics

Is the incentive too generous? For mobile manufacture against a minimum investment of Rs 10 billion over a four-year period the investor could get the entire amount paid back within three years with eligible sales of Rs 200 billion and up to Rs 33 billion (more than 3X of the initial investment) by the fifth year.

Time will tell who wins this battle of wits- the producer or the government. But industries set up with a short-term objective of extracting government largesse have a notorious history of rigged accounting, shoddy equipment purchase and poor sustainability. 

Diluting the “structural disabilities” could cost less and broad-base the benefits

Couldn’t the “structural disabilities” impeding competitiveness be diluted further so that all businesses would benefit? The scheme cites “lack of adequate infrastructure, domestic supply chain and logistics” as a disability. But Gujarat alone has 188 Industrial Parks on 19,908 Ha of land and several in Southern India are managed in partnership with the private sector. Surely, the Doing Business improvements must be reflected on the ground in an improved environment?

Another is the “high cost of finance”, but lending rates have trended lower already. The “unavailability of quality power” would be hotly disputed by the Ministry of Power whose generators are stranded from lack of demand. Also, industrial feeders are kept live because DISCOMS profit from such supply. The average cost of power traded on the India Power Exchange has varied from Rs 2.4 per kWh off-peak to Rs 3.5 per kWh at peak times.

In September 2019 corporate tax rate was slashed to 22% from 30% to combat the slow down which cost the government Rs 1.45 trillion. More recently higher import tariffs on electronics provide a protective wall behind which the industry shelters. 

With the stock market and corporate profits surging by Diwali, the need for and the efficacy of a clunky, 1980s style, administratively complex scheme is not self-evident and must be proven before being extended further. Aim for Pareto optimality not isolated gains. 

Also available at TOI Blogs November 20, 2020

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