7 minute read
Nitesh Singh, IIFT
By Nitesh Singh, IIFT
Foreword
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2020 was by far the most distressing year since it was the year of a deadly pandemic that wreaked havoc on people's health, industries, and communities all over the world. The Indian economy was also harmed as a result of the resulting lockdown, which unveiled supply chain flaws and delays in working around social distancing norms. De-growth in the economy, contraction in GDP, widening of fiscal deficit, and high inflation has all illustrated the economy's extreme strike in the past year.
Faced with the daunting task of bringing the economy out of the grip of de-growth, a slew of fiscal and non-fiscal initiatives were implemented during the year to help the economy recover from the pandemic's aftermath. This is supported by the pre-budget Economic Survey's forecast of 11% real GDP growth in 2021.
The Hon'ble Finance minister has set out an idea for ‘AtmaNirbhar Bharat’ , supported by six columns: welfare and health, physical assets/money resources and infrastructure, property growth for the Republic of India, reinvigorating human capital, and Research &Development, along with minimum government-most governance. On the indirect tax front, there are plans to simplify customs duty provisions by revising their structure, making sector-specific improvements in customs duty rates, and streamlining those procedures, and making enforcement easier.
Overall, the reforms announced seem to be in the right direction, given the fiscal constraints that the Finance Minister had to work with. If implemented in a timely manner, these initiatives can help to accelerate overall growth, as well as healthcare development, increased consumption, and infrastructure development.
RUPEE COMES IN
In addition, initiatives to attract foreign
investment in the infrastructure
market, affordable housing/rental housing, tax incentives for IFSC, and start-ups have been announced, all in line with overall objectives outlined in the pillars.
RUPEE GOES OUT
The ‘Production Linked Incentive (PLI)’ scheme has been presented by Government of India to uplift cost competitiveness and its measures in core sectors facing hard, stiff competition and backlash from other small and large manufacturing markets, drifting swiftly, and deriving knowledge from other nations' hypersuccess industrial/manufacturing models.
The scheme is strategically targeted at industries that have demonstrated global expertise, growth potential, or a heavy reliance on imports. It offers financial benefits to businesses that contribute to sales of goods made in the United States. When juxtaposed with the government's previous declarations on lessening the corporate tax, it paints a picture of a gripping case for deep pocketed, capital-rich companies to participate, invest and boost capacity in the nation.
However, the scheme is not a long-term solution for improving global competitiveness. It would be impractical to expect India to be able to manufacture anything on its own. The idea of making India globally competitive, will be defeated if high customs duties on a variety of goods are maintained for an extended period of time. Tariffs on imports will also be needed to be phased out.
Down the line, chief Asian manufacturing jumbos such as Korea, Vietnam, China among others, have spot-lighted on manufacturing-based businesses and have become crucial parts of the worldwide value chain in a plethora of subdivisions. This emphasis allowed them to attract more investments, create jobs, and develop export-oriented economies. India, on the other hand, which concentrated more on agriculture and services, was unable to match the size of manufacturing and jobs in its peer countries.
More job opportunities for India's rural population will be provided due to the increased investment in the manufacturing sector, as well as increased contribution to GDP growth.
The PLI scheme is supposed to produce better results because it is output-oriented and has ‘milestone-based incentivization’ , as opposed to previous schemes that were more dependent on multiple input parameters. It would draw broad sector participants, advanced technology, and grow an interconnected ecosystem of products because of its output-oriented existence.
It would lure large sector participants, cuttingedge technology, and grow a unified interdependent environment with manufacturing efficacy and economies of scale because of its production-oriented existence. Moreover, the PLI scheme must be properly assisted by a comprehensively integrated solution that encompasses the entire manufacturing ecosystem and caters to the other associated economic ecosystems.
In the next five years, the country's minimum output as a result of the PLI schemes is
Kickstart towards the path of self-sufficiency
expected to be about INR 3.92 lakh crore. From 2021 to 2022, the scheme has the ability to generate nearly 1.40 crore man-months of jobs, essentially doubling the current workforce across industries. This will help our country's MSME sector develop even further.
The Remaining Challenges
While the scheme's purpose can be appreciated, the results must be monitored. Historical tendencies along comparable outlines, such as the four-decade-old Freight corridors/Special Economic Zones(SEZ) understanding and the more than two-decade-old manufacturing estates dedicated to augmenting services/products value superfluities, have faltered to harvest the anticipated results.
Similarly, the Merchandise Export from
India Scheme(MEIS), which are export incentive schemes, were afflicted badly by bureaucratic delays and faltered to paint the desired picture. In fact, it actually intensified uncertainty and developed islets of self-governing rules and regulations, resulting in unequal and unsatisfactory indifference to challenging and competing interests. PLI is unique in its architecture, despite this, it is impossible to exclude the likelihood of operational inadequacies and the complications this indicates. Performance of a PLI scheme in the mobile and manufacturing sector cannot be expected in other industries since the nature and input elements for mobile manufacturing are different from those for other industries. These programs are just a band-aid solution for the real problem, which is the high operating costs and complexities of doing business in India.
Only by resolving these issues India will become a desirable location for new business ventures. Previous experiences have shown that such a challenge can stifle desired outcomes, in spite of the fact that PLI's full & final print is yet to be published.
Potential investors with a large capital base, will show keen interest in manufacturing estates which have the right provisions in availability, accessibility of energy, labor laws and land acquisition laws, and quality manpower, etc., in short, the appropriate ecosystems in different areas. However, the query that ascends is whether India will provide a corporate-welcoming milieu to endorse business/production at all levels.
The PLI schemes will continue to act like a shortlasting incentive bubble, until all favorable conditions are met. For such incentives/subsidies, specific clauses are critical; otherwise, the clamor for their continuation will continue, particularly when the market fluctuates.
Consistent and headstrong policymaking seems difficult, as long as, government's bolster comes in the form of subsidies, subventions and paybacks tied to a number of thresholds. The COVID-19 go-slow may have polarized the assortment of ten title-holding sectors, but the competitive landscape of commerce and export markets and nations may categorize and tag it as subject to individualistic choices in the longer run.
India's manufacturing competitors, such as Korea and Vietnam, had strict trade-oriented industrial policies. They were combined with lower-wage jobs, labor law stability, lower enforcement, a great ecosystem, and tax and duty relief to encourage export. India's stagnant manufacturing can be accredited or rather discredited to factors like complicated and time-consuming compliances, high capital costs, land and power availability, a shortage of qualified labor, and a fragmented supply chain with heavy reliance on imports.
Although India is committed to establish itself as an investment attraction hub, the other manufacturing powerhouses are becoming more appealing and establishing themselves in dynamic response to shape-shifting paradigms. However, for MNCs seeking to establish facilities outside of China, the PLI scheme would offer a super significant boost, as per the current scenario.
An integrated solution that encompasses the entire manufacturing ecosystem, would be needed to bolster the PLI scheme. The bigger and larger trial will be safeguarding interests of investors who not only come to India under this scheme but are also able to efficaciously set up their production estates, with iota of delays and capital price overruns. Steps like actualization of ease of doing business, labor law simplification, a large professional resource base, a check on the import duty, and promotion of R&D initiatives of certain main goods in the early years to avoid disrupting existing supply chains will ensure successful scheme execution and long-term market viability.
Additional measures are needed to support the USD 5 trillion economy's ambition and to knock out the intercontinental front-runners, the government should consider incentivizing key participants to establish innovation and research substructures in almost of the associated fields. In the current
The Way Forward
environment, such a strategy and emphasis on export-oriented initiatives could seem improbable.
However, as the global trade situation improves, India will be well positioned to reap benefits of these industrialization initiatives in terms of large businesses, increased productivity, and job opportunities. Talking on aspects of increased productivity, technological advancements, large businesses, and job opportunities, India will definitely be at a vantage point to garner the benefits of these economic development ingenuities.
