Govt must not micromanage

The Centre should focus on broad policy framework rather than micromanaging industrial and developmental activities

Micromanagement is when matters that should be left for decision by a lower level are controlled and decided at a higher level. The main problem with this is that the focus on the broad policy framework is lost because of the obsession with details. For example, focusing attention on a few trees does not constitute a forest policy, which should deal with the totality of plant growth that would lead to a greater respect for biodiversity. At present, we are seeing this trend towards myopic micromanagement in the Union government’s approach to industrial policy and to development activities that have to be implemented by the states.

In the case of industrial policy, the origins of this obsession with government intervention in corporate strategy lie in the belief that East Asian growth rested on direct interventions by public officials in the decisions taken by corporations about investment, technology and trade, the Japanese Ministry of International Trade and Industry being the archetypal example. Such a connection survives when there are social connections between corporate owners, politicians and bureaucrats and a political system with a weak opposition. 

The production-linked incentive (PLI) scheme announced by the government is an attempt to shape the direction of industrial growth. It requires discretionary decisions by public officials on the industries and the enterprises that would be eligible for the incentives offered and the criteria and quantum of incentives.  It has been announced for 13 sectors that were identified on the basis of their growth, employment, and export potential. It offers a production subsidy on incremental sales for products manufactured in India. In the last Budget, the finance minister announced a provision of Rs 1.9 trillion over five years for this corporate subsidy.

The scheme is basically a protective measure to promote domestic production of items that are being imported, and is, therefore, not very different from a tariff increase. The selection of 13 sectors for such protection has to be justified on the basis of sector-specific disabilities that cannot be attributed to the technological or managerial incompetence of the domestic producers but to factors beyond their control. In that case, would it not be more appropriate to correct the factors rather than to provide subsidies to compensate for the cost disadvantage? Are the factors that are causing the disadvantage unique to these 13 sectors or do they apply also to others? Are they macroeconomic in character, like an overvalued exchange rate?

The PLI reflects a micromanagement approach to policy that gives government officials, who have little experience of commercial activities, the discretionary authority to define what “win” means and to choose the “winners”. It is a business-friendly approach not a market-friendly approach and will lead, sooner or later, to charges of favouritism and possibly even of corruption.  A business-friendly approach based on subsidies may show some immediate gains like the increase in the domestic production of mobile phones, based largely on imported components, which the PLI supporters are publicising. But a market-friendly approach will lead to broader gains that are not dependent on subsidies.

Illustration: Binay Sinha

A market-friendly approach to industrial development will not try and pick winning and losing sectors or companies.  It will set a stable framework of regulations and taxes, macroeconomic stability and a correctly valued exchange rate and leave it to the market to pick winners and losers. In fact, such a market-friendly approach may achieve more than micromanagement by bureaucrats and politicians, as it will offer incentives for all sectors, not just the ones that attract the attention of the Delhi durbar.

This does not mean that the government has no role beyond macro-economic and exchange rate management in promoting industrial development. It can address more specific factors that are holding back industrial growth and exports like inadequacies of infrastructure, much of which is under public control, inadequate research and development in industry, shortages of skilled labour, imperfections in the capital market for MSMEs, and so on. If the government had chosen to spend Rs 1.9 trillion on correcting these impediments rather than a five-year subsidy regime for 13 sectors, we would have achieved much more by way of growth and competitiveness.

Industrial policy is not the only area of unnecessary micromanagement. Another area is the growing intrusion of the Union government in the development efforts of states through conditional grants given under centrally-sponsored schemes. The budget provision for this has gone up from Rs 3.4 trillion in 2020-21 to Rs 3.8 trillion in 2021-22.  

Federalism requires that the Union government must move away from micromanaging activities that will be implemented by the states and their administration. Indian states are large—Uttar Pradesh, the largest state, is about the same size as Pakistan; even Haryana is nearly half the size of Venezuela. Not only is there great diversity between the states, but also within the states. A standardised approach imposed by the Union government is not the answer for designing public interventions in sectors such as agriculture, health and education, where policies must suit local conditions. For instance, should the terms of a grant for drinking water supply be the same for Kerala and Rajasthan? I remember a Planning Commission discussion where some officials from Kerala protested and asked why the same money could not be used by them for drainage and water quality as they did not face a supply problem.

The substantial sums of money deployed for Centrally-sponsored schemes should be given as unconditional grants with perhaps some bias in favour of less developed states. In this area, the Union government must focus on issues which connect states and are beyond the competence of any one of them, like the movements of migrant labour, power transmission, infrastructure for inter-state movement of goods and so on. The goods and services tax agreement was an example of what the role of the Union government should be in a federal polity. It must now move beyond micromanagement to achieving similar agreements in other areas of inter-state importance.

The Union government must not try and micro-manage what corporate management and state governments have to implement. It should recognise that now these lower level decision-making entities have the competence and will make the right choices. It should focus more on building a framework for these decisions that is stable and consistent in a market-friendly and federal economy, and on promoting decentralised collaboration on matters of inter-state significance.

nitin-desai@hotmail.com