The Big State and its discontents

It is disheartening that India sees its place in the sun only in the context of a Chinese economic sunset

Perfumes, toiletries, umbrellas, toys, imitation jewellery, solar panels, mobile phones…. Over the past 10 years, all of these items and many more have attracted the attention of the Modi government’s Make in India enthusiasm.

Add in, since 2016, the following: Demonetisation, a crash deadline to introduce the Goods and Services Tax, two versions of the clunkily named Faster Adoption and Manufacturing of (Hybrid &) Electric Vehicles in India (better known as FAME-I & -II), a Production-Linked Incentive (PLI) scheme, and now the licensing of laptops and generous state subsidies for semiconductor manufacture.

Indian economic reform was, or so its votaries assured us, all about the government leaving the business of doing business to businesspeople. But the extant version of economic reform appears to be predicated on the Big State theory, according to which an omnipotent leader will determine the trajectory of the economy. The results have been decidedly variable.

With customs tariffs rising sharply in each Union Budget since 2018, India now figures among the most protectionist regimes in the world, surpassed by such countries as Sudan, Egypt and Venezuela. This should make Indian industry happy, you would think. But consider this July 2023 study by the Indian Cellular and Electronics Association (ICEA). India has the highest tariffs on electronic inputs among competing economies, ICEA complained, and it lobbied for a reduction to increase India’s competitiveness.

It said India’s average MFN (most favoured nation) tariff is 9.7 per cent compared with 3.2 per cent in China. For Vietnam, a line-by-line comparison with India’s non-zero tariffs shows that the latter are higher for up to 98 per cent of the lines.

Vietnam, of course, has forged ahead in its exports thanks to energetically signing free trade agreements (FTA) — such as with the EU, which gives it a huge advantage over India in such traditional items as textiles. India, in the meantime, is struggling to sign FTAs with meaningful trade partners such as the US, EU or Asean as it searches for an elusive winning formula instead of focusing on the shrewd give-and-take that is the essence of successful trade negotiations.  

Several issues stand out. First, it is astonishing that the government should think that Indian industry needs protection after three decades of steady tariff reduction — from a peak rate of 150 per cent in 1991-92, tariffs on non-agricultural products have fallen to 10 per cent by 2007-8 without India suffering major problems. The irony of the steady tariff hikes is that imports have surged with those few countries with which India has signed preferential tariff and trade agreements — the UAE being a good example.

Second, for a regime that posits itself as business friendly, it reveals a notably poor understanding of the operations of global value chains. Raising tariffs on key electronic components produced at optimum cost elsewhere (mainly China) makes India uncompetitive in electronics exports, one of this government’s cherished goals. Likewise with solar panels, though India has set itself stiff targets for alternative energy.  

The government’s Big State outlook posits that fiscal policy should be focused on creating desirable outcomes such as the growth of electric vehicles. This is not unreasonable; all major countries have offered some form of financial support to further this aim. But a policy that is predicated on bureaucratic scrutiny rather than encouraging consumer demand is doomed to failure. The rash of scandals that have emerged of manufacturers misusing FAME to dupe consumers is a case in point.

In PLI schemes, the government’s latest signature scheme has run into arguments over qualifying criteria. It’s been three years since the scheme was launched and the performance has been underwhelming with actual investment till March 2023 (Rs 62,500 crore) lagging expected investment (Rs 3.65 trillion) by miles.

The continuous media excitement over Apple’s triumph only serves to underline the lack of success in other PLI schemes. The plan to license laptop and notebook imports is reportedly an attempt to stoke interest in an enhanced PLI scheme, a remarkable misreading of the writing on the wall.

The focus, however well meaning, on making the Big State the key facilitator of India’s manufacturing dynamism has fallen short of expectations, if only because policymakers have ignored the other basic elements to improve the business environment — ease of accessing basic infrastructure, transparency in approvals and, most of all, policy predictability. 

The country is currently basking in its status as one of the world’s fastest growing economies overtaking China in the limited metric of gross domestic product growth. It is depressing that India sees its place in the sun only in the context of a Chinese economic sunset.  A pity that the country never posed even a squeak of a challenge when China’s economic dragon roared in the past three decades. Worse, we now look over our shoulders at Vietnam, a country with a landmass that is nine times smaller than India’s, to gauge our progress in the global business stakes.