By Nagesh Kumar
Budget FY23 will be presented in the shadow of the third-wave of the pandemic, with the Omicron variant of SARS CoV-2 spreading like wildfire across the country, requiring reimposition of a number of restrictions that have the potential to moderate the recovery. Hence, the stimulus would need to continue for the coming financial year to not only sustain but further deepen the pace of the recovery. The key priority for the stimulus would be to enhance and frontload capital expenditure on infrastructure development that would not only help in creating jobs and purchasing power but also help crowd-in private investment, especially in the manufacturing sector.
Focus on manufacturing would be crucial for enhancing the longer-term sustainability of economic growth and job creation. A key factor explaining rapid progress and poverty reduction in the East Asian countries has been their focus on manufacturing. They derive 30% or more of their GDP from manufacturing. The proportion of manufacturing in India’s GDP has stagnated between 14-16%. Even in neighbouring Bangladesh, the share of manufacturing is approaching 20% as the country has emerged as a global hub for readymade garments, next only to China! Not only has manufacturing’s share in the Indian GDP stagnated at low levels, there is also evidence of premature de-industrialisation and rising dependence on imports in electricals and electronics, among others.
The relative neglect of the manufacturing sector has cost India dearly in terms of lost opportunity for creation of adequate ‘decent work’ jobs, leading to pervasive informality and persisting poverty. Besides, for every direct job, manufacturing creates more indirect jobs through its extensive forward and backward linkages. In that context, the adoption of the ‘Make-in-India’ campaign in 2014 was timely. It has now been reinforced by Aatamanirbhar Bharat Abhiyan, announced in 2020 as a part of the strategy to rescue the Indian economy from the Covid-19 pandemic.
The production-linked incentive (PLI) schemes announced in the Budget FY22 for 13 key sectors have attracted interest from major domestic as well as foreign companies. Incentives linked to the scales of production may also help the beneficiaries to exploit scale economies and make them more competitive as they boost their production. It may also help in building productive capacities for key sunrise industries like mobile handsets and other electronic items, active pharmaceutical ingredients, electrical appliances, batteries for electrical vehicles, semiconductors and chips, solar panels, among others. Given that these industries are going to occupy an increasingly important place in the economy over time, building competitive productive capacities in them would provide a solid foundation for manufacturing-led development. PLI could be expanded to cover some more import-dependent industries.
The thrust on manufacturing needs to be supported by exchange rate management. As a country running trade and current account deficits nearly always, the exchange rate of the rupee should be gradually depreciating on its own, as a self-correcting mechanism, boosting the competitiveness of domestically produced goods. However, expanded liquidity in advanced countries resulting from quantitative easing tends to find its way to emerging markets like India, pushing the exchange rate of the rupee upwards.
Overvaluation of the rupee tends to erode the competitiveness of Indian products and makes imports more competitive. It also brings in volatility in the financial markets and makes the stock and foreign exchange markets vulnerable to policy changes in the advanced countries, a la taper tantrum. The taxes on short-term capital inflows could be enhanced to make them less volatile. Going forward, an unwritten policy direction for maintaining competitive exchange rate will be critical for the success of Make-in-India programme.
The competitive exchange rate management will also help to attract export-platform investments in the country by multinational enterprises (MNEs) looking to relocate some of their value-chains, as a part of China-plus-one strategy.
Finally, while the liquidity support to MSMEs is critical to revive them, the rising proportions of non-performing assets in the banking sector suggest that commercial banks are ill-equipped to cater to the long-term lending needs of the corporate sector and large-scale industry due to asset-liability mismatches and poor technical capacities. The East Asian countries have intervened strategically to develop sunrise industries through the directed long-term credit. India in the past had the trinity of Industrial Finance Corporation of India (IFCI), Industrial Credit & Investment Corporation of India (ICICI), and Industrial Development Bank of India (IDBI) to support the industry through term-lending. However, they were transformed into universal banks as a part of 1991 reforms.
There is a need for a more appropriate institutional architecture to cater to the special needs of the industry to make the Make-in-India a success. A specialised, term-lending institution catering to the special needs of the manufacturing industry is the need of the hour.
To conclude, Budget FY23 needs to provide another booster dose to Make-in-India to exploit India’s potential to emerge as a manufacturing hub of the world and harness its potential for creating decent jobs for the country’s youth population.
The author is director of the Institute for Studies in Industrial Development (ISID). Views are personal.