Are there production linked incentives for construction work?

What do you think about the policy of subsidizing some domestic sectors and on the other hand, imposing duties on imports in favor of domestic manufacturers?

Arun Kumar: Globally, nations are trying to capture others’ markets by exporting more than what they import. So, this is what brings us to the question of defending national markets to protect jobs and income at home, and there may be different strategies for doing so. Instead of protecting large scale industries, we need to promote the micro sector, which accounts for the bulk of the employment, so that we can generate enough demand in the economy. But unfortunately, what is happening in India is that due to various steps taken by the government the demand is shifting from unorganized to organized sector. This has led to marginalization and decline in sectors where employment generation is high. So, in a way what we are facing today is a lack of demand and an economic slowdown. And dealing with it should be the first priority.

Nagesh Kumar: Core sectors are – sectors that have high externalities or multiples to other economic activities. If you start with investing or developing in a few key areas, it will help drive growth in a big way. Earlier we had a policy to promote industries like machine tools, which were considered as core sectors. In the present context, the semiconductor industry or the electric vehicle industry can be thought of as a major sector that will help promote industrialization. These are the types of policies that are found in different countries.

How do you go about actually subsidizing certain sectors, given that the process of subsidizing involves discretion and is prone to cronyism?

Nagesh Kumar: Targeting is very important when you decide to promote certain industries. Governments usually target certain strategic sectors that have great potential. These days, considering the future of sustainability considerations, there is a lot of emphasis on green industries. And so, this is a set of industries whose demand will grow exponentially as each country commits to net-zero goals. The US government has put $720 billion on the table to be distributed in the form of subsidies or incentives to companies that will manufacture high-tech equipment such as semiconductors, green hydrogen and electric vehicles. Therefore, there is intense competition among countries. Industrialization and manufacturing does not happen in a vacuum in this globally integrated world. So, we need to keep an eye on what other governments are doing and develop our strategy accordingly.

Why do you really need a scheme that costs lakhs of crores of taxpayers to subsidize businesses? Why can’t businesses be left to meet market demand without the help of subsidies?

Arun Kumar: At the macro level, PLI is a free gift to the corporate sector. And it’s based on the idea of ​​supply-side economics, which means we give incentives to the private sector to produce, but it won’t work when demand is low. And if demand is a problem, these policies won’t deliver. As we are currently seeing, our growth rate is stabilizing. As a result, even before the pandemic, our growth rate declined from 8% quarter on quarter to 3.1% quarterly growth rate for eight quarters. Now, to boost demand, what you need to do is reduce inequalities, so that the demand for mass consumption goods boosts the economy as a whole. Hence demand is a structural problem. And the bulk of PLI is concentrated in the organized sector which has very little job creation due to automation. So what we need to do is create good employment data. While 320 million Indians have proper employment, 270 million Indians do not. And that’s why there is less demand in the economy. Another structural problem that needs to be highlighted is the inadequacy of research and development (R&D) by businesses. Imports stifle local R&D. We are facing this problem since last 50-60 years. India invests very little in R&D compared to most dynamic economies. Indian businesses spend less than others because investment in R&D is very risky. So the conditions that need to be created are to de-risk investments in R&D. But what is happening is that instead of building internal strength, we import technology again and again. And this is the characteristic of various sectors in the economy even after 1991. These problems need to be tackled before the PLI scheme is actually delivered.

Don’t you think that the basic problem of the manufacturing sector is bureaucratic control? If so, don’t we need to address that problem instead of subsidizing companies?

Nagesh Kumar: It is very clear that we need to address structural issues. Infrastructure has to be fixed, quality of education has to be improved at all levels, R&D investment has to be increased. I think one of the points that Professor Arun Kumar raised is that there is a demand problem. I think there are demand issues, but for strategic industries that are being targeted under PLI, demand is not an issue. I want to emphasize this because we are meeting our demand, whatever it may be, through imports. Therefore, there is an existing demand which is not being met by local production. It is estimated that even by 2025, we can import electronics worth $400 billion every year. Why are we importing it when we can make it in India? The ready demand for some of these industries in the country is waiting to be tapped. For rest of the industries, we need to provide demand stimulus.

The second thing is about PLI which is offered free of cost to the companies. We have to keep in mind that after 1991 the context of industrialization has changed. Today we are talking about a globally open and integrated economy. Every investor, whether domestic or foreign, looks to see if other governments are giving huge subsidies, and if so, investment will flow straight there. So, if we don’t make some effort to promote, facilitate and encourage investments, we might as well forget about those investments. PLI is not a handout. This post work incentive is given when you give incremental output. So, once you give up the incremental output, only these incentives come to you.

Arun Kumar: PLI is basically a subsidy. And given the lack of political accountability in our system, we find that there is a great amount of cronyism, and the bureaucratic approach that you were referring to needs to be relaxed. Which companies and which sectors get subsidies and which get priority is largely influenced by cronyism in the Indian context. Also, subsidies need to be segregated. A general subsidy is one that is necessary for the macro state of the economy, whereas a specific subsidy is given to sectors or companies and is based on micro-level decisions taken by the government. In the case of the latter, cronyism can play an important role there, which is not necessarily an efficient thing. In the case of the former, the major issues become employment, living conditions etc. Subsidies often require higher indirect taxes. and due to higher indirect taxes, costs and prices go up; When this happens, subsidies for exports and the poor become necessary. So, these are the issues that we need to think about before considering the industries that have the technology and the ability to supply goods to the market on their own. Now, indirect taxes tend to be regressive, so those at the bottom need to be supported by subsidies. So, what we need to do is have a living wage.