Will the govt's plan to prune import dependency in a new avatar work?

The aim is to boost domestic output, without raising tariffs or providing subsidy, of items on whose imports India is heavily dependent. The plan is to start with consumer and capital goods

Import substitution as a policy lost steam after India ushered the era of economic liberalisation in 1991. But now the government is exploring the possibility of boosting domestic production of items on whose imports India is heavily dependent. The strategy this time, however, is to do this without raising tariffs or providing subsidies.
 

The sustained rise in inbound shipments in recent months prompted officials from the commerce department to meet industry representatives last week over ways to boost domestic production of specific items. This, in turn, could provide a fillip to exports. They identified 102 items whose imports had surged in recent months. Bbut raising domestic production would be explored in consumer and capital goods in the beginning. These two categories contribute 26 per cent by value of these 102 items.  

While the minutes of the meeting were not made public, people aware of the matter told Business Standard that India doesn’t intend to regulate or substitute imports, but asked the industry to ‘prioritise for immediate interventions’ to boost domestic production.

The government has asked industry associations and manufacturers to consider exploring domestic capacity expansion in these items as persistent and consistent domestic demand indicated an opportunity. The focus on domestic production could, in turn, fuel economic growth and create employment opportunities.

These 102 items include electrical equipment, metals, chemicals, petroleum products, precious and semi-precious stones, lithium-ion batteries, plastics, and textiles among others, and comprise 57.67 per cent of the overall inbound shipments during March-August, 2021.

Of the high import items, raw materials have a 41 per cent share, officials said, acknowledging that some of them may not be even available in the country. Therefore developing capacity for such products will be a long-term strategy.

To start with, production of low hanging fruit, such as consumer and capital goods will be targeted.

“Over a period of time, we need to have a granular approach. Once we identify the product, the industry can take it forward,” they said.

“One suggestion that came from the industry was to form a working group pertaining to sectors where major imports are happening, so that there is a focused approach. Last week’s meeting was a preliminary exercise. We also understand that some imports may not be able to be substituted or replaced,” one of the officials cited above said.

Government officials also told industry representatives that exports and domestic production are inter-linked and therefore it is crucial to focus on increasing production of consumer goods such as electronics.

India imported goods worth $611.93 billion in 2021-22, up 54 per cent year on year. According to the department of commerce’s analysis, of the 102 items, raw materials have a share of 41 per cent, intermediate goods 33 per cent, capital goods 17 per cent share.

However, the issue is whether the policy to enhance domestic production of items and not import them--even if this is not import substitution--a step in the right direction. Moreover, some consumer electronics and capital goods are part of production-linked incentives (PLI) which is nothing but an import substitution scheme.

Former chief statistician Pronab Sen said the strategy to raise domestic production of items has been part of India's strategy for years.

"There is nothing new in this. This has been around in India for the past 50 years. This kind of interaction where industry thinks it can compete provided the right set of incentives are provided happened earlier as well. This has happened since 1991 as well. This is a regular exercise. The crux is how you are going to be promoting it," he said.

Earlier, the emphasis was on creating special economic zones, specific industrial estates, manufacturing zones, Sen said.

"The basic problem is our industry does not have economies of scale. Industry would point that it can do it provided a set of problems are addressed. The problems could be land, then you will have all these industrial estates where the government would acquire land and then provide the facilities," Sen said.

Naushad Forbes, co-chairman Forbes Marshall, wondered why companies would invest in producing consumer electronics locally unless they are more competitive.

"If you are more competitive you should be producing them anyway. If you are not competitive, I am not sure how they are encouraging local production without increasing tariffs. If they are not increasing tariffs,  it is a good development.  But I don't follow the economic logic as to why those capacities have not been created if we were competitive." he said.

If the case is that companies want some logistic cost issues, labour issues, land issues, or some other hurdles be addressed, then doing so is a very good thing, Forbes said.

"But, the big challenge in consumer electronics is that we have a very small manufacturing base and you need a fair amount of work to increase that," Forbes said.

He said hopefully the PLI scheme will get us there.

Calling PLI as an import substitution scheme, Forbes said in the long run, if it leads to a more competitive supply chain even after removal of tariffs, then the scheme has worked. "If tariffs need to be continued for production to continue, then the PLI scheme has not worked," he said.  

Sen also said PLIs are an import substitution scheme. "Okay, you are not giving tariff protection, but you are giving subsidies. It is import substitution. Tariffs or subsidies don't make any difference," Sen said..

Sen said be it consumer electronics or garments,  many of the problems are related to ease of doing business.

"The point is you get the ease of doing business and say we have fixed this, we have fixed that, but what about those which should be fixed, nobody seems to be asking those questions. Ease of doing business has not really worked," he said.

When asked that India's rank in the World Bank ranking of ease of doing business has improved significantly in recent years, Sen said this ranking uses particular parameters. but problems may lie somewhere else.

"In manufacturing, absolutely nothing has been done. Look at the data itself. Manufacturing has not done anything remarkable. But if half of the problem is in the policy environment in which business operates, then instead of fixing policy you are providing palliatives," he said.

Sen said the 1991 reforms corrected policy distortions. "Then the government took away lots of policy barriers which inhibited firms from growing. But there were various other policy barriers as well. You got rid of one bunch and you did well. But then you started hitting other ones. The point is you have not fixed those," Sen pointed out.

When asked what those hurdles are, he said those have to be discussed with industrialists. "The policy barriers should be targeted. This would be a lasting solution," he suggested. 

Share of top four of 102 heavily imported items

Consumer goods:  9%

Capital goods: 17%

Intermediate goods:  33%

Raw materials:  41%

Source: Commerce Department