Return of rent-seeking

PLI schemes have already set off the expected lobbying

The government’s initial push under “Make in India” to attract manufacturing has not succeeded as hoped. Perhaps that is one reason, alongside a more general scepticism about trade that has caused the rash of recent 1970s-style industrial policy announcements, from “champion sectors” to “production-linked incentives” (PLI). Economists have warned that these inducements to investment have been tried in India before but come with a dangerous tendency to become self-sustaining, causing a permanent drain on the treasury without really improving competitiveness. The first signs of such a development are, sadly, already visible. A body representing mobile handset makers has said its members may miss their targets under the production-linked incentive scheme for 2020-21, but should nevertheless not be penalised. They say that the government could rework the five-year map for the scheme without compromising its overall direction.

While the fact is that the pandemic upended supply chains for much of the first quarter of 2020-21, it is also true that these are grounds for overall support across sectors, and not special support for those companies already singled out under an existing scheme. If systems such as the PLI are not to be subject to constant gaming by their beneficiaries, then they must be set in stone, not composed of movable targets. Yet the chances are that the government will compromise in this instance, and then proceed to compromise over other, far less consequential disruptions, and finally repeatedly extend the scheme beyond five years. This has been India’s experience with all such subsidies, especially those directed at the private sector.

Meanwhile, the sectors lobbying for the schemes will multiply. The original targets of industrial policy were those sectors that received “special packages” a few years ago because they were dominated by small and medium enterprises, labour-intensive, and (such as leather, gems, and textiles) export-focused. But that lens has now begun to expand in a dismaying but nevertheless entirely predictable manner. Existing players will want PLIs so as to make their already planned investments cheaper. Bureaucrats “in charge” of various sectors will demand their own pet sectors become part of the PLI system. This extension is already happening, as the original set of PLI sectors was augmented in November by the addition of LED lights and air-conditioners. There is no reason why the former, for example— an industry with exploding consumer demand, and is relatively low-tech — needs to be part of a focused industrial strategy. If it has been included for reasons to do with cutting carbon emissions, then it is odd that it has been paired with emissions-belching air-conditioners as a focus area.

Existing players in the market are complaining that the PLI scheme benefits new investments, and should be tweaked to help them as well — or that interest subvention should be for the entire value chain, and not just for exporters. This is classic rent-seeking, and an unsurprising consequence of the sort of industrial policy that the government has unleashed. If the government really wishes to improve investment in manufacturing, it needs to ensure that the regulatory and tax climate is such that investors are more comfortable. Direct subsidies and picking winners help nobody but bureaucrats and vested interests — India has several decades of experience to prove this.