Growth instruments

Enabling conditions needed for manufacturing

A day after data showed that overall government expenditure in the health care sector has been increasing over time, which resulted in lower out-of-pocket health spending, the Union Cabinet this week approved a policy for the medical-device sector. Given India is now estimated to be the most populous country, with the population expected to increase in the coming decades before stabilising, the need for expanding capacity in the health care sector, which is severely constrained at the moment, will only increase. In this context, a vibrant domestic manufacturing base for medical devices would be useful. India currently depends significantly on imports. According to one estimate, imports of medical devices increased by over 40 per cent in 2021-22 to Rs 63,200 crore. Further, the data showed electronics and equipment had a share of over 60 per cent in medical-device imports.

The government thus is aiming to increase production and reduce import dependence. According to government estimates, the market size is about $11 billion, or about Rs 90,000 crore. The policy expects the sector to grow to about $50 billion by 2030. To increase activity in the sector, the government has initiated the implementation of the production-linked incentive scheme. Under the scheme, 26 projects have been cleared as of now, which are expected to result in an investment of Rs 1,206 crore (an investment of Rs 714 crore has been attained so far). The government is also supporting the setting up of a medical-device park each in Himachal Pradesh, Tamil Nadu, Madhya Pradesh, and Uttar Pradesh. It has put forward a strategy to create an enabling environment. For instance, the government intends to enhance regulatory streamlining with measures such as single-window clearance. It would also work to provide enabling infrastructure and facilitate research and development. For human resource development, the policy will support dedicated multidisciplinary courses, among other things.

Given the scale of India’s requirement and potential in the sector to increase output and create jobs, the government’s intent cannot be faulted. However, it is worth noting that setting targets and announcing a policy often do not yield much by themselves. The government for decades has been trying to push up manufacturing without much success. Besides focusing on a particular sector, it is important to push broad-based policy reforms. For instance, single-window clearance, infrastructure and logistics support, and skilled manpower are needed for all businesses. In the absence of a broad enabling environment, interventions focused only on a particular sector may not yield desired results. As a recent report in this newspaper showed, electronics manufacturing could significantly fall short of the target, with exports reaching only 53-55 per cent of the stated target by 2025-26.

It will also be important that the government does not resort to tariff hikes to increase activity in the medical-device space as it has done in several other sectors. Notably, India received an unfavourable ruling recently at the World Trade Organization (WTO) for imposing higher tariffs on imports of products related to information and communication technology. While this may not have an immediate impact because the WTO appellate body remains dysfunctional, it may result in retaliatory tariffs by trading partners, which would affect Indian businesses. Given the dominance of global value chains in manufacturing, higher tariffs cannot be a solution in promoting activity. Thus, policymakers should focus more on creating enabling conditions, which would help manufacturing in general.