Draft New Industrial Policy

Context: Recently, the draft – Statement on Industrial Policy 2022 Make in India for the world – has been circulated to different ministries for their views and comments.

Key highlights of the Draft New Industrial Policy:

• Prepared By the Department for Promotion of Industry and Internal Trade (DPIIT), Ministry of Commerce and Industry
• Setting up of a development finance institution to provide finance at competitive rates
• Considering using some part of foreign exchange reserves for such funding.
• Aims in addressing issues and challenges of industry through certain policy measures to foster and create an innovative and competitive industrial ecosystem in the country.

Objectives of the Draft New Industrial Policy:

• Focus on competitiveness and capability;
• Economic integration and moving up the global value chain;
• Promoting India as an attractive investment destination;
• Nurturing innovation and entrepreneurship; and
• Achieving global scale, and standards.

Made in India brand:

• The scheme could serve as a platform for manufacturers to demonstrate local value addition which can enhance the country’s credibility as a source of quality products.
• It is making finance accessible to industry and for marketing the Made in India brand.

Evolution of  Industrial Policy in India:

• The quest for industrial development started soon after independence in 1947.
• This will be the third industrial policy after the first in 1956 and the second in 1991. It is likely to replace the industrial policy of 1991 which was prepared against the backdrop of the balance of payment crisis.
• The Industrial Policy Resolution of 1948 defined the broad contours of the policy delineating the role of the State in industrial development both as an entrepreneur and authority.
• This was followed by comprehensive enactment of Industries (Development & Regulation) Act, 1951 (referred as IDR Act) that provides for the necessary framework for implementing the Industrial Policy and enables the Union Government to direct investment into desired channels of industrial activity inter alia through the mechanism of licensing keeping with national development objectives and goals.
• Economic reforms initiated since 1991 envisages a significantly bigger role for private initiatives.

Issues associated:

• The potential role of industrial policy has been consistently downplayed in developing countries outside of East Asia ever since the early 1980s after the growing dominance of the orthodox paradigm with well-known consequences in much of India, Latin America and also sub-Saharan Africa.
• Industrial policies are more focused on large firms and many of the industries currently chosen to be under PLI (production linked incentives) are highly capital- and skill-intensive.
• Even in Japan and South Korea, where industrial policy has been otherwise successful, it has often mainly helped large firms.
• In a world of geo-political conflicts and supply chain disruptions, national security is often considered a major goal.
  • Hence sometimes resources are less allotted to the industrial sector .
• Indian politicians and bureaucracy are more comfortable with “top-down” over-centralised policies.
• The government had failed to instil confidence even as its policies till now had crippled the construction, manufacturing, real estate, pharma and other major contributors to the economy.
• Lakhs of workers have lost job opportunities because of the retrogressive policies.
• The role of industrial policy is not only to prevent coordination failures but also to avoid competing investments in a capital-scarce environment.
• Excess capacity leads to price wars, adversely affecting profits of firms — either leading to bankruptcy of firms or slowing down investment, both happening often in India (witness the aviation sector)
• Imperfect information with respect to firm-level investments in learning and training; and lack of information and coordination between technologically interdependent investments.
• Industry’s inadequate expenditure on research and development (R&D) and micro, the small and medium enterprises sector facing tough competition from cheap imports from China and other countries
• Lack of human capital has been a major constraint upon India historically being able to attract foreign investment (which Southeast Asian economies succeeded in attracting).

Suggestive measures:

• The implementation of an integrated investment promotion strategy by involving district, state, national and international market synergies is needed.
• Leveraging fintech and encouraging MSMEs to choose the corporate bond market.
• Accepting intellectual property rights as collaterals for loans.
• Rolling out social security schemes for women workers, and inclusion of labour-intensive industries under the production-linked incentive scheme.
• Enabling supply chain financing.
• Encouraging microfinance institutions to form cooperative groups and finance micro-enterprises at affordable rates.
• Providing performance-based loans and incentives for innovation and green growth.
• Incentivising public procurement to promote Make in India, creating a national digital grid, developing a robust data protection regime, setting up of a technology fund, and creating a task force to continuously identify skill gaps.
• On nurturing innovation, the creation of innovation zones at the level of urban local bodies and the formulation of a national capacity development program should be done.

Source: Economic Times