Narendra Modi’s flagship growth scheme is off to a sluggish start
In the early 1990s India abandoned the principles of swadeshi, or self-sufficiency, that had guided its policies since independence. Subsidies were scrapped; import levies tumbled. By 2014 the average tariff had fallen to 13%, from 125% in 1991. Over the same period, exports soared.
Yet the country’s exports remain a little lopsided for the tastes of Narendra Modi, who is currently seeking (and likely to obtain) a third term as prime minister. Although India is a services superpower, it plays only a small role in global manufacturing supply-chains, including for generic drugs and phones. Indeed, over the past decade, its share of global goods exports has stagnated at around 1.8%.
What can be done? As most economists would suggest, India is investing more in infrastructure, signing trade deals and cutting red tape. Yet it is also indulging in experimental measures—none more ambitious than “production-linked incentives” (PLIs), which were set up in 2020 and carry a 2trn-rupee ($24bn) price tag. The scheme gives firms in 14 industries seen as crucial to the country’s success, such as electronics and textiles, a handout equivalent to 4-6% of the value of any sales above pre-2020 levels, provided certain conditions are met. Ministers hope the policy will boost growth and exports.
Already the government reports impressive figures. It says that the scheme is linked to nearly $13bn in investment and 700,000 jobs. On top of this, the Annual Survey of Indian Industries shows that the largest, most productive manufacturers are growing faster than smaller, sluggish ones. But how much of this would have happened even without the spending? To answer this question, The Economist has analysed export data for five big industries. Our results will not please Mr Modi.
Start with the positives. Phone and electronics exports have grown faster than GDP since PLIs were launched. Morgan Stanley, a bank, notes that India accounts for more than 3% of global electronics exports, up from 1% a decade ago. Phone exports have more than tripled in value since 2019. Some 14% of iPhones produced in the past year were reportedly assembled in India, up from 7% the previous year.
Beyond electronics, however, the picture is less rosy. Across the other industries we consider, exports have grown at or below the rate of GDP. Textiles, a sector responsible for more jobs than any bar agriculture, has seen exports actually fall. And as Raghuram Rajan, former governor of India’s central bank, finds, the boost to phone exports has been driven by the assembly of imported parts—a process that accounts for a sliver of the value added for an iPhone. He even suggests that, once the cost of subsidies has been factored in, PLIs might not have added to India’s GDP.
Part of the problem is that not all government policies are pulling in the same direction. India’s average tariff has, for example, risen from 13% to 18% over the past decade in an effort to convince the country’s consumers and companies to buy local. Badri Gopalakrishnan, an economist who previously led work on trade at the government’s in-house think-tank, notes that because India’s supply chains are still nascent in many industries, levies on intermediate inputs have absorbed some of the subsidy given out through PLI programme. Pranay Kotasthane of the Takshashila Institution, a think-tank, warns that India is attempting to “globalise and localise” simultaneously, and may be better off doing the first before the second.
Meanwhile, officials note that, despite the high profile of the programme, civil servants working on it often lack expertise. Different schemes are managed by committees in different ministries, some of which are nimbler than others. Firms complain of hard-to-meet requirements and risk-averse administrators. Thus far only $1bn of the original $26bn has been distributed—a sign of onerous requirements and drowsy decision-making.
Some also worry that the programme is a distraction from deeper reform. In the mobile-phone industry, the star performer, it is difficult to prove financial incentives were behind Apple’s investment. Sceptics note that the company is eager to increase capacity in countries other than China, and therefore may have invested in India anyway. Yet an industrialist who has received PLIs says that, more than money, the scheme’s main benefit is a “signal” that the Indian government is committed to clearing regulatory hurdles, which reduces uncertainty around everything from acquiring land to gaining access to energy. India may benefit more from clearing hurdles for companies across the board, rather than for just the select few that receive PLIs and big-name firms, such as Apple.
These are serious concerns. But it would be premature to declare PLIs a failure. Although the boost to phone exports is driven by assembly, such a state of affairs is to be expected. As Dani Rodrik of Harvard University has written, countries such as China and South Korea began their manufacturing ascent in low-skill areas, before moving up the value chain and building complex industries. Apple is planning to boost iPhone production in India; other suppliers will follow its lead. It is possible in a decade’s time India will have a thriving electronics industry, which PLIs will have played a part in establishing.
And there are signs that India’s strategy is evolving. The electronics PLI now involves fewer bureaucratic hurdles—an approach the government wants to copy with other industries. In the most recent budget, ministers also cut tariffs on imported electronics components from 15% to 10%, demonstrating that they are aware of concerns about high import costs. When poorly run, corporate handouts are an excellent way to lose money quickly. If India wants to avoid such a trap, more improvements are needed, and fast. ■
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