Opinion
Industrial policy is back with a vengeance everywhere
Summary
- Governments globally are intervening to prop up manufacturing but its efficacy is unclear. India’s government must address the real reasons behind the private sector’s unwillingness to invest at home.
The state has made a comeback. Or, to be more precise, industrial policies have made a comeback. Events over the past 10-12 years have forced governments across the world to re-engage with micro-policies that seek to improve industrial competitiveness through administrative measures, including subsidies, and protect domestic industry from global competition, mostly through tariff increases.
The immediate compulsions vary, but the 2008 financial crisis, a disenchantment with free markets, China’s rise, the pandemic, disruptions in global supply chains, climate crisis and geopolitical conflicts have forced governments to wade into the weeds of economic policymaking. Industrial policy, banished in the 1980s, is seeing something of a revival.
This re-engagement is spread across both developed and developing nations, though advanced countries seem to be investing much more intent and energy. International Monetary Fund (IMF) research records over 2,500 industrial policy interventions in 2023. Of these, the developed world’s policy actions were five times more than those of emerging markets and developing economies.
The new industrial policies share many elements with policies from the last century. These range from government initiatives designed for promoting domestic industry to a renewal of the belief that government mediation is necessary because markets often do not allocate resources efficiently. There are also new elements: a need to respond to the climate crisis and transition to cleaner energy sources, or, re-imagining supply chains to make them more resilient.
All this raises a key question: What do these industrial policies aim to achieve and how far have they been successful? Specifically, will these industrial policies influence changes in the study of development and growth economics, or, on a broader scale, in existing economic theory?
A lot will depend on how the current state of play—with geopolitical conflicts influencing domestic economic policy and a repurposing of globalization—evolves over time. A lot will also depend on the specific provocation for framing an industrial policy and the robustness of that policy structure. It might be instructive to examine the industrial policies of the US and India to understand the direction.
The core of US industrial policy exertions takes the form of two legislations. The first is the Inflation Reduction Act, which was signed into law in August 2022. The Act, according to economist and Nobel laureate Paul Krugman, seeks to “fight climate change with industrial policy, offering business and consumers a variety of subsidies to adopt green technologies." A McKinsey study states the Act budgets for over $500 billion in government spending, tax breaks and subsidies.
A dashboard (bit.ly/4bmROSs) created by researcher Jack Conness shows over 150 companies have so far invested $106 billion under the Act, generating 88,000 jobs. The second piece of legislation is the CHIPS and Science Act, which was also signed in August 2022. This Act sets aside $39 billion to be paid out as subsidy for building new semiconductor plants and for expanding existing fabrication units, and includes a 25% investment tax credit. The Conness dashboard shows CHIPS has so far inspired $157 billion worth of investment for 28 projects, resulting in over 25,000 jobs.
The USA’s legislations seem like a response to three immediate concerns: A China threat which could impact the supply chain for semiconductors, jobs disappearing along with manufacturing facilities, and the need to achieve net zero. These hold for India as well.
The Indian government responded to similar challenges through the instrumentality of production-linked incentives (PLI), which are designed to promote domestic manufacturing and initiate structural reforms in this sector. Yet, the response to the scheme has been unsatisfactory. Let us unpack this.
A crisis in manufacturing prompted the ‘Make in India’ policy of 2014, which replaced the 2011 National Manufacturing Policy, both seeking to raise manufacturing output to 25% of gross domestic product. However, given the policy’s sub-optimal outcomes, a new and more comprehensive industrial policy was awaited.
In the interim, compelled by the pandemic and deteriorating relations with China, the government launched the PLI scheme. In 2023, the draft of a new industrial policy was unveiled which proposed, among other things, the revival of development financial institutions to provide low-cost financing, cluster-based industrial development, clean energy projects, a focus on labour-intensive industries (such as textiles) and tax incentives.
But here is the problem: While the industrial policy draft is no longer available for public consumption, the PLI scheme seems to have hit multiple roadblocks. Three years after its launch, investment and other metrics have fallen short. For example, against the ₹50,000 crore investment target for 2023-24, actual commitments were only ₹31,000 crore.
It is well known that the scheme’s structure has many problems, but the real hitch lies elsewhere. It is the same shortcoming that also plagues the government’s capital expenditure push: the private sector’s reluctance to invest. No industrial policy can work unless the government appreciates the real reasons behind the private sector’s unwillingness to invest in India even while finalizing capital allocations for overseas projects.
