Pratap Bhanu Mehta writes on laptop import ban: India needs an industrial policy – The Indian Express

Second, arguably these restrictions are being introduced in sectors where we have prospects of success. India has experimented with this model in the case of mobile phones. Outright failure in industrial policy is easier to understand; what counts as success is harder to define. For critics of the scheme, the relevant yardstick is value added in exports. Eminent economists like Rohit Lamba and Raghuram Rajan, are sceptical of PLI on the grounds that not much value is added in India. There has been much debate over the data on value added and jobs created in the case of mobile phones. Let us concede for a moment that some of their criticism is correct. But it is still not clear that India is worse off in any way. For starters, given India’s deeply sub optimal equilibrium, even assembly without high value added manufacturing puts us in a better position than its absence, both in terms of jobs and learning capabilities. Second, our assessment will depend on what we think are the feedback loops from getting companies to assemble in India: Are there spillover, agglomeration and demonstration effects that benefit the economy in the medium run? If so, forcing companies to manufacture can work.

But equally, it has to be said that for advocates of import restrictions, and PLI more generally, there are four questions. First, notwithstanding growth in state capacity, the political economy of bureaucratic arbitrariness should not be underestimated, especially in a context where the state heavily favours particular companies over others. Second, the Indian states’ Achilles’ heel has always been exit: Will it be able to exit from these subsidies and modest protections?

Third, we know that the most important thing about Chinese and East Asian industrial policy was their export orientation. Unless you are benchmarking yourself in competition with the best and most demanding in the world, you will never be at the frontier. But India’s orientation to exports is challenging in two respects. China and East Asia pulled off both industrial policy and maintained access to an open world trade system. India is in a contradictory position. Export orientation will require an open trade system. But support for an open trade system is diminishing globally. India cannot be an effective advocate for that system if it itself turns protectionist. So there is a risk that modest sectoral success comes at the cost of undermining the broader conditions of an export economy.

India has had some success in exporting mobiles. But in other cases, automobiles for example, made and assembled in India, even by multinationals, are not competitive on the quality curve. It is possible that you can relocate assembly and manufacturing, but India will not be at the edge of the quality curve. So it is important to configure industrial policy in a way that it becomes a push for exports, not another import substitution scheme.

And finally, with the government there is the penchant for showmanship. We are, for instance, making much of the Micron deal, with the government providing 70 per cent of the investment. Yet at the same time we forget that chip companies are relocating manufacturing to far more expensive places with less subsidy. But the important thing is that in the debate over industrial policy we should not be hostage to showmanship, theoretical simplicity or misleading historical analogies. We will require careful analysis of our circumstances and capabilities. We do need an industrial policy where the benefits of laptops are for more than the laptop class.

The writer is contributing editor, The Indian Express