Should India Give Apple Money To Make iPhones Here with Suyash Rai

Puja Mehra speaks to economist Suyash Rai about manufacturing incentives in India, India's Industrial policy and the implications of Apple manufacturing iPhones in India.

22 April 2024 12:00 PM GMT

In this conversation, journalist Puja Mehra speaks to deputy director and fellow at Carnegie India, Suyash Rai about manufacturing policy in India, Apple planned iPhone manufacture in India, whether PLI schemes actually work and much more.

Suyash Rai is a deputy director and fellow at Carnegie India. His research focuses on the political economy of economic reforms, and the performance of public institutions in India. His current research looks at the financial sector, the fiscal system, and the infrastructure sector.


Puja Mehra: So I want to talk to you about something that is always in the news these days, which is manufacturing smartphones. India's producing a base for Apple to produce its smartphones, also other large companies and brands. And India is doing a lot to attract these manufacturing plants to India. But the sharp question that I want to ask is that why is it that a company as large as Apple, which has annual sales, which are almost as much as India's annual GDP, why does it want, and why does a country like India, which is not a rich country, why do we have to give them subsidies for them to come and set up these manufacturing plants in India?
Is this best use of India's scarce resources? We don't have a lot of money. So if we are going to have to subsidise different companies or sectors, is this the best use of our money? And is it all right for Apple to expect something like this out of India?
Suyash Rai: Yeah. Thank you, Puja. That's a very good question, a provocative question to start with. So I think whether a particular use of money is good or not depends… an empirical question. Basically, you have to ask, what are you going to get out of it? Right? So I think the government's objective of giving subsidy is that it wants to make it easier for firms like Apple to come and establish their plants here and make things in. It's… If you look at, from the company's perspective, if you give it a subsidy for production, which goes straight to its bottom line, it adds to its profit. It makes it easier for the company to decide whether to invest in the country or not. So at that level, it's perfectly rational for Apple to accept a subsidy if it helps decide setting up the plant in India, because on the margins, basically, investment is a decision between comparing your cost of capital and the return that you expect on the capital. So if you get a subsidy, it increases the return immediately, and it helps makes it easier for you to set up the plant.
But for the country, it's a larger question that, okay, even if the plant is set up, is this the best use of money? And that, I think, is something that requires much more careful analysis of the larger benefits that flow from setting up the plant. So when you set up a plant, you start making things in India. What are the larger economic benefits that grow from there? So you can't just rely on news reports of this or that plant being set up in India because when you give a subsidy, more plants will be set up because they're getting a good kind of deal out of setting up the plant. But is that benefitting the Indian economy broadly is a much harder question to answer. And so far I think it's not clear that that is true because if you look at the broader, more aggregate indicators, whether manufacturing has grown as a percentage of India's GDP or gross value added, I don't think there is evidence to show that has happened yet. Whether employment in manufacturing has grown in India, that I don't think also there is any evidence to show that is happening. So as citizens, I think we should look at the aggregate picture rather than just look at one or two companies or one or two good news stories… and say because the government policy is meant to shape the aggregate picture, right? It's a part of the larger structural transformation process that India has to go through to higher productivity, making better products, better, more complex products and so on.
Puja: In fact, I saw that you have written that in the last 20 years, manufacturing GDP as a percentage of GDP has not increased. It has remained more or less stagnant despite all these policies. You have also put out data showing that even investments as captured by the National Income Accounts measure of gross fixed capital formation in manufacturing has not increased in the last 20 years, employment generation also, you have shown using data, government data, that it has not really increased. FDI there, there is some, because companies like Apple and their contract manufacturers are setting up here. There is some probably increase over there. And exports, exports also manufacturing exports, we haven't really seen that kind of increase. So is it too early to be looking at …for these policies to show up results? Probably they will after some time…?
SR: I think the essay that you're referring to uses five indicators and you're right, as I said earlier, also the share of manufacturing and gross value added hasn't increased. Merchandise export, which is the export of goods, hasn't increased. In fact, there was a slight increase—it was a pandemic era, but it has now come back to a lower level. FDI also hasn't increased. In fact, if you look at the data, the employment data is actually not government data—I've used CMI data on manufacturing employment and that also shows a decline in manufacturing employment over, say, five, six years ago. So none of these aggregate indicators seem to suggest that there's been any kind of improvement as far as manufacturing in India is concerned. And I do think it's early in one way that some of the policy interventions that have been done are fairly recent. So if you look at the PLI schemes, it's not even been four years, right? So the first batch was done about four years ago and the second batch was done about 3.5 years ago. These things take time. So I don't think we can pass judgment on these kinds of interventions and policy interventions with any level of finality right now.
But if you look at the broader Make in India objective, that is almost ten years old now. So it was launched in the second half of 2014. Now we are in the first half, 2024. So almost nine and a half years it's been. So I think at that level we can raise some kind of questions about whether the strategy is working on... And the strategy has also gone through changes. So in the last 5-6 years, we have seen a rise in protectionism, we have seen more fiscal intervention like the PLI schemes. We have seen a big push on infrastructure development. So things have changed. So these specific kind of tactics we can maybe evaluate over a period of time. But the Make in India objective has been there for almost a decade and I think there's not much evidence to suggest that it has really worked in the aggregate.

Now coming to these policies that were launched in the last 3-4 years there also, I'm not saying we can say things with finality, but we should certainly measure ongoing progress.

Puja: Right. Let me stop you here and we can come to the point that you're making. I thought it would be better for the flow of the conversation. If you've written about, since you've talked about Make In India, you've written about how there have been two phases. One has been the ease of doing business phase and then the fiscal tools. So there's a change in strategy that we are seeing. So if you could explain this change of strategy, and probably before you say that, why is Make in India or why is manufacturing important for a country like, for an economy like India, why are governments trying to increase manufacturing?
SR:So,I think there are different reasons why government try to promote manufacturing in India. Government has been trying to promote manufacturing for almost 60-70 years in a variety of ways. So one of the reasons is that manufacturing provides one way for people to move to a higher productivity activity from agriculture, which is somewhat more structured. And it creates an opportunity for people to join a more kind of modern workforce from agriculture, it allows for that. And it's a little less difficult than, say, some of the services sectors. So there are people who believe, not just economists, anthropologists and all, who have written about the nature of manufacturing job, which is like a structured place you can go and work, you can learn a little bit, maybe before the job, but as apprenticeship, you can learn a few things and you can enter into a workforce at different levels. So you may be a trained engineer or you may be just a school graduate, you can get into it and you can start working. That's on the employment side. And India, because it's got a major employment problem, it's always had a persistent unemployment problem and also occasional unemployment problem. If you create manufacturing growth in India, especially in more labour intensive areas, it will employ many more people and create opportunities and for livelihoods for many of them, that is there.
But I think over time, the rationale also has changed a little bit. Like one of the things that has happened in the last 3-4 years is that China has emerged as a major manufacturing powerhouse of the world. And there is a lot more dependence on China in many supply chains and now countries, especially India, because there is an adversarial relationship. If they want to reduce interdependence a little bit, especially in areas which are more strategic, like pharmaceuticals and all, there can also be some kind of electronic equipments where if there is a strain on the supply chain, large parts of the economy, India itself would suffer. So I'm not saying that China will necessarily weaponise interdependence, but it can create difficulties if there is some kind of a situation with China where the supply chain is under constraint for even external reasons. So I think over time, the rationale has intensified in some ways, changed in some ways.
But the objective that a country like India should go from agriculture to substantial manufacturing to maybe increase most services growth has been there for a long time. Although our growth has bucked that kind of trend, that pattern, we've not followed that pattern. We never really got manufacturing going in any big way. There is a significant manufacturing sector in India, but services have been much, much larger. And the typical pattern that you saw in some of the other countries that went through social transformation, we have not seen.
And India is such a large country that still, I think politicians and civil servants and even many economists believe that we shouldn't give up on manufacturing, although there are interesting arguments made by some economists like Raghuram Rajan, Rohit Lamba and others, that we shouldn't invest too heavily on manufacturing only. We should consider our other comparative advantages in areas like services and all, and aspects of manufacturing that require more imagination and more services type inputs. So those are good arguments for sure. But in India, such a large country that you can have that as well as the other manufacturing, we should be making clothes and toys and machinery and all of that. So it's a fairly kind of valid and reasonable kind of objective to pursue. It's a question of whether the strategy is going to work or not.

Puja: So therefore it makes sense for there to be a Make In India push. That brings us to the question of how to do it and how it is being done. Do you see a gap?
SR: So this is obviously a very big question and there are many ways to answer it. Let me just answer it in a few ways. One is that we talked briefly about PLIs earlier, which is a Central Government led industrial policy approach. Now, one thing about India that always kind of startles me is the kind of diversity we see across states. And in a country like India, something like industrial policy should ideally be pursued to the extent it can be pursued effectively at a sub-national level because each state has its own kind of industrial policy challenges and they are better placed to figure out what they need to do. Let me give you an example, where the government in Delhi has understood that this is the case…infrastructure development, right. They wanted to make a big infrastructure push 2020 onwards, and soon they realised that a lot of infrastructure development now relies substantially on states. So they started giving every year since then they've given this 50-year zero interest loan, which is basically a grant to the states to do infrastructure development. And many states are taking it up also because they realise the Centre cannot really be planning all the infrastructure. It's something that states have xxxx and choose the projects, give the concessions, do all of that… Centre can only enable and facilitate. I think a similar kind of approach is required even in encouraging manufacturing more explicitly through industrial policy kind of instruments. So that's one gap, I think, in the approach that we are taking right now, we need much more place based, local, sub-national approaches to doing industrial policy.
But there's a lot that the union government can do otherwise to create enabling environment for not just manufacturing generally for investment and business in India. So there are a few areas that are directly in the union government's control. One is taxation. So direct taxes are almost entirely in union governments. There's very little direct tax that is collected at sub-national level and the enforcement of direct taxes in India requires, I think, careful attention and thought. There's a lot of direct tax disputes that are building up over the years and those create a lot of inefficiency because many large amounts—of more than Rs.10 trillion -- are stuck in disputes. And people, some of the cases go on for several years and many of the cases the government actually loses. Most of the cases the government loses, but the amounts are stuck there.
And you think about why tax matters, because tax changes the appropriability of the profit you've made. So if you are going to dispute, then the predictability of whether you will keep the profit that you made goes down and that on the margins will affect your investment decision also.
Then financial market regulation is entirely, with almost entirely, there are some small bits like chit funds and cooperatives and all that at the state level. Otherwise, mostly it's with the union government there. Also, I think there is a big reform agenda that some things have happened. There was a reform in terms of central banking, monetary policy objectives being set. There was a reform on bankruptcy, on enterprise regulation. There have been some reforms on financial regulation. Payment systems have seen improvements in India. But there's a bigger agenda that needs to be pursued: reforming banking, bond markets and so on. And those will eventually reduce the cost of financing. Right? And that also has, if the cost of financing goes down, then the barrier to investment also goes down.
Then the union government can also play a role in creating a more predictable kind of a working environment by having more rule of law in the way enforcement agencies act and so on and so forth, because that also shapes the business environment and all of that. So a lot of enabling conditions the central government can create, and then the states can pursue a lot more of place based local understanding of… because one thing that is for sure is that industrial policy is very hard to do. That is the one lesson that comes from the experience of industrial policy from all over the world. It's one of the most capacity intensive and knowledge-intensive policies you can implement ….it requires knowledge that governments usually don't have.

Puja: For listeners with no background in economics, what do you mean when you say industrial policy? What do economists mean when they say industrial policy?
SR: The industrial policy is any policy intervention that is meant to directly encourage moving an economy from a lower productivity activity to a higher productivity activity. So you're making something which is of a lower productivity in terms of lower value of output for the kind of inputs you are using, land, labour, capital, so on to a higher productivity activity. So anything that directly encourages that. So I use word directly because many things indirectly will encourage that. You have better infrastructure to encourage that and all of that. Industrial policy is more direct. So PLI is a very classic example of industrial policy in that sense that it is meant to directly encourage it. And therefore, I think it requires a great amount of knowledge about, because it's not new. India has tried industrial policy for many, many decades. We shouldn't forget that. In fact, our approach to economic growth in 50s, 60s, 70s, 80s —the involved a lot of industrial policy intervention.

Puja: I'll come to that. Before we end, I'll ask you for a recap on all our efforts to get manufacturing going right from independence. But before I get to that. So when the Make In India programme was announced in 2014, the impression I got was that in at least 5 to 7 years, we will have large factories employing large number of people, so that a lot of people who don't find jobs or who think they're working on farms, but actually this is disguised unemployment. All of those people will find better paying jobs in these huge factories, like something like we hear of in China. Have you seen anything like that? All of the efforts? Have you seen this kind of a result? Or was this kind of a result even intended?
SR: I think it was intended and it was not just intended by this government. If you remember, 2014 election campaign, one of the talking points even the ruling UPA Congress party was making is that we will make a bigger push for manufacturing. Rahul Gandhi also gave a speech about it, and Mr.Modi was obviously promising these things. And so it has been a …
Puja: The UPA government had a manufacturing push, in fact Make in India…they used that phrase, I think, back in 2009 or something like that, I don't recall the year. And they had set the goal of increasing manufacturing GDP as a percentage of total GDP to 25%, which has never happened. So it was there.
SR: So it's been a goal and it's a worthy goal. But as I said earlier also that if you look at the aggregate picture of employment in manufacturing, there's actually been a decline in recent years. So I'm going with the CMI employment and employment data. Maybe there are other sources that will have a different reading of the situation. And so we have not really seen the kind of large scale manufacturing employment that was expected. And some of it is kind of, we are seeing other countries like Vietnam have seen significant increase in manufacturing in recent years. They've been able to do that. So there are opportunities out there because quite a few companies are not just talking about it, generally trying to diversify away from China and finding opportunities. So some of them have got to Vietnam and some of them got nearer to the large markets like Mexico has been one of the beneficiaries and all of that. So India has also benefited to some extent, but not to any significant extent…that it is not something that shows

Puja: What are these countries doing right? How is it that they are managing to get these plants there?
SR: So I don't know. I've not studied the specific. I've only read the news reports about how Vietnam has a Minister assigned for large corporations to facilitate their entry and all of that. But news media reports often don't understand the deeper political economy reasons why some things happened. Because why Vietnam… Why not other countries in the region? Why Mexico…Why not other countries in that region? I think it's an interesting question that is worth studying, but I would not want to answer that because I don't know. It requires much deeper understanding of the.

Puja: So probably this takes me to what you were saying, that industrial policy is fairly complex and involves deep know-how. Are we exhibiting that kind of deep know-how in our policy making?
SR: There are about, I think, 14 or 15 PLI schemes. So if you look at that, each one requires sectoral knowledge to understand whether we are designing it well or not. I don't have knowledge on most of the sectors. I looked at the aggregate indicators to figure out whether on the whole it's working. So each sector expert can tell you nuanced answers about whether the policy is designed well.

But let me give you one or two examples that I looked at. So I studied the auto PLIs a little bit and I've also written about it…the auto PLI, let's leave aside the electric part for now. Let's talk about internal combustion engine vehicles. The targets that are given for additional sales that you are supposed to achieve…Production that you're supposed to achieve and shown in terms of sales are actually in nominal rupee terms. So if you look at, say 1200 crores rupees, 5000 crores, 4000 crore rupees, whatever it may be, and there are subsidies that are linked to meeting different levels of the target that are given. Now if you look at the larger PLI, larger automobile companies, they will fairly, if you look at just the past few years trend, they are going to fairly easily meet the targets and they will take most of the subsidy that is earmarked
22:30 to 22;43 (there is some voice overlap not clear)
22:42 Yes. So the question that comes is what is the counterfactual like? What wouldn't have happened if the scheme hadn't been there? So ultimately, when you're putting money on the table for anything, especially tax money, which is very expensive, right? Because there's a huge amount of economic cost of raising tax resources in a country like India. So it imposes costs on the rest of the economy. And there has to be at least Rs4 or Rs5 worth of benefits, economic benefits for every rupee of tax money you spend. If you go by Kelkar, Shah kind of calculation of this. And if you are getting production that would have anyway happened and you're giving subsidy for that, then there is a problem. So I think those are the kind of questions that each sector should have. There's also a food processing PLI on things like ready-to eat-meals and all of those. Now, I'm not an expert in these sectors. These sector experts should look carefully and figure out whether they are well designed. Something has to happen which is substantially different from what would have happened otherwise.

Puja: Understand the point you're making. The point you're making is that if I am manufacturing, let's say paper or paper products, I know I'm oversimplifying. And if you're taxing me and taking away money from me and giving it to the auto sector, you are making sure that money that I could have invested in expanding my business is going to the auto sector for them to expand their business. So this raises many questions. One is that does the auto sector even need this incentive? Would they not have expanded in any case, even without the absence of this incentive? So you have encouraged them by discouraging me. Net net, the economy loses what I would have invested. But what it gains is nothing additional or incremental… that auto investment would have come in any case…
SR: Auto is even more interesting because auto has had protectionism for many decades, right? So to do a PLI in auto is to basically give a cherry on the top of the cake that has already been gifted year after year after year for decades.
Puja: Again for those who are not understanding …what is protectionism [Unclear as voices overlap 24:55 to 25:02]
SR: Tariffs… Import tariffs are very high for automobiles, for automobiles across all ranges of categories. So basically, if for several decades the industry has been benefiting from large, very high tariffs, and tariffs very simply is a transfer from consumer to producers, right? Because consumers are paying higher than they would have paid for the same specification product because of the tariff. But after so many decades, you still are a very small part of the world's exports of automobiles. So if you say that protectionism is required to protect the industry while it's infant, that was the old argument, and then it grows, then you remove the barriers and then they'll compete with the world. So that test was not met. We are a small part, maybe 1.2 (one point two), 1.3 (one point three) percent of the world's automobile export after so many decades, even though it's such a large industry in India because it's protected. And then you would give PLI to the sector on top of that, which is expensive tax resources.
So I think my point is not so much about this or that policy. My point was the policy making process. I'm a policy…I think about did you do an analysis of ex-ante analysis of costs and benefits of something like this? Did you do a proper consultation with different people who know this area, not just the industry, because.. they like protectionism, many of them like fiscal subsidies if they can get them and so on. But there has to be much more objective analysis, ex-ante and also ongoing concurrent understanding of whether it's working. And then of course, once the whole cycle is over and learning about what went wrong, what went right and all of that, but we are not seeing much of that. It's not a very transparent kind of a system in which one can see and try to analyse and add value because we are all part of this kind of policy system. We want to analyze, add value, give constructive criticism, not just for the sake of it, like on the margins, help improve things.
So what we see is the policy, but not the underlying thought process of the policy, which is where I think the interesting kind of analytical choices are made. Why this? Why not that?

Puja: Actually, I don't know. In a policy system where the top key decision makers, which are secretary level bureaucrats, their tenure is hardly for two years and the final two years of their IAS career where they're of course making these very important policies, but also preoccupied a bit, I feel that what am I going to do with post retirement. What feathers I'm going to ruffle. Is it better for me to not take a decision? Is it better for me to make a decision? In any case, they are not accountable and answerable two years later. Right. I'm not sure… Like you have written, our system is conducive for very good policy choices as long as bureaucrats are making those choices. SR: No. So I think ultimately, bureaucrats have to make the choices in terms of creating, analysing different alternatives, proposing the right alternatives, and ministers have to approve. Most of these schemes actually go to cabinet for approval. Then there's an appropriation in the parliament. There's a whole system of accountability that is there for the bureaucrats.

Puja: But did they even tackle the question that you've written about, for instance, that when you're giving a PLI for smartphones, you're essentially taking resources from consumers and giving them to producers? And I'd like you to explain to my listeners, what does this mean that when you do a PLI, you essentially take away resources from consumers and pass them on to producers?
SR: So PLI is on the margins, funded by tax money. And tax money, as you know, in India, is basically raised primarily through GST and the direct taxes and little bit from excise. Most of it is coming from individuals and from their pockets. And when you do protectionism, which will raise tariffs, import tariffs, basically on the margins, the consumers have to pay more for the same product and pay more means… the producers of those products actually will get that additional kind of revenue because they are not competing with the producers in other countries. So it’s a protected kind of environment. So foreign firms will also come and invest and make here, because importing is very expensive, so it makes more sense to invest in here. But all of it is ultimately financed by the producers of the country…

Puja: Consumers
SR: By the consumers in the country. Yes, exactly. Ultimately, everything the consumer has to pay for.. The government is a pass through. Corporations are a pass through all of that. So if you look at these PLI schemes, there were three of them announced in March, I think, 2020. And let me just look for…

Puja: I think the thinking behind some of the PLIs was that they thought that if they could encourage building on scale production on scale, that would become a comparative advantage for India. For some of the others, they thought they may not be on a comparative scale, but it would lead to a strategic necessity getting addressed for which they didn't want to depend on imports. And third, I think purely they wanted to reduce imports because the current account deficit was just otherwise going to become too much to handle.
SR: As I said earlier, for some of the strategic kind of product categories, the rationale has changed because of the same dependence on China. So if you look at the first three PLI schemes that were announced, they were on key starting materials, APIs or pharmaceuticals, large scale electronics and medical devices. And there was some thinking, I think, in designing those, and that's why I think those have to be seen separately. And then within six months, as it happens in government, something looks interesting, then everybody wants to replicate it. Then we went to some eleven more categories and some of those I think we need to… were, I think, rushed because policy design takes time. You can't just do something in one or two months. It requires a little bit more. And that's why I suspect that some of these PLIsthat were added and now we are seeing the second generation of those PLIs. If we had more information we would figure out what thinking has gone into it. I'm sure there is some thinking that because in the file they would have given an argument that's the way the government works, that's going to work, but that has not been subjected to any public kind of criticism. So we don't know the robustness in that thinking.
But I do agree that some of the strategic product categories, especially pharmaceuticals and medical devices, some of the electronics product categories, we should carefully do a little bit of industrial policy to reduce dependence on just one country so much. And I think that's a fairly reasonable objective to pursue. But then to do it in so many food processing industries and industrial commission engineering, bikers and all of those, I think each one has to stand for itself.

Puja: This reminds me of the mindset post independence, where we just didn't want to depend on the rest of the world and we wanted big PSUs. Tell us about industrial policy in the early years of independence.
SR: My knowledge on this is patchy, only studied a little bit. I'm not a historian, economic historian. But if you look at the years after independence, private investment was very small in India and we had had 50 years of almost economic stagnation. So whatever you say in the 50s it is clear that growth did accelerate to some extent and substantially there was some problem of what you call missing markets, right? It is not clear to what extent the markets would have come by government just providing private regulatory kind of certainty, infrastructure and all of those. The kind of things we usually talk about now. And the direction that was taken is that government has to lead in terms of investments in the economy. And that requires, of course, the idea was to invest a lot in capital intensive sectors. I think now many people critique that idea. But at that time there were serious economists who were arguing for that kind of an approach. It's like a big effort by the government which solves many, I mean, potentially could solve many of the coordination problems that come in emergence of markets and market-led kind of investment. And then once these activities take off, then the assumption was that private investment will also grow and other kind of activities will happen on their own. And to some extent we did see acceleration in growth in the 50s and 60s. But this approach, I think, went too far. And it was also accompanied with a great deal of control on private economic activity. So if you look at the bottom line of that period, in my mind, the key is this, that a lot of learning happened, a lot of technological know-how got built. Quite a bit of investment increases, increased, did happen. If you look at it was, I think the gross capital formation in the early 50s was less than 10% of GDP or something. And it doubled over the next couple of decades or so. All of that happened. But because of the control that the government had over private economic activity, we couldn't really plug the fruits of this effort that the government had made in the 50s and 60s. And the kind of learning that was happening in India to try to meet the limited demand of the domestic economy. Because we were kind of an inward looking kind of economy. We're a closed economy. So there were people who are trying to build more to learn, to make scooters or this and that and try to sell in the market. But even there, there were so many restrictions because of the license permit quota raj. So it was a very bad combination that you had created this kind of a closed economy in which at least a little bit of response was given by domestic capitalists to do more of learning. But then when they started to make more, you restricted them in a variety of ways. And that was, of course, a policy, but also a state capacity issue that your state didn't have the capacity to really implement anything like license permit quota raj with even modest level of competence. And by design, policies like these are bad. But even if you had these policies in a high capacity, maybe you would do a little better. So you had a lot of capacity constraints, and you ended up basically stifling the economy in a very big way.

And when you opened up, basically, if you look at the opening period, it was the same old kind of technological know-how learning. A lot of the industries were not able to compete, but many old companies were able to compete because they had know-how. They were able to compete in the new economy because they were freed up in many ways. Right? So I remember hearing some of the industrialists who said that in the previous time, we knew how to make more, but we are not allowed to now. We are allowed to, and we are able to benefit from that. And new companies came up and so on.

So one key part of that was the dominance of the public sector. So in many sectors, it was government-owned enterprises that were seen as the champions, national champions, who will lead the charge in terms of investment and building technological know-how and serving the demands of the Indian economy. And when you have a large public sector enterprise in any sector, it's very difficult to create competitive neutrality in the sense that treating the private sector also at par with them. So it became very difficult in many areas. In fact, the private sector was not allowed at all, or was allowed, but restricted, heavily regulated.

Puja: What is the objective of restricting the private sector? What was the objective of having a license permit? What were they thinking? What were they trying to do?
SR: So the ideology kept changing over time. But one of the things that kind of really strikes me is the ideology that large private capital shouldn't really be there in India. It should be small ones. Private enterprises should be small and medium. And many, many product categories were restricted to be made only by SMEs. It is the opposite of economies of scale thinking, building advantages that you can compete with the world and all of that.

So if you look at the list of products for which only SMEs were allowed to make in the private sector, the government could do whatever it wanted. It was a very long list. So the thinking was, I think it was ideology, mainly, that large capital is not something which we really want to flourish too much in India. There were some who were able to grow, but it must have been very hard. I don't know how they survived. But otherwise, there's a strong ideological push that the government will do the heavy capital investment and the private production investment should be limited to SMEs.

And even at that time, many economists would argue against this kind of a strategy, right? And they were arguing, literally, there were many economists who were arguing that this is not our approach, but they had a strong kind of ideological conviction that SMEs are the ones that should be encouraged. Even now we have a little bit of that, but I think we have mostly shed that baggage.

Puja: Right. One of the learnings is that SMEs can't do the kind of manufacturing that the country needs. Am I right? On that note, I think I'll end this conversation.
SR: I don't have anything…Depending on the kind of products, for some of the products, SMEs may be more competitive, they may be better, but for other products, they're not. I'm not thinking from a central planning hat here. So for some of the products, like artisanal products and all, maybe small scale has certain advantages and you can have that. In the food industry maybe there are some segments where keeping things small, you can have better quality control, you can supply better and all of that.

Puja: That's a choice for the unit to make. Yeah. We can't never have SR : Government will never have the knowledge to decide which category should be made only by SMEs and which should be made by large. And this was a choice that was making year after year for many decades. So there was quite a bit of this assumption that: I know everything that —guided policy making at that time, and I fear that some of it is coming back.

Puja: The government knows all, is it?
SR: Yeah, some of it is like that we can really know who are the companies that are better, which product categories are worth backing,... not just at a local level, with a little bit more specific knowledge about that area. We are not as bad. It was pretty bad earlier, so I think we are very far from that. But we should certainly guard against the possibility of going back to that assumption that the government knows better than consumers.

Puja: On that note, let me thank you for this conversation about India's manufacturing and with special focus on the current thrust on PLIs.

Updated On: 22 April 2024 3:00 PM GMT
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