On May 21, it was reported on the website of the British weekly The Economist on May 16 that the article entitled "Indian Prime Minister Modi's Flagship Development Project Has a Bad Start" was published. The article is excerpted as follows:
India is a superpower in the service industry. It only plays a small role in the global manufacturing supply chain, including generic drugs and mobile phones. In fact, India's share in global commodity exports has stagnated at around 1.8% in the past 10 years.
What can we do? As most economists have said, India is increasing its investment in infrastructure, signing trade agreements and reducing red tape. However, India is also addicted to experimental measures - the most ambitious is the "production related incentive plan". The plan will be launched in 2020, and 24 billion US dollars will be invested. As long as relevant conditions are met, companies in 14 industries will receive rewards from this plan, with the amount of rewards ranging from 4% to 6% of new sales (compared with the level before 2020). Officially, these 14 industries, including electronics and textiles, are critical to the country's success. Ministers hope that this policy will promote economic growth and exports.
The Indian government has released impressive data. The government said that the plan was related to nearly 13 billion dollars of investment and 700000 jobs. In addition, the annual survey of Indian industry shows that the growth rate of the largest and most productive manufacturers is faster than that of the smaller and slower growing manufacturers. But how much of that growth would have occurred without these expenditures? To answer this question, The Economist analyzed the export data of five major industries. Our conclusion will not satisfy Indian Prime Minister Modi.
Let's start with the positive aspects. Since the launch of the "production related incentive plan", the growth rate of India's mobile phone and electronic product exports has exceeded the growth rate of gross domestic product (GDP).
Morgan Stanley pointed out that India's share in global electronics exports rose from 1% 10 years ago to more than 3%. Since 2019, India's mobile phone exports have more than tripled. It is reported that about 14% of the world's iPhones produced last year were assembled in India, up from 7% the previous year.
However, beyond electronic products, the situation is not so optimistic. In other industries considered by The Economist, export growth rate is equal to or lower than GDP growth rate. India's textile industry provides more jobs than any other industry except agriculture, but its exports have actually declined. As Raghuram Rajan, the former governor of the Bank of India, discovered, the factor driving the growth of mobile phone exports is the assembly of imported parts - a process that only accounts for a small part of the added value of the iPhone. He even said that once the cost of subsidies is taken into account, the "production related incentive plan" may not increase India's GDP.
Officials pointed out that despite the high profile of the plan, the civil servants who implement the plan often lack professional knowledge. Companies complain that it is difficult to meet relevant requirements, and managers are risk averse. So far, only one billion dollars of subsidy funds have been issued, which can be seen from the cumbersome requirements and slow decision-making.
Some also worry that the plan will distract people from deeper reforms. India may benefit more from removing obstacles for all companies, not just for selected companies receiving subsidies and major companies such as Apple.
These are serious problems. But it is too early to declare the failure of the "production related incentive plan". Although the growth of mobile phone exports is driven by assembly, this situation is expected. Apple plans to increase production of iPhones in India; Other suppliers will follow suit. In 10 years' time, India may have a booming electronics industry, and the "production related incentive plan" has contributed a lot to the establishment of this industry.
There are signs that India's strategy is evolving. In the electronics industry, there are fewer bureaucratic obstacles involved in the "production related incentive plan" - a practice that the government wants to replicate to other industries. In the recent budget, the ministers also reduced the import tariff of electronic components from 15% to 10%. This shows that they realize that people are worried about high import costs.
If the operation is not good, the handouts obtained by the enterprise can be regarded as the best way to lose money quickly. If India wants to avoid such a trap, it needs to make more improvements, and faster. (Compiled by/Qing Songzhu)
