pli: Wrong priority: putting eggs in the manufacturing basket starves services. | So Good News

The future lies in the service industry, not the manufacturing industry. This is good news as India is comparatively better in services than manufacturing and should build on its strengths. Instead, the government seems to be obsessed with manufacturing, pouring huge subsidies into that sector. This is a false priority.

The services that need priority are not only obvious sectors like IT, but also education and health. Both have been severely underfunded for decades. Rising subsidies for manufacturing will cut into limited funding for human development. The public debt/GDP ratio remains near a record 90% despite rising interest rates and further squeezing budget resources. The subsidy for Vedanta-Foxconn’s proposed silicon fab could exceed the annual cost of the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA).

Atmanirbhar is almost entirely about manufacturing. Supported sectors include food processing; organic farming; iron, copper agricultural chemicals; electrical equipment industrial machinery; furniture, leather and shoes; car parts, Including textiles and Covid accessories (covers, masks, ventilators). It’s not just a service industry here.

The Production Incentives (PLI) program provides large grants to corporations that meet specified investment and production targets in 14 sectors. These include mobile phones and components; bulk drugs and active pharmaceutical ingredients (API); automobiles and auto parts; white goods; textiles, special steels; high efficiency solar modules; Includes telecom and networking products and electronic components.

In some fantastic Asian countries, autocratic governments have ‘picked winners’, focusing government support on a few export-oriented and world-class sectors. These governments are land confiscation, They were brutal in matters such as labor laws and closing down inefficient units. But India is a messy democracy that cannot do these things strictly. He is in danger of being saddled with the new white elephant’s saddle. In that case, Our banking sector, after a decade of hard work, will once again collapse under massive deleveraging, just as it is cleaning up its books.

In a democratic system, Usually populism trumps technical ‘picking winners’. Industrial policy can only work if it is limited to a few promising sectors. But in India, it is impossible to select only a few winners. The lobbies will demand an extension to every other sector and the opposition parties will promise such an extension during the elections.

Even now, Atmanirbhar and PLI are so broad that it is difficult to quickly tell which manufacturing is left out. Every ministry thinks its industry has great potential. No ministry dares to say that the losers are pushing back.

Services have received government support over the years, but not as focused as the freebies for agriculture and now manufacturing. without special attention; The share of services in GDP has steadily increased from 30% in 1950 to 55% last year. This pattern is common throughout the world. The share of services in GDP is US (79.9%). It is higher in advanced economies such as the UK (79.3%) and Japan (69.5%). It is also high in middle-income countries such as Brazil (72%) and Mexico (60.4%). The only exception is China due to the overall unique pattern of industry-led exports, where the share of services is a low 49.7%. As a democracy, India cannot imitate the Chinese model.

India has achieved great success in IT services. But these accounts are only a small part of the total service. In fact, Our GDP data did not even attempt to calculate a separate figure for contribution to IT services. India’s neighboring countries do not have a comparable IT industry, but their share of services in GDP is 57.5% of India’s Sri Lanka; Similar to 52% in Pakistan and 51.3% in Bangladesh. Critics who say India’s share of services is too high are simply wrong.

In his latest Monetary Policy Committee (MPC) report, Shaktikanta Das said India will run a large trade deficit of 8.1% of GDP in the first quarter of fiscal 2023. This will sink most countries. Fortunately, India posted a surplus of 5.3% of GDP in services and remittances, bringing the current account deficit down to 2.8% of GDP. Services is the strongest segment of Indian economy and is saving us from disaster.

The latest news on the trade front shows that things are getting worse. The trade deficit widened to $30 billion in July and $28 billion in August. At this rate, The trade deficit could be 11-12% of GDP in the second quarter of FY2023. Some may argue that India desperately needs import substitution in manufacturing to reduce inequality. The correct conclusion is that despite Atmanirbhar and PLI, the trade deficit has worsened despite the rise in import duties over five years. That approach doesn’t work.

The answer is not always to put money in the wrong bin. Economist Anne Krueger demonstrated decades ago that a dollar invested in export promotion yields greater returns than a dollar invested in import substitution. Becker has shown that investing in human capital is the best investment. Those are the right directions to go.