Industrial policies have returned. What’s new?
₹1.97 trillion production-linked incentive (PLI) scheme. On the face of it, the PLI scheme has nothing to do with tweaking tariffs. It is focused on incentivizing companies to increase domestic production across 14 sectors, rather than manufacture products outside India.
Another important category of industrial policy measures across richer, middle-income, or poorer countries attempt to lower cost of production for companies through a variety of means—loan guarantees, trade finance, loans from the state, or even outright grants. Finally, even in the case of trade, the so-called non-tariff barriers to trade—governments setting minimum quality standards for imports, for example—have become progressively more important in influencing trade flows. Some sectors stand out prominently when it comes to industrial policy.
Green energy in general, and electric vehicles in particular, are sectors that many governments give attention to. The auto sector is another example. Among poorer countries, textiles and apparel figure prominently as sectors targeted for incentives.
So, how is the new industrial policy different? Contemporary industrial policies, the authors argue, are much less inward looking. They are aimed at blocking off imports, but much more focused on promoting exports. An industry focused on winning export orders is likely to be much more cost-efficient and uses the latest technology than one that knows it can operate safely in a sheltered domestic market with few competitors.
In an important sense, of course, this is hardly ‘new’ industrial policy. The tiger economies of Asia—starting from Japan, followed by South Korea, Taiwan and others, and finally China—did exactly this. By doing so, these countries have
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