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Daily Current Affairs 16.09.2022 (The Eastern Economic Forum and India’s balancing act, Tamil Nadu’s new breakfast scheme in schools, Parliamentary business and an essential pit stop, Climate action that runs on cooperative federalism, Arbitrary, exclusionary, Should India choose manufacturing over services?)

Daily Current Affairs 16.09.2022 (The Eastern Economic Forum and India’s balancing act, Tamil Nadu’s new breakfast scheme in schools, Parliamentary business and an essential pit stop, Climate action that runs on cooperative federalism, Arbitrary, exclusionary, Should India choose manufacturing over services?)

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1. The Eastern Economic Forum and India’s balancing act

What are the benefits of investing in the Russian Far East? Which all countries are currently investing in the region?

The Eastern Economic Forum was established in 2015 to encourage foreign investments in Russia’s Far East. As of 2022, almost 2,729 investment projects are being planned in the region.

During the forum, Prime Minister Narendra Modi expressed the country’s readiness in expanding trade, connectivity and investments in Russia. India is keen to deepen its cooperation in energy, pharmaceuticals, maritime connectivity, healthcare, tourism, the diamond industry and the Arctic.

India has vested interests in both the EEF and the Indo-Pacific Economic Framwork and has worked towards balancing its involvement. The IPEF is a vital platform for India to strengthen its presence in the Indo-Pacific region.

Avishka Ashok

The story so far: Russia hosted the seventh Eastern Economic Forum (EEF) Vladivostok from September 5 to 8. The four-day forum is a platform for entrepreneurs to expand their businesses into Russia’s Far East (RFE).

What is the Eastern Economic Forum?

The EEF was established in 2015 to encourage foreign investments in the RFE. The EEF displays the economic potential, suitable business conditions and investment opportunities in the region. Agreements signed at the EEF increased from 217 in 2017 to 380 agreements in 2021, worth 3.6 trillion roubles. As of 2022, almost 2,729 investment projects are being planned in the region. The agreements focus on infrastructure, transportation projects, mineral excavations, construction, industry and agriculture.

Who are the major actors in the Forum? What are their interests?

This year, the Forum aimed at connecting the Far East with the Asia Pacific region. China is the biggest investor in the region as it sees potential in promoting the Chinese Belt and Road Initiative and the Polar Sea Route in the RFE. China’s investments in the region account for 90% of the total investments. Russia has been welcoming Chinese investments since 2015; more now than ever due to the economic pressures caused by the war in Ukraine. The Trans-Siberian Railway has further helped Russia and China in advancing trade ties. The countries share a 4000-kilometer-long border, which enables them to tap into each other’s resources with some infrastructural assistance. China is also looking to develop its Heilongjiang province which connects with the RFE. China and Russia have invested in a fund to develop northeastern China and the RFE, through collaborations on connecting the cities of Blagoveshchensk and Heihe via a 1,080 metre bridge, supplying natural gas, and a rail bridge connecting the cities of Nizhneleninskoye and Tongjiang.

Besides China, South Korea has also been gradually increasing its investments in the region. South Korea has invested in shipbuilding projects, manufacturing of electrical equipment, gas-liquefying plants, agricultural production and fisheries. In 2017, the Export-Import Bank of Korea and the Far East Development Fund announced their intention to inject $2 billion in the RFE in a span of three years.

Japan is another key trading partner in the Far East. In 2017, Japanese investments through 21 projects amounted to $16 billion. Under Shinzo Abe’s leadership, Japan identified eight areas of economic cooperation and pushed private businesses to invest in the development of the RFE. Japan seeks to depend on Russian oil and gas resources after the 2011 meltdown in Fukushima which led the government to pull out of nuclear energy. Japan also sees a market for its agro-technologies which have the potential to flourish in the RFE, given similar climatic conditions. However, the momentum of trade that existed with Shinzo Abe was lost with the leadership of Yoshihide Suga and Fumio Kishida. The trade ties between Japan and Russia are hindered by the Kuril Islands dispute as they are claimed by both countries.

India seeks to expand its influence in the RFE. During the forum, Prime Minister Narendra Modi expressed the country’s readiness in expanding trade, connectivity and investments in Russia. India is keen to deepen its cooperation in energy, pharmaceuticals, maritime connectivity, healthcare, tourism, the diamond industry and the Arctic.

In 2019, India also offered a $1 billion line of credit to develop infrastructure in the region. Through the EEF, India aims to establish a strong inter-state interaction with Russia. Business representatives of Gujarat and the Republic of Sakha have launched agreements in the diamond and pharmaceuticals industry.

What does the EEF aim for?

The primary objective of the EEF is to increase the Foreign Direct Investments in the RFE. The region encompasses one-third of Russia’s territory and is rich with natural resources such as fish, oil, natural gas, wood, diamonds and other minerals. The sparse population living in the region is another factor for encouraging people to move and work in the Far East. The region’s riches and resources contribute to five per cent of Russia’s GDP. But despite the abundance and availability of materials, procuring and supplying them is an issue due to the unavailability of personnel.

The RFE is geographically placed at a strategic location; acting as a gateway into Asia. The Russian government has strategically developed the region with the aim of connecting Russia to the Asian trading routes. With the fast modernisation of cities like Vladivostok, Khabarovsk, Ulan-Ude, Chita and more, the government aims to attract more investments in the region. Russia is trying to attract the Asian economies in investing and developing the far east. The Ukraine war is a worrying issue as it affects the economic growth of the country. However, Russia believes that it can survive the economic crisis and the sanctions with the help of China and other Asian powers.

Although, the EEF is an annual gathering, the forum comes at an opportune time for Russia who is dealing with the impact of the sanctions. Moreover, the coming together of countries like Myanmar, Armenia, Russia, and China seems like the forming of an anti-sanctions group in the international order.

Will India be able to achieve a balance between the EEF and the Indo-Pacific Economic Framework for Prosperity (IPEF)?

The U.S.-led Indo-Pacific Economic Framework for Prosperity (IPEF) and the EEF are incomparable based on its geographic coverage and the partnership with the host-countries. India has vested interests in both the forums and has worked towards balancing its involvement. India has not shied away from investing in the Russia-initiated EEF despite the current international conditions.

At the same time, India has given its confirmation and acceptance to three of the four pillars in the IPEF. The country understands the benefits of being involved in the development in the RFE but it also perceives the IPEF as a vital platform to strengthen its presence in the Indo-Pacific region. The IPEF also presents an ideal opportunity for India to act in the region, without being part of the China-led Regional Comprehensive Economic Partnership or other regional grouping like the Comprehensive and Progressive Agreement for Trans-Pacific Partnership .

The IPEF will also play a key role in building resilient supply chains. India’s participation in the forum will help in disengaging from supply chains that are dependent on China and will also make it a part of the global supply chain network. Additionally, the IPEF partners will act as new sources of raw material and other essential products, further reducing India’s reliance on China for raw materials. Although, Mr. Modi has refrained from full participation in the trade pillar of the IPEF, it does not signify an end to India’s role in the forum.

2. Tamil Nadu’s new breakfast scheme in schools

How has the history of the idea of nutrition in school schemes progressed so far?

Tamil Nadu Chief Minister M. K. Stalin on Thursday, at the Madurai Corporation Primary School Aathimoolam II in Simmakal, Madurai, launched the Chief Minister’s Breakfast Scheme for students of Class I to V in government schools.

Anaemia is a major health problem in Tamil Nadu, especially among women and children, says the 2019-21 National Family Health Survey-5’s report. Those in charge of the meal programme can enhance the component of nutrition to those children having specific problems. The latest Breakfast Scheme is a step in this direction.

As of now, there are nearly 46.7 lakh beneficiaries spread over 43,190 nutritious meal centres.

T. Ramakrishnan

The story so far: Tamil Nadu Chief Minister M. K. Stalin on Thursday, at the Madurai Corporation Primary School Aathimoolam II in Simmakal, Madurai, launched the Chief Minister’s Breakfast Scheme for students of Class I to V in government schools. The scheme covers around 1.14 lakh students in 1,545 schools which include 417 municipal corporation schools, 163 municipality schools and 728 taluk and village panchayat-level schools. A sum of 33.56 crore has been set apart for the scheme. The inauguration of the scheme marks an important milestone in the State’s history of providing free meals to school students.

How has the idea evolved?

In November 1920, the Madras (now Chennai) Corporation Council approved a proposal for providing tiffin to the students of a Corporation School at Thousand Lights at a cost not exceeding one anna per student per day. P. Theagaraya Chetty, the then President of the Corporation (the modern-day equivalent of Mayor) and one of the stalwarts of the Justice Party, said the boys studying at the school were poor, which affected the strength of the institution ‘greatly’. The scheme, which was extended to four more schools and facilitated higher enrollment of students, suffered a setback in 1925 when the British government disallowed the expenditure on the supply of mid-day meals to students from the Elementary Education Fund. It was revived two years later, benefitting around 1,000 poor students in 25 schools.

The concept saw a State-wide application in 1956 when the then Chief Minister K. Kamaraj decided to provide free noon meal to poor children in all primary schools across the State. The Budget for 1956-57 contained a provision for supplying mid-day meals to schoolchildren for 200 days a year, initially covering 65,000 students in 1,300 feeding centres.

In July 1982, it was left to the then Chief Minister M. G. Ramachandran to extend the programme to children in the 2-5 age group in Anganwadis and those in 5-9 age group in primary schools in rural areas. Subsequently, the scheme — now called Puratchi Thalaivar M.G.R. Nutritious Meal Programme — was extended to urban areas as well. Since September 1984, students of standards VI to X have been covered under the scheme.

Over the years, there have been improvements to the programme. M. Karunanidhi, as Chief Minister during the short-lived Dravida Munnetra Kazhagam Ministry (1989-91), introduced the provision of boiled eggs once every fortnight, starting June 1989. His successor, Jayalalithaa, in March 2013, extended the scheme by including variety meals along with masala eggs as per the children’s choice.

What are the number of beneficiaries of the programme?

As of now, there are nearly 46.7 lakh beneficiaries spread over 43,190 nutritious meal centres. This includes around 3,500 students of National Child Labour Project (NCLP) special schools. The State budget for 2022-23 has provided around ₹2,077 crore for the nutritious meal programme.

Besides, as a consequence of the collaborative implementation of the Integrated Child Development Scheme (ICDS) and the nutritious meal programme, around 15.8 lakh children in the age group of 2+ to 5+ years receive nutritious meals.

What was the impact of the mid-day meal scheme on school education ?

After the improved version of the mid-day meal scheme in 1982, the Gross Enrollment Ratio (GER) at primary level (standards I to V) went up by 10% during July-September, 1982 as compared to the corresponding period in 1981.

The rise in boys’ enrollment was 12% and in the case of girls, 7%, according to a publication brought out by the Tamil Nadu government on the occasion of the launch of the Chief Minister’s Breakfast Scheme.

Likewise, attendance during July-September 1982 rose by 33% over the previous year’s figure.

Kamaraj – An Era (2008), a biography authored by senior Congress functionary A. Gopanna, states that after the inauguration of the mid-day meal scheme in 1956, the number of primary schools went up from 15,800 in 1957 to 29,000 in 1962.

Where should the programme focus more?

Anaemia is a major health problem in Tamil Nadu, especially among women and children, says the 2019-21 National Family Health Survey (NFHS)-5’s report. From 50% during the period of the 2015-16 NFHS-4, the prevalence of anaemia in children now went up to 57%. This and many other health issues can be addressed through the combined efforts of the departments of School Education, Public Health and Social Welfare and Women Empowerment.

Based on expert advice, those in charge of the implementation of the ICDS and the nutritious meal programme can enhance the component of nutrition to those children having specific problems. The latest Breakfast Scheme is a step in this direction.

Besides, a continuous and rigorous review of the progress of the scheme and nutritious meal programme should be carried out in a sustained manner, says a senior government official.

3. Editorial-1: Parliamentary business and an essential pit stop

Referring Bills to the Department Related Parliamentary Standing Committees does help the process of lawmaking

It was heartening to have the recently concluded monsoon session of Parliament (July-August), even though it was adjourned sine die on August 8, 2022, witnessing the Competition (Amendment) Bill, 2022 and the Electricity (Amendment) Bill, 2022 being sent to the Standing Committee of Parliament for detailed examination and a report thereon.

This is a significant step in light of the fact that Parliament had only limited legislative time this session and could pass only five pieces of legislation. This has also come in the wake of constant criticism by the Opposition that has been alleging that the Government has been trying to steamroll various pieces of legislation in the last few sessions. The worry of the Government has been that so much time is lost in disruptions in Parliament that the legislative process, as it is, becomes unduly delayed and therefore, referring the bills to the Standing Committees may be counterproductive — that could only add to this delay.

Relevant parliamentary data

The functioning of the monsoon session of Parliament this year bears testimony to this fact: the Lok Sabha’s productivity was 47% and the Rajya Sabha only 42%. It may be mentioned here that Parliament has 24 Department Related Parliamentary Standing Committees (DRSC), comprising members of the Parliament of both the Lok Sabha and the Rajya Sabha in the ratio 2:1, which are duly constituted by the Speaker of the Lok Sabha and the Chairman of the Rajya Sabha, jointly.

The mandate of these committees is to examine various legislations referred to it, the budget proposals of different Ministries, and also to do policy thinking on the vision, mission and future direction of the Ministries concerned. The objective of this article is to examine whether these committees have been able to achieve their stated objectives, and if not or if done inadequately, what the corrective actions could be to increase their efficacy and their relevance.

The percentage of Bills having been referred to the DRSCs during the tenures of the 14th (2004-2009), 15th (2009-2014) and 16th Lok Sabhas (2014-2019) has been 60%, 71% and 27%, respectively. The fall in this percentage during the 16th Lok Sabha was witnessed largely in the second half of its session, when the Government was in a hurry to push its big ticket reforms through and the Opposition was equally adamant to stall it in view of high stakes involved in the 2019 elections.

Committee versus Parliament

Even though it is not obligatory for the Government to agree to refer each Bill to the DRSC, the experience, both nationally and internationally, has been that referring a Bill to the DRSC has been of use to the process of lawmaking. It has been alleged that Bills which are not being referred to the parliamentary committees, are not examined properly, especially from the perspective of consumers and stakeholders and remain just a bureaucratically conceived piece of legislation. As proof of this, the case of the three Farm Bills is cited as they were passed without being referred to the DRSC and had to be withdrawn later.

Even though there could be many reasons for the withdrawal of the three Farm Bills — some of it political — it needs to be understood that the examination of the Bills by the parliamentary committees is more to the benefit of the Government than the Opposition. The simple reason for this is that the tenor and the ambience of the discussions in the parliamentary committee and in Parliament are two entirely different things. The committee meetings are in camera and, therefore, the meetings are held in a comparatively congenial atmosphere of bonhomie and cordiality than they would be in Parliament.

The deliberations in these committees mostly add value to the content of the legislation and, more often than not, the Members, their party positions notwithstanding, try to reach a consensus. Additionally, such pieces of legislation after examination in the committees, have some sort of ownership of the members of the committee, both from the ruling side and the Opposition, even though it is also a function of the skill of the chairman of the committee.

Governments and the ruling party should not be wary of these committees, as in most of these committees, the government has a majority and the final decision is always by the process of majority voting. Therefore, there is no reason why any government should shy away from referring Bills to the committee. Skilled and experienced Ministers know this and generally have no aversion to a Bill being referred to to the committees. So, fostering the trust of parliamentarians, both from the ruling party and the Opposition parties, in the relevance and usefulness of the system of the committees is of paramount importance.

Consider these steps

It has been observed that the reluctance to refer the Bills to the committee arises more out of inaction and ignorance of the Ministry concerned, and rarely out of ideological or policy reasons. So, the following changes could be suggested to be made into procedures meant for consideration of Bills.

First, the Speaker of the Lok Sabha and the Chairman of the Rajya Sabha have powers to refer Bills to a DRSC of Parliament. This requirement is often given a go by for various political or administrative reasons. It may be useful to make the process of reference of Bills to these committees compulsory/an automatic process. An exemption could be made with the specific approval of the Speaker/Chairman after detailed reasons for the same. The prerogative of the House to refer the Bills to the Standing committee, through an amendment, would, of course, remain unaffected.

Second, all discussions in the Parliamentary Standing Committee should be frank and free. For this, it may be provided that during the discussions of the committee meetings, no whip of the party would apply to them. In any case, they have the liberty to vote in favour or against the Bill in Parliament.

Third, the committees can be given a fixed timeline to come up with the recommendation and present its report which can be decided by the Speaker/Chairman. The committees mostly abide by this direction of the Speaker/Chairman. But to deal with just political exigencies, it can be provided that in case the committee fails to give its recommendation within the approved/extended time, the Bill may be put up before the House concerned directly.

Fourth, to ensure quality work in the committees, experts in the field may be invited who could bring with them the necessary domain knowledge and also help introduce the latest developments and trends in that field from worldwide. It would be value for money if some subject matter experts/young researchers could be associated with the committee for a short period.

Fifth, the Speaker/Chairman should have the right to fix a time limit, sometimes even stringent, if the government of the day asks for it and the demand is found to be reasonable by the Speaker/Chairman.

Sixth, between two sessions, there is generally enough time to organise committee meetings for discussions on Bills in the parliamentary committees. Sometimes, the government and the committee chairmen are lax in this respect, and then try to push through these pieces of legislation when the next session is announced. Hence, it is important for the Ministry of Parliamentary Affairs to keep an eye on this and, in collaboration with the committee chairmen, get these parliamentary works organised during the inter-sessional period, in advance.

Seventh and last, when it comes to the budget proposals of the Ministries, the committees should not limit themselves to discussing just the budget proposals and endorsing them with a few qualifications here or amendments there. They should also come up with suggestions for the Ministry to take up new initiatives and people-friendly measures.

4. Editorial-2: Climate action that runs on cooperative federalism

The outcome of the ‘Grand Challenge 1’, a tender for electric buses, is an innovative model for India and the world

India’s procurement of 5,450 electric buses and subsequent increase in ambition to have 50,000 e-buses on the country’s roads by 2030 represent the immense potential for progress on climate and development goals through close collaboration between the Union and State governments. With the shared aim to rapidly electrify a key pillar of India’s public transportation, recent governance efforts have created a new business model for e-buses. If this sector is further developed, it can reduce air pollution in cities and fuel import bills, improve the balance sheets of State transport companies, and spur domestic manufacturing and job creation.

State of State-owned buses

There are currently around 1,40,000 registered public buses on India’s roads, with large numbers of them having sputtering engines that spew planet-warming fumes into the atmosphere. At least 40,000 of these buses are at the end of their lifespan and must be taken off the roads immediately.

However, most buses are owned and operated by State transport undertakings, which are in poor financial health. In part, they incur large losses because they play an important social function by providing subsidised fares to crores of Indians each day. With a few exceptions such as Mumbai’s Brihanmumbai Electric Supply & Transport Undertaking (BEST) of the Brihanmumbai Mahanagarpalika, when State transport undertakings go to the market to buy buses, they face problems of fragmented demand and high prices. Furthermore, there are limitations to nation-wide action on this issue as State governments control issues such as transit, urban governance and pollution control.

A success story

Until recently, there had never been a unified tender to address some of these challenges. Cooperative federalism can easily become a fraught issue. However, in the case of the Grand Challenge 1, a tender for 5,450 buses (across five major Indian cities — Kolkata, Delhi, Bengaluru, Hyderabad and Surat), the opposite happened. Instead of a race to the bottom, the respective expertise, strengths and needs of Union Ministries and States informed the process and the successful outcomes.

Convergence Energy Services Limited (CESL), a nodal agency of the Union government, acted as the programme manager in this effort at centralised procurement in concert, with State-led demand and customisation. Coordination between a range of Union government Ministries and State governments standardised demand conditions across these five cities and discovered prices that beat the increasingly outmoded internal combustion engines.

On a cost-per-kilometre basis, the prices discovered were 40% lower than diesel and 34% less than CNG (without factoring in the subsidy through FAME-II). A note on FAME: the Faster Adoption and Manufacturing of (Hybrid &) Electric Vehicles in India (FAME-India) Scheme was launched under the National Mission on Electric Mobility in 2011/National Electric Mobility Mission Plan 2020, and unveiled in 2013. The scheme encourages the progressive induction of reliable, affordable and efficient electric and hybrid vehicles.

With high fuel prices and energy security challenges in the wake of the war in Ukraine, the switch to electric vehicles appears even more sensible and lucrative.

This inflection point in unit economics was enabled by three key factors: collaboration, pace and transparency. First, the tender itself was a fully consultative process and varied contributions by participants already influenced the design of future tenders. Second, there was a shared sense of urgency that shaped this collaboration, which leveraged the bureaucracy’s power when working on time-bound and measurable schemes and increased receptivity to creative and new ideas. Finally, transparency was the most resilient quality of a public process. From the outset, there was clarity about the intention to engender trust and build a publicly available process and tender that invited bids from automakers and operators.

In the wake of the first tender, it was incredibly gratifying to share a feeling of success with five States, five Transport Ministers, five State Secretaries and the heads of a range of State transport undertakings, each of whom had played a part in the process.

To be clear, excessive centralisation can have limitations and contradict the federal principles enshrined in the Constitution. For instance, India’s States and districts vary vastly in their vulnerability to climate impacts, and decentralised decision-making and locally-led adaptation will help reduce potential damage to lives and livelihoods. Urban local bodies and gram panchayats can be the heart of climate action.

However, in certain areas where India must move the needle quickly or where States lack size and financial clout, such as the electrification of mass mobility, centralised procurement and programme management can deliver architectural transformations rather than just incremental transitions.

There is much work ahead

Although a good start has been made, much work remains to be done to enable the electrification of mass mobility in India. The country’s shift to clean public transportation will require a suite of efforts, from ramping up manufacturing capacity to domestic battery production to building out charging infrastructure (ideally plugged in to a grid powered by renewables) to capacity building of State transport undertakings to developing financial instruments and structures.

Nonetheless, the progress we have made on electric bus tendering is a harbinger of climate action made possible by cooperative federalism. As India now ramps up its demand to deploy 50,000 buses across 40 cities, it will need to continue the spirit of true inter-ministerial and Union-State collaboration to fulfil its ambitious targets for green and inclusive economic development. The combined clout and strength of the federal compact can enable large strides being made towards innovative models that not only improve transit, the quality of life in cities and progress towards national climate goals but also build models for the rest of the world to emulate.

5. Editroial-3: Arbitrary, exclusionary

Even if EWS quota is upheld, eligibility will have to be properly defined

A Constitution Bench led by Chief Justice of India U.U. Lalit is now examining the validity of the 103rd Constitutional Amendment, which provides for 10% reservation to the economically weaker sections (EWS), excluding Other Backward Classes, Scheduled Castes and Scheduled Tribes who already have reservation in higher education institutions and government jobs. The Bench has finalised three issues for hearing — whether the amendment has breached the Constitution’s basic structure by permitting the state to make special provisions; whether it does so in relation to admissions to private unaided institutions and, lastly, if the exclusion of OBC/SC/ST communities from the scope of the quota tramples on the basic structure. These are valid questions and it could be argued that the legislation of the reservation in 2019 was done hastily without due diligence of the criteria adopted. For example, the setting of an annual family income of ₹8 lakh as a ceiling to determine if someone belongs to the EWS is clearly problematic. If available consumer expenditure surveys such as the NSSO report, ‘Key Indicators of Household Consumer Expenditure, 2011-12’, are relied on, a large chunk of the population will be eligible for reservations in the “below Rs. 8 lakh” EWS category and not just the truly deserving sections of the poor. A government-appointed committee submitted that this ceiling was reasonable, but it could not adequately explain how the income criterion was “more stringent” than the one for the OBC creamy layer. Also, the ₹8 lakh figure did not correspond to any data on the estimated number of EWS persons in the population with incomes related to it.

Petitioners have also argued that the net effect of the exclusion of Backward Classes and SC/ST aspirants from the EWS has been that they are now denied an opportunity to compete in the general category to the extent of 10%, in effect, limiting the quota to the “forward classes”. This is a valid argument. Even if the Court agrees to maintain that reservations can be provided on economic basis — something that has been explicitly denied so far with only social and educational backwardness being mentioned in the Constitution and reiterated in several judgments — excluding people of certain communities from this benefit despite their belonging to the EWS renders the legislation discriminatory. In recent recruitment and entrance examinations such as the UPSC and JEE, marks cut-offs for admissions were lower for the EWS quota than that of the OBCs. In essence, if an income criterion for identifying the economically weaker sections has to be the basis, it must arrive at a clearly determined figure for the limit unlike the ₹8 lakh figure, and all sections of society, irrespective of caste, should be eligible to avail of reservation under this category.

6. Editorial-4: Should India choose manufacturing over services?

Manufacturing can create higher productivity jobs; but India’s limited state capacity is a risk

Earlier this week, the former Governor of the Reserve Bank of India, Raghuram Rajan, questioned the Central government’s production-linked incentive (PLI) scheme, arguing that it works against the interests of Indian consumers. In doing so, he revived the larger debate on the government’s efforts to promote the country’s manufacturing sector through subsidies, and on its relative importance vis-a-vis the services sector. Ajay Shah and Nagesh Kumar discuss this issue and talk about creating enabling conditions, in a discussion moderated by Prashanth Perumal J. Edited excerpts:

Should government policy focus on promoting any particular sector of the economy?

Ajay Shah: I’m sceptical of the state bureaucracy being able to understand and anticipate which sectors will do well and which sectors will do badly. It is very difficult to forecast the future. Only risk-taking entrepreneurs can take speculative bets, such as saying the computer hardware industry or automobile component manufacturing will do well in India. Who could have predicted that two-wheelers in India would fight off foreign competition pretty well while dozens of other manufacturing businesses would get butchered by foreign competition? It is not feasible for officials in bureaucracies to look at the industrial landscape and make speculative calls. That’s because they do not have the necessary information or the forecasting ability. Nor do they have the incentive, like private businesses do. Also, there is nobody to protect them if their speculation goes wrong; when their speculation goes wrong, they will be investigated by the Central Bureau of Investigation and the Enforcement Directorate. So, which official is ever going to take a risk? For all these reasons, the task of figuring out which sector to focus on is best left to the private sector. The job of the government is to create a broad enabling environment.

Nagesh Kumar: I have a slightly different view. I think the history of development not just in developing countries, but also in industrialised countries today tells a different story. They all made strategic interventions, or had an industrial policy. While I agree that the government can’t do everything, prioritising certain sectors that have desirable features such as higher job creation or greater industrialisation is welcome. There was a time when industrial policy had become a bad word, but it has resurfaced in an aggressive manner with different countries favouring certain industries. The latest example is the 2022 CHIPS [and Science] Act in the U.S., under which some $50 billion in incentives will be given to American companies to develop or to strengthen their semiconductor industry. Each of the East Asian countries such as Japan, South Korea, Taiwan, Malaysia, Thailand, China and Vietnam has a story of strategic interventions by the state and has become a manufacturing powerhouse running consistent trade and current account surpluses. There is something to be learned from them. In such a context, the Centre’s decision to promote the manufacturing sector is timely because India has favoured an agriculture and services-dominated economy over the years.

Should India focus on manufacturing over services?

NK: So far, in services, we have certainly developed some advantage and we are doing rather well. Services’ share of the economy has gone up to over 50% of the GDP. However, this sector has not been able to create enough jobs in a commensurate manner. The result is that agriculture still continues to sustain nearly half of India’s workforce, which means that 15% of GDP is supporting some 45% of the workforce. We need more productive job opportunities for the workforce to shift away from agriculture. We need to focus attention on the manufacturing sector because of the direct and indirect jobs that it can create. It is an empirical fact that manufacturing of all productive sectors has the highest backward and forward linkages. So, all together, there is significant potential for the manufacturing sector to create higher productivity jobs for people stuck in agricultural activities. That is the future for India.

AS: On industrial policy, when we look at world history, we see many attempts by governments to pick winners. It is always possible to find interventions which look good with the benefit of hindsight. But at the same time, there are many more stories of failure. Everyone who thinks that you should have a strong leader and points to [former Prime Minister of Singapore] Lee Kuan Yew as an example of how well a strong leader works also needs to counterbalance this with the fact that there are hundreds of strong leaders all over the world who have done badly. So, while it is always possible to find individual episodes, such as the role of the Taiwanese government in fostering the semiconductor ecosystem in Taiwan, it is also possible to identify a very large number of failure stories. And the overall assessment of industrial policy is not good.

Second, we should think about the country that we operate in. We should think about state capacity, bureaucratic capacity, the incentives of policymakers, the capabilities of policymakers, etc. We’ve got to come up with policy ideas that are sensitive to our realities. There was remarkable civil service quality in the early years after independence in India. Later, interventionist policies led to a corrosion of civil service quality and of state capacity. So, we should be careful in giving high discretion in the hands of the state. Since we already have low state capacity, the greater the discretion in the hands of the state, the greater the danger of further corroding state capacity.

Aren’t schemes like the PLI prone to the risk of cronyism?

NK: It is possible that the PLI would lead to some kind of cronyism. But when subsidies are linked to performance, there is little room for discretion. There are objective criteria which have been defined, such as you getting a certain percentage in incentive if you perform better than last year. And of course, one can have third-party verification of performance to minimise misuse. Also, as we go along, we can tighten the criteria further to things such as export performance, competitiveness and innovation. So, it is possible to have an incentive system and achieve most of the objectives without major problems.

AS: If you read the details of the PLI policy framework and the industries that it applies to, of course it is subject to many discretionary decisions. There are always pushes and pulls. When these frameworks are established, only large firms are able to do the hard work of pounding the corridors of power, and engaging with the government, filling in all the forms and getting these benefits. If there are structural problems, it’s better to go to the root cause and solve it because then everybody benefits, every company — large or small, domestic or outward oriented — benefits from a more rational policy environment. If there is a mistake in the GST (Goods and Services Tax), solve it; if there is a mistake in the Companies Act, solve it; if there is a mistake in income tax treatment, solve it. I don’t buy it when people say electricity is expensive in India or labour is cheap. The competitive advantage of operating in India is that labour is cheap. But it doesn’t mean everything has to be cheap. There will be a variety of inputs that goes into an industry and each firm has to figure out whether it is competitive to operate in India. What policymakers should focus on is just mistakes of public policy. We should focus on things like the way the Companies Act works, the way Indian capital controls work, the way income tax works, the way GST works, etc.

Shouldn’t the government liberalise all sectors and let market forces decide outcomes?

NK: The sectors that have been selected by the government include some of the new sunrise sectors, such as the semiconductor industry, which are highly import-dependent. The feeling is that we can make some of these things in India a part of a domestic industrialisation drive. Industries have been chosen based on where there is an opportunity to create new industries or reduce the dependence on imports, or where there are high spillovers or linkages to other sectors. So, industries benefiting from these subsidies have not been randomly chosen. Of course, one could argue that there are also other sectors that merit subsidies, but one has to start somewhere. The start would obviously be from the most promising sectors and sunrise sectors which are coming up. I don’t think these sectors have been selected to benefit a particular individual. You could find one or two of them, but most represent opportunities that India should be exploiting at this moment.

AS: I remain sceptical, as economic policymakers do not have a crystal ball to know the future. In India’s history, the decisions of some of the most respected thinkers and policymakers, when it comes to favouring this or that sector, have proved to be wrong. So I just don’t find it persuasive that we have the forecasting capacity. It is risky, it is speculative, and the word speculative appropriately belongs in the private sector. You want to trade on the stock market? I’m all for sophisticated discussion on that. Should we be buying the stocks of a labour-intensive garment company? Or should we be buying the shares of an electronics manufacturing company? That’s a discussion for private speculators to have; it’s not a discussion for people in public policy. And I just want to come back to the argument that since in the U.S. there is the CHIPS Act, that justifies a similar policy in India. I have two problems with that. First, as Ashok Desai stated, ‘Every bad idea has been adopted in at least one good country.’ For example, because they have agricultural subsidies in Europe, you will argue that we should have agricultural subsidies in India. That’s a slippery slope. We should always be able to argue things from first principles. And then remember the magnitude of the numbers we are comparing. When you look at the European agriculture subsidy divided by European GDP, it’s nothing. When you take the American subsidies for chips and divide it by the American GDP, it’s nothing. Whereas here, in India, if you think of a trillion dollars of exports, and then 6% of that, it’s taking a significant chunk out of the tiny amount of tax revenues of the Indian state.

NK: I don’t buy this argument. Until a policy has been implemented, how will you know if it is right or wrong? When we are trying to revive our economy, and we want the investment cycle to pick up, we need to persuade investors to invest. And for that, some incentivisation is important, especially in the context of other countries offering incentives. If we don’t offer incentives, we do so at our own peril. So, we need to be vigilant. It is an open economy context that we are working in; it is not a closed economy context any more. So, we have to see what others are doing. And if you don’t, all the investments of chip manufacturers will simply go to the U.S. or Taiwan. Wherever they get more incentives, they will go, and we won’t get any of them. So, I feel that what has been done through the PLI, and the current focus of the government to promote the manufacturing sector, is the right thing to do at this moment.

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