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‘License Raj’ & ‘Protectionism’
‘License Raj’ & ‘Protectionism’ – How Modi Govt is Failing India’s Manufacturing!

Modi government is hell-bent to adopt protectionism, trade barriers, Licence Raj, import substitution and inward-looking policies, all in the name of promoting manufacturing.

The Modi government’s midnight decision to introduce a Licence for the import of laptops, tablets, personal computers, and servers will not only revive ‘Licence Raj’, but it is also a tacit admission that the PLI Scheme has failed to deliver. It is also an assault on a large number of lower and middle-income consumers, including students, who had taken to digital learning, especially in the post-pandemic era. Digital India will suffer. 

First things first. India needs a vibrant manufacturing sector to thrive. Since 2014, the output of India’s manufacturing sector has dipped from 15% to 13%. Although India stands at sixth position in the global ranking of countries in the manufacturing sector, yet its market share is just 3% of the total manufacturing, while China’s share is about 28%. Even though India’s services sector is its growth engine, in the post-pandemic era, it is imperative for India to fire all its engines of growth. Therefore, manufacturing, agriculture and urbanization cannot be ignored and must be emphasized too. 

However, the question is what is the mechanism to spur the manufacturing sector? Is it protectionism, or it is creating a holistic environment which enables private entities to set up manufacturing units? Access to land, better regulatory clearances, easy compliances, reducing red tape, transparent practices which forgo rent-seeking, access to technology and emphasis on greener and cleaner energy infrastructure could be some of the vital factors to encourage this sector. India does not have a dearth of labour – both skilled and semi-skilled, and a large number of people would be given better opportunities through manufacturing. 

Surprisingly, the Modi government is doing the opposite. It has a two-pronged strategy of crony capitalism and protectionism. No Indian will oppose ‘Aatmnirbhar Bharat’ or ‘Make in India’ – but there is a wide wedge between these high voltage campaigns propagated by the present government and the actual implementation. 

The biggest example of this approach is the apparent failure of the PLI scheme (introduced in 2020) which is targeted at a motley group of 14 sectors, mostly big industries, chosen without any clear criteria, which provides subsidies to finished goods in India. The chosen sectors are big-ticket, large industries that have the potential to crowd out MSMEs. They create lesser jobs than MSMEs. 

Former RBI Governor demonstrated in a recent paper that the PLI Scheme does not add to the manufacturing output. Giving an example of mobile phone exports and imports, Rajan’s paper reflected on how PLI Scheme is only subsidizing the assembling of mobile phones in India, but not the elements used to make it – semiconductors, PCBA, displays, Li-ion batteries, battery chargers, and cameras. 

Is the PLI Scheme a panacea for Indian manufacturing and the creation of jobs? Despite the government’s over-the-top claims, the PLI scheme does not seem to garner the desired results. The PLI scheme provides a subsidy ranging from 4% to 6% on the value of the additional production the investing firms generate. Till March 2023, 733 applications were approved in 14 sectors with an expected investment of Rs 3.65 lakh crore. However, the actual investment of just Rs 62,500 crore has been realized till March 2023. This is just a measly 1.7% of the expected investment under the scheme. It is important to note that the government’s incentive outlay in the form of subsidies and tax incentives is Rs. 1.97 lakh crore for the scheme, which is almost 1% of the GDP. 

In June 2023, the Modi government notified the PLI scheme for IT hardware 2.0 after it was held up for more than two years. The government had to initially scrap the scheme in 2021 after it received no bids from global giants, who had issues with the investment requirements of the scheme. The reason for the introduction of Licences for the import of laptops, tablets, personal computers and servers is that big manufacturing companies like Apple, Samsung, Acer etc. did not show any interest in setting up manufacturing units here in India, using the PLI scheme. 

The Modi government’s trade policy is another problem. It is inward-looking and is based on pre-liberalisation import controls. According to the World Trade Organization’s (WTO) Tariff Profile 2022, India has one of the highest average tariffs of 18.3% in the Asia-Pacific region. 

Successive governments in the past two decades have been following a consistent policy of reducing import duty, but the Modi government in a calibrated departure has changed the policy on its head by hiking tariffs in well over 500 major item categories since 2016. Shockingly, between 2016 and 2022, more than 3,000 tariff increases by the present government have affected 70% of India’s imports. 

High import duties for India also mean a loss of exports by making them uncompetitive. A large portion of India’s exports is contingent on its imports. The long-term impact of introducing trade barriers is inefficiency in domestic manufacturing and lower quality of goods production. 

India has been negotiating several bilateral Free Trade Agreements (FTA) since 2004. In fact, under Dr Manmohan Singh India signed 11 Trade Agreements, but under the Modi government, they have only progressed on trade agreements with Saudi Arabia, U.K and Australia – which are still a work in progress. In 2019, the present government did not enter the multilateral Asian free trade agreement – Regional Comprehensive Economic Partnership (RCEP). 

Protectionism, trade barriers, Licence Raj, import substitution and inward-looking policies have way passed their expiry date. The present government’s departure from a well-established post-liberalisation policy may well be following the post-pandemic global trend, but the sting in the tail is that these polices were started by them well before the pandemic stuck. 

Why the Indian Frontier Administrative Service could be a potent force against China

This piece was published on Wion News

India can deal with Chinese expansionism with the Himalayan region only by expeditious infrastructure development at its frontier areas. India has been able to establish political governance at the grassroots level through Hill Development Councils, Panchayats, and a host of ‘packages’ in these areas. But, there is a sense of deep neglect on the implementation front, especially in the context of physical infrastructure needs. A revival of the esteemed Indian Frontier Administrative Service (IFAS) – an experiment done in the 1950-60s will bridge the governance gap in these remote far-flung areas.

The best public policy interventions work on pilot and feedback loops. In this case, we have had a pilot in the IFAS and some key learnings from it. A renewed, reoriented and restructured IFAS dedicated to the Himalayan frontier states in India is the need of the hour. The first step of a good foreign policy measure is to start domestically. And this is what this piece elucidates.

The Indian Frontier Administrative Service (IFAS), a separate cadre created in 1954 to administer the North-East Frontier Agency (NEFA i.e., present-day Arunachal Pradesh and at that time, a part of Assam) was the military-governance mechanism mooted by Pandit Jawaharlal Nehru. It emphasised more on the socio-economic development of the various tribes in the protected region but did not focus on strategic border development. Some historical accounts attribute this deficiency in the said policy to Verrier Elwin, an anthropologist who was appointed as the advisor to the government of Assam. But this may not be entirely true.

 A cursory review of the list of IFAS cadre suggests that most members were either distinguished army officers or belonged to the Indian Foreign Service, the Indian Administrative Service, and the Indian Police Service, rotating between these postings.

NEFA was placed in a special category administered by the Ministry of External Affairs (and post 1965, by Ministry of Home Affairs) through an ‘IFAS’ Secretariat at Shillong, consisting of advisors for finance, tribal and legal affairs. The IFAS cadre mainly functioned as Political Officers (and thereafter as Deputy Commissioners) in charge of a frontier district vested with the powers of a District Magistrate and were the ultimate authority in their district to examine and implement development schemes. All top bureaucratic posts in other North Eastern States like Manipur were also filled by IFAS officers. An interesting Parliamentary answer between Manipur’s stalwart politician, Rishang Keishing and the then Deputy External Affairs Minister alludes to local tribals being preferred in filling the IFAS posts.

One of the most illustrious officers of IFAS was Major Ralengnao (Bob) Khathing. Under whose leadership, two platoons of Assam Rifles took possession of Tawang in February 1951, establishing Indian administrative control in the Bum La area along McMahon Line. This heroic act was enacted without shedding blood, even as China forced Tibet to sign a Seventeen Point Agreement in May 1951 and officially annexe it.

In 1968, the special cadre of IFAS was merged within the Indian Administrative Service. In the present context, the Indian Government can draw many lessons from the IFAS experiment, especially when China has officially transgressed the LAC as many as 2264 times since 2015 and India-China faced a 73-day standoff on Doklam in 2017.

First, for the NEFA tribals, IFAS had a simple policy laid down by Nehru. He avoided the two extremes – “one was to treat them as anthropological specimens for study and the other was to allow them to be engulfed by the masses of Indian humanity”. The could act as a Magna Carta for the newly restructured IFAS too. Since 2019, Jammu and Kashmir and Ladakh are now both Union Territories. They are crucial frontier border areas with Pakistan and China, it is imperative that IFAS should be resurrected and expanded for their administration and infrastructural development.

Second, Chief Ministers of Arunachal Pradesh and Mizoram have made calls for a revival of the IFAS, but their plea is more to provide a state-specific cadre than a larger administrative force implementing developmental programmes in the Himalayan region. A set of highly specialised officers, superior in merit and in strategic thinking, would entail that the development of Himalayan frontier regions remain at par with the rest of the country.

Third, presently the Border Roads Organisation (BRO), albeit mainly an infrastructure special purpose vehicle, backed by the army, is used for building strategic roads in the frontier areas. It is not a secret that towns, hamlets and villages in border areas are neglected and often complain of virtually no administration. The political mechanism of Hill Development Councils which was fructified in Leh & Ladakh (and later replicated in North-Eastern states) have become bastions of local political empowerment, but lack robust administrative capacity. They are often marred with leakages and want of strategic planning. Massive packages have been announced, in the name of development by all governments, but they hardly reach the last border village.

Fourth, given that the present government is widening the scope of lateral entries in civil services provides enough ground for ‘specialized’ inclusion in the civil services.

Many would argue that replacing the existing IAS driven cadre stationed in these districts with a rehashed version of the same – The IFAS, would hardly solve any purpose. They are wrong. Looking at the merit, superiority and the military background which the erstwhile IFAS cadre possessed, and their accounts of solid administrative delivery in the difficult terrains, punctures that argument.

National security is closely linked with strategic development, and it is a hope that policymakers realise that.

(Disclaimer: The opinions expressed above are the personal views of the author and do not reflect the views of ZMCL)

Farmers need support before getting free.

Free our farmers. They can help us absorb the impact on COVID- 19. Freeing here means remove the bottlenecks in their supply chain. Yes. The same ‘supply chain’ which the Prime Minister mentioned 9 times in his speech on 12th May. Following it, Finance Minister announced the creation of ‘Rs 1 lakh crore Agri-Infrastructure Fund for farm-gate infrastructure’ and a ‘legal framework’ to amend the Essential Commodities Act and APMC Act. On paper, these are bold steps in the right direction, but in the context of the pandemic, this shall do nothing to alleviate the immediate pain of the farmers.

The present government’s record in reviving the agriculture sector does not instill any confidence. India’s Average Agricultural GDP growth in the period 2004–5 to 2013–14 is 4%. This has plunged to 2.9% from 2014–15 to 2018–19.

Agriculture is the largest private sector but the Government has not let it unshackle its true potential due to enormous controls. This tendency to control agriculture stems through two historical reasons. First, until the Green Revolution made us self-sufficient in grains, India was dependent on foodgrain hand-outs by developed countries. Our farmers battle all kinds of challenges, including drought and monsoon and show a record increase in the food grain production, each year. For cereals, the Minimum Support Price (MSP) is a committed liability of the government to assure the farmers of a remunerative and stable price environment in the “increasing of agricultural production and productivity”.

Second, Remunerative prices to farmers in the political economy of India became an important issue after the 1960s as big farmers became an important political interest group. Farmers used this newfound political power as a tool to seek higher and more stable farm prices through government intervention which made India the second largest food producer in the world. Thus, shedding years of ignominy which India suffered through foodgrain import. Record food production is a matter of pride for us because it comes with a piece of historical baggage. It is the first item which is reflected by the government in any agriculture report.

From the farm to the dinner table, the government virtually controls every aspect of the agriculture sector. There is ‘Capital Control’ in the form of restrictive ownership, lease and tenancy laws. It is virtually impossible for a farmer to sell or rent her land to private people. There is ‘Input Control’ in the form of government regulating the prices of fertilizers, seeds, subsidy on water and power. The GST on farm equipment and allied parts is also a kind of control. Then, there is ‘Price and Trade Control’. The Essential Commodities Act regulates the price of farm produce. The APMC Act facilitates on a broken market system which is monopolistic and rent-seeking, with high commissions, especially for perishables. There are massive trade barriers which impede free trade of India’s farmers with the rest of the world.

Many experts and policymakers who are grounded to the cause of farmers do believe that the opening up of Indian agriculture needs to be gradual and incremental. After all, the sector affects the economic well-being of half the Indian population and provides access to affordable and nutritious food for all Indians. There is a need for a much-balanced approach than just some one-time magic pill of deregulation.

Finance Minister’s announcements are neither sound incremental policy measures to free the farmers nor any reforms by stealth. They are just lip-service, wrapped into a ‘package’ — meant for headlines management.

Several reasons. Agriculture is a State subject. At most the Union can make a ‘Model Law’ for states to adopt. But it is up to the states to adopt it. The Union did this when it passed the ‘Liberalizing Land Lease Markets and implementation of Model Agricultural land Lease Act, 2016’. Very few states, even from the ruling party adopted it. So the measure of removing ‘Capital Control’ was not successful.

Marketing of Agricultural commodities is again a State subject. While announcing that the “Centre will frame a law for adequate choices to a farmer to sell produce at attractive price” and remove the “barriers of free interstate trade”, the Finance Minister failed to emphasize that this will be at best, only a model law for states to adopt. Just like the Land Lease Act.

A second option for the Union would be to take refuge in the ‘Concurrent List’ items which has trade of ‘food stuffs’, ‘raw cotton’, ‘raw jute’ and ‘cattle fodder’ listed in it. For that yet another law needs to be passed using article 301 of the Constitution.

Finance Minister announced that a “facilitative legal framework will be created to enable farmers for engaging with processors, aggregators, large retailers, exporters etc.” On paper, very good. But it is a broad policy announcement with no details, roadmap or institutional framework.

Amidst the pandemic, the Parliament or its Standing Committees are not functioning even through video conference. There is no legislative oversight. No bill has been put forth for public consultation. Bringing ordinances will not serve any purpose here. The government should bring in the entire legal framework in the Monsoon Session of the Parliament. This would not be enough without consulting the states. A knee jerk, policy push without an institutional framework would only end up like the flawed GST regime.

Partial removal of ‘Price & Trade Control’ is only a half-baked measure. An entire architecture of deregulating agriculture needs to be created, with the simultaneous removal of ‘Input Control’ and ‘Capital Control’. This needs huge planning and institutional setup. The e-NAM mandis brought by this government failed because of a lack of planning on the logistical side.

In the COVID-19 crisis, when the economy has become more inward-looking and our farmers need money in their hands for input costs, freeing them partially without adequate support would be a travesty. It is best to first provide them with monetary support and then to usher in these reforms, after creating an institutional framework.

Riots and Rajadharma

This piece was published on Wion News with a different headline.

Delhi burnt and almost all our policymakers failed us. ‘Rajadharma’ is the construct often abused in modern Indian polity. The notion of Rajadharma in the ancient Indian political traditions, as a normative yardstick to evaluate governance, has always been all-pervasive and cherished. Mahabharata speaks of Rajadharma. Kautilya’s Arthashastra — India’s best known secular treatise on how a state and a ruler should be, separates law and religion by explicating Rajadharma.

We, the people of India should not be surprised when our elected representatives, in most cases, desert us and work against our interests by relinquishing their responsibilities. The hard truth is that they are driven by their interests. Some would be surprised by this theory, but whoever has the slightest iota of how Government’s interests work, knows that its only interest lies — in holding on to power.

This soulless version of a coercive state disturbs us all in the society. State is supposed to protect us and uphold the social contract, which we as a society have forged with it. When the state tends to break that social contract, the relationship between the state and the society is strained. Society becomes vulnerable, but the state persists. Many would accuse that this is unnecessarily complicating and theorizing. Therefore this needs to be clearly explained.

Daron Acemoglu and James Robinson in their book about ‘States, Society and the Fate of Liberty’ (The Narrow Corridor), have brilliantly argued that “…for liberty to emerge and flourish, both state and society must be strong. A strong state is needed to control violence, enforce laws, and provide public services that are critical for a life in which people are empowered to make and pursue their choices. A strong mobilized society is needed to control and unshackle the strong state… without society’s vigilance; constitutions and its guarantees are not worth much more than the parchment they are written on”.

The state and the society are embattled into a day to day struggle to compete and to cooperate. Repression and despotism by states result in this ‘narrow corridor’ to liberty, where society struggles. Riots are not new to India. Political parties and vested organisations have time and again unleashed riots as a tool to attain political interests. Societies, especially the poor and the vulnerable have suffered indescribable pain and trauma at the hands of the state. But the lamp of ‘liberty’ in India’s ‘narrow corridor’– the persistent struggle between society and the state has always managed to burn. It can be flickered, but it has not been extinguished.

The cost of the violence unleashed over the society is enormous and immeasurable. The trauma of dividing a society is impossible to overcome. State dithers and Institutions collapse. State is undeterred and policymakers across the spectrum fail to control it with checks and balances. In this strained scenario, the society needs to take control of the social contract. In the information age, where nothing remains hidden and even deep fakes can easily be exposed. Society needs to show the ‘mirror of truth’ — Rajadharma to the state. This can be done if the society is aware and can enquire.

Kautilya considers anvikshiki (the science of enquiry) as the central tool (“lamp”) for generating valid knowledge and judging ethical behaviour. For Kautilya, anvikshiki is the benchmark for ethical behaviour and it leads to Rajadharma. Arthashastra usually refers to Rajadharma as the ‘dharma of the king’ and not to dharma as a religion. Rajadharma is essentially ‘prescriptions of righteousness applicable to a ruler’.

This implies that the ruler ought to bear the responsibility of upholding dharma (law) in the society, thereby the dharma of the king (Rajadharma). The duty of the king is not only to observe dharma in person but also ensuring its observation by others. Rajadharma, therefore, is an all-encompassing construct for the ethical evaluation of the performance of the state and the government.

In modern times, for a strong society, awareness (or anvikshiki) is the prerequisite to make governments accountable for Rajadharma. In an increasingly inner looking society where superficial information becomes the basis of discord, the need to adopt Kautilya’s ‘science of enquiry’ (anvikshiki) is felt more than ever. Unless, the society becomes vigilant enough to make the state accountable and follow its Rajadharma, the state and its vested interests would prevail, while the society would continue to be strangulated in the ‘narrow corridor’, vying for every inch of liberty and freedom.

Thus, what is happening in Delhi is not only a stark failure of Rajadharma, but also, to a large extent, the failure of society as we, the people of India have somewhere forgotten to practice the ‘science of enquiry’ — the raison d’état of our traditions and strategic culture.

Rachit Seth is a student of Public Policy at the Takshashila Institute, Bangalore and can be found on Twitter at @rachitseth

(Views expressed by the author are strictly personal in nature)