Former Reserve Bank of India Governor Raghuram Rajan has said the Production Linked Incentive (PLI) scheme, the flagship programme of the Modi government in manufacturing, needs to be studied more closely to understand the potential for its success. History, he added, shows such policies have not worked well in the past.

To buttress his statement, Rajan gave an example of the electronics sector. The electronics industry has an 8.5 to 11 per cent cost disadvantage when it comes to competitiveness with global players. To tackle this disadvantage, the PLI scheme seeks to offer subsidies and also give tariff protection through higher duties on the grounds that electronics is an infant industry. “By doing so, we are going back to license raj which has been tried before and failed for India,” he said.

Rajan was delivering a lecture on ‘Democracy and Indian Economic Development’ at a workshop organised by the Madras Institute of Development Studies in Chennai on Thursday..

India’s ambition to build a strong advanced chip building ecosystem is another case in point, he added. Intel, he pointed out, which already has a strong base in chip manufacturing, is investing $40 billion. For India to build this ecosystem from scratch would involve huge subsidies which will eventually become a white elephant. This money could have been better invested elsewhere like in education, he suggested, adding that the money could be used to educate thousands of engineers who can play a big role in chip design, is a critical input in chip manufacturing.

Protectionism on rise

India, he further added, should seriously look at a services-led growth rather than aping China’s manufacturing-led growth.

He argued that China was able to succeed by keeping wages and interest cost low. It was able to do so as it is not a democracy. India cannot follow this path. Also, the world today is very different from the time China began its manufacturing-led growth journey.

Protectionism, he said, is on the rise and a lot of tariff barriers are being put in place. That apart, the world is going green and consumption of manufactured goods will decline going forward as people cut back on their carbon footprint. Services on the other hand, he said, will not face any such restrictions. Rather than going deep into manufacturing, India can leap-frog into a services-led growth which will help it create more jobs and tap global demand.

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