Opinion: Make in India? It Will Take More Than Subsidies

Last week, while inaugurating a new aircraft factory in western India, Indian Prime Minister Narendra Modi returned to a slogan he coined a few months after taking power in 2014: "Make in India." This time, however, he added: "Make for the world."

This isn't the first time Modi has gestured toward India's need to increase manufacturing exports. Still, the rhetorical emphasis is welcome, given that India's pitch to investors has typically focused on the size of its domestic market rather than on how easy it is to set up shop and export from the country.

Partly that's because it isn't yet as easy as it should be. The factory Modi was inaugurating will make Airbus SE's C-295 military transport in collaboration with the Tata Group. While India has promised to buy 40 planes, no export deals have been announced. And the government's boast that most of the supply chain for the aircraft would be located within India (underscored by Tata Sons Ltd.

Chairman Natarajan Chandrasekaran's claim that the company would "take aluminum ingots at one end of the value stream and turn it into an Airbus") reveals that Indian decision-makers still don't understand the nature of modern, decentralized supply chains.

In fact, the controversies surrounding the Tata-Airbus deal - and, in particular, its location in Modi's home state of Gujarat - are revealing of how India's latest plans to become a manufacturing superpower might struggle.

India doesn't have real industrial policy as such. What it has instead are multiple government schemes, costing about Rs. 2 trillion, for "production-linked incentives" or PLIs. These are effectively subsidies or special treatment for large investments in particular sectors - 14 of them, at last count.

Some of these targeted sectors have obvious strategic value, including semiconductors, solar modules, mobile handsets and batteries. Others have clearly been chosen because will employ lots of people - textiles, for example. And some are simply areas where India has done well in the past, such as automobile components. Given this muddled set of priorities, it isn't surprising that multiple other sectors are also lobbying for subsidies.

There isn't a manufacturing investor in the world who would turn down a government subsidy. But industrial policy is supposed to be about more than that; it's meant to clarify and cement government priorities. Companies are supposed to be able to read an industrial policy and have faith that the government's commitment to a sector is firm.

The PLI programs don't quite achieve that. For example, one of the sectors targeted for incentives was specialty steel. Government assistance for lucky steel producers came with built-in production and export targets. Yet, a few months after setting the targets, the same government unexpectedly introduced an export tax on those same steel products. It's hard to sell PLIs as a sign of government commitment after mix-ups like that.

The other reason that PLIs work to an extent is that companies hope the subsidies will significantly de-risk investment in a targeted sector. It's common for foreign investors to go into business in India with a local partner; surely a government that says it will put millions into your plant is the best partner of all? Once the central government has a stake in a particular project, some of the obstacles to doing business in India - meddling bureaucrats, political whims, obstructive regulators - might be cleared away.

What we have seen, however, is that the government is not exactly a silent partner. Until recently, most observers were under the impression that the Tata/Airbus project would be located in the state of Maharashtra. News that it would go to Gujarat instead led to a political spat. One former state minister claimed that the companies had told local officials that they had no choice in where they set up shop - the location would be up to Modi's government.

Tempers in the two states were short partly because this came very soon after Maharashtra had lost another, even bigger PLI project - an ambitious chip fabrication plant set up by Foxconn and Vedanta - to Gujarat. Here, too, the preferences of the central government - which has set aside up to $10 billion for semiconductor subsidies - would likely have been crucial.

Modi has talked often about "cooperative competitive federalism" - the idea that India's states would freely compete for investors and raise each other's standards in doing so. When it comes to PLI choices, however, New Delhi appears to have a thumb on the scales.

A real commitment to export-led manufacturing growth would require greater trust in investors. The government should spend less on subsidies, but make sure that investors have free choice as to where and how they operate. The PLI scheme may give India one or two success stories - in mobile handsets, for example. But, unless it is accompanied by a shift in the government's mindset, it's not going to turn India into the next China.

(Mihir Swarup Sharma is a fellow at the Observer Research Foundation.)

Disclaimer: These are the personal opinions of the author.