15 Oct 2020: UPSC Exam Comprehensive News Analysis

E. Editorials

Category: ECONOMY

1. Phased manufacturing policy that is hardly smart

Context:

• Initiatives taken by the Ministry of Electronics and Information Technology (MeitY) to provide impetus to domestic manufacturing in India.

Background:

Mobile industry in India:

• India produced around 29 crore units of mobile phones for the year 2018-19; 94% of these were sold in the domestic market, with the remaining being exported.
• The mobile production has increased from $13.4 billion in 2016-17 to $31.7 billion in 2019-20.
• Over the years, firms such as Apple, Xiaomi, Oppo, and OnePlus have invested in India, but mostly through their contract manufacturers.

Production Linked Incentive (PLI) scheme:

• The Ministry of Electronics and Information Technology (MeitY) had approved 16 firms in the mobile manufacturing sector for the Production Linked Incentive (PLI) scheme (for large-scale electronics manufacturing).
• The scheme is aimed at transforming India into a major mobile manufacturing hub.

For more information on this topic refer to:

CNA dated Oct 7, 2020: Govt. clears Rs. 11,000-cr. of PLI proposals by Samsung, others

Phased Manufacturing Programme (PMP):

• The PMP began in 2016-17 and was supposed to culminate in 2019-20.
• The PMP incentivised the manufacture of low-value accessories initially, and then moved on to the manufacture of higher value components. This was done by increasing the basic customs duty on the imports of these accessories or components.
• The PMP was implemented with an aim to improve value addition in the country.

Concerns:

• Though the schemes like the PMP and PLI are well intended there are doubts over the benefits that can accrue from these.

Low value addition:

• The value addition in India remains very low, with most of the firms recording below 10%.

Continued reliance on imports:

• A large percentage of the inputs going into electronic manufacturing in India are being imported. This is as high as 85%.

India continues to be a net importer:

• Compared to economies such as Vietnam, Korea and Singapore which export more mobile phone parts than imports, India, on the other hand, imported more than it exported.
  • In 2019 Indian imports of mobile phone parts were 25 times the exports.
• This indicates the lack of facilities that add value to the imported parts before exporting them. Therefore, while the PMP policy increased the value of domestic production, improvement in local value addition remains a work-in-progress.

Challenge to PMP at the WTO:

• In September 2019, Chinese Taipei contested the raise in tariffs implemented by India under the PMP.
• If the PMP is found to be non-compliant with World Trade Organization (WTO) rules and agreements leading to the striking down of India’s PMP, this could lead to a situation where the Indian markets would be flooded with imports of mobile phones which might make the local assembly of mobile phones unattractive. This will affect the operations of the mobile investments already done under the PMP.

Continued focus on value of production:

• The new PLI policy by offering an incentive for incremental investment and sales of manufactured goods seems to be focussing on only increasing value of domestic production, without paying attention to increasing local value addition.

Shift from China is unlikely:

• Despite the current incentives provided by the government in the form of the schemes like PLI, the effective cost (with subsidies and other benefits) of manufacturing mobile phone in China continues to be much lower than in India.
• This indicates that the PLI policy may not turn out to be a game-changing move, and it may be wrong to expect a major chunk of mobile manufacturing to shift from China to India.

Neglecting India’s strengths:

• Available figures indicate that India’s export competitiveness seems to be in mobiles with a lower selling price.
• This aspect seems to be overlooked in the current PLI policy as the incentive for foreign firms chosen under the PLI policy will be computed on the basis of the invoice value of phones priced above a certain threshold.
• The PLI policy in its current form does not strengthen India’s current export competitiveness of low-value mobile phones.

Challenges for domestic firms:

• Domestic firms currently have very little share in the Indian market. Their ability to take advantage of the PLI policy and grab a sizeable domestic market share seems difficult.
• Thus, how well they respond to the opportunity that the PLI policy provides is an open question.

Doubtful supply chain collocation:

• The six component firms that have been given approval under the ‘specified electronic components segment’ may not be able to complete the mobile manufacturing ecosystem in India.
• Prior international experience has shown that investments from major mobile manufacturers in a country should be followed by the co-location of related industries.
• However, this seems to be not happening in India. Though Samsung has invested hugely in India, it has not colocated its supply chain in the country.

Conclusion:

• The PMP policy and the new PLI may be helpful in only increasing domestic production, and not value addition which would bring in much more benefits to India.
• The government must encourage foreign firms chosen under the PLI policy to colocate their supply ecosystems in the country.

2. The RBI tunes in to the economy

Context:

• The article analyzes how the COVID-19-triggered recession had led to some of the strongly held economic assumptions being revised around the world.

Details:

US Federal Reserve:

• The chairman of the Federal Reserve (Fed) of the US, has declared that the Fed will not let inflation stand in the way of maximising employment implying that it will no longer raise rates pre-emptively, i.e., in anticipation of inflation.
• The reasoning seems to be that the Phillips Curve, the relationship between inflation and unemployment, may no longer hold in the U.S. economy. The Phillips Curve principle has had wide acceptance in Anglo-American economics.

Philips curve:

• The Phillips curve suggests there is an inverse relationship between inflation and unemployment.

Reserve Bank of India:

• The latest monetary policy review by the newly reconstituted Monetary Policy Committee seems to be indicative of signs of the RBI shifting away from its rigid inflation targeting policy.

For information on the recent monetary policy review, refer to:

CNA dated Oct 12, 2020: Signalling optimism

• Available data shows that the model that currently guides India’s inflation control strategy may be quite irrelevant as seen in the recent behaviour of inflation in India.
  • Despite the staggering decline in output by 23% in the first quarter of this year, the inflation rate did not decrease in India.
  • This observation goes against the argument that inflation reflects an ‘over heating’ economy, one growing too fast in relation to its potential. This conception of inflation represents the RBI’s official understanding of inflation, and presumably forms the basis of its policy of inflation targeting.
• Also going by the Phillips Curve, inflation should have abated as India’s economy contracted during the lockdown.

Newer models for inflation forecasting:

• A recent working paper of the RBI’s research department proposes a model that accepts a role for food prices.
  • Newer evidence has noted food prices as an important determinant of inflation along with imported inflation. Hence a macroeconomic contraction need not lower inflation.
• This could lead to better forecasting of inflation in India as this is more in tune with the Indian scenario, as against the western economic models which do not attach much weightage for food prices in their inflation monitoring.

Conclusion:

• The fact that RBI has been evolving itself to better align its policies more in line with the Indian economy is a welcome and much-needed move.

3. Labour’s data lost

Context:

• Recently the Code on Social Security; the Code on Occupational Safety, Health and Working Conditions; and the Code on Industrial Relations were passed in Parliament. This follows the August 2019 passage of the Code on Wages.
• The four labour codes together subsume more than 40 labour laws.

For more information on this development, refer to:

CNA dated Sep 20, 2020: Three bills in Lok Sabha to bring in changes to labour sector

Background:

Labour force in India:

• There are nearly 50 crore ‘informal’ workers in India and informal workers contribute to nearly 50% of the GDP.
• As per the 2017 Economic Survey, there are about 14 crore migrants, half of whom are inter-state workers. These inter-state migrant workers contribute to about 6% of the GDP. A majority of the inter-state labourers are self-employed and/or engaged in casual labour with limited opportunities for skill-building and increased wages.

Concerns:

• The article analyzes some of the concerns regarding the current policies of the government towards the labour sector in India and evaluates their impact.

Effectiveness of the new labour codes:

• The mission statement from the Ministry of Labour and Employment emphasizes the following objective with respect to the labour force in India.
• “Improving the working conditions and the quality of life of workers through laying down and implementing policies/programmes/schemes/projects for providing social security and welfare measures, regulating conditions of work, occupational health and safety of workers, eliminating child labour from hazardous occupations and processes, strengthening enforcement of labour laws and promoting skill development and employment services”
• However, there are concerns that the new labour codes lack sufficient social protection measures to vulnerable informal workers.

For information on this issue, refer to:

CNA dated Oct 8, 2020: Gig work and its skewed terms

Neglect of the informal sector:

• The Labour Ministry has sought to focus its skill development initiatives primarily on the formal sector, neglecting the urgent need to better assess the capabilities and improve the skills of the informal sector as well.

Negative impact on workers and country:

• The high levels of informal employment have negative impacts not just on the workers but also on the country’s economy because of the following reasons:

On workers:

• The informal sector does not provide learning and training opportunities thus impeding the workers’ chances to upgrade their skills. This leads to their low productivity and low incomes for such informal labourers.
• The informal sector also seems to be compounding the existing inequality in the country. The low income of the informal labourers limits their children’s access to quality education and training, nutritional security and health and this act as a major impediment in their upward social movement.

On economy:

• The low productivity and continuing inequality in the economy act as a major drag on the economic development of India.

For related information, refer to:

CNA dated May 8, 2020: Labour rights are in free fall

Q1. Consider the following statements with respect to Thalassemia:

Q2. Consider the following statements with respect to retreating monsoon season:

Q3. Philip’s curve describes the relationship between which of the following?

Q4. Consider the following statements about the Strengthening Teaching-Learning and Results 
for States (STARS) program:

I. UPSC Mains Practice Questions

1. The COVID-19-triggered recession has led to some of the strongly held economic assumptions being revised around the world. Comment. (10 marks, 150 words)(GS Paper 3/Economy)
2. Though the schemes like the Phased Manufacturing Programme and Production Linked Incentive scheme are well intended, there are some reservations over the benefits that can accrue from these to India. Analyze. (15 marks, 250 words)(GS Paper 3/Economy)