Oops, bad Hyundai. India’s Industrial Policy Misfires – Again
It took a public notice from Hyundai Motor Co. – claiming that Hyundai Global Motors’ successful bid had nothing to do with it – for the bureaucrats to realize they had backed the wrong horse. Of the 50 gigawatt hours of subsidized capacity, 20 gigawatt hours had been reserved for the South Korean company. That allocation would likely be redistributed now between Indian conglomerate Reliance Industries Ltd. and local automaker Mahindra & Mahindra Ltd., the Mint newspaper reported in August.
The gaffe did not shed a benevolent light on Modi’s production incentives, or PLI, the centerpiece of his self-reliance economic strategy. Costing $24 billion over five years, it’s an ambitious industrial policy that, like US President Joe Biden’s Cut Inflation Act, seeks to galvanize private investment in a mix of industries ranging from automotive and textile manufacturing to solar power, batteries and semiconductors, with the aim of creating new jobs and much subsequent prosperity.
However, it is unclear whether India has given serious thought to the costs and benefits. Take the recently announced joint venture of Taiwanese group Foxconn Technology and metallurgical company Vedanta Ltd. to set up a $19.4 billion semiconductor factory in Modi’s home state of Gujarat. Last week, the administration announced that it would cover half the cost of these plants, at the very top of its support plan of 30 to 50%. As one opposition politician pointed out, the Foxconn-Vedanta project would cost the public treasury more than a rural jobs program that supported 80 million Indians during the pandemic lockdown.
Rather than addressing the root causes of the country’s lack of manufacturing competitiveness, New Delhi has opted to pay a “disability cost to chosen firms”, says journalist M. Rajshekhar in a three-part analysis by PLI for the Carbon Copy website. Worryingly, this compensation includes tariff and non-tariff barriers on imports to protect manufacturers from competition. In a world of globally connected supply chains, such protectionism is an even bigger personal goal than it was in India’s autarkic past.
In 2018, the country raised tariffs on mobile phones from 15% to 20%, followed by higher duties on camera modules, display and touch panels, printed circuit boards and used parts in the chargers. An iPhone 13 costs 40% more in India than in the United States, economists Raghuram Rajan and Rahul Singh Chauhan of the University of Chicago recently noted. “The Indian customer pays a high price because of the tariffs, and the Indian taxpayer pays the subsidy,” they wrote. “The combination of protection and subsidies makes it very profitable to manufacture in India, and even export.” Apple Inc. said on Monday it had started assembling its next-generation phones near Chennai, ahead of schedule.
Businesses rush to PLI, and only some receive the grant. This invites the charge of arbitrariness. There is also the question of what happens when the program terminates. From bureaucracy to inadequate infrastructure, once there is no compensation for the many handicaps associated with manufacturing in India, will investors get up and leave? Or will the mere threat of this make the subsidies permanent?
Instead of trying to find those answers, the Modi government is looking to indigenize entire value chains. New Delhi last week authorized a second round of incentives worth $2.4 billion for solar photovoltaic modules, following last year’s $550 million in aid. With that, India is expected to produce nearly 250,000 tons of polysilicon each year and enough modules to provide 90 gigawatts of annual production capacity, writes Rajshekhar. But ground-mounted solar installations were about 4 gigawatts in the first quarter, according to BloombergNEF, and even that was a record amid a rush to commission projects ahead of a 40% tax on imported modules. Obviously, most panels made in India will need to be exported. Likewise, for the country’s polysilicon to be profitable, it will need buyers from a second industry: semiconductors. As this production is lacking, New Delhi pays half the cost of fabulous projects. The subsidy rabbit hole could become endless.
No LIP recipient will say no to free money. Given that the Modi government has decided that subsidizing widget production in India will be a game-changer, the industry will play along. But with a current account deficit approaching an uncomfortable 3.5-4% of product Gross domestically, the country’s ambition to become a manufacturing powerhouse isn’t exactly riding high on booming global demand. Furthermore, even if all this new capacity creation in several adjacent industries goes as planned, the rest of the world will not stand still. It is estimated that Biden’s IRA will lead to the installation of 950 million solar panels, 120,000 wind turbines and 2,300 grid-scale battery plants.
For a resource-constrained government like India’s, investing in infrastructure, human resources and state capacity would have given the post-pandemic economy a bigger and longer-lasting boost than trying to compete. with rich countries on industrial policy. Choosing the wrong Hyundai is simply embarrassing. Going down a protectionist path reminiscent of the country’s impoverished socialist past — and out of step with the openness displayed by genuine manufacturing successes like Vietnam — is the greatest folly.
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Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services in Asia. Previously, he worked for Reuters, the Straits Times and Bloomberg News.
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