In my Principles of Economics classes, I spend a lot of time explaining what I think are the six core principles of economics:

1. Incentives Matter
2. There Is No Such Thing As A Free Lunch
3. Trade Matters
4. Costs Matter
5. Information Matters
6. Externalities Matter

Note that the fifth point is really about prices, which are really about information.

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And a recent blogpost by Gulzar Natarajan, one of my favorite bloggers from India, showcases two of these principles really well: incentives, and externalities.

When compared to the task at hand, relocating supply-chains especially from China and attracting global contract manufacturers in various sectors to establish facilities in India, the PLI scheme outlay at Rs 1.97 trillion (~$25 bn) over five years is modest. The scheme extends 4-6% subsidy on incremental sales. However, this is only a small share of the at least 18-20% cost advantage, not to speak of several other locational and supply-chain advantages, enjoyed by manufacturers in China and Vietnam. This coupled with stiff production expansion targets the inevitable bureaucratic difficulties with accessing these benefits mean that the substantive benefits from PLI Scheme are limited. In fact, a recent Bloomberg Intelligence report estimates that it would taken about 8 years to move just 10% of Apple’s production capacity out of China. 

https://gulzar05.blogspot.com/2022/10/some-thoughts-on-pli-as-industrial.html

The PLI scheme incentivizes the domestic manufacture of products across fourteen sectors, by providing subsidies linked to “incremental sales from products that are manufactured in domestic units”. That quote is from the Wikipedia article about the scheme, which is a good place to begin reading more about PLI.

On the face of it, you might think that Gulzar Natarajan’s take on the PLI scheme is a negative one. Because even if the scheme is fully utilized, it still falls short of China’s 18-20% cost advantage, plus the locational and supply chain advantages enjoyed by China (and Vietnam). In fact, as he goes on to say in the blogpost, “the PLI is unlikely to be substantive enough to be a game changer for India’s manufacturing sector”.

Worse, as a Business Standard article that the author links to points out:

Global players have raised concerns on the slow and complex disbursement process, causing some of them to question whether they want to go ahead with their investment commitments under the scheme. Others are questioning the qualifying criteria. And still others are struggling with the “China factor”.

https://www.business-standard.com/article/economy-policy/govt-takes-plis-back-to-the-drawing-board-amid-critical-challenges-122092101038_1.html

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But neither the Business Standard article, nor Gulzar Natarajan’s blogpost should be construed to mean that the PLI scheme is a failure (not yet, at least). The Business Standard article points out that the silver lining to the rocky start to the PLI scheme is the willingness of the government to listen (about which more later). And Gulzar Natarajan points out that a good way to think about the PLI scheme is to think of it as a complement to marketing campaign of Make in India. If (my emphasis, not GN’s) the PLI scheme is able to “attract the critical mass of a few big contract manufacturers to establish massive manufacturing facilities in the country”, that in and of itself will be a Very, Very Good Thing.

Which brings me to the second principle of economics at play in this blogpost: externalities matter.

This is perhaps an example to avoid evaluating policies based solely on their substantive merits. The circumstances and their externalities matter, and are often more important than the policies themselves. To put this in perspective, if India’s manufacturing sector moves to the next level in scale and productivity towards the later part of the decade, I’m inclined to argue that while the PLI’s contribution by itself would be small (say, less than a tenth), it could not also have happened without the PLI Scheme.
When examining policies, researchers and commentators fail to see the larger context in which they are being implemented. They are blind to the complex theory of change associated with major policies. More often than not, transformational changes in health, education, nutrition etc are not brought about through technocratically designed and targeted policies. Instead they are brought about by community and stakeholder mobilisation, which engenders a virtuous cycle of ownership and engagement, and which can in turn be triggered by standard policies and programs which are effectively implemented. The entire process has space for improvisation and innovation to improve design and implementation quality.

https://gulzar05.blogspot.com/2022/10/some-thoughts-on-pli-as-industrial.html (emphases added)

Sure, it is entirely possible that the PLI scheme doesn’t meet its stated aims and targets. But if it acts as a catalyst in terms of better scale and productivity, thereby giving a boost to India’s manufacturing sector in the medium to long term, that would be a great start. That is, the positive externalities wrought by the scheme might end up mattering more – and that is just fine.

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But.

If you are a student of economics intending to eventually work in the realm of policy-making, you would well to focus on the phrase “community and stakeholder mobilization”. You can come up with the most well-thought-out policy in the world, but it means nothing if you don’t have a) community buy-in and b) the ability to listen to feedback and rework your policies iteratively.

In The Service of the Republic, Ajay Shah and Vijay Kelkar describe Satya Poddar’s four-step policy process:

1. Defining the future state, or the preferred policy outcome,
2. Preparing a blueprint for the design and specification of the future state,
3. Defining the transition path from the current to the future state, and…
4. Building political consensus or garnering public support for the change.

Of which, the fourth step is often ignored or downplayed, to the detriment of the whole scheme. Remember, announcing a scheme isn’t policymaking. That’s the easy bit. Making it happen is the real challenge, and that requires having a very sensitive ear to the ground at all times.

And that’s why the willingness of the government to listen matters so much, for the success of the PLI scheme depends (very much so) on our ability to tweak it as we go along.

…the success of the Scheme will depend on how nimble, flexible, and courageous are the relevant Ministries of Government of India in responding to emergent problems and trends and adapting the scheme guidelines(say, in calibrating import duties up the value chain). Policy making will have to become entrepreneurial in being able to reap gains from the PLI Scheme.

https://gulzar05.blogspot.com/2022/10/some-thoughts-on-pli-as-industrial.html

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Re: the break on the blog (the last post was on the 19th of September): I just felt like taking a break, so I did. 🙂