Oops! Wrong Hyundai. Govt’s industrial policy misfires again with PLI gaffe
In March, India announced a list of battery makers that would receive a coveted state subsidy. Locally manufactured cells for electric vehicles would trigger almost $6 billion in investments, build a supply chain at home, cut $30 billion in energy imports and be a “major boost” to Prime Minister Narendra Modi’s Make in India project, the government said.
There was only one problem with the $2.2 billion handout: Among the four winners selected from what its press release described as an “overwhelming response” by investors, New Delhi had picked the wrong Hyundai.
It took a public notice from Hyundai Motor Co. — asserting that the successful bid by Hyundai Global Motors had nothing to do with it — for bureaucrats to realize that they had backed the wrong horse. Of the overall 50 gigawatt-hours of subsidized capacity, 20 gigawatt-hours had been earmarked for the South Korean firm. That allocation would likely be redistributed now between the Indian conglomerate Reliance Industries Ltd. and the local automaker Mahindra & Mahindra Ltd., the Mint newspaper reported in August.
The goof-up didn’t cast a kindly light on Modi’s Production-Linked Incentives, or PLI, the centerpiece of his economic strategy of self-reliance. At a five-year cost of $24 billion, it’s an ambitious industrial policy push that — just like US President Joe Biden’s Inflation Reduction Act — is seeking to galvanize private investment in a mix of industries ranging from auto manufacturing and textiles to solar, battery and semiconductors, with the goal of creating new jobs and a whole lot of follow-on prosperity.
However, it’s unclear if India has given serious thought to costs and benefits. Take the recently announced joint venture of Taiwan’s Foxconn Technology Group, and the metals 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 bear half the cost of such plants, at the top end of its plan of 30% to 50% support. As one opposition politician noted, the Foxconn-Vedanta project would cost the exchequer more than a rural jobs program that sustained 80 million Indians during the pandemic lockdown.
Rather than address the root causes of the country’s lack of manufacturing competitiveness, New Delhi has chosen to pay a “disability cost to chosen companies,” says journalist M. Rajshekhar in a three-part analysis of PLI for the website Carbon Copy. Worryingly, this compensation includes tariff and nontariff barriers on imports to protect manufacturers from competition. In a world of globally connected supply chains, such protectionism is an even bigger own-goal than it was in India’s autarkic past.
In 2018, the country raised the customs duty on mobile phones to 20% from 15%, followed by higher duties on camera modules, display and touch panels, printed circuit boards, and parts used in chargers. An iPhone 13 costs 40% more in India than in the US, economists Raghuram Rajan and Rahul Singh Chauhan at the University of Chicago noted recently. “The Indian customer pays a high price because of tariffs, and the Indian taxpayer pays for the subsidy,” they wrote. “The combination of protection and subsidies make it very profitable to make in India, and even export.” Apple Inc. said Monday it had started assembling its new-generation phones near Chennai, sooner than it anticipated.
Companies are making a beeline for PLI, and only some are being given the subsidy. That invites the charge of arbitrariness. There’s also the question of what happens when the program ends.
From red tape to inadequate infrastructure, once there’s no compensation for the many disabilities associated with manufacturing in India, will investors up and leave? Or will the mere threat of that make the handouts permanent?
Instead of trying to find those answers, the Modi government is out to indigenize entire value chains. Last week, New Delhi cleared a second round of incentives worth $2.4 billion for solar photovoltaic modules, following last year’s $550 million in aid. With this, India should be turning out close to 250,000 tons of polysilicon each year and enough modules to supply 90 gigawatts of annual generation capacity, Rajshekhar writes. But ground-mounted solar installations amounted to 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. Clearly, most of the Indian-made panels will have to be exported. Similarly, for the country’s polysilicon to be profitable, it will need buyers from a second industry: semiconductors. Since that production is missing, New Delhi is paying half the cost of fab projects. The rabbit hole of subsidies could become never-ending.
No PLI recipient will say no to free money. Since the Modi government has decided that subsidizing production of widgets in India will be a game changer, industry will play along. But with a current-account deficit that’s approaching an uncomfortable 3.5% to 4% of gross domestic product, the country’s ambition of becoming a manufacturing powerhouse doesn’t exactly have the tailwind of booming global demand behind it. Besides, even if all this new capacity creation in multiple adjacent industries goes to plan, the rest of the world won’t stay still. Biden’s IRA is estimated to 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 larger, longer-lasting push than trying to compete with rich nations on industrial policy. Picking the wrong Hyundai is just embarrassing. Going down a protectionist path reminiscent of the country’s own, impoverished socialist past — and out of sync with the openness being displayed by real manufacturing successes like Vietnam — is the bigger folly.