The Economic Survey of 2014-15 has suggested three initiatives in the decreasing order of effectiveness and the increasing order of controversy to realise the ‘Make in India’ dream.
The non-controversial response lies in improving the business environment by making regulations and taxes less onerous, building infrastructure, reforming labour laws, and enabling connectivity. “All these will reduce the cost of doing business, increase profitability, and, hence, encourage the private sector, both domestic and foreign, to increase investments,” the Survey said.
The next response could be in the form of ‘industrial policy’. This could focus on promoting manufacturing by providing subsidies, lowering the cost of capital, and creating special economic zones (SEZs) for manufacturing activity.
And then, it suggested a ‘protectionist’ response. Essentially, this would focus on the tradability of manufacturing intended to shield domestic manufacturing from foreign competition via tariffs, local content requirements, and export-related incentives. “The effectiveness of these actions is open to debate given past experience. Moreover, they could run up against India’s external obligations under the WTO and other free trade agreements, and also undermine India’s openness credentials,” the Survey said
While sounding caution on micro-intervention, the Survey offered a way out. “An intervention that can be immediately implemented, that can have large impacts, and that is win-win, is to eliminate the current negative protection facing Indian manufacturing,” it said. Eliminating all exemptions for the countervailing duty (CVD) and special additional duties on imports would eliminate the negative protection facing the Indian manufacturers, it pointed out. The Survey went on to illustrate how the tax policy was effectively penalising domestic manufacturing. This could be addressed by enacting a well-designed GST preferably with one internationally competitive rate and with narrowly defined exemptions.
In one stroke, the penalties on domestic manufacturing would be eliminated because the GST (Central and State) would automatically be levied on imports to ensure neutrality of incentives.