Last Friday, the government decided to hike the import tariffs of a host of electronic goods. The rate for microwave ovens and television sets doubled from 10 per cent to 20 per cent. The rates for mobile phones were hiked from 10 per cent to 15 per cent. Ditto for digital cameras, digital video recorders and a host of other goods.
Ostensibly, the move was to encourage domestic manufacturing. But any government that thinks that it can encourage domestic manufacturing by raising import duties alone needs to think a bit harder. India has been down that road before and it did not encourage the country to become a manufacturing power. Instead, it led to shoddy, substandard goods way below the quality of international goods, as well as higher prices for consumers.
A whole host of measures are needed before manufacturing in India can take off. Ability to start a manufacturing set up is one. Being able to acquire land is another. A more flexible labour policy is the third. And better infrastructure and logistics, along with cheaper power, better connectivity to ports, etc are equally important.
India's manufacturing policy thinking has always been somewhat muddled. The grand Make in India initiative has failed to make much headway so far. One reason for that has been that the government has not yet made up its mind as to whether India needs a manufacturing policy whose primary aim is to create lots of jobs. Or a policy that ensures that India becomes a global manufacturing powerhouse.
A couple of decades ago or for that matter, even a decade ago, growth in manufacturing went hand in hand with large scale employment generation. Over the past half a dozen years though, rapid advances in technologies such as robotics, digitization, artificial intelligence, automation and others have ensured smarter factories that need fewer, and far more technically adept workers. Even China, which is held up as an example of large factories employing thousands of workers and becoming the manufacturing hub of the globe is now beginning to see a lot of change. Smarter factories and less workers is the way forward for them. In fact, the rapid advances in smart factories is seeing some production return to the US, which had earlier outsourced almost all its manufacturing to take advantage of lower labour cost manufacturing destinations.
India needs to make up its mind as to which kind of manufacturing it is planning to encourage. If it involves lots of small and medium scale manufacturers who use labour and therefore create jobs, the tariff protection might serve a purpose. But equally, it would mean giving up on becoming a smart manufacturing hub that can export high quality goods to the rest of the world.
Working to improve the competitiveness of Indian factories by fixing infrastructure, labour and land acquisition problems would work better than increasing tariffs to make imports costlier.