The first set of Budget proposals of NDA 3.0 that Finance Minister Nirmala Sitharaman presented were completely at variance with those that she had presented during the past five years. The strong nationalist sentiments that were reflected in her proposals for strengthening the manufacturing sector were missing. Except for a few proposals for the promotion of MSMEs and two paragraphs on industrial parks, nothing was mentioned about bolstering the manufacturing sector.

The most surprising aspect of this Budget was that the flagship programme for reviving the manufacturing sector, the Production Linked Incentive (PLI) scheme, which was launched with much fanfare in 2020, finds no mention.

The PLI scheme was floundering, by the government’s own admissions, and therefore speculations were rife that the Finance Minister will make major announcements to get the programme back on track for it to deliver on its two overarching objectives.

These were, making India’s manufacturing sector globally competitive and, more importantly, to facilitate job creation to help reverse the dismal labour market conditions. Considering that the disruption in the country’s labour market had attracted so much attention during the recent elections, improving the performance of the PLI scheme should have been an obvious priority for the government.

Industrial policy

From the Budget proposals for 2024-25, there is hardly any doubt that the PLI scheme has fallen off the government’s priority list. Like in most major economies in the recent past, the PLI scheme was fashioned as India’s industrial policy, the significance of which has steadily increased in a world of increasing geo-economic tensions.

But the main reason why countries like the US and the EU have adopted industrial policies in recent years, by even reversing their past aversion towards such policies, is to reduce their overwhelming import dependence on China. This, too, was India’s intent as the government launched ‘Atmanirbhar Bharat Abhiyan’.

Sectors on which India is excessively dependent — active pharmaceutical ingredients, electronics, auto components, semiconductors, and electric vehicles and batteries, among others — found focus under the PLI scheme. In each of these sectors, the government gave large incentives to both foreign and domestic investors for expanding domestic production. Investments from China were discouraged; Chinese companies were not allowed to bring foreign direct investment (FDI) through the automatic route. Also, Chinese FDI was subjected to government scrutiny and was largely blocked. But this antipathy towards China seems to be passé, going by the government’s signals in the latest Economic Survey. The Survey argues, most unexpectedly, that inflows of FDI “from China can help in increasing India’s global supply chain participation along with a push to exports” and that focusing on FDI inflows from China “seems more promising for boosting India’s exports to the US, similar to how East Asian economies did in the past.” Further, relying on FDI from China would be a more effective strategy to benefit from the China as it would be “more advantageous than relying on trade”.

Reflections of this policy shift towards China were visible in the Budget proposals. Chinese manufacturers seem to have been offered incentives to invest in India in the form of duty-free imports of critical minerals like lithium, nickel, cobalt, and vanadium, among others, used for the production of batteries. The big announcement was reduction of import duty on mobile phones from 20 per cent to 15 per cent as the government feels that the Indian producers have matured, gauging from the significant increase in mobile phone exports over the past four years. However, only time will tell whether the government has taken the right step by reducing import duties, thus reposing confidence in the ability of domestic manufacturers to stand up to competition from their Chinese counterparts.

In light of the Budget proposals, it is appropriate to ask: Where do the PLI scheme and the Atmanirbhar Bharat Abhiyan go from here?

The writer is former Professor, JNU, and Distinguished Professor, Council for Social Development