CURRENT AFFAIRS – 02/06/2023

The issue of manufacturing or services as the desirable path for India’s economy makes the rounds in public fora periodically. In the early part of this century, when India’s software exports were booming, it had been asked why India’s services sector should not leapfrog over manufacturing to propel the economy forward. This proposal challenged the standard model of economic development, for, in most successful economies, industrial expansion had come first. The frustration of the Indian economic policy maker can be well understood.

The economic reforms of 1991 had almost exclusively focused on manufacturing, but the significant scaling down of tariffs and the dismantling of the ‘licence-permit Raj’ did not lead to an increase in the share of manufacturing in the economy. Of course, India’s manufacturing sector ought not to be seen only in terms of its size. There has been a qualitative change after 1991. The range and quality of products manufactured in India have undergone an impressive increase. The rising quality and variety of the goods produced, without the expansion of manufacturing in relation to the economy, suggests a rising inequality of income.

After the economic reforms of 1991, the next time manufacturing came into the government’s view was after 2014, when ‘Make in India’, with its emphasis on foreign direct investment, was launched. More recently, there has been the Production-Linked Incentive scheme, which essentially subsidises production of certain products. Though announced with fanfare, the first within months of the Narendra Modi government assuming office, the record of these schemes has not been impressive.

The first advance estimates of the national income for 2022-23 show manufacturing growth to be 1.3% for the year, less than that for agriculture and all main segments of services. While the data unambiguously point to the role of the demonetisation of 2016 in the slowing of the manufacturing sector, the persistence of low rates of growth in the presence of policy initiatives that were focused on manufacturing point to something ‘structural’ holding back the sector in India.

This issue reportedly came up for discussion at a private event, where it was agreed that the economy needs a manufacturing push for the creation of jobs and to raise the growth rate. We are told that during the ceremony, the Finance Minister addressed the corporate leaders gathered with the remark, “I am sure the Indian private sector is ready. Are you?” Even on earlier occasions, the Minister has publicly referred to the many policy initiatives favouring the corporate sector. Among them, the tax rate had been lowered substantially in 2019 and the government also claims to have improved the ease of doing business. There is also another factor, namely, public investment. In the last Union Budget, capital expenditure was raised by 18.5%. This unusually high increase should come to the aid of the private sector by raising aggregate demand.

Despite the favourable measures undertaken by the government, it would be simplistic to expect industry leaders to achieve a manufacturing push on their own. There is demand to be reckoned with, and this is largely independent of the supply side, which the government has acted upon. Household demand for manufactures inevitably follows the satisfaction of its demand for the necessities of life — food, housing, health and education, none of which can be postponed. For a substantial section of India’s households, food occupies a large share. This constricts the growth of demand for manufactures.

The relationship between per capita income and the share of food in household expenditure is strongly negative globally, with the richest countries, such as the United States and Singapore, having low such shares. Of the large economies of the world, the share of food is the largest in India, and its GDP per capita the lowest. Industry leaders have no control over the demand side of the equation. However, the possibility of exporting means that the manufacturing sector of an economy can sidestep a narrow domestic market. After all, the smaller countries of East Asia would never have been able to grow their manufacturing base to such an impressive level had they relied on their domestic markets alone. Taking this route, however, does require that an economy’s manufactures are globally competitive.

In a comparison with the economies of East Asia, we can see what is necessary for an economy to be a successful exporter. One is infrastructure and the other is the skill level of the workforce. These determine the cost of production and the type of products that a country can produce, respectively. The export of manufactures is largely by sea. The challenge of reaching the seaports faced by companies located in north India can be imagined. Goods have to first reach the coast by road, and then exporters must deal with the relatively poor infrastructure and practices in India’s ports. The competitive disadvantage faced by India’s exporters can be seen in the much higher turnaround time for ships in India’s ports with that in Singapore. The importance of ports for exports may be seen in a public statement recently issued by a section of Kerala’s traders: that they are forced to use ports outside the State as they cost much less to use. While transportation is a big factor, it is not everything yet. Inexpensive power, space and industrial waste disposal services all matter.

But it is with respect to education that India has fallen most behind the countries that are the manufacturing successes of the world. The ranking of countries by the Programme for International Student Assessment reveals this directly. In a group of about 75 countries, the countries of East Asia are at the very top while India barely manages not to be the last. Now, if we do not wish to rely on tests administered by international bodies, we may turn to our very own non-governmental organisation Pratham, which assesses learning outcomes in India’s schools. Its widely publicised findings point to the very low reading ability and numeracy of Indian children in their early years. These tests are for schoolchildren.

While there is no standardised test for university graduates, we have leading Indian employers issue statements on the lack of employability of these graduates. This dismal assessment has extended even to an Indian Institute of Technology. India’s universities expanded to serve the aspiration of its middle class who wish to avoid manual work. However, for those headed for a life as a skilled worker, ranging from carpenters to plumbers and mechanics, university is not an aspiration at all. This cohort has been neglected in economic policy-making in India. There is no formal assessment available of the state of the vocational training institutes in India, but we certainly know that they are few and far between. When it existed, the Planning Commission had released data showing that only about 5% of Indian youth have had any kind of technical training. The figure for South Korea was over 85%. It would be naïve to expect India to make a mark on the global stage for manufacturing with such a labour force.

The economic reforms of 1991 were undertaken with a view to raising the presence of manufacturing. To this effect, the trade and industrial policy regime had been overhauled. However, it overlooked the need for an entire ecosystem, including schooling, training and infrastructure for manufacturing to flourish. This has to be built. It cannot be achieved merely through legislation. Liberalising reforms have run their course in India.

The story so far:

The news of potentially significant reserves of lithium, an element needed to manufacture batteries used in electric cars and other renewable energy infrastructure, in Jammu and Kashmir has been welcomed universally. Commentators have called this a boost for national prosperity and security without dismissing concerns about the potential social and environmental impacts.

India’s electric-vehicle (EV) market was valued at $383.5 million in 2021, and is expected to expand to $152.21 billion in 2030. India imported 450 million units of lithium batteries valued at $929.26 million (₹6,600 crore) in 2019-2020, which makes the development of the country’s domestic lithium reserves a matter of high stakes. Scholars have argued that the ongoing global transition to low-carbon economies, the rapid expansion of artificial intelligence (AI), and 5G networks will greatly reshape global and regional geopolitics. The access to and control over rare minerals, such as lithium and cobalt, will play a crucial role in these epochal changes.

In July 2013, a three-judge bench of the Supreme Court of India ruled that the owner of the land has rights to everything beneath, “down to the centre of the earth”. Yet, large areas of land, including forests — which make up more than 22% of India’s landmass — hills, mountains, and revenue wasteland are publicly owned.

The Supreme Court also recalled that the Union government could always ban private actors from mining sensitive minerals, as is already the case with uranium under the Atomic Energy Act 1962. In today’s context, lithium is as important as, if not more than, uranium.

The stories of two South American countries, Chile and Bolivia — which have the largest known reserves of lithium — are particularly instructive.

In Chile, the government has designated lithium as a strategic resource and its development has been made the exclusive prerogative of the state. The state has licensed only two companies — SQM and Albemarle — to produce lithium in the country. In April 2023, Chile’s president Gabriel Boric announced a new “National Lithium Strategy”, which many in the corporate sector took to be a declaration of his intention to nationalise the industry. On the contrary, Mr. Boric has clarified that his government would honour existing contracts. As a supplement, the new strategy calls for public-private partnerships for future lithium projects, which will allow the state to regulate the environmental impact of lithium-mining, distribute the revenue from lithium production more fairly among local communities, and promote domestic research into lithium-based green technologies.

Bolivia’s new constitution, developed under the leadership of former president Evo Morales and approved by a popular vote in February 2009, gave the state “the control and direction over the exploration, exploitation, industrialisation, transport, and commercialisation of natural resources.” The Morales administration nationalised lithium and adopted a hard line against private and foreign participation. This is believed to be one of the factors for the country’s failure to produce any lithium at a commercial scale nearly 20 years after the industry was nationalised. Bolivia’s current president, Luis Arce, seeks to change that. However, instead of handing over lithium resources to the private sector, Mr. Arce wants to join hands with other Latin American countries to design a ‘lithium policy’ that would benefit all their economies.

Mexico’s president Andrés Manuel López Obrador also nationalised lithium in February this year, declaring, “Oil and lithium belong to the nation, they belong to the people of Mexico.”

In general, the countries in Latin and South America are thinking through ways and means to pursue a multi-pronged strategy. While the national governments of these countries exercise a significant degree of control, the nature of private sector participation varies between these countries. The actions of these governments are also a response to the mobilisation of Indigenous Peoples in the region who want to hold corporations as well as governments to account.

As India explores and develops its own lithium reserves, it is notable that the appropriate development of this sector will require a very high level of effectiveness on the part of the Indian state. Much of India’s mineral wealth is mined from regions with very high levels of poverty, environmental degradation, and lax regulation. Effective and careful management of the sector should be paramount if India’s rare minerals development is to meet its multiple goals — social wellbeing, environmental safety, and national energy security.

The writer is an associate professor of Environmental Studies at the Heller School for Social Policy and Management at Brandeis University, Waltham, USA

The story so far:

On May 24, the U.S. Secretary of State Antony Blinken announced a “new visa policy” which threatens to restrict visas to Bangladeshis who undermine the democratic election process at home. The notification said the restriction would apply to current and former Bangladeshi officials, members of pro-government and opposition political parties, and members of law enforcement, the judiciary and security services. There were allegations of rigging in elections held in 2014 and 2018, which the government of Prime Minister Sheikh Hasina had denied. Bangladesh responded immediately to the U.S. threat, with the government saying it would take steps to prevent any interference in elections. The U.S. is the largest foreign direct investor in Bangladesh followed by Japan and China, according to top official sources in Dhaka.

The new visa policy specifies that actions that undermine the democratic election process include “rigging, voter intimidation, the use of violence to prevent people from exercising their right to freedoms of association and peaceful assembly, and the use of measures designed to prevent political parties, voters, civil society, or the media from disseminating their views.”

Bangladesh and the U.S. share a strong economic bond despite somewhat icy political relations because of legacy reasons. Washington under President Nixon was not in favour of East Pakistan seeking liberation from West Pakistan, followed by the birth of Bangladesh post-December 16, 1971. This particular issue became accentuated as the government of Sheikh Hasina has modelled itself as the defender of the spirit of 1971, and equates its opponents with those who opposed the creation of Bangladesh. The Hasina government has maintained a distinction between economic and political relations between the two sides. The U.S. is the third largest trading partner of Bangladesh and is the largest recipient of the garments produced in Bangladesh. With China taking a keen interest in Bangladesh, the U.S. feels the need to look beyond trade ties. The importance of the Indo-Pacific strategy also makes Bangladesh politically indispensable for the U.S.

Prime Minister Hasina has followed a policy of zero tolerance against terrorism and extremism since being sworn to power in 2009. She has uprooted insurgents of northeast India who had maintained a base in Bangladesh for decades. That apart, Islamist radicals were also consistently targeted by security agencies especially the RAB (Rapid Action Battalion). Her actions, however, have drawn criticism from various quarters including the U.S., which has accused Bangladesh of violating human rights and for enforcing the disappearance of around 600 individuals. In December 2021, serving and former top officials of the RAB were sanctioned by the U.S. Treasury Department.

Additionally, Bangladesh maintains a neutral policy on the Ukraine crisis, with Ms. Hasina repeatedly arguing against interference in the affairs of sovereign countries. On the ground, multiple projects indicate a strong cooperation between Dhaka and Moscow. Russia is building the first nuclear power project in Rooppur which is expected to be operational later this year. Ms. Hasina has also shown her plan to maintain energy independence and announced in the Qatar Energy Forum earlier this month that her government will purchase energy at a “comfortable” price.

Ms. Hasina has emerged as an important regional player because of her strong connection with India. Interestingly, India has not responded to the visa restrictions despite the fact that Bangladesh is the largest trade and security partner of India in South Asia. Moreover, Bangladesh has shown some indication to soften its attitude to the U.S. with its April declaration of the Indo-Pacific Outlook (IPO). However, there is no sign that Ms. Hasina would consider a stronger strategic alignment with the U.S. by allowing a naval base for them or by joining the western bloc on Ukraine.

The border between India and Nepal should not become a barrier, Prime Minister Narendra Modi said on Thursday as the two sides signed a series of agreements on energy and transport, including export of Nepal’s hydropower to Bangladesh through Indian territory.

Welcoming Prime Minister Pushpa Kamal Dahal ‘Prachanda’, who is on a four-day visit to India, Mr. Modi said the two countries should fast-track projects related to the Ramayana circuit.

“I remember that nine years ago, in 2014, within three months of taking charge of office, I made my first visit to Nepal. I said at the time that we will establish ties between India and Nepal that would overcome the presence of borders. Today we signed the Transit Agreement. It will help Nepal’s population access India’s inland waterways,” he said.

Mr. Modi said India would take forward the 2022 India-Nepal vision document for cooperation in the power sector that sets an ambitious goal in India-Nepal power trade and transmission. “Taking this forward, a long-term Power Trade Agreement has been signed between India and Nepal today. Under this agreement, we have set a target of importing 10,000 MW of electricity from Nepal in the coming years,” Mr. Modi said. Focusing on energy cooperation, Mr. Modi said that a “new pipeline will be constructed from Siliguri to Jhapa in eastern Nepal”.

The two sides signed a number of agreements, including an MoU between NHPC and VUCL (Vidyut Utpadan Company Ltd.) of Nepal, for the development of Phukot Karnali Hydroelectric Project and a Project Development Agreement for Lower Arun Hydroelectric Project between SJVN (India) and Investment Board of Nepal. Foreign Secretary Vinay Mohan Kwatra said the two PMs agreed to “achieve tangible and time-bound progress on the Pancheshwar multipurpose project”.

The two Prime Ministers participated through a video link in the ground breaking ceremony of the Gorakhpur-Bhutwal Transmission Line — on the Indian side. Mr. Kwatra announced that the two countries signed the revised Treaty of Transit under which Nepal will get to access to India’s inland waterways. He described it as a “once in a generation” pact.

“I appreciate India’s willingness to facilitate export of hydropower from Nepal to Bangladesh through India. We have agreed that the transmission of up to 50 megawatts of power will commence soon,” said Mr. Dahal.The two Prime Ministers jointly inaugurated a cargo train from Bathnaha in India to Nepal Customs Yard. The rail link was built with an Indian grant. They also inaugurated integrated checkposts (ICPs) at Nepalgunj in Nepal and Rupaidiha on the Indian side. They participated in the ground breaking ceremony of ICPs at Bhairahawa and Sonauli as well as Phase-II facilities as part of the Motihari-Amlekhgunj Petroleum Pipeline.

Prime Minister Dahal will proceed toUjjain on Friday where he will visit the Mahakaleshwar temple. Mr. Modi highlighted India’s cultural links with Nepal and said, “The religious and cultural ties between India and Nepal are very old and very strong.”

The joint venture (JV) between Russian transportation giant Transmashholding (TMH) and Indian public sector undertaking (PSU) Rail Vikas Nigam Ltd. (RVNL) to manufacture 120 Vande Bharat Express train sets, valued at nearly $3.63 billion (over ₹30,000 crore), has run into problems.

The issue involves sanctions imposed on Russia, following the Ukraine war, by multiple countries that are spare parts suppliers for Vande Bharat trains.

The Indian Railways awarded the JV deal to the TMH-RVNL consortium after it emerged as the lowest bidder in March. But TMH and RVNL are not able to see eye to eye on the majority shareholding issue for the JV, railway officials confirmed to The Hindu.

In the interest of smoother movement of the project, which requires TMH and RVNL to manufacture 120 Vande Bharat train sets, each costing nearly ₹120 crore, officials said that RVNL had requested majority shareholding from TMH. Sources say that TMH has not agreed to this and has also, as a result, not deposited the bank guarantee of nearly ₹200 crore required for the project to get started.

Not all parts of the much-touted ‘Make in India’ Vande Bharat train sets are manufactured indigenously. “Many of these parts have to be imported from Western European and American manufacturers,” a senior RVNL official said. On May 22, the U.S. imposed sanctions on Metrovagonmash, a division of TMH, which specialises in manufacturing rolling stock for the railways. It is also responsible for the maintenance of the rolling stock and spare parts.

While RVNL has a substantial share in the JV, the Indian PSU is vying for a majority stake as a confidence-building measure. “Many international suppliers and bankers are more confident if the Indian company has the majority share as many of these companies are being guided by sanctions imposed on Russia due to the Ukraine war. They are not comfortable dealing with Russia,” the official said.

By June 2025, the TMH-RVNL consortium has to ready the first two prototype Vande Bharat trains for testing and trials. After the prototypes are approved, every year, 12 to 18 trains will be manufactured in a tapered fashion.

The consortium will also run maintenance services on the trains for 35 years. The railways is spending $1.8 billion for the train sets and another $2.5 billion for their maintenance.

“While the Russians are highly technically capable, the question is only that of comfort in dealing with them, and we will resolve this issue within a few days,” the official added.

The Russian Embassy did not respond to a request for a comment on the deal. According to sources, both sides had committed to keeping negotiations on the deal bilateral and not making them publicly available.

While India may have internationally committed to half its installed electricity being sourced from renewable sources by 2030, an estimate of the country’s projected power needs by the Central Electricity Authority (CEA) on Wednesday suggests that this target may be achieved early, by 2026-27.

The National Electricity Plan (NEP) prepared by the CEA is a five-year plan that assesses India’s current electricity needs, projected growth, power sources, and challenges. The voluminous document notes that “…the share of non-fossil based capacity is likely to increase to 57.4% by the end of 2026-27 and may likely to further increase to 68.4% by the end of 2031-32 from around 42.5% as on April 2023.”

Installed capacity, however, does not perfectly translate into generated power as different sources of energy have varying efficiencies, and not all sources of power are available at all times. For instance, solar power is available only during the day and wind energy is dependent on climate vagaries. Accounting for this, the available power from renewable energy will only be around 35.04% of the total generated electricity by 2026-27 and 43.96% by 2031-32, the NEP estimates.

Independent experts told The Hindu that the NEP’s targets were “ambitious but possible”. “It’s a little ambitious but the government has recently said that it is committed to adding 50 GW [of renewable energy] every year,” said Vibhuti Garg, South Asia director at the Institute for Energy Economics and Financial Analysis.