Why in the News? 

Prime Minister Narendra Modi has formed the government again, now leading a coalition in his third term. The new administration must intensify its focus on economic reforms, especially those related to manufacturing.

Significance of Manufacturing Base

• Economic Growth: Enhancing the manufacturing sector is vital for India’s economic growth. Increasing manufacturing output can significantly boost GDP, as evidenced by the government’s initial target to raise manufacturing from 15% to 25% of GDP by 2025.
• Employment Creation: A robust manufacturing sector can generate substantial low-skilled employment, which is crucial for absorbing the large workforce transitioning from agriculture. This can help mitigate stress on urban governance structures caused by rapid urbanization.
• Trade Balance: Strengthening manufacturing can help reduce India’s goods trade deficit, particularly by decreasing reliance on imports of manufactured goods such as electronics, which currently contribute to a significant trade imbalance.
• National Security: A strong manufacturing base can provide the resources needed for national security. By enhancing industrial capacity, India can better support its defense needs and contribute to regional security, aligning with American interests.
• Supply Chain Resilience: Developing manufacturing capabilities in India can improve the viability of U.S. supply chains by having production bases in friendly countries. This is particularly important in the face of China’s rising economic and geopolitical influence.

Issues with the “Business Reforms Action Plan (BRAP)” and the States

• Outdated Rankings: The BRAP rankings, designed to foster competition among states, have not been updated since the COVID-19 pandemic. This has diminished their effectiveness in motivating states to improve their business environments.
• Self-Reporting Issues: The BRAP rankings rely heavily on states’ self-reporting of their local business practices, which often does not align with actual investor experiences. This discrepancy undermines the credibility of the rankings.
• Model Industry Laws: The central government’s initiative to create model industry laws for states has been underwhelming. There is a lack of robust and effective frameworks to guide states in implementing these laws.
• State-Level Control: Many critical factors of production, such as power, water, sanitation, labor regulations, land acquisition rules, and environmental regulations, are controlled by state governments. This decentralization complicates the implementation of cohesive national policies.
• Need for Transparent Policies: Encouraging states to adopt thoughtful and transparent industrial policies is challenging. The current toolkit of incentives and penalties needs enhancement to motivate states effectively.

Role of the US in Improving the Business Attractiveness of Indian States

• Guidance on Economic Governance: The U.S. can expand engagement with Indian states by providing direct guidance on effective economic governance. This can help states create more investor-friendly environments.
• Investment Pathways: Improving pathways for potential investors to engage with state governments is crucial. The U.S. can facilitate connections between American investors and Indian states, helping to streamline investment processes.
• Senior Officials’ Engagement: U.S. officials visiting India should go beyond the major economic hubs of Delhi, Mumbai, and Bengaluru. Engaging with a wider set of large states can highlight the importance and opportunities arising from global supply chain shifts.
• Policy Redirection: The recent national election provides an opportunity for policy assessment and redirection. The U.S. can support India in aligning its policies with the core needs of the manufacturing push — jobs, trade, and security.
• Encouraging Job-Creating Sectors: The U.S. can emphasize the importance of job-creating manufacturing sectors such as textiles, paper mills, and furniture, rather than focusing solely on capital-intensive sectors like semiconductors and robotics. This approach can help create more employment opportunities in India.

Way forward: 

• Establishment of State-level Economic Advisory Councils: Create advisory councils comprising experts from academia, industry, and government to advise state governments on economic policies, including manufacturing incentives and regulatory frameworks.
• Review and Update of BRAP Rankings: Overhaul the Business Reforms Action Plan (BRAP) to include independent evaluations and audits alongside self-reporting. Ensure transparency and accuracy in ranking states’ business environments to provide credible guidance for investors.

Mains PYQ: 

Q Can the strategy of regional-resource-based manufacturing help in promoting employment in India? (UPSC IAS/2019)

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now