Do not rest on subsidies, import tariffs to stay competitive, CII DG tells firms

Context

In a discussion on the upcoming Budget for 2023-24, Director General of Confederation of Indian Industry (CII) stressed on the need to focus on job creation along with growth and suggested including employment as an additional factor in official incentive schemes aimed at spurring manufacturing.

Details of the discussion: (Suggestions by the CII)

Citing the emerging geopolitical and economic conditions, India has an opportunity in the manufacturing sector to create good quality jobs.
Indian industry must not rely on subsidies and high import tariffs to stay competitive and must further should rationalise compliances and reduce the costs of doing business.
The Production Linked Incentive (PLI) scheme to push investments is good but can only work for a finite period.

How do Government subsidies help an Industry?

Government subsidies help an industry by paying for part of the cost of the production of a good or service by offering tax credits or reimbursements or by paying for part of the cost a consumer would pay to purchase a good or service.
A subsidy is often granted by a government to support critical parts of the economy that are thought to be vulnerable to external forces.

Tax credits:

On the consumer side, government subsidies can help potential consumers with the cost of a good or service, usually through tax credits.
It refers to an amount of money that taxpayers can subtract directly from the taxes they owe. Unlike deductions, which lower the amount of taxable income, tax credits reduce the actual amount of tax owed.

Effect of Subsidies on Supply:

Governments seek to implement subsidies to encourage production and consumption in specific industries.
When government subsidies are implemented to the supplier, an industry is able to allow its producers to produce more goods and services.
This increases the overall supplyof that good or service, which increases the quantity demanded of that good or service and lowers the overall price of the good or service.
When the government gives subsidies to the supplier, it results in a win-win situation for both the supplier and the consumer.
Essentially, the supplier is benefitting as if the good were selling at a higher price and is able to produce more of the product.
Meanwhile, consumers get to enjoy the product for what would be a comparatively cheaper price, since suppliers do not need to charge exorbitant rates to break even on production.
Since the government helps suppliers through tax credits or reimbursements, the lower overall price of their goods and services is more than offset by the savings they receive.

Critiques of Government Subsidies

Subsidies can interfere with free markets, and therefore can cause anomalies or inefficiencies.
Subsidies create unfair conditions that favour one set of companies over others, reducing competition.
These companies can take advantage of subsidies to engage in rent-seeking, ultimately at the harm of consumers.

Important Government initiatives:

Credit Guarantee Fund Scheme for micro and small enterprises:
- Under the scheme, fund and non-fund-based credit facilities up to Rs. 200 lakh are covered for eligible borrowers.
- The guarantee cover under the scheme is up to the extent of 50%, 75%, 80%, and 85% of the sanctioned credit amount.
Pradhan Mantri Mudra Yojana (PMMY): This is a business loan type offered to MSMEs by the Government of India. PMMY disburses the following three types of loans:
- Shishu loans up to Rs.50,000
- Kishore loans above Rs.50,000 but up to Rs. 5 lakh
- Tarun loans above Rs.5 lakh but up to Rs.10 lakh

The business loan offer for MSMEs via PMMY doesn’t need any collateral, and one can avail this loan for business growth from financial institutions enrolled and eligible to disburse it. One can also file an online application to procure this loan.

Credit Linked Capital Subsidy Scheme for Technology Upgradation (CLCSS):
- Small Manufacturing Enterprises (SMEs) can remain competitive, only by upgrading their technology and machinery periodically. However, this upgrade can be quite capital intensive. This is where the CLCSS scheme is helpful in providing SMEs with the required funds.
- The scheme provides an upfront capital subsidy of 15%, limited to a maximum of Rs. 15 lakh to MSMEs to modernise their plants and machinery.
Integrated Processing Development Scheme (IPDS):
- IPDS aims to facilitate the usage of eco-friendly technology in textile processing along with creation of new processing parks.
- While the Central Government shares 50% of the cost, the state government, beneficiary, and financial institution share 25%, 15%, and 10% of the cost respectively.