Economic Planning

Model Answer

India’s defense sector has seen significant changes through strategic institutional and policy measures that have facilitated indigenization, domestic capital procurement, and defense exports.

1. Defense Indigenization:
The Government of India has taken several steps to reduce reliance on imports and foster indigenization:

• Defense Procurement Procedure (DPP) 2016: This introduced the ‘Buy Indian-IDDM’ (Indigenously Designed, Developed, and Manufactured) category to prioritize indigenous equipment.
• Defense Acquisition Procedure (DAP) 2020: Emphasized increasing indigenous content in defense procurement. Between 2016-2020, 86 capital acquisition proposals were categorized under this initiative.
• Indigenization of Components: A policy was introduced to indigenize defense components and sub-assemblies. For instance, 1,499 items were indigenized against a target of 1,244 in 2020-21.
• Bilateral Agreements: Agreements such as the one signed in 2019 with Russia have promoted joint manufacturing of spares and components.

2. Domestic Capital Procurement:
India has allocated significant resources to support domestic defense industry growth:

• Budgetary Support: In 2022-23, 25% of the domestic capital procurement budget was earmarked for the private defense industry.
• Innovation Incentives: Rs. 1,500 Crore was allocated for procurement from startups to encourage technological innovation.

3. Defense Exports:
India has actively promoted defense exports, resulting in a 32.5% year-on-year growth in 2023-24:

• Streamlining Export Process: The establishment of defense export promotion cells and the Defence Exim Portal has simplified export procedures.
• Promotional Efforts: Platforms like Aero India exhibitions have helped increase international outreach.

Challenges Remaining: Despite these efforts, challenges persist:

• Production Shortfalls: India’s defense production has not met the armed forces’ requirements, with domestic procurement remaining stagnated at around 60% of the total needs.
• Technology Gaps: The domestic industry still faces significant gaps in designing and manufacturing major systems and critical components.
• Private Sector Participation: Limited long-term contracts and complex procurement procedures have hindered private sector involvement.
• Skilled Labor Deficit: There is a shortage of skilled workers, especially in high-tech areas like aeronautical engineering and cybersecurity.

Addressing these challenges will require further collaboration between the government, industry, and academia, with enhanced investments in R&D and skill development.

Highlights

• Policy Measures: DPP 2016, DAP 2020, and initiatives for indigenization and procurement from startups.
• Growth in Exports: 32.5% increase in exports in 2023-24, supported by simplified processes and international promotions.
• Challenges: Production limitations, technological gaps, private sector involvement, and skilled labor shortages.

Model Answer

The middle-income trap refers to a situation where a country, after experiencing rapid growth and reaching a middle-income status, struggles to move further towards high-income levels. These economies face challenges from low-cost competitors while lacking the necessary institutional, human, and technological capabilities to advance.

India’s Risk of Falling into the Trap

India has been classified as a middle-income country since 2008, with a per capita Gross National Income (GNI) between $1,086 to $13,205 (World Bank, 2022). The country is at risk of falling into the middle-income trap due to challenges like overreliance on demand from the wealthiest 100 million citizens, rising income inequality, and limited expansion of the demand base among the poor, all of which constrain growth.

Strategies for Avoiding the Middle-Income Trap

1. Improving Total Factor Productivity (TFP)
   India must invest in R&D, manufacturing efficiencies, and human capital development to boost factor productivity. South Korea’s success in leveraging TFP through innovation by conglomerates like LG and Samsung exemplifies this strategy’s potential to elevate a country’s economic status.
2. Land Reforms
   Streamlining land acquisition processes and addressing land disputes is crucial. As 66% of civil cases in India are related to land, resolving such disputes could unlock significant investment opportunities, estimated at USD 200 billion.
3. Focus on Manufacturing
   Labor-intensive manufacturing can diversify India’s economy, create jobs, and enhance competitiveness globally. Successful industrialization strategies in South Korea and Singapore show the importance of foreign direct investment (FDI) and industrial policy in avoiding the trap.
4. Investing in Human Capital
   With India ranking 116th in the Human Capital Index (2022), investment in education, skill development, and innovation is essential to bridge income disparities and drive productivity. Countries like Japan and Singapore have avoided the middle-income trap by reskilling their workforce and driving innovation.
5. Export Diversification
   Moving up the value chain by focusing on high-value exports such as technical textiles and eco-friendly products could boost India’s export revenues, helping the nation progress towards high-income status.
6. Stimulating Domestic Demand
   Policies like GST reduction, enhanced employment creation, and universal basic income can boost domestic consumption, ensuring sustainable economic growth.

Conclusion

To avoid the middle-income trap, India must focus on a diversified economic approach, investing in human capital, manufacturing, and exports while addressing structural challenges. By sustaining its growth momentum for the next 15 years, India can transition to a high-income economy.

Model Answer

Since gaining independence in 1947, India has implemented a series of industrial policies aimed at fostering economic growth, creating employment, and enhancing competitiveness. Here’s a brief overview of these policies:

1. Industrial Policy Resolution, 1948: This policy established India as a mixed economy, categorizing industries into four groups:
   • Exclusive monopoly of the Central government (e.g., arms, atomic energy, railways).
   • Industries reserved for the state (e.g., coal, iron and steel).
   • Industries of basic importance regulated by the government.
   • Remaining industries open to private enterprises and cooperatives. Foreign investments were restricted under this policy.
2. Industrial Policy Resolution, 1956: Known as the “Economic Constitution of India,” this policy emphasized expanding the public sector and preventing private monopolies. It classified industries into three sectors:
   • Schedule A: Public sector (17 industries).
   • Schedule B: Mixed sector (12 industries).
   • Schedule C: Private sector only. It also highlighted the importance of small-scale industries for employment and economic decentralization.
3. Industrial Policy Statement, 1977: This policy focused on employment generation for the poor, reducing wealth concentration, and prioritizing small-scale industries. It imposed restrictions on multinational companies (MNCs).
4. Industrial Policy Statement, 1980: This policy aimed to promote competition, modernization, and technological upgrades. It liberalized licensing and reaffirmed the Monopolies and Restrictive Trade Practices Act (MRTP) and the Foreign Exchange Regulation Act (FERA).
5. New Industrial Policy, 1991: Marking a significant shift, this policy aimed at liberalization, privatization, and globalization. It increased the foreign direct investment (FDI) ceiling from 40% to 51% in selected sectors and allowed 100% FDI in certain areas like infrastructure. Industrial licensing was largely abolished, except for 18 industries, and the MRTP commission was established to regulate monopolistic practices.
6. Recent Initiatives: The National Manufacturing Policy (2011) and the Make in India scheme (2014) were launched to further enhance manufacturing capabilities and attract investment. There is an ongoing discussion about the need for a new industrial policy to ensure inclusive and sustainable growth for the future.

These policies reflect India’s evolving approach to industrialization, balancing state control with market forces to foster economic development.