Context:
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Announcement of PLI schemes which gives discretionary powers to bureaucrats at Centre.
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Increase in conditional incentives to states.
What is Micromanagement?
Micromanagement is when matters that should be left for decision by a lower level are controlled and decided at a higher level. The main problem with this is that the focus on the broad policy framework is lost.
Production Linked Incentives (PLI) Scheme:
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It gives government officials, with little experience of commercial activities, the discretionary authority to define who is eligible for the incentives.
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It is a business-friendly approach not a market-friendly approach and will lead, sooner or later, to favouritism and possibly even corruption.
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A business-friendly approach based on subsidies may show some immediate gains, as the increase in the domestic production of mobile phones. But a market-friendly approach will lead to broader gains that are not dependent on subsidies.
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A market-friendly approach will set a stable framework of regulations and taxes, macroeconomic stability, and a correctly valued exchange rate and leave it to the market to pick winners and losers.
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In fact, such a market-friendly approach may achieve more than micromanagement by bureaucrats and politicians, as it will offer incentives for all sectors.
Areas where government should involve itself:
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It can address more specific factors that are holding back industrial growth and exports like
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inadequacies of infrastructure,
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inadequate research and development in industry,
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shortages of skilled labor,
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imperfections in the capital market for MSMEs, and so on.
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If the government had chosen to spend Rs 1.9 trillion on correcting these impediments, we would have achieved much more by way of growth and competitiveness.
Union government Micromanaging the development efforts of states:
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Another area is the growing intrusion of the Union government in the development efforts of states through conditional grants given under centrally-sponsored schemes. The budget provision for this has gone up from Rs 3.4 trillion in 2020-21 to Rs 3.8 trillion in 2021-22.
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There is a great diversity between the states, but also within the states. A standardized approach of the Union government for designing public interventions in the agriculture, health, and education sector are not right. Here, policies must suit local conditions. For instance, the terms of a grant for drinking water supply for Kerala and Rajasthan can’t be the same.
Way forward
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The Union government must not try and micro-manage what corporate management and state governments have to implement.
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It should recognize that now these lower-level decision-making entities have the competence and will make the right choices.
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It should focus more on building a framework for these decisions that is stable and consistent in a market-friendly and federal economy, and on promoting decentralized collaboration on matters of inter-state significance.