The budget should be proactive, not reactive, in promoting industrialisation
Despite the budget being pro-local industry, it has been more reactive than proactive in supporting industrialisation. It should identify a few strategic sectors and provide monetary and policy support
The national budget – an accounting exercise of the government, specifying the sources of income and heads of expenditure for the ensuing fiscal year – is also an important tool to leverage the process of industrialisation in a country. This is more so for a developing country like Bangladesh, which has observed a significant structural shift towards manufacturing over the last two decades or so.
In this article, I ask a simple question: To what extent can the national budget of FY25 help promote industrialisation in Bangladesh?
Before addressing this question, to set the tone, I will first delineate the global context wherein the national budget has been announced. Then I will assess the national budget for FY25 through the lens of industrialisation in Bangladesh.
'Industrial Policy is Back' runs the title of an article by Dani Rodrick et al. in Project Syndicate on 28 September 2023, which points out the current trends in commercial policies are being shaped by forces of de-globalisation.
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The US, UK, Germany, France, Japan, and South Korea are relying more on government support than before for a wide range of strategic industries such as electric vehicles, renewable energy, semiconductors, etc.
In Europe, between 2014 and 2020, €67 billion was spent on 'Smart Specialisation' programmes for innovation and firm development. Through the Chips and Science Act 2022, the US government is spending $39 billion in subsidies for chip manufacturing on US soil.
The import substitution policies have also gained traction in middle and higher middle-income countries - Modi's 'Make in India' campaign is a good example.
The Production Linked Incentive (PLI) Schemes in India have targeted 14 sectors for boosting domestic manufacturing.
Similarly, Indonesia's 'downstreaming' policies are encouraging the expansion of domestic industrial capacities. Needless to mention China's 'Made in China' programme, which started in 2015, aims to upgrade the Chinese manufacturing sector.
To substantiate Dani Rodrick's point, I would like to draw attention to the following recent three news:
• "Biden announces 100% tariff on Chinese-made electric vehicles" — Guardian, 14 May 2024
• "Janet Yellen urges EU to join US in curbs on cheap Chinese exports" — Guardian, 21 May 2024
• "India reaffirms restrictions on import of certain electronics & IT goods" — Economic Times, 21 May 2024
These recent developments suggest that protection for the domestic market has been the mantra of recent trade policies in many countries and this has not been limited to the countries involved in trade wars.
Hence, against this backdrop, the question is, what should be our strategies for industrialisation, and if they are reflected in the national budget of FY25?
As we know, the policy makers involved in budget preparation face steep trade-offs in balancing between three competing objectives - increasing revenue collection, protecting local industries, and tariff rationalisation in line with WTO. As we know, increasing revenues through custom or supplementary duties are at odds with WTO compliances.
Moreover, the reduction of import tariffs on intermediate goods for promoting local industries will lead to a loss of revenues.
My initial scrutiny of the budget document suggests that the budget for FY25 has maintained a critical and healthy balance between these competing objectives.
For example, in the case of tariff rationalisation, the budget FY25 has proposed to withdraw supplementary duties for 19 products and to reduce it for 172 products. It has been suggested that regulatory duties be withdrawn for 91 products.
Interestingly, the rationale for this withdrawal and reduction has been spelled out, and this includes clear indications for not harming the competitiveness of the local industries.
To beef up revenue collection, the budget proposes an increase in VAT on several final goods such as agro-processing industries—mango bar, mango juice, pineapple juice, guava juice, and tamarind juice; electronic industries—energy saving bulbs, tube light, air conditioners, refrigerators, and freezers.
In most cases, the rate has been increased from 5 to 15%. However, previously exempted air conditioners, refrigerators, and freezers will now see 7.5% VAT.
Note that the existing VAT exemption facility for the production of compressors, which is the key component for producing refrigerators and air conditioners, has been extended for one more year, indicating the government's commitment to generate greater local value addition in this sector.
In the case of promotion of local industries through protections and concessions, the budget document is very detailed and specific.
For example, to incentivise the local production of man-made fibres, which is replacing natural cotton very fast in the global market, the proposed budget waives all duties and taxes on two raw materials—Purified Terephthalic Acid (PTA) and Mono-Ethylene Glycol (MEG), with only 1% custom duty.
Ferro alloy manufacturing industries use manganese as an essential raw material and the custom duty has been reduced from 10% to 5%. LRPC Wires are used in railway sleepers, PC poles for power transmission and distribution, PC piles for massive foundation works, etc. To protect the local LRPC industries, it has been proposed the import duty on LRPC wire be increased from 10% to 15%.
In addition to popular electronic industries such as air conditioners and refrigerators, water purification equipment manufacturing industry, switch socket manufacturing industry, some unconventional industries such as the local ATM and CC camera manufacturing industry, which have shown some promise in recent years, have been given greater protection in the current budget.
The budget FY25, as previous discussions suggest, is pro-local industry, which is in fact in line with the local demand led industrialisation.
However, the role of the national budget (read 'government') has been more 'reactive' than 'proactive' in supporting industrialisation. It seems that the government has been waiting for things to happen. When an industry emerges and can draw the attention of the government, the government helps them grow.
However, this strategy misses out on the industries that suffer premature death, on the incubation table. The market can lead to the path of industrialisation, but it may lead to a vast drift from our desirable path.
History suggests that if wholesale industrialisation is pioneered by local industries (not FDI), it requires a more active role of the government. The government should have a plan for which industries to take the lead in industrialising the country and act proactively.
The government should not wait for the market to pick the winner. The market may never pick.
It is essential to identify a few 'strategic' sectors, chalk out a plan on how these industries will be supported and to offer a comprehensive 'industrial development package' for the next five to 10 years, including fiscal and monetary incentives and policy support.
Let's take an example of the automobile industry as a strategic sector. By strategic sector, I mean, the sector with high priority. The industry will not flourish if left to market. As we know from the history of industrialisation across the globe, automobiles have always been a precursor to a modern industrial sector.
In fact, countries with large local markets have experimented with automobiles at a stage well below the per capita income of current Bangladesh. India, China, and Brazil are good examples. Hindustan Motors of India was established in 1942 and produced its first car in 1948 (Hindustan 10, later Ambassador).
During the same time, Premier Automobiles Limited also launched its first car (Premier Padmini). While these were joint ventures with Moris and Fiat, respectively, the local value addition tended to increase over time.
In fact, during the time of severe shortage of foreign currency in India during the 1960s, both of these automobile companies started to manufacture engines along with other important parts, of course with the help of the government.
The lesson from the Indian automobile industry is that sometimes comparative advantage-defying industries help learn things that have a greater long-term impact on industrialisation and economic growth, outweighing their short-term costs.
We should start experimenting with a few strategic industries now. The national budget FY25 should have reflected such aspiration.
Dr Kazi Iqbal is the Research Director at the Bangladesh Institute of Development Studies (BIDS).
[This piece is written based on the author's presentation at the post-budget seminar titled "National Budget for 2024-2025 and the Medium-Term Outlook on the Bangladesh Economy" organised by Bangladesh Institute of Development Studies (BIDS) on June 8, 2024.]
