Our PLI plans require a consistent business policy

Rajan argues that PLI schemes alone do not add value to electronics and semiconductors, even though value addition is a key objective of the ministry’s 2022 vision document. It aims to increase India’s electronics exports from $25.3 billion in 2022-23 to $300 billion by 2025-26 and deepen integration with global value chains (GVCs).

Rajan has previously questioned the rationale of subsidizing industries that would have invested in them to reach India’s rapidly growing consumer base. His criticisms affect the effectiveness of PLI schemes as industrial policy tools to drive domestic manufacturing.

Vaishnav dismissed Rajan’s concerns as politically colored and said that PLI schemes are necessary to boost manufacturing in India.

The debate is conspicuously silent on an important aspect of manufacturing strategy—trade policy. A coherent trade policy lowers tariff barriers and encourages technology transfers from countries and companies that dominate the production of information and communications technology (ICT) hardware and semiconductors.

India is looking to emulate China, Taiwan and Vietnam by providing tax exemptions and financial incentives for ICT manufacturing, as well as improving domestic infrastructure and logistics. However, no attempt has been made to emulate their liberalized trade policies. For decades, the three countries held a combination of low- or zero-tariff regimes and foreign investment, research and development, as well as free trade agreements enabled by the Information Technology Agreement (ITA-1) of the World Trade Organization (WTO). Industrial Policy Reforms.

The resulting ecosystem attracted companies—including Intel, AMD, and Qualcomm—looking to establish various parts of their supply-chain operations.

On the other hand, India’s trade policy has been marked by a tendency to raise tariffs, especially since 2015, as increasingly parts of self-reliant India gather pace. Initiatives such as a phased manufacturing program for smartphones gradually increased import duties on components. Basic customs duty on components such as display assemblies and camera modules increased from nil in 2015 to 22% by 2020-21. Additionally, the ad hoc tariff hike is inconsistent with India’s obligations under ITA-1, as ruled by the WTO recently. Disputes filed by the European Union, Japan and Taiwan.

Meanwhile, India’s electronics imports are set to increase from $39.8 billion in 2015 to $69.7 billion in 2021-22, showing that India’s tariff barriers have not reduced Indian dependence on foreign suppliers; They have only made sure that what is imported is input material which we do not produce locally.

High tariffs make high-quality components from foreign suppliers costlier, putting domestic ICT manufacturers at a disadvantage as they compete on costs with other global players. Indeed, India’s efforts to introduce large-scale ICT manufacturing ignore the uncomfortable realities of GVCs, which are essentially networks of production stages across countries that create the value of the final product. It is unrealistic to expect the raw materials, technologies and human capital needed to produce these components to be all located in the same geographic area.

Ideally, the prospect of accessing India’s rapidly growing demand should persuade multinationals to set up local manufacturing or assembly operations through tariff-jumping foreign direct investment (FDI), where foreign companies can avoid tariff barriers. invests in a subsidiary company in another country for

However, studies have shown that for the ICT and semiconductor sectors, tariffs may deter foreign manufacturing investment and GVC integration, bypassing the anticipated benefits of tariff-jumping FDI. Simultaneously, it does nothing to further export production targets, thus reiterating Rajan’s point about India’s growing trade deficit in key component manufacturing, as foreign investment is only in smartphone assembly plants. .

Certainly, India’s integration in ICT and Semiconductor GVCs is underway. The US-China tech war and supply vulnerabilities exposed by COVID have prompted businesses to look for alternatives to China and build in security, redundancy and resilience. To benefit from this disruption, New Delhi will have to abandon its protectionist trade policy. This will help in reaping the benefits of large market, low labor cost and strategic partnership with the US and others.

Recent initiatives such as the Indian Semiconductor Mission and the National Policy on Electronics, 2019 suggest increasing policy convergence on FDI, fiscal incentives and manufacturing infrastructure. The abolition of duty on certain parts of smartphones announced in the Budget for 2023-24 is also a step in the right direction. Now that India has adopted a targeted industrial stimulus-centric approach, it is time to revamp our trade policy as well.

Mihir Karandikar also contributed to this article.

Satya Sahoo is a Researcher in the Hi-Tech Geopolitics Program at the Takshashila Institution, Bangalore.

UPDATE: June 23, 2023, 02:10 AM IST