Explained: How India’s tariff policy could harm its manufacturing aspirations


India’s policy of adopting high tariffs on the import of electronic components to reduce the risks associated with global competition and save domestic companies could prove counterproductive to its programs to increase national production of electronic products, a report by the Indian Cellular and Electronics Association (ICEA).

How does India compare to other electronics manufacturing countries?

By comparing India’s performance with that of China, Vietnam, Mexico and Thailand, the report highlights how all countries have attempted to encourage domestic production of electronic goods in their geographies by adopting almost similar strategies such as attracting foreign direct investment, improving national capabilities and competitiveness, increasing exports, and then linking their markets to global value chains.

Since 1980, when the data was compared, China has improved its ranking in terms of exporting office and telecommunications equipment from 35 to 1, while Vietnam, which did not export any electronic products of this type until the 1990s, rose through the ranks to become the eight largest export in just 20 years.

Similarly, Mexico, which was 37th in electronics exports in the 1980s, has steadily climbed the ladder to 11th place, a position it has maintained for the past two decades. Thailand, which ranked 45th in 1980, has also solidified its position among the top 15 electronics exporters, according to the report.

On the other hand, India, which started at the 40th position in the 1980s, gained and lost positions to reach the 28th position in 2019.

How are high tariffs hurting India’s electronics industry?

Comparing these rankings, the ICEA noted in its report that although all these countries followed almost the same policy to boost domestic electronics manufacturing, a major difference between India and the rest of the countries was the heavy reliance on tariffs .

The report notes that it is because of such high tariffs that investors and manufacturers of electronic components in global markets are turning away from India as a market, as the country’s participation in global value chains has remained low. Moreover, despite the size of the Indian economy, its participation in exports and international trade has remained low.

Even for domestic markets, the assumption that it will benefit most businesses because it is large and growing is wrong, the ICEA report notes. For example, in the case of mobile phones, where one of the largest PLI programs is currently operational, the domestic market size is expected to reach $55 billion by 2025-26, while the global market is expected to reach $625 billion. dollars by the same time.

“So at present, India’s domestic market is around 6.5% of the global market, with the potential to grow to 8.8%, if growth forecasts are reasonably robust. At present, India’s market share is not attractive enough for FDI to choose India as a destination primarily on the basis of its domestic market per se, especially if India’s policies result in cost inefficiencies that create barriers to accessing a much larger global market. noted report.

Why does the ICEA believe that high import tariffs are counterproductive for LIP programs?

There are several reasons why the report concluded that a high tariff on the import of electronic components could end up nullifying the gains from the PLI programs. One of the main ones is that companies with large global value chains are reluctant to enter India when component prices are high.

“Although the large electronics markets in India may look attractive, they are very small on a global scale. Moreover, India does not produce about 50% of the components on which the tariffs have been increased. Therefore, the impact of tariffs is likely to be negative on India’s competitiveness,” the report notes.

The ICEA report also noted that although global companies such as the United States are increasing tariffs on the import of electronic components, India must keep its tariff to a bare minimum to ensure that it remains competitive among its peers in the Asian neighborhood.

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