How India’s tariff policy could be hurting its manufacturing aspirations

Syllabus: General Studies Paper 3

Context

• A reportby the Indian Cellular and Electronics Association (ICEA) has said that India’s policy of adopting high tariffs on the import of electronics components to reduce risks from global competition and save domestic companies may prove to be counterproductive to its schemes aimed at increasing domestic production of electronic products.

How does India compare to other electronics manufacturing nations?

• Comparison of India’s performance with that of China, Vietnam, Mexico and Thailand, shows that all the countries have tried to encourage the domestic production of electronic goods in their geographies by adopting almost similar strategies such as
  • attracting foreign direct investment,
  • improving domestic capabilities and competitiveness,
  • increasing exports and
  • linking their markets with global value chains.
• Improvement in rank electronics exports since 1980-
  • China from 35^th to 1^st , Mexico from 37^th to 11^th.
  • India from 40^th in 1980s to 28^th in 1980.

How do high import tariffs hurt India’s domestic electronics industry?

Compared to others one major difference between Indian and rest of the countries was heavy reliance on tariffs.

• Due to hugh tariffs, investors and electronic component makers from global markets shy away from India as a market since the participation of the country in global value chains has remained low.
• Further, despite the size of the Indian economy, its participation in exports and international trade has remained low.
• Even for the domestic markets, the assumption that it will be beneficial to most companies since it is large and growing is wrong, the ICEA report noted. For example, in the case of mobile phones, where one of the largest PLI schemes is currently operational, the size of the domestic market is expected to increase to $55 billion by 2025-26, whereas the global market is expected to reach $625 billion by the same time.

Thus, at present, the Indian domestic market share is about 6.5 per cent of the global market which is not attractive enough for FDI to choose India as a location primarily on the basis of its domestic market per se.

How high import tariffs are counterproductive to PLI schemes?

There are several reasons why a high tariff on the import of electronic components may end up undoing the gains of PLI schemes-

• One of the major reason is that companies which have extensive global value chains are reluctant to enter India when tariffs for components are high.
• The large electronics markets of India may look attractive, but they are very small in global terms.
• Moreover, India does not produce about 50% of the components on which tariff has been increased.

Hence the impact of tariffs is likely to be adverse on India’s competitiveness.

Conclusion

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

The IE Link

https://indianexpress.com/article/explained/india-import-tariff-electronic-components-7731125/

Question- With respect to electronics sector, describe how high tariffs on imports impact domestic manufacturing?