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Explained: How high tariffs on electronic gears may negate PLI gains

How does India compare to other electronics manufacturing nations? How do high import tariffs hurt India's domestic electronics industry? Why does ICEA believe high import tariffs are counterproductive to PLI schemes?

Written by Aashish Aryan , Edited by Explained Desk | New Delhi |
Updated: January 20, 2022 7:34:30 am
At a mobile phone market in Budhwarpeth in Pune. (Express Photo: Pavan Khengre)

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, a report by the Indian Cellular and Electronics Association (ICEA) has said.

How does India compare to other electronics manufacturing nations?

By comparing the performance of India with that of China, Vietnam, Mexico and Thailand, the report highlights how 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 then linking their markets with global value chains.

Since 1980, from when the data has been compared, China has improved its ranking in terms of office and telecom equipment export from 35 to 1, while Vietnam, which did not export any such electronic products up until 1990s has climbed the ladder to become the eight largest export in just 20 years.

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Similarly, Mexico, which was 37th in terms of electronics product export in 1980s has steadily risen through the ranks to gain 11th place, a position it has maintained over the last two decades. Thailand, which ranked 45 in 1980 has also consolidated its position in the top 15 electronic product exporters, according to the report.

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

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

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

The report notes that it is due to such high tariffs that 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 is about 6.5 per cent of the global market, with a possibility of growing to 8.8 per cent, if the growth forecasts are reasonably robust. At present, India’s market share is not attractive enough for FDI to choose India as a location primarily on the basis of its domestic market per se, especially if India’s policies result in cost inefficiencies which create obstacles to accessing a much larger global market,” the report noted.

Why does ICEA believe high import tariffs are counterproductive to PLI schemes?

There are several reasons why the report concluded that a high tariff on the import of electronic components may end up undoing the gains of PLI schemes. One of the major ones is that companies which have extensive global value chains are reluctant to enter India when tariffs for components are high.

“While the large electronics markets of India may look attractive, 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,” the report noted.

The ICEA report also 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.

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