Now that a jobs crisis is weakening its hold on power in India, how serious is the BJP government about reviving Indian factories? We will know in the budget, which offers it a chance to remedy a disastrous lurch toward protectionism. Without fixing that folly, the country could miss an opportunity to join key global supply chains.
A large home market will keep assembly lines busy—but crucial parts will be made by Chinese and Vietnamese labour. What could easily be a $100 billion-plus boost to annual factory production by the end of the decade might fail to materialize.
Trouble began in 2018 with New Delhi’s “calibrated departure” from more than two decades of greater trade openness, and an increase in import duties on mobile phones to 20% from 15%. Soon it was the turn of components: In 2020, the tariff on printed circuit board assembly and display units was raised by 11 percentage points.
A downward spiral in China-India relations didn’t help. The administration made it mandatory for Chinese firms to obtain permission before investing in India. Visas for Chinese engineers started taking four to five months to process.
On paper, the idea was to prevent opportunistic acquisitions of vulnerable firms during the pandemic and promote local industry. However, the measures haven’t had the intended effect. Quite the opposite, in fact.
Yes, India manufactured $102 billion of electronics last year, led by mobile phones, up from $60 billion in 2018. But that’s mostly just putting together the finished goods. From lithium batteries to the precision machine work needed in phone casings and the fabrication required for display units, most actual value is being added in China, South Korea, Japan or Vietnam.
According to a recent report by the Confederation of Indian Industry (CII), it would be 8% to 10% more expensive to make flexible printed circuit boards—the kind that can fir into tight spots—locally. No wonder then that even with booming smartphone exports, India is becoming a larger net importer of electronics.
The government’s answer to this cost disadvantage has been to offer a 4% to 6% subsidy on domestic production. But as CII noted in its report, the fiscal support is “grossly inadequate” to offset the gap with China and Vietnam. “Industry players are seeking a low tariff regime,” it said.
There has been talk about becoming self-reliant in semiconductors. What Indian policymakers should pay more attention to is less capital-intensive production. Taken together, circuit boards, cameras, displays, batteries and enclosures account for more than two-fifths of a smartphone’s production cost. Yet, little domestic capacity has come up to make these at home because of a faulty trade policy.
Most of the stuff that goes into making electronic components can be imported duty-free into China and Vietnam from free-trade partners, whereas a 10% to 15% tariff is India’s norm. Expecting import barriers to encourage domestic production is an outdated idea.
All it does is keep the country out of global supply chains that require free movement of goods—and people—across a seamless international network of factories. Make it too onerous for Chinese firms to invest (or their engineers to visit), and the production base they could help move from China would stay where it is. Which is why India had an $83 billion goods trade deficit with China last year, up from $55 billion in 2018.
India’s jobs crisis has assumed alarming proportions. Young graduates are nine times more likely to be unemployed than those who can’t read or write. Even outside New Delhi, politicians are panicking and pandering to populist causes. Karnataka invited a huge backlash by trying to introduce a law to reserve half or more of private-sector jobs in the state for locals.
Just as India Inc is now raising its voice to keep internal markets free, it should also have insisted on more external openness when autarky crept back into trade policy years ago. Back then, however, captains of industry joined the chorus around the slogan of self-reliance even as the promised revival in manufacturing and factory jobs continued to elude.
An unexpected loss of parliamentary majority for the ruling party has come as a wake-up call. According to media reports, the budget could tweak the government’s industrial policy. Its five-year, $24 billion production-linked incentive scheme might be supplemented with subsidies for firms that hit employment targets.
Yet, no amount of additional fiscal resources will help in the presence of high tariff walls. The ongoing shift in global supply chains, triggered by covid disruptions and the estrangement between Beijing and Washington, is a once-in-a-generation opportunity. But it won’t last forever. It’s time for a course correction. ©bloomberg