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Is Preferential Market Access justified?

Domestic manufacturing will reduce India's dependence on imports of electronics but may deprive access to the latest global products

Business Standard 

Ron Somers
President, US-India Business Council

"Many states with infrastructure and competitive costs are developing incentives to attract business. India is making itself an undesirable outlier"

India has passed the (PMA) policy to address concerns about product quality and security; to address a significant balance of payments deficit in electronics; and to create new employment opportunities in the manufacturing sector. While all of the government's concerns are legitimate and important, PMA is ill-suited to address any of these concerns. In fact, this policy may further depress foreign direct investment, potentially undermine security and undercut India's competitiveness as a desirable location to do business.

Currently, India has insufficient capacity to meet the proposed near-term manufacturing target of 30 per cent local value-added, much less the 80 to 100 per cent envisioned for the future. The government has assured that it would not force companies to source locally if there is a globally competitive product available - which begs the question, why do you need a PMA if there is a globally competitive product available? Joining a global supply chain requires best-of-breed sourcing and solutions that India cannot currently meet. The only supply chains that can accommodate such requirements are those that do not need to be competitive because of state backing, or those of lower quality products that have greater tolerance for lack of precision manufacturing.

It is also clear that where artificial constraints exist in the market, true competition does not develop. In such cases, the market only meets the lowest common denominator - a race to the bottom. The greatest potential success of PMA is, therefore, a level of mediocrity that will not be globally competitive. India will have lost the opportunity to create a globally competitive export-capable manufacturing sector. Further, Indian industry and consumers may well be faced with not having access to the newest and best products.

The need for PMA is also curious in the light of the government's consistent description of the significant unmet domestic demand in this area. Forced localisation is sometimes the recourse of governments that believe production of a product is essential for national security, but for which there is an insufficient local demand. India has excess unmet demand. This raises a more significant underlying question: why is it that in one of the most entrepreneurial business sectors in the world, no one is willing to invest in The only logical answer must be that there are some regulatory, operational, structural or other impediments that prevent local entrepreneurs from seizing an opportunity.

Global companies develop supply chains to meet global distribution needs. Selection factors include location, logistics, workforce, incentives/cost and risks (operational, geographic and regulatory), which collectively assure that production or sourcing in the jurisdiction can be seamlessly integrated into global operations, and that there is a certainty in law and legal outcomes.

Over the last few years, India has moved away from finding the appropriate incentive structures to attract business investment, enable technology transfer or promote joint ventures in favour of needlessly coercive measures. This recent change of approach is surprising in the light of India's success in the BPO industry where early and appropriate incentives not only created a domestic market, but made India globally competitive, even dominant. The approach of PMA - one overarching policy applying to a broad range of products, already gazetted, to be supplemented by new specific lists of covered products by ministries in a slow stream of incremental incursions into and disruptions of supply chain - is the antithesis of legal certainty. There is little likelihood of a global enterprise engaging in strategic planning based on a moving target created by a government courting investment.

India seems not to recognise the global competition for manufacturing. Many states with better infrastructure and, similarly, competitive costs are developing incentives to attract business. India is making itself an undesirable outlier. This is even more relevant as PMA is being applied to private sector licensees, which would violate India's obligations, absent an unprecedented claim of national exemption. Such a claim of national exemption will not only undermine India's credibility in the global trade arena, but further ignite a series of copycat actions that would negatively impact global trade, including of global Indian companies.

Rajoo Goel
Secretary General, ELCINA

"Abysmal dependence on imports is resulting in our being susceptible to cyber-attacks and information leaks related to national security and defence"

There is a growing realisation in India that imports are not a solution for everything. From the 1991 crisis, when we did not have enough foreign exchange to pay for a month's import requirements, we were lulled by the success of our information technology industry, resulting in plentiful inflows of dollars. Owing to this complacency, we are facing another crisis caused by a serious trade deficit. The key components contributing to this deficit are oil, gold and electronics.

India is a signatory to the Information Technology Agreement-I under the World Trade Organisation (WTO), which mandates bringing 217 tariff lines consisting of information and communication technology products and their inputs to zero customs duty. This agreement was signed in 1997 and implemented from 2005. As a result, imports of electronic goods and components have been spiralling upwards, and over 60 per cent of domestic demand is serviced through imports. The Indian electronics industry is caught in a vicious circle of zero duty imports, high domestic production costs and manufacturing ecosystem challenges.

According to a 2009 study commissioned by the government's Department of Electronics and Information Technology, demand for electronic equipment in India is estimated to reach $400 billion by 2020, while domestic electronic production, in the absence of policy support, is projected to reach a bare $104 billion in the same period. This will lead to a huge trade imbalance. The import bill for electronics in 2020 is estimated to exceed the import bill for oil. Huge imports, projected at $296 billion, will also create millions of jobs in supplier countries, effectively exporting jobs from India.

The (PMA) policy is a reasonable document and its only objective is to ensure that our security and national interests are not compromised. It aims to achieve this through graded domestic value addition. The policy recommends that 30 per cent of demand be met by products made in India achieving the desired domestic value addition, if they are technically and commercially competitive for government procurement. Thus, goods manufactured in India, by domestic or foreign companies, must fulfil required standards to receive the benefit of this policy in equal measure. This should allay the fear that the government will buy any substandard electronic product.

In the absence of PMA, it is impossible to see India becoming self-reliant in critical electronics and telecom technologies, which are vital for our national needs. Abysmal dependence on imports is resulting in our being susceptible to cyber-attacks and information leaks related to national security and defence. These technologies and products are for use by the government or in public-private-partnership projects, not for commercial purposes. Thus, allegations of PMA being unfair has no basis.

Global economic history abounds with examples of countries taking measures to create The American Recovery and Reinvestment Act of 2009 is the latest. The European Union and Canada have also adopted PMA. India is an observer to the WTO's government procurement agreement (GPA) and, therefore, is not constrained by its stipulations.

does not discourage countries from developing policies to promote General Agreement on Tariffs and Trade (GATT) Article III 8(a) permits governments to buy domestic products preferentially, making government procurement an exception to the national treatment rule. This exception is permitted because members recognise the role of government procurement in national policy.

Those criticising PMA argue that GPA, resulting from the Uruguay Round, mandates that signatories offer national treatment. Mostly developed countries, however, have joined GPA, so in the context of government procurement, the national treatment rule applies only between those who are signatories to it. For others, like India, the traditional exception under GATT rules is still in force.

The growth of our manufacturing sector is of value to the global community, since India has the potential to be a supporting pillar for the world. Expansion of manufacturing with accelerated economic growth is a necessity. PMA is one step in that direction.

www.elcina.com
These views are personal

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