PMO moots changes to preferential market access policy

Suggests delinking security issues and manufacturing location

The Prime Minister’s Office (PMO) has suggested substantial changes to the preferential market access (PMA) policy guidelines for information technology and electronics products, including delinking “security” issues and “manufacturing location”.

It said encouraging indigenous manufacturing at the cost of new and better products would lead to distortions in the market. Instead, it suggested audits, certification and setting up standards to handle security issues and a dialogue with the industry on ways to address security concerns.

In a note for discussion with the Department of Telecommunications (DOT) and the Department of Electronics and Information Technology, the PMO suggested a moratorium on implementation of the policy till adequate assessment of manufacturing capability for products that qualify for domestic value addition was made.

The note also suggested incentivising capability building for products not made in India.

The PMA policy stipulated that the government would have to procure a certain percentage of its requirements from domestic manufacturers based on a timetable. Similarly, domestic manufacturers have to value-add to production other wise they would be considered imported products.

The policy was notified in October 2012. Detailed guidelines are yet to come. The thinking behind the policy was to give a fillip to domestic production as well as assuage  the concerns in the government on security threat from imported products.  

The PMO note said the domestic value-added criterion, key in manufacturing, was onerous and not based on any study. It argued that as component manufacturing in India was limited, the capability needed to be created first.

Value addition calculations based on bill of materials were complex and could lead to creative accounting and put large compliance burden and bureaucratic oversight, it said.

The note has also said the PMA policy should not be extended to the private sector but should be limited to government procurement only. It’s response was to PMA policy stating that it will cover procurements by the government and also by its “licencee”, which effectively meant it would be applicable on private telecommunication companies and banks.

The substantial changes suggested by the PMO came in response to strong opposition from foreign companies. A few months back, the US-India Business Council and 37 business groups and companies from around the world had asked the Indian government to rescind the PMA policy and avoid “market-distorting policies”.

The PMO said the policy stipulates high percentage of value addition over a short period, not allowing time for manufacturing efficiencies. It said there was no nodal agency to lay down specifications and identify specific products. This should be addressed first and the uncertainty over which product should be notified first cleared.

Involvement of multiple agencies and allowing any government department to notify its list of PMA products, it said, opens avenues for graft, bureaucratic delays and compliance issues.

It had argued that manufacturing in India was not cost competitive with global manufacturing benchmarks, as domestic players had six% to eight% landed-cost disadvantage. Therefore, import duty issues and poor infrastructure have to be addressed. Special incentives for private sector would be required to help build manufacturing capabilities.