Improving competitiveness

The electronics sector would benefit from global integration

The government has pointed to recent increases in production and exports of electronics, particularly mobile phone handsets, as a sign that its attempts at industrial policy are working. Certainly, there have been some visible successes. For example, while only 15 per cent (in value terms) of India’s electronics production in 2021-22 was for export, it grew to 25 per cent the next financial year and may cross 30 per cent in 2023-24. The government’s target of $52-58 billion worth of exports by 2025-26 seems reachable under these circumstances. The total target of $126 billion worth of production might also be considered reasonable. But the Indian Cellular and Electronics Association (ICEA) has sounded the alarm on such optimism. In its recent studies, the trade body has predicted the rate of growth in domestic demand for mobile phones to slow from 21 per cent a year earlier to under 4 per cent. Further, exports, according to the ICEA, will be only about half of the official target.

This is not a poor performance by any means. However, when measured against the opportunities provided by a global rebalancing of supply chains, it can be seen as disappointing. Further, the reasons why the government’s targets may be missed are likely to be found in the design of its own industrial policy. It has used imperfect ideas generally inapplicable in the Indian context as a guide to policymaking. The basic concept used in its formulation of policy for this — and other similar sectors, such as electric vehicles — is to erect tariff barriers for imported components and final goods, to use high domestic demand growth as an initial draw to get large multinationals to make investments, and to sweeten the pot with production-linked incentives (PLIs).

This combination of policies is appealing to bureaucrats, as each step in the chain essentially means increasing controls and the discretion of decision-makers. But, put together, it is economically incoherent. The ICEA study has pointed out, for example, that high import tariffs on the components and sub-assemblies that go into mobile phone handset production may add 5-7 per cent to the cost of a locally manufactured device. This, in turn, simply wipes out the advantages that accrue from the PLI scheme for handsets, which the ICEA estimates at between 4 per cent and 6 per cent. If the PLI scheme has been rendered unremunerative by import tariffs, and domestic demand is also slowing, it is hard to see where future investment and growth in the sector will come from.

The government would be well advised to take into consideration these outcomes — not entirely unexpected — and make necessary adjustments to enable India’s entry into global value chains. The economies of the West might seek to erect tariff walls to reshore production, but that is because their tariffs are very low in comparison to India’s and their future growth is not necessarily dependent on finding new export markets. The case with a developing economy like India is different. Furthermore, value chains in the 21st century are so diffuse that the imposition of high tariffs adds both uncertainty and cascading costs. A stable and low-tariff regime across the board, along with a business-friendly environment, rather than production subsidies would lead to far greater success for India.