As part of the National Policy on Electronics, the government has stipulated that up to half its annual orders for laptops and printers would henceforth be solicited only from companies that have demonstrated a 30 per cent 'value-add' in India, with increments of five per cent a year thereafter.
This has predictably caused a furore in the US. "There are so many global companies here, many from the US who have value chains across the world, that it has become a burning issue," says T S Vishwanath, a trade expert and principal advisor with APJ-SLG Law Offices. So much so that it has provoked a group of 45 US Senators and Representatives to write a letter to US Trade Representative Ron Kirk to take immediate action against India.
Is this just hype? Or has India done anything to violate international trade treaties? More importantly, are its actions different from those of other countries?
It turns out the entire world has dabbled, on and off, in protecting its domestic economic interests when the need arises, the biggest culprit being the US. For instance, the American Recovery and Reinvestment Act of 2009 was enacted by the US Congress and signed into law by President Barack Obama on February 17, 2009, its main provision being a 'Buy American' clause. This Act, passed to jump-start a moribund domestic economy, prevented the use of stimulus funds for construction, repair or maintenance of a public building or public work, unless all iron, steel and manufactured goods used in the project were made in the US. Many countries, including neighbour Canada, were singed and predictably furious.
If this was an outlier - a justifiable intervention to breathe life into one of the most important economies in the world - that would be one thing. But such 'Buy American' laws have been part of the landscape for centuries, the most famous being the Smoot-Hawley Tariff Act in 1930, which raised duties 60 per cent to try and lift the country from the Great Depression. While at the helm, former president Ronald Reagan, too, introduced a few such laws. Also, many Latin American countries, struggling in the climate of the post-economic meltdown, have enacted protectionist measures. A policy in Argentina, passed in 2011, required importers to buy local products or commodities that had the same value as the products they imported, and then export these. So, in a quixotic turn of events, car manufacturer Porsche began exporting wine. Brazil stepped up duties on cars outside the Mercusor (Brazil, Argentina and Paraguay) group by as much as 55 per cent.
Clearly, irrespective of domestic economic compulsions, these actions can have deleterious effects. In an interview last year, Thomas Helbling, an adviser to the International Monetary Fund's research department, told Emerging Markets: "Sometimes, protectionism can backfire. Some local content requirements can lead to domestic capacity constraints if the economy does not adjust quickly enough…they can create problems of their own." There are other issues. "Joining a global supply chain requires best-of-breed sourcing and solutions that India cannot currently meet," wrote Ron Summers, president US-India Business Council, in Business Standard yesterday.
Is that necessarily true? Well, yes and no. "Many years ago, I heard Japanese colleagues say the Indian supply chain was rubbish. But they don't say that anymore. Why did Nokia come to Sriperumbudur and create a large supply chain?" The Indian auto components business, for example, has become world-class", says A Gururaj, Managing Director of Vittal Innovation City and former head of electronics major Flextronics. He cautions there are limitations in the ability to instantly roll out complex products in the electronics sector.
Another superlative example of the prospects of electronic manufacturing is Nokia Siemens Network, which has a state-of-the-art facility in Chennai. It made cutting-edge telecom equipment worth Rs 5,192.57 crore in 2011 (19 per cent lower than the previous year due to lower telecom spends). Many of their products have enabled domestic 3G operators to roll out their networks quickly. On the other hand, it still has to import its very high-end components because of the lack of AN electronics eco-system here.
So, why are electronics manufacturers reluctant to set up shop here? Apart from a shortage of skills, there are other reasons. "Everybody is cautious about unnecessary capex costs, and this has been a major factor," says Gururaj, despite the fact that components such as resistors, capacitors and PCBs-which are similar in complexity to those in the automobile industry-can be easily, and cost-effectively, made here.
For domestic companies that want to go global, India could prove to be the best bet soon, say industry experts. Reason: Just-in-time manufacturing necessitates tight inventory management. Yet, when a company imports from China, cost factors require bringing in large volumes at a time, which can play havoc with working capital. Also, "China has opaque supply chains that hide huge pain points. An international quality control rejection rate of 25-30 per cent is not unheard of," says P V G Menon, president, India Electronics and Semiconductor Association. Even opening lines of credit becomes expensive when you're dealing with thin margins, say others.
Nevertheless, the question of India being seen as protectionist would proliferate as long as the stakes are high. "It's a normal reaction to see when someone changes rules," says APJ-SLG Law's Vishwanath. "Suddenly, the notification came and they sat up and said 'Oh my God'. I don't think they've fully understood how this impacts them. But they're doing that homework now." He adds that India hasn't done anything wrong-many countries have behaved similarly and would continue to do so to grow their domestic economy.
However, India needs multinational companies and their advanced technologies as much as they need the country's markets. Once the heat and dust of the debate on preferential market access dies down a bit, it may be in the government's best interests to engage stakeholders and establish processes that bring transparency and predictability to plans such as these.