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Going back in time

Directive on electronics procurement can be counterproductive

Business Standard Editorial Comment  |  New Delhi 

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In its laudable attempt to give a push to manufacturing under the "Make in India" campaign, the government has taken a retrogressive step in directing government departments to give preference to domestically manufactured electronics products in their procurement. For this, departments have been asked to identify domestically manufactured electronics products relevant to them and notify these within a fortnight. Simultaneously, an online system has to be created for official agencies to report their procurement, so that a picture can emerge of domestically manufactured electronics products. This amounts to going back to the days of industrial licensing, when an organisation called the Directorate General of Technical Development (DGTD) had to clear imports by manufacturers after ascertaining that the items sought to be imported were not being manufactured domestically. In fact, exports did well once that power of the DGTD was taken away and the rupee was allowed to seek out its own value.

Certainly, a push towards using state procurement as a strategic tool in advancing Indian technological prowess and domestic production is understandable. It may even work - for example, the indigenous purchases of the space programme have helped develop private-sector capabilities. But it certainly cannot be done in a short time frame; and it cannot be done on command. Indeed going by the details available so far, government electronics procurement will be at a disadvantage as private importers will not be under any similar obligation to give preference to domestic manufactures in their purchases. This can end up in government entities not getting the best price and the quality that they could have otherwise got. Worse, the current decision will be seen by Indian electronics manufacturers as a signal that they will be able to survive as government suppliers even while falling behind in global competitiveness.

Another objection to the latest directive is that this is likely to be counterproductive. India can become an attractive geography for manufacturing if it has adequate physical (power, roads, ports) and social (worker skills and health) infrastructure, and its official procedures are not stifling. In a world that is increasingly moving towards freer trade under which everybody is better off by exporting what they are good at and importing what others are good at, it is critical not to seek temporary relief by raising non-tariff trade barriers. It is not as if India does not have any advantages along the entire electronics value chain. It has competitive capabilities in electronics designing through its software prowess that allows for high value addition. China mostly engages in electronics assembly, in which value addition is low - but it does create jobs. The last priority should be to promote a domestic semiconductor industry (building "fabs" or fabricators) as semiconductor manufacturers the world over are ruing their low margins. This is over and above the fact that fabs guzzle power and water. Tariff levels can be used up to a point to make it attractive for global manufacturers to have factories in India to address its huge and growing market. Beyond that, the government's policy must restrict itself to the areas outlined above - improving social and physical infrastructure, and cutting red tape.

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First Published: Mon, December 29 2014. 21:45 IST
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