Opinion
Our PLI schemes are in need of a coherent trade policy
Summary
India’s PLI scheme is being hotly debated but we must also talk about our trade policy that has seen tariffs and input costs go up, thus counter-productively hurting domestic producers.
The recent spat between former Reserve Bank of India governor Raghuram Rajan and electronics and information technology minister Ashwini Vaishnaw over the former’s criticism of the production-linked incentive (PLI) scheme for semiconductors and other manufacturing sectors is part of an ongoing debate on India’s manufacturing policies.
Rajan argues that PLI schemes alone do not add value to electronics and semiconductors, even though value addition is a key objective of the ministry’s 2022 vision document. It aims to increase India’s electronics exports to $300 billion by 2025-26 from $25.3 billion in 2022-23, and deepen integration with global value chains (GVCs).
Rajan has also previously questioned the rationale of giving subsidies to industries that would anyway have invested in India to access its rapidly-growing consumer base. His criticisms knock the effectiveness of the PLI schemes as industrial policy instruments to kick-start domestic manufacturing.
Vaishnaw rejected Rajan’s concerns as being politically coloured, and maintains that PLI schemes are necessary to promote manufacturing in India.
This debate is conspicuously silent on a critical aspect of manufacturing strategy—trade policy. A coherent trade policy reduces tariff barriers and incentivizes technology transfers from countries and companies that dominate the production of information and communication technology (ICT) hardware and semiconductors.
India wants to emulate China, Taiwan and Vietnam by improving domestic infrastructure and logistics alongside providing tax breaks and financial incentives for ICT manufacturing. However, there is no effort to emulate their liberalized trade policies. Over the decades, the three countries combined a low- or zero-tariff regime enabled by the World Trade Organization’s (WTO) Information Technology Agreement (ITA-1) and a litany of free trade agreements, alongside foreign investment, research and development, and industrial policy reforms.
The resultant ecosystem attracted companies—Intel, AMD and Qualcomm, to name a few—looking to set up different parts of their supply-chain operations.
India’s trade policy, on the other hand, is marked by a tendency to raise tariffs, particularly since 2015, as the moving parts of Aatmanirbhar Bharat gained momentum. Initiatives such as the Phased Manufacturing Programme for smartphones gradually increased import duties on components. Basic Customs Duty on components such as display assemblies and camera modules rose to 22% by 2020-21 from nil in 2015. Additionally, ad hoc tariff hikes are inconsistent with India’s obligations under the ITA-1, as the WTO has recently ruled in a dispute filed by the EU, Japan and Taiwan.
Meanwhile, India’s electronics imports have risen to $69.7 billion in 2021-22 from $39.8 billion in 2015, showing that India’s tariff barriers have not reduced Indian dependence on foreign suppliers; they have merely ensured that what gets imported are input materials that we do not produce locally.
High tariffs also make high-quality components from foreign suppliers expensive, disadvantaging domestic ICT manufacturers as they compete on cost with other global players. Indeed, India’s attempts at kick-starting large-scale ICT manufacturing ignores the uncomfortable realities of GVCs, which are essentially networks of production stages across countries that create the value of the final product. It is unrealistic to expect the raw materials, technologies and human capital needed to produce these components to all be present in one geographic area.
Ideally, the prospect of accessing India’s rapidly-growing demand should have convinced MNCs to set up local manufacturing or assembly operations via tariff-jumping foreign direct investment (FDI), where foreign companies invest in a subsidiary in another country to avoid tariff barriers.
However, studies have shown that for ICT and semiconductor sectors, tariffs may deter foreign manufacturing investment and GVC integration, bypassing the supposed benefits of tariff-jumping FDI. Simultaneously, it does nothing to advance export production goals, thus echoing Rajan’s point about India’s growing trade deficit in key component manufacturing, as foreign investment only pours into smartphone assembly plants.
To be sure, India’s integration into ICT and semiconductor GVCs is underway. The US-China tech war and supply vulnerabilities exposed by covid have prompted businesses to seek alternatives to China and build security, redundancy and resilience. To benefit from this decoupling, New Delhi must discard its protectionist trade policy. That will help leverage its advantages of a large market, low labour costs and strategic partnerships with the US and others.
Recent initiatives like the Indian Semiconductor Mission and National Policy on Electronics, 2019, suggest growing policy cohesion on FDI, fiscal incentives and manufacturing infrastructure. The elimination of duties on certain smartphone parts announced in the 2023-24 budget is also a push in the right direction. Now that India has taken a targeted industrial incentives-focused approach, it is high time that our trade policy is revamped too.
Miheer Karandikar also contributed to this article.
Satya Sahu is a researcher with the high-tech geopolitics programme at Takshashila Institution, Bangalore.
