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Opinion

The right way to boost Indian electronics

Stop manipulating import duties and instead modernize rules, skills and infrastructure

On the face of it, India should be the promised land for local electronics producers, with demand, especially for mobile phones and laptops, growing at 26% a year, compared to 5% globally.

But the dream quickly turns into a nightmare for manufacturers trying to turn the vision into a reality.

Most of India's electronics products are imported from China. Electronics are second only to crude oil, in pushing up the country's import bill and current-account deficit, and so adding to downward pressure on a vulnerable rupee.

Pushing indigenous production of consumer electronics would improve the trade balance, create jobs directly and indirectly through components manufacturing, and perhaps boost the country's weak manufacturing exports.

However, the industry faces myriad obstacles, including infrastructure deficiencies, a growing skills gap and archaic labor rules. Potential foreign investors must negotiate the risks of arbitrary tax demands, unexpected regulatory actions, slow court cases and cumbersome customs procedures.

India has the world's second highest number of mobile telecom subscribers, with 1.17 billion on June 30, and of internet subscribers (447 million). Only China has more.

With low smartphone penetration of 26% of the 1.3 billion population and falling internet data charges, demand for smartphones is growing at double digit rates. But India's electronics hardware production including those of mobile handsets and components and LCD/LED TVs stood at a meager $59 billion in the year ending in March 2018 -- just 60% of local consumption and only 3.4% of the industry's global turnover of $1740 billion.

With domestic production being insufficient to meet demand, India is increasingly relying on Chinese supply. India's import of electronics and computer hardware stood at $53 billion, including $18 billion in mobile phones and components. India's electronics hardware demand is projected to soar to $400 billion by 2025. Unless indigenous manufacturing improves substantially, import dependence will increase -- and dramatically.

The Indian government's draft Electronics Policy 2018 aims at raising the output of mobile handsets from 225 million units now to 1 billion mobile handsets with a turnover of $190 billion in 2025 -- including 600 million for export. Clearly, the target is far too ambitious.

Moreover, the domestic value-added in electronics hardware production remains very low in the absence of a vibrant component supplier base -- and will not increase quickly.

The current turnover of India's mobile phone industry is $20 billion but most of it is accounted for by the low-added-value assembly of imported parts. Exports are negligible.

The situation would perhaps be less dire if the authorities had not been so heavy-handed in dealing with Nokia. The Finnish telecoms closed a factory in the southern state of Tamil Nadu due to a series of unreasonable tax demands before eventually shutting down its India operations altogether. Before then, India's exports of mobile phones totaled around $2 billion (in 2013).

Many Indian experts think that joining the WTO's Plurilateral Information Technology Agreement (now known as ITA-1) in 1997 killed its nascent electronics hardware industry by forcing market opening.

However, if that were true, how come China which became a party to ITA -1 in 2003, pushed its global share in electronics manufacturing from 2% in 2000 to 14% in 2011?

At present, China, including Hong Kong, accounts for 57% of the world mobile phone exports through popular brands such as Mi while Indian brands such as Micromax or Carbon Mobile, heavily dependent on imported parts, are struggling to survive despite the large and growing domestic market and high import barriers on foreign handsets.

ITA -1 did make India remove import duties on 200 electronics hardware products including computers, semiconductors and telecom equipment. But New Delhi mistakenly chose to maintain high import duties on components, making it financially unviable to import them and so choking the growth of the local assembly of consumer electronics.

Meanwhile, the same problems that have held back Indian industry in general, constrained electronics, including poor infrastructure, bureaucratic red tape, and restrictive labor laws. Staying out of ITA-2, a successor agreement that seeks to further liberalize trade in IT goods, or raising imports barriers or extending subsidies, won't be enough to help local manufacturing.

Moreover, the uncertainties associated with land acquisition and regulation discourage foreign investors from pressing ahead quickly with expansion plans. For example, Foxconn, the world's largest contract manufacturer, pledged in 2015 to invest $5 billion in the western state of Maharashtra but was this summer still discussing with local officials the scheme's implementation, according to reports.

To push indigenous manufacturing, New Delhi this year raised import duties on mobile phones to 20% while also lifting to 10% the levy on key components such as printed circuit boards, which can account for half the cost of a mobile handset. The idea, through the government's phased manufacturing program for the phone sector is to boost domestic value addition. Skeptics doubt that in the absence of better basic conditions such infrastructure, skills or business-friendly regulation the plan will struggle.

India must realize that only a competitive manufacturing sector can withstand competition from Chinese imports or enter overseas markets through exports. The priority should not be playing with the import duty regimes but addressing the real problems.

Circuit boards, memory chips and processors are the key to long-term success in electronics manufacturing. That requires capital intensive R&D. Given India's relative technological backwardness in these areas, foreign investment would be vital, as would a robust intellectual property regime.

New Delhi must make it easier for foreign investors looking to set up manufacturing base in the country by expediting bilateral investment protection treaties and minimizing arbitrary tax decisions, especially ending retrospective tax rulings, as the Narendra Modi government has promised but so far has not delivered.

If India is serious about electronics, it cannot underestimate foreign manufacturers at a time when not just China but countries such as Vietnam are competing for a share of the industry.

Ritesh Kumar Singh is the chief economist the new policy research and advocacy specialist Indonomics Consulting. He is former assistant director of the Finance Commission of India.

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