India mustn’t miss this chance to supercharge its electronic goods industry 

Aatmanirbharta in the electronics sector is a myth, as competitive exports require cheap imports. By disregarding the ITA, products manufactured in India will not be able to compete in the international market.

India is caught up in a quarrel over tariffs on information and communication technology (ICT) goods. The EU filed a WTO dispute that India has applied tariffs up to 20 percent on certain ICT goods, such as mobile phones and accessories, which is against the Information Technology Agreement-1 (ITA-1), to which India is a signatory.
Signatories to ITA-1 are obliged to levy a maximum tariff of zero percent on a set of pre-agreed ICT goods. India claims that the goods on which it levies a tariff are not covered under ITA-1. Besides the EU, Japan and Taiwan also filed similar cases against India. The WTO has ruled against India in all three disputes.

India approached the appellate body (which has been dysfunctional for some time now) in the dispute filed by Japan on May 25, while the EU is threatening to apply retaliatory tariffs.

China’s Gain And India’s Loss

Keeping this tariff squabble aside, there is a bigger question of whether India should join the ITA-2, which expands on the scope of the original agreement to include software and digital content, touch screens, GPS navigation equipment etc.

The Indian government seems to have taken a firm stance against joining the expanded agreement and justifying it by highlighting India’s “most discouraging” experience with ITA-1, in which “the real gainer from that agreement has been China”. It further states that given the government’s current manufacturing push, this is the “time for us to incubate our industry rather than expose it to undue pressures of competition”.

It is indeed the case that China’s electronics industry gained more from ITA-1 than India. Particularly, Chinese companies dominated the industry for cheap mobile phones and electronic products, and the Indian domestic manufacturers could not compete and disappeared from the market by 2017.

This causality is the underlying argument behind India’s adamance on ITA-1 and reluctance with respect to ITA-2. However, the government is drawing the wrong lessons from prior experience for three reasons.

But Why Did India Lose Out?

First, the government is mistaking correlation for causation. It is wrong to attribute the dismal performance of the Indian electronic manufacturing sector to the ITA-1. The domestic phone makers’ business model was to rebrand imported phones from China, which would not be profitable for long.

In fact, it is the ITA that enabled companies to import electronic components cheaply, giving them an opportunity to move up the assembly value chain. These companies quickly captured nearly 30 percent of the smartphone market share.

However, the lack of investment in R&D or industrial innovation meant these companies had no competitive advantage. It was not so much a failure of an infant industry but the inability of incumbents to catch up technologically.

This story isn’t unique to electronic products. Even in segments to which the ITA doesn’t apply, such as machine tools, textiles, or toys, Indian companies couldn’t stand international competition. Surely, the problem lies in India’s large-scale manufacturing troubles, not the ITA. Fundamental – and tougher to resolve – factors such as the unfriendly business climate, archaic land and labour laws, complicated tax system, and lack of financing options underlie India’s past manufacturing underperformance.

Protectionism Won’t Work

Second, if India wants to be a manufacturing and exporting powerhouse, it cannot do so by protecting “champions” from “undue pressures” of competition, as we did before 1991. The electronics industry heavily relies on the frictionless flows of goods, capital, and human resources across borders.

Aatmanirbharta in the electronics sector is a myth, as competitive exports require cheap imports. By disregarding the ITA, products manufactured in India will not be able to compete in the international market. Even industrial policy and targeted subsidies are ineffective due to high import tariffs.

An analysis by the industry body of phone manufacturers shows that higher import tariffs have meant that a large portion of the money companies receive under PLI gets re-routed to pay these tariffs, ultimately making production cost-prohibitive. This is why companies such as Apple have been seeking duty exemptions for some electronic components.

Tariffs are also a major sticking point in the India-Taiwan Free Trade Agreement. A unilateral reduction in tariffs by following ITA is thus in India’s interest.

Learning From China’s Success

Third, it’s important to derive the right lessons from China’s success under the ITA-1 regime. China joined ITA-1 in a position of strength in 2003, with a fairly well-established electronics manufacturing sector. By then, China was the third-largest exporter of ITA products and the fourth-largest importer.

The ITA supercharged this advantage and propelled China to become a global leader. Twenty years later, India is in a similar position to China in 2003. It has managed to kickstart its electronics assembly industry, and the global winds are in India’s favour.

Moreover, by virtue of its manufacturing strength, China could enter the ITA-1 and negotiate favourable exemptions – a delayed phase-out period and exemptions on certain goods. It has also been able to negotiate some exemptions under the expanded ITA-2.

By categorically dismissing the ITA-2, India has lost its seat at the table and negotiating rights. Given that India is both a large market and is more deeply integrated with global value chains with the manufacturing presence of Samsung and Apple, it can negotiate for important waivers and co-shape the ITA-2 product list.

Weigh Costs, Benefits Of ITA-2

Finally, reducing tariffs helps in greater adoption of ICT products that play a key role in increasing productivity and efficiency not just in the electronics sector but also in all other sectors that use ICT as an input, such as the wider digital economy.

Cheaper ICT products also increase consumer choice and welfare and spur economic growth. A liberal import policy on electronic items will help India attract domestic and foreign investment in electronics manufacturing and embed Indian companies in global value chains.

A liberal, rules-based trading order is beneficial to India. Instead of a doctrinaire opposition to ITA, India must carefully weigh the costs and benefits of staying out of ITA-2.

Anupam Manur is a Professor of Economics and Pranay Kotasthane is the Chairperson of the High-Tech Geopolitics Programme at the Takshashila Institution. Views are personal, and do not represent the stand of this publication.