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Seven Years In The Making, Self-reliance May Be The Way Forward For India

Taken together, these changes will also ensure massive job creation and save hundreds of billions of dollars in foreign exchange and boost reserve capital accumulation in the Indian banking system.

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It has been seven years in the making since India under Prime Minister Narendra Modi first signalled an intent to undertake a serious push towards import substitution as part of the grand Make in India strategy. The initial, tentative, steps were taken in the central government’s Budget of 2015 with the then finance minister, the late Arun Jaitley, enacting an enabling provision to hike the import duty on iron and steel by as much as 50 per cent. This was at a time when steel imports had surged to nearly 8.4 million tonnes.

By 2017, the focus on using import duties as a tool to nudge foreign manufacturers to undertake manufacture in India saw hikes on items as diverse as microwaves, television sets, LED lamps and smartphones. The most recent Budget by finance minister Nirmala Sitharaman saw hikes in customs duty on over four dozen items as part of the continuing import substitution strategy of the Make in India initiative.

It is not as if earlier governments had not hiked customs duties. In 2012, finance minister Pranab Mukherjee doubled the import duty on gold to 4 per cent, leading to a month-long protest by jewellery manufacturers in many states. Post India joining the WTO, import duty hikes have been sporadically hiked primarily as a source of revenue or for protecting domestic manufacturers like steel companies from Chinese imports.

There is a crucial difference in the strategy followed by the NDA government. Since coming to power in 2014, the Modi government is estimated to have hiked import duties on over 3000 goods.

This is where Prime Minister Narendra Modi’s call for “atma-nirbhar Bharat” or a self-reliant India echoes strongly.

The forceful nature of Modi’s address and the masterly linking of the self-reliance theme with the sentiment against globalisation in the post-Corona world order could well be the second most seminal moment in India’s recent economic history after Narasimha Rao allowed his finance minister Manmohan Singh to begin the process of opening up India’s economy to global capital, supplies and technology.

This shift, coming as it does after three decades of that watershed moment in India’s history would have profound consequences for our industrial future.

Let us analyse the announcement through the prism of import dependence and the consequent drain on foreign exchange. A vast majority of India’s import bills are on account of crude oil, gold and information, communications and technology (ICT) items.

I am purposely leaving out Gold and Crude Oil for which there is simply not enough domestic production for any worthwhile self-reliant “manufacturing”. This leaves us with ICT as the biggest sector to analyse the justification of the proposed move.

India imported around $ 400 billion of ICT products last year. As we fight the Coronavirus, the difficulties of supply chain disruption amidst the lockdown led to the realisation that for each small item, whether critical or not, there is an excessive dependency on China.

It is not as if Modi suddenly sprung the concept in the country. He has been dropping hints including as recently as April 24 when he, while interacting with gram panchayat members, said, “the biggest lesson the COVID-19 pandemic has taught India is to become self-reliant”.

So, what is the reality of ICT imports?

ICT and telecom are areas where even after huge domestic potential, the goods are imported, because of faulty policies for last 20 years. In this sector other than mobile handsets, the balance of trade position is extremely disappointing with the ratio of imports being 10 times higher than exports, as can be seen from granular goods classification data maintained by the Department of Commerce.

Further, most imports are classified under the heading of “others” to take advantage of the prevailing zero per cent basic Duty structure under that respective heading. On careful review of the import data, it is seen that when duty was imposed on import of some of the non-ITA products, the import of the modules and parts/equipment in “other” category increased substantially.

Despite many industry associations advocating a course correction, policies have not changed as is evident from customs data. Given the new direction that Prime Minister Modi has set for self-reliance and import substitution, it would make sense for an immediate hike in the customs duty structure for the ICT sector to ensure self-reliance and security of India. Accordingly, all products getting imported under “other category” to circumvent duty should be brought under 40 per cent tariff structure. (There are no fears of smuggling as these goods are bulky and cannot be brought in a pocket or on the body of a person like gold.)

Further to promote design-led manufacturing in India, the Basic Customs Duty on non-ITA products shall be enhanced to flat 40 per cent.

Similarly, the basic customs duty on anything assembled imported part or full, assembled printed circuit boards (PCB’s), modules and sub-systems should attract 40 per cent customs duty to discourage any time of imports in these categories of items.

To encourage the manufacturing of the component ecosystem in India, customs duty on components shall be gradually increased, starting from 10 per cent from base year to 40 per cent by the fourth year. This will promote component manufacturing in India. For fully imported products, the basic customs duty should be hiked to 75 per cent in the base year and be further increased by the fourth year to 100 per cent to ensure that all such importers utilize the three years to set up manufacturing units in India. The machinery for the production of items be kept at 10 per cent in the base year and then subsequently increased every year to also encourage the domestic manufacturing of the machinery that is used to produce.

Further, it is also important to immediately clarify the definition of “importer”, “assembler” and “manufacturer” as currently there is no such official classification in India. The lack of a definition allows all importers, system integrators to incorrectly be portrayed as manufacturers. Thus, they falsely sell all imported products as “Made in India”. The ICT sector is one area where despite the huge domestic potential, most goods are imported. One of the reasons is that India does not have a clear definition of what is a “manufacturer” in India.

Majority of importers or assemblers bring in the imported equipment by simply changing the sticker and declaring it as “manufactured in India”. A similar strategy is adopted by for goods in semi-knocked down (SKD) condition, where after local assembly, the product is declared as “manufactured in India”. Such importers, system integrators, assemblers just promote foreign products and have no interest to invest in research and development (R&D) within India.

Such companies enjoy a huge advantage over those few Indian companies who have tried to keep the flag of manufacturing alive in India all these years. These few, true Indian manufacturing companies, despite investing money in R&D and product development, lose out due to policy and bureaucratic approach that only promotes traders over true manufacturers.

In addition, it is essential that the authorities increase the component of preferential market access (PMA) purchase to 100 per cent as per the existing Public Procurement (Preference to Make in India), Order 2017 (PPP-MII Order), for all ICT products.

In 2017, the NDA government came out with a policy that specified the strategic list of items for public procurement for any project, funded wholly or partially, by the government (central or state). However, implementation in true letter and spirit remains pending. In addition, the government should also consider amending and mandate that all public procurement of domestically manufactured items be 100 per cent from April 1, 2021.  This can be carried out via an amendment to 2017 Order, with time being provided for implementation.

Taken together, these changes will also ensure massive job creation and save hundreds of billions of dollars in foreign exchange and boost reserve capital accumulation in the Indian banking system.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.


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Siddharth Zarabi

The author is a Senior Journalist and Macro-Economic Policy Expert.

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