GOVERNMENT INCENTIVES & SOPS

The Indian government recently imposed restrictions on imports of laptops, tablets, personal computers and servers, requiring importers to seek licenses for these products. The move aims to boost domestic manufacturing and reduce dependence on imports, especially from China. The government justifies these restrictions citing security concerns and the need to build domestic capabilities. It also intends to incentivize local manufacturing through the production-linked incentive (PLI) scheme, similar to how it promoted mobile phone manufacturing earlier. However, there are questions whether same success can be replicated in the computer hardware industry. While aims are noble, experts argue that the policy measures may be premature given the nascent state of this industry. There are also concerns that frequent policy changes create uncertainty for businesses. The Mobile Phone Manufacturing Success Story The government’s policy to boost domestic mobile phone manufacturing has largely been a success story. Here is an overview of the key interventions and outcomes: Policy Interventions: Import duties on mobile phones were raised from 15% to 20% in 2018 to discourage imports of fully built units. Import duties on components like chargers, adapters, batteries and mechanics were also hiked to 15% in 2018 to boost local value addition. The PLI scheme was introduced in 2020 offering 4-6% incentive on incremental sales of locally made mobile phones. Achievements: Mobile phone exports from India grew 128% in Apr-May 2022. Total exports are projected to cross $1.2 billion in 2022-23. Share of domestic value addition has increased to 20% compared to negligible earlier. Investments and jobs have increased substantially. Leading global brands like Apple now manufacture in India. The PLI scheme attracted investment commitments of Rs.11,000 crore from international companies. India became 2nd largest mobile phone manufacturer globally after China by volume. Criticisms: Research by former RBI governor Raghuram Rajan argues that net exports of phones and components remains negative despite these measures. India still imports most components and does only assembly of mobile phones which is a small part of the overall value. Vietnam's exports are 6 times higher than India's despite not having any incentives or import barriers. There are concerns that the PLI scheme mostly subsidizes assembly not actual manufacturing. The incentives may outweigh the value addition done in India. Frequent policy changes like imposing import barriers after years of liberalization creates uncertainty for businesses. Can This Be Replicated in Computer Hardware Sector? While the aim to encourage domestic manufacturing of laptops, PCs and servers is commendable, experts argue that the policy measures may be premature given the differences between the two industries: Current State of Computer Hardware Industry: The domestic computer hardware industry is still at a nascent stage. India has minimal presence in manufacturing of computing hardware like PCs, laptops and servers. There is no significant exports taking place currently to developing countries. Domestic value addition is negligible as India depends almost entirely on imported components. Challenges in Local Sourcing and Manufacturing: India lacks a component manufacturing ecosystem for key parts like semiconductor chips, processor units, displays etc which are critical for a functioning laptop or PC. Setting up manufacturing facilities for these high-tech components requires huge investments and advanced technology which will take time. The PLI scheme for IT hardware manufacturing has received a muted response so far, with only 3 approvals finalized. Risk of Frequent Policy Changes: Global manufacturers have invested in supply chains keeping India's liberal trade policies in perspective. Sudden import restrictions create uncertainty. Import restrictions may backfire, although the success of the mobile PLI scheme may act as an assurance. Comparison with Mobile Phone Sector When import duties were introduced in 2018, India already had some component manufacturing like chargers, batteries, mechanics etc which enabled assembly of mobile phones. The components required for mobile phones are relatively simpler compared to advanced chips, processors and displays needed for laptops and PCs. Mobile phone manufacturing could leverage India's strengths in electronics assembly and component manufacturing. Computing hardware requires creation of an ecosystem, which will take time. Vietnam's success in mobile phone exports is partly due to availability of components through free trade agreements. India lacks this advantage currently in the computer hardware space. Suggestions to Effectively Promote Domestic Manufacturing While emulating the success of mobile phone manufacturing in the computer hardware sector may not be feasible immediately, there are other policy measures that can help develop this industry: Create Component Manufacturing Ecosystem: Provide incentives and technical support for setting up semiconductor fabrication units and chip packaging facilities through the semiconductor PLI scheme. Collaborate with global tech giants for knowledge transfer and skilling workforce in chip design and manufacturing. Invest in R&D infrastructure for indigenous development of commercial chip designs leveraging organizations like CDAC. Strategic Trade Policy Reforms: Rationalize import duties in a graded manner over 5 years to provide policy stability. Calibrated tariffs aligned to local capacity creation. Pursue free trade agreements with chip exporting countries like Taiwan, South Korea, Japan to enable input procurement. Negotiate deals with global manufacturers to export components like camera modules, displays from India. Handhold Local Industry: Provide production linked incentives on incremental local value addition instead of just finished products. Facilitate JVs between Indian assemblers and global component majors to nurture know-how and ecosystem. Develop local R&D capabilities through academic partnerships and skill development. Promote Exports: Encourage exports to developing countries by allowing duty free import of components required for production of export units. Provide logistics support and market access to boost exports. Create manufacturing clusters and promote branding to improve competitiveness. Conclusion In summary, while the objective to boost domestic manufacturing of computers and laptops is good, experts have cautioned against import restrictions given the nascent state of this industry. Developing a competitive manufacturing ecosystem requires creation of supply chains along with a stable trade policy, which will require calibrated efforts. The government can take inspiration from the mobile phone success story but may need a different playbook to replicate it in the computer hardware space. With the right policy support and long term approach, India can reduce dependence on imports and emerge as a global manufacturing hub across electronics and IT products.

Tag: GOVERNMENT INCENTIVES & SOPS

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