India failed to capitalise on possibilities from US-China tensions

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December 25, 2019 12:50 AM

PMO wanted to exploit the possibilities from US-China tensions six months ago, but we missed it; US-China relations on the mend now.

nirmala sitharaman, appleSome months ago, finance minister Nirmala Sitharaman said she was designing policies to woo big manufacturers looking to move out of China.

The Apple, most will recognise, is a fairly hardy fruit, but it does lose its flavour if left in the open for too long. So, it has to be worrying that little has happened even six months after the principal secretary in the PMO asked senior secretaries to make the most of “a golden opportunity (of) … several global companies … in China… seriously considering an alternative location.” In the event, the PMO asked “that an enabling policy framework to seize this opportunity may kindly be designed”.

The PMO had companies like Apple and Samsung in mind—together they account for 60% of the $500 bn global export market for mobile phones—but, six months later, when the US and China have started unwinding their aggressive trade positions, India is no closer to offering them a good reason to relocate a large part of their mobile phone production here. This, sadly, is not the only instance of the government—and not just the Narendra Modi one—failing to capitalise on the moment; that is why, between 1990 and 2018, Vietnam’s exports rose 102 times from $2.4 bn (13% of India’s) to $245.6 bn (75% of India’s) while our exports rose just 18 times, from $18 bn to $325.6 bn.

The reason why the PMO, and others like Niti Aayog, were keen to get an Apple and a Samsung to produce in India is that though India’s production of mobile phones rose dramatically—from 6 crore units in FY15 to 22.5 crore units in FY18—so did imports of components, from $11.2 bn to $21.9 bn. Were an Apple or a Samsung to shift a meaningful part of its production to India—while Apple still primarily produces out of China, Samsung shut its last China factory, which made 63 mn phones, in October—the argument was, they would shift their principal suppliers, and value-addition in India would grow dramatically.

Apple’s exports out of China (iPhones, iPads, iWatches, etc), to put this in perspective, retail at $200 bn and the firm employs (directly and indirectly) 47 lakh people in the country. For its part, when Samsung—it produces around half its mobile phones out of Vietnam—moved out of Huizhou, the Chinese city turned into a ghost town due to the main factory, and its ancillaries, shutting shop; the services economy, including the rental one, built around Samsung also collapsed. While Samsung has the world’s largest mobile phone factory in the world in Noida—this has a capacity of 120 mn phones—it has several more, albeit smaller ones, in Vietnam; with half its 350-400 mn phones made out of Vietnam, not surprisingly, the country’s exports are over $52 bn today, or roughly 10% of the global exports market.

If India has to have any chance of meeting its exports target—the 2019 National Policy on Electronics (NPE) has a domestic sales target of 400 mn phones (worth $80 bn) and an export target of 600 mn (worth $110 bn) by 2025—a business-as-usual approach just won’t do. Between FY18 and FY19, India’s exports grew 125%, but they were still a mere $2.7 bn. NPE, in fact, aimed at zero net imports of electronics (including mobiles) by 2020 while the actual imports were just under $39 bn; the 2025 mobile-export target implies India is looking at a global market share of 19-20%!

It is true that Apple assembles phones in India, but doing this in, say, a Foxconn facility, without its entire ecosystem,isn’t quite the same thing as there is little value addition. What makes the inability to get either an Apple or a Samsung to shift any significant part of their production setup in India even more tragic is that, even before the PMO wrote its letter, things looked like they were moving in the right direction.

Till then, while India boasted of having become a big producer of mobile phones, the truth was quite the opposite. While the government spoke of 268 units producing mobile phones/components in 2019—up from 120 in 2017—FE found that half had shut shop as there was little local value addition. Since the additional problem with the policy was that imports were burgeoning, in February 2019, the government came up with NPE 2019 that shifted the focus from domestic manufacture to exports, and from import-tariff protection to incentives for exports. Some months ago, finance minister Nirmala Sitharaman said she was designing policies to woo big manufacturers looking to move out of China; it was in this context that she cut the corporate tax rate from an effective 46% (including dividend distribution tax, DDT) to 15% (without accounting for DDT). The government also announced a `50,000 crore export incentive scheme to replace the existing MEIS and other schemes that were also falling foul of WTO norms.

While the temporary (?) patch-up between the US and China has meant that big producers in China have no immediate pressure to leave the country (with trade sanctions, their China exports would have been hit by import duties in the US); at the same time, the government has not made any concrete offer to the big mobile phone manufacturers either. Indeed, while estimates are manufacturing in India is around 19-23% more expensive than in China, and 10-12% as compared to Vietnam—due to poorer infrastructure here, and lower fiscal incentives—India has lowered the export incentives it gives for mobile phone exports; this was 4% of the value of the phone till January, when it was reduced by half, as a result of which, this year’s exports are likely to be lower than last year’s.

Postscript: This is, though, not the first time India has failed to seize the initiative. When China vacated the lower-end textiles markets, it was countries like Bangladesh and Vietnam that captured the markets. India’s refusal to free up oil and gas markets has ensured investments in the sector remain poor; ditto for the mining sector. In the case of telecom, not scrapping licence fees in 2010—when spectrum was sold at sky-high prices—has resulted in the sector almost dying… The list of lost chances is a long one.

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