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TV sets signal a lapse into licence raj

India has been far more protectionist than any other country at a similar per capita income level. India has made 233 protectionist interventions since 2018 (Photo: Bloomberg )Premium
India has been far more protectionist than any other country at a similar per capita income level. India has made 233 protectionist interventions since 2018 (Photo: Bloomberg )

  • There is a growing hit list of products marked for protectionist barriers. Who will this regime actually benefit?
  • The licensing policy isn’t good news for global and even Indian brands used to the import route. A regulated regime would either restrict choice or force consumers to pay higher prices.

NEW DELHI : In the summer of 1984, Rajeev Karwal became the first MBA to join television maker Onida. It was a fascinating time for India’s communication revolution. The then Prime Minister Indira Gandhi aspired to make TVs accessible to 70% of India’s population. But there was a gnawing gap—critical parts of the television were imported.

“Curvature picture tubes were imported from Japan and Germany. There was a worldwide shortage. The government realised that dollar reserves were getting depleted," said Karwal, who in 2007 founded Milagrow Robots. Licences doled out for the manufacture of colour TVs therefore came to be tightly controlled.

Onida was one of the companies with a licence. “If you had good relationships in the corridors of power, then you stood a good chance of getting the licence, getting production enhancements. There was a dog fight between companies," Karwal remembered.

The restricted supply meant long waiting times for consumers at times. In its 31 July issue of 1984, India Today reported that the public sector Electronics Corporation of India Ltd had 40,000 people on its waiting list for a 51cm model fitted with an electronic tuner. Many had booked their sets the previous year, in December. Nevertheless, prices remained high for a majority of the population. A 51cm model from a private player could have cost 35,000 in mid-80s.

Cut to 2020. Critical parts of a LED TV set, like the open cell panel which forms 65% of the bill of materials, is still imported. China, Taiwan and Korea have replaced Japan and Germany in the component supply chain. And, the Directorate General of Foreign Trade, on 30 July, amended the import policy of colour TVs from ‘free’ to ‘restricted’. In the minds of many, licence raj, banished in 1991, has made a determined comeback.

On the surface, the goal appears twofold—de-coupling from China and pushing more assembly to India. This, by extension, could generate more employment in India’s struggling manufacturing sector. While many of the larger television brands were already assembling many models in India, newer brands are reliant on imports.

While TV is the target today, a larger number of products are expected to be included in a growing hit list. Gopal Krishna Agarwal, Bharatiya Janata Party’s national spokesperson on economic affairs recently wrote in the Hindustan Times that 371 items have been identified for increasing import duties, or for imposing non-tariff barriers on some of them. Indian manufacturers, he said, needed to “seize this golden opportunity in sectors such as toys, electrical equipment, electronics, minerals, chemicals, iron and steel, plastics, furniture, sports goods, musical instruments, fertilisers and apps".

Already, the union budget of 2020-21, in order to provide a “level playing field for domestic producers", increased customs duty on everything from kitchenware and footwear to toys and furniture goods. On the other hand, customs duty on many categories of raw materials and inputs imported by domestic manufacturers to assemble have been slashed.

The spectre of the licence raj, nonetheless, raises some uncomfortable questions. Who will the protectionist regime benefit? On paper, import substitution appears to be good news for domestic manufacturers. Still, can they scale up fast enough to become globally competitive? There is a risk that the current turn of things could come at the expense of consumers and at the expense of India becoming further de-globalized.

“Governments all over the world are using either the covid crisis or geo-politics as a cover for their own ideology," Vivek Dehejia, associate professor of economics and philosophy at Carleton University in Ottawa, Canada, said. “India wants to punish China for what they did at the border. The real question worth asking is if this is going to help Indian consumers? The answer is no," he added.

A licensing regime would either restrict choice or force consumers to pay higher prices. “A quota raises the domestic price of the product because it is now in restricted supply. Consumers who want to buy imported TVs will have to pay more and, who knows, there could be a knock-on effect on the price of assembled TVs as well. “The only possible beneficiaries are Indian firms that are involved in assembly," Dehejia said.

‘Not protectionism’

Bibek Debroy, chairman of the Economic Advisory Council to the prime minister, didn’t comment on TV licensing, but said that there were “ongoing exercises" that he wouldn’t characterise as protectionist. These include a review of trade agreements that are largely seen to have undermined Indian manufacturing. Meanwhile, India’s indirect tax structure is still work in progress—thereby, customs duties are work in progress, he said.

“We are in a period of a transition trade wise. There are trade frictions. In the midst of this, there are reviews on the free trade agreements (FTAs). As a result of the large number of FTAs, quite often, the customs duty has been inverted (when import duty on finished goods is lower than the duty on raw materials that go into making the product locally)," he said. “We also know that the rules of origin requirements have not really worked. As part of the review of FTAs, the rules of origin requirements will be looked at," he added.

One of the FTAs, the Asean–India Free Trade Area (AIFTA), came into effect in 2010. Indian manufacturers and lobby bodies have consistently maintained that the agreement was not well thought through. Countries such as China, Japan, Korea, and Australia have FTAs with the Asean block too and there was little competitive advantage for India. In the seven years between 2012-13 and 2018-19, India has run a trade deficit with Asean each year.

But standard reviews apart, data does show a distinct, underlying policy orientation. According to the Global Trade Alert Database, since 2018, India has been far more protectionist than any other country at a similar per capita income level. India has made 233 protectionist interventions, which include tariff hikes, new licensing requirements and changes in FDI rules, in the last two years. Philippines and Vietnam, in comparison, made eight protectionist interventions.

Good news, bad news

For now, Indian contract manufacturers of TVs are a happy bunch.

Sunil Vachani, chairman and managing director of Dixon Technologies (India) Limited, a contract manufacturer, said that of India’s overall TV market of 25,000 crore, about 30% is being imported. “Hopefully, with the new policy, a large part of the imports will start getting manufactured in India... even the very large screens. It is a matter of time before the entire production which was outside India comes back," he said.

Not just contract manufacturers, he thinks the licensing move is good news for the entire industry. India, over time, now has a chance to morph from a nation of assemblers to real manufacturers where even the components are made. “When you have a low production base, the component makers don’t come in. The component ecosystem could develop now," Vachani said.

The jury is still out on the impact on employment. Assembly operations are indeed labour intensive in many sectors such as garments. What about consumer appliances and electronics?

Frost & Sullivan, in a report for industry body Consumer Electronics and Appliances Manufacturers Association (CEAMA), analysed the impact of localisation on five consumer products—air conditioners, refrigerators, washing machines, TV and audio equipment. In 2018-19, the five categories employed 250,000 people across manufacturing, operations, and support. With increased levels of localisation, the five products could employ up to 400,000 by 2024-25, the study predicted. The unknown here could be automation. Manufacturing, today, employs far less people than a decade ago. Companies are likely to press the accelerator on automation, especially after the migrant labour crisis and social distancing norms post the pandemic.

As for global and even Indian brands used to the import route, the licensing policy isn’t good news. An executive from a multinational said that over the years, global brands have developed supply chains to a fine point where there is minimum effort-maximum output. Components are sourced from multiple countries in the cheapest ways and this has evolved over the years. “When suddenly a government policy tampers with this arrangement, it is a market distortion. You are upsetting the natural pricing order of the supply chain," he stressed.

Beyond tariffs

Of course, import substitution is not the only answer in industries where there are challenges such as access to technology. Furniture manufacturing, which is dominated by micro and small sized companies, is one such sector. The playbook here has to be a tad different.

Ashish Shah, co-founder and COO of furniture aggregator Pepperfry, pointed out that India exports around $1.5 billion of furniture. This implies India has the skills and the craftsmanship. “We do produce good furniture in India. We understand furniture really well," he said. “Yet, manufacturers in India do not have scale. They are small companies. Our business, for instance, is built on MSMEs," he added.

The playbook to encourage furniture making must therefore concentrate on attracting manufacturers from across the globe to set up units in India. “We are inviting retailers to set up shop. But we need to import technology rather than products, like we have done with electronics. If we get large manufacturers to set up n India, over time, we will learn how to go about large-scale production," Shah said.

The silver bullet here must therefore be subsidies, not higher import tariffs. Higher tariffs, if at all, must be on the imports of finished goods and not on the factors of production such as wood. That’s because maximum manpower utilisation in furniture making happens in converting the raw material to finished goods.

Toy making, like garment manufacturing, is employee intensive. To promote Make in India, customs duty on tricycles, scooters, and dolls, among others were raised from 20% to 60% in 2020-21. Nevertheless, for quality manufacturing at an export competitive price, toy makers have to figure out an efficient local supply chain.

Pals Plush, an Indian stuffed toy exporter, ran factories in both India and China. Over the last five years, it shifted capacity to India—to Sri City and Kakinada in Andhra Pradesh—as costs in China rose. Nonetheless, raw material supplies still come from China. So does the design expertise and prototyping.

A soft toy is made of a fabric with polyester fibre stuffing inside. There are quality suppliers of the stuffing. However, fabric is the challenge because it could frequently change, like in the fashion industry. There are different varieties and colours.

With recent developments around decoupling from China, Seema Nehra, director at Pals Plush, foresees supply chain challenges in the near future. “There are a few fabric factories in India but they do not have expertise to cater to international quality or clients. We are exploring if we can set up a joint venture for fabric manufacturing in India," she said.

For the time being, industrialists appear to be reconciling to the era of stiffer tariff and non tariff barriers. Many do not speak up in public; they privately hope that the government is more understanding when it comes to the time frames around decoupling from China.

“The government’s approach is that of a teacher who raps you on the knuckle for not listening. Teachers who are popular are those who encourage students," the owner of an electronics hardware company who did not want to be identified said.

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