Opinion | Let’s not miss this opportunity to revive ‘Make in India’

India can leverage the US-China trade spat to attract firms looking to shift manufacturing out of China

India’s next government is poised to inherit a troubled economy. Several indicators point to a reduction in demand, including for packaged consumer goods and two-wheelers which had earlier seen consistent growth. Conscientious policymakers have consequently begun to highlight that this lack of demand is a symptom of a deeper malaise—namely, lack of income growth for a majority of Indians. A vicious cycle like this can only be remedied by resuscitating economic activity wherever possible. As far as manufacturing is concerned, the “Make in India" programme has thus far been unsuccessful in catalysing such activity.

A large thrust of “Make in India" has been on localizing mobile phone manufacturing. Trade metrics, however, paint a dismal picture. Broadly, mobile manufacturing entails two steps—the higher-value activity of making components and the lower-value assembly of these. Traders can import parts and assemble them locally, or import ready-to-use phones, depending on relative advantages under prevailing import duty regimes. While imports of fully-built mobile phones have reduced substantially over the last five years, imports of components has risen manifold. Specifically, imports of ready-to-use phones on which India imposes 20% duty have fallen 80% from 47,439 crore in 2014-15 to 9,592 crore in 2018-19 (until February). However, imports of mobile components rose by around 116% from 47,011 crore in 2014-15 to 1.02 trillion in 2018-19 (until February). It thus seems an “Assemble in India" paradigm has emerged that serves the interests of companies that only wish to make nominal investments in local supply chains for trading profits, and not for manufacturing value addition.Typically, assembly does not account for more than 5-6% of a smartphone’s value. Lack of local value addition is worrying not just because it militates against the logic of “Make in India", but because it’s directly related to lack of income growth in India’s economy.

A sharp contraction in exports of mobile phones from India worsens the outlined challenges. Mobile phone exports peaked in 2012-13 at 14,487 crore. By 2018-19, they had fallen to under 9,000 crore. That is, imported parts were not used to make complete products for re-export. Instead, these component imports fuelled a trading and assembly ecosystem which contributes very little value locally. Indian consumption demand, then, is not doing much to drive domestic income growth.

Evidently, “Make in India" has been limited in ambition and scope. Its vision follows from an outsize focus on erecting tariff barriers to protect domestic industry, instead of incentivizing manufacturing competitiveness through tax breaks, infrastructural support and other structural interventions. A similar tariff-led approach failed to catalyse the local manufacture of solar cells, the technologies of which have evolved rapidly like phone technologies. Keeping up with the technology curve requires serious investments in local research and development, which high-tariff regimes do not encourage.

India’s tariff-led approach is reminiscent of a bygone era of industrial policies. However, greater specialization of industrial production today means that countries must adopt holistic policies that address supply chain complexities. Instead, in 2016, India chose to adopt a simplistic Phased Manufacturing Programme (PMP) under “Make in India", to levy duties on component imports hoping to stem related merchandise inflows.

The PMP is a sequential application of tariffs that are raised gradually for different mobile phone components. Lower-value parts such as battery packs and chargers are sought to be localized first, followed by higher-value components like display screens and cameras. However, the disadvantages of manufacturing in India, including acute infrastructural deficits, cannot be offset by high tariffs alone. This is already visible in import statistics relating to low-value components covered under the PMP’s first phase. More such components are being imported at cheaper rates, perhaps an indication of the large surplus capacity of Chinese companies, which dominate the Indian smartphone market.

It could be argued that Chinese companies cannot similarly reduce costs on higher-value components. However, both the European Union and Japan have recently filed consultation requests at the World Trade Organization on the tariffs imposed by India on several ICT products, including ready-to-use phones and several assembly components covered under the PMP. Such consultations constitute the first step towards initiation of disputes at the WTO. Given that India had already committed to keeping its tariff levels at zero on such products prior to the notification of PMP, the programme may have a short shelf life.

It is also worth highlighting the strategic opportunity India currently enjoys, wherein it can leverage the ongoing trade spat between the US and China to attract firms that may be looking to hedge bets and shift some manufacturing capacity out of China. However, lacklustre inward investment in manufacturing shows that such re-orientation is contingent on a re-balancing of incentives and tariffs under “Make in India". The next government could begin to address such concerns with an immediate impact assessment of the PMP, particularly since the success of “Make in India" and income growth in the economy are correlated.

Vivan Sharan is partner at Koan Advisory Group, New Delhi. These are the author’s personal views