#261 Incentives That Work and That Don't
When Chinese Exports and Taiwanese Firms Met India
India Policy Watch #1: No Free Run for Chinese Exports
Policy issues relevant to India
— RSJ
One of the things we have argued here for a long time is the counter-productive nature of import tariffs in India’s goal to become a global electronics manufacturing hub. Our aim is to be a part of the global value chain (GVC) and shift a large part of the GVC manufacturing base to India. And in many areas, we have gone about that task by adopting policy measures that defy logic. Raising import barriers is Exhibit A in this list. By their very nature, GVCs are global in nature. It means it is difficult to have a single country or a single manufacturing base to own it completely. You could have a plan to have a lion’s share of it, but that can only take shape in the long term (we are talking decades here). However, our policy thrust in the already flawed PLI schemes is raising import barriers in sectors where our manufacturing base is nascent. The Gross Value Added (GVA) for much of our electronics manufacturing sector is less than 15 per cent. We have to import to build sub-assemblies, PCBAs and other value-added components. Import tariffs on components increase domestic manufacturing costs and make us uncompetitive in global markets. Without the touchstone of global competition, we lack the appreciation and understanding of quality and innovation. So, we are stuck at a low-level equilibrium despite all the pious intentions.
This isn’t rocket science. There is data already to establish that import barriers on components aren’t helping. This isn’t restricted to electronic manufacturing alone. In the past decade, we have raised tariffs on over 3000 items in our mispronounced zeal to boost domestic manufacturing. The problem, as ever, in India is industry doesn’t make a strong enough case to the government about glaring issues like this. Much of what comes out from industry bodies regarding recommendations tends to be adulatory prose on what the government has already done, with some polite requests for further subsidies or fiscal support.
Therefore, I read the CII report Developing India as the Manufacturing Hub for Electronics Components and Sub-Assemblies, which was published last week, with great interest.
For once, apart from the usual prayers to the state, a few recommendations go to the root of the issue. Quoting from the report:
“India has continuously retained high tariffs for electronics imports with a presumed approach of boosting localisation. On the contrary, the adverse impact of high tariffs and duties on the scale and cost of manufacturing is evident. This has made India’s ecosystem globally uncompetitive.
In the scenario where domestic capabilities for components and modules are still in its nascent stage, import tariff barriers can only increase the cost of finished products in India. This will severely impede the ability of domestic companies to compete efficiently in the global market. Building cost competitiveness is key to participate and efficiently compete in the GVCs besides ensuring build-up of scale and exports.
The key competing economies such as China and Vietnam have adopted a policy of lower tariff barriers to encourage greater access to components and sub-assemblies through imports. In many cases through FTAs these countries are also able to import at zero duties which provides a competitive advantage globally. India will need to evaluate its approach by building its own capabilities and reforming the current policy structure to be globally competitive.”
I’m glad that this has been put down in black and white. Much of this was anticipated, and if you go back to our editions a couple of years back on this topic, we covered the downstream consequences of raising import tariffs. At that time, the industry applauded every move as a masterstroke. Maybe it is a sign of times that the CII has found its voice and ability to reason. Because what follows in the report is plainer talk. This time on dealing with China and the “Press Note 3” that restricted FDI from China. The report states:
“Press Note-3 was introduced in April 2020 mandating government approval regarding FDI originating from countries sharing land borders with India. While the original intent was to prevent predatory acquisition of companies during the pandemic, it has severely restricted FDI from China where the majority of the global component value chain is located. The exponential growth of mobile manufacturing and planned creation of the component ecosystem has hit a hurdle owing to this investment restriction. Migration of these units in a short span of time may not be feasible. There needs to be a strategic view of sectors where there is a need to shift large scale GVCs along with their ecosystem in the short run (3-5 years) while creating conditions for Indian companies to join the GVCs in a 4-10 years period. If the ecosystem does not move along with the GVCs, it may stifle large scale production. Moreover, it will also adversely impact domestic value addition, as GVCs will turn to import routes for components. India should adopt a non-restrictive approach towards investments, component imports, openness towards technology transfers, ease of inward movement of skilled manpower and easing on non-trade tariffs. Review of Press Note-3 with adequate guardrails should be considered in the current context.”
Bravo. A bit late, perhaps, but it is great to see sensible recommendations.
Separately, on how to deal with China on trade, Ajay Shah and Ila Patnaik make a case for a ‘surgical approach’ to trade barriers with China by policymakers. A bit ambitious, perhaps. But worth considering. As they write in Business Standard:
“ From 2018 to 2023, the overall growth of Chinese exports (measured in USD) was 36%. Their exports growth into India in this period was 53%. We believe it is now wise for the Indian state to establish non-tariff barriers against Chinese exports and overseas production sites of Chinese firms. We recognise that this constitutes protectionism, and violates the tenets of sound development strategy. But in this special moment, with regard to one trading partner, we believe it is appropriate.
These restrictions are required for a finite period of time, in which the Chinese problem of macroeconomic adjustment will get done. They should not be viewed as indefinite restrictions. In addition, these restrictions are required only in the areas where there is a meaningful Indian industry to protect. When the capabilities in India are very low, there is no point in incurring the adverse consequences of trade barriers.
Alongside this, an array of actions are required that uphold the gains from international integration and improve the working of Indian firms. There are a large number of inverted duty structures which need to be removed. Of great importance is the long-pending GST reforms, which should go to a lower number of rates (ideally one), lower rates, and the integration of a broader base particularly industries such as energy and railways. The harms associated with protectionism should be combated by compensating moves of liberalisation: New non-tariff barriers against Chinese imports into India should be accompanied with numerous elements of liberalisation of engagement with all other countries. Through this, India should get the full gains from globalisation in all aspects (goods, services, capital, labour), with deep engagement with every country in the world but one.
It will take great professional capabilities in economic policy, to surgically engage in protectionism with one trade partner only, in some industries only, for a finite time period only, accompanied with an array of complementary moves which reverse the conventional Indian protectionism against the rest of the world. The puzzle of 2024 for policy makers lies in establishing such a strategy.”
I’m not sure we are anywhere close to having such professional skills. We should tame the monster, not feed it.
Addendum
— Pranay Kotasthane
A related development was the news that the Adani Group has sought short-term visa approvals for 30 Chinese engineers for setting up their solar equipment manufacturing units in India. The Business Standard report further has this interesting detail:
“all solar PLI winners including Reliance Industries have listed supply chain partners and service providers from China, with some of them mentioning more than 50 Chinese vendors.”
This development led to a response by the Congress spokesperson, who accused the government of allowing Production-linked Incentives to benefit Chinese companies at the expense of Indian taxpayers. He further called for “a proper strategy to wean India off dependence on China”.
Just think about this development for a minute. One of India’s largest conglomerates—one that’s considered to be close to the current government—is waiting for government approvals to permit travel of Chinese engineers who can train Indian staff to ‘Make Electronics in India’. And even this small ask has become a political hot potato.
This, to me, is a perfect illustration of what is likely to happen once we start going down the path of increasing barriers to trade with China. We need to contend with the fact that Chinese talent and investment are crucial elements of the global electronics supply chain. Even firms such as Apple have a large supplier base in China. Of the 188 companies in its supplier list, 151 are Chinese or have a substantial manufacturing presence in China. There is absolutely no way for India to build an electronics ecosystem quickly without accessing Chinese investment, talent, and commodity chips.
It would be terrific if India could put in place fine-grained barriers specifically against Chinese products in sectors where India has competing firms. But from what we know about the Indian State, such a strategy is most likely to spill over into other sectors where India has no competing firms, and turn into an all-out denial regime towards Chinese companies. This will hurt India far more than China, as we account for just 3 per cent of Chinese exports.
Nevertheless, it is important to note that the world is no longer willing to give Chinese exports a free run. The restrictions imposed by the European Union on Chinese EVs and the US on a whole range of Chinese exports suggests an important shift from mere high-tech restrictions against China to a general aversion towards artificially low-priced Chinese exports of all sorts.
The challenge for India is to identify an economic strategy towards China that works in its favour. It cannot afford to impose across-the-board restrictions on Chinese firms like the West can, because Indian firms in crucial sectors have a lot of learning to do from their Chinese counterparts. Nor can it allow a free flow of Chinese imports in sensitive sectors given the state of the political relationship between the two countries. Threading this needle over the next few years is a grand intellectual and policy puzzle.
PS: Our previous essays covering trade with China are compiled here.
India Policy Watch #2: Influencing Firm Hiring Decisions
Policy issues relevant to India
—Pranay Kotasthane
The other notable news this week was another investigation of Foxconn India’s treatment of its largely female workforce. This was the third investigation against the Apple supplier that I have come across. The first two were related to restrictive working conditions, and we covered that topic in edition #248. This time around, the Reuters investigation alleges that Foxconn’s hiring agencies explicitly discriminate against married women.
This report led the union ministry of labour and employment to seek a report from the Tamil Nadu labour department. Citing sources, Indian Express reports:
“In an informal note shared with the government after reports suggested it is not hiring married women, Foxconn stated that such stipulations are not part of its policy and these claims may have been made by those individuals who were not hired, sources said.”
…
Foxconn had clarified that 25 per cent of the latest hires are married women… the Foxconn factory currently has about 70 per cent women and 30 per cent men and the Tamil Nadu plant is the largest factory for women employment in the country with the total employment having touched 45,000 workers during peak periods”
So, another report in which the Apple supplier finds itself in the news for the wrong reasons. Foxconn and Apple’s stated policies do not allow exclusion of married women from hiring. However, the hiring vendors employed by Foxconn India posted advertisements that contradict such policies. Apparently, the hiring vendors directly employ the workers and manage the payroll for Foxconn, and are paid on a per employee basis. Thanks to this report, some of these vendors will face additional scrutiny from Apple. And given that this global company prides itself on its high supply chain standards, we might even see an improvement in hiring practices by vendors.
However, this incident is symptomatic of a larger social problem that’s not unique to Foxconn. India’s low female labour force participation is more a social failure and less a market or government failure. And yet, the government’s way of rectifying it was to bring in the 2017 Maternity Leave Law, which requires Indian firms to pay for more weeks of leave than in many Western countries. The unintended yet entirely anticipated consequence of this law was that firms were further disinclined to hire women. This effect is accentuated when the hiring agencies are paid on the basis of continuing employment of their appointees. While the generous maternity leave policy may well benefit those in elite jobs, where companies would prefer long-term talent retention; it is likely to have an adverse effect on married women employed in low-end manufacturing jobs. The likes of Foxconn can be disciplined by appealing to Apple’s standards, but what about hiring decisions of other firms that have no such compulsions?
HomeWork
Reading and listening recommendations on public policy matters
[Paper] (En)Gendering Marital Status in Indian Job Market by Abu Afzal Tauheed is a useful experiment to study the effect of marital status on employment.
[Paper] Another classic paper on the related topic of premature imitation, by Shruti Rajagopalan and Alex Tabarrok.