Sunday, December 8, 2019

On RCEP, Mohit Kalawatia and Raghav Priyadarshi, The Pioneer, 27 November

At the recently-concluded Regional Comprehensive Economic Partnership (RECP) Summit, Prime Minister Narendra Modi announced that despite seven years of negotiations, his Government had decided not to join this plurilateral regional trade bloc that was launched by the Association of South-East Asian Nations (ASEAN) leaders and six other countries during the 21st ASEAN Summit in Phnom Penh in November 2012.
The objective of launching RCEP negotiations was to achieve a modern, comprehensive, high-quality and mutually beneficial economic partnership agreement among the ASEAN member States and its Free Trade Agreement (FTA) partners.
Announcing the country’s decision to stay out, Modi said, “India stands for greater regional integration, as well as for freer trade and adherence to a rule-based international order. India has been pro-actively, constructively and meaningfully engaged in the RCEP negotiations since inception. India has worked for the cherished objective of striking a balance, in the spirit of give and take. Today, when we look around we see during seven years of RCEP negotiations, many things, including the global economic and trade scenarios, have changed. We cannot overlook these changes.”
Modi’s decision came in the backdrop of intense domestic pressure from various stakeholders, including political parties, State Governments and various industry lobbies. Indian decision-makers were persuaded to shun the free trade partnership due to shrill concerns that India would become a dumping ground for Chinese products, adversely impacting Micro, Small and Medium Enterprises (MSMEs) and also cripple its dairy industry due to the presence of majors such as Australia and New Zealand in this trade grouping.
Interestingly, India’s decision to withdraw from the RCEP came despite the Ministry of Commerce’s High-Level Advisory Group (HLAG) recommending that the country adopt an optimistic outlook towards RCEP. The HLAG, constituted under the chairmanship of Surjit Bhalla — Executive Director for India at the International Monetary Fund (IMF) and former member of the Prime Minister’s Economic Advisory Council — comprised other high-ranking members such as Foreign Minister Subrahmanyam Jaishankar and former Commerce Secretary Rajeev Kher. The HLAG was tasked with recommending steps to boost the country’s share in global merchandise and services trade, and formally came out with its recommendations only days before the Prime Minister announced India’s withdrawal from RCEP. Since then, the Commerce Minister has clarified that India may still join the partnership if its concerns are addressed, though such an eventuality seems unlikely in the near future.
To an extent, India’s decision to withdraw was also influenced by the perceived negative outcomes of earlier trade pacts it had entered into with Japan, Korea and the ASEAN. A central theme which emerges across trade discussions, of which India is a part, is the country’s perennial inward focus. This stance is counter-intuitive since India has benefitted greatly from globalisation and liberalised market access, evidenced not only in its services exports but also through import of primary and intermediate goods for domestic value-addition and re-export.
Further, the impending stalemate at the World Trade Organisation (WTO), precipitated by the US’s efforts to render the WTO appellate body comatose, necessitates an exploration of other routes for trade enhancement. Bilateral and plurilateral trade arrangements such as the RCEP have thus emerged as a preferred alternative. Since the beginning of the Doha Round of trade negotiations at the WTO in 2001, the number of such arrangements in force globally has grown more than three-fold. During the same period, India inked trade agreements with the ASEAN, Japan, South Korea and Singapore. However, since 2011, India has not signed any further bilateral or plurilateral trade agreements, primarily due to a growing perception that opening up of trade borders has not served the country well.
Contrary to this perception, such agreements have contributed immensely towards trade creation. For instance, India currently has a trade surplus of $2.5 billion with Singapore. Similarly, India’s trade deficit with ASEAN vis-à-vis its total trade deficit witnessed a continuous decrease from 9.9 per cent in 2007 to 6.6 per cent in 2017; despite the fact that ASEAN’s share in India’s total trade has remained more or less constant. Meanwhile, India’s deficit with China, a non-FTA partner country, increased from 18 per cent of the total trade deficit in 2007, to 40 per cent in 2017. Even within the aegis of the WTO, the concept of flexible multilateralism has found several supporters. Flexible multilateralism allows WTO members to advance and conclude plurilateral agreements where full consensus is not yet possible. Examples of such plurilateral arrangements include the Information Technology Agreements (ITA-I and II) — while India is a signatory to ITA-I, it has refrained from adopting the second iteration. More recently, taking forward the approach of flexible multilateralism, 76 countries decided to initiate discussions on trade related aspects of electronic commerce. India has so far not joined the discussion, citing the erosion of policy space and the digital gap between member countries among other reasons, for not doing so.
Looking ahead, if India wants to achieve its target of becoming a $5 trillion economy by 2024, then considerable efforts and resources are required to push its exports. More importantly, the country will have to review its frozen approach towards bilateral and plurilateral arrangements. Indeed, along with other like-minded countries, the country should continue to ensure that the relevance of a multilateral trading system is maintained. However, it is also important that in light of changing global trade dynamics characterised by forward and backward linkages, it cannot afford to ignore preferential agreements, or even limited trade deals like the one it is currently exploring with the US.
Given India’s political-economy compulsions, it is understandable that the country remains wary of entering into far-reaching trade agreements proposed by advanced jurisdictions. But India must nevertheless adopt an alternative strategy to advance its self-interest. It is better to sit in the negotiating room and disagree than to leave the room altogether.
Going forward, the Indian leadership must resist the temptation of abstaining from decisions due to perceived costs in the short-run. To begin with, there is an urgent need to fix internal decision-making mechanisms. A more concerted and coordinated effort across Government departments in evaluating trade partnerships should be the way forward, instead of convening inter-ministerial discussions as a reactionary measure. Government departments should engage with the industry on a more frequent basis on issues of market access and to determine sub-sectoral competitiveness.
Further, the country’s relative strengths and domestic industry participation in specific value chains should inform prioritisation of trade partner negotiations. At present, the Commerce Ministry reaches out to the industry for inputs only after the country has initiated trade discussions — this mechanism largely remains ineffective as it fails to solicit detailed and usable submissions within predefined timelines.
To ensure that there is coherence in the decision-making process, the Government should explore the establishment of a nodal body, on the lines of the erstwhile Trade and Economic Relations Committee (TERC) of the Cabinet. Such a body can enable consultative decision-making, efficient inter-ministerial coordination and better definition of the country’s trade priorities and strategies.
(Kalawatia and Priyadarshi work at Koan Advisory Group, New Delhi. The views expressed here are personal.)

"India should now get its trade negotiation act together", Vivan Sharan, The Mint, 07 November 2019

India opted out of the Regional Comprehensive Economic Partnership (RCEP) negotiations this week. A mega free trade agreement (FTA) in the works, the RCEP currently comprises ten countries of the Association of Southeast Asian Nations (Asean), along with Australia, China, Japan, New Zealand and South Korea. In addition to conventional trade-related issues, like custom duties and dispute settlement mechanisms, an imminent RCEP agreement is expected to cover a wide range of new areas, including intellectual property, competition and e-commerce. India had participated in the RCEP process since its inception in 2013, dedicating a significant part of its limited state capacity to extensive trade negotiations. Therefore, India’s late decision to exit the RCEP took many observers by surprise.
The long-term economic trade-offs in complex trade deals are never easy to quantify, chiefly because markets are dynamic. For instance, while India can leverage its strengths in services trade with RCEP members today, lack of new innovations may change this paradigm in the future. And India’s situation is not unique. The remaining RCEP countries must equally confront such uncertainties while negotiating with the rest. China may not remain the manufacturing hub of the world, South Korean chaebols may falter, Japan may not be able to solve its demographic challenges, and so on. In such circumstances, it is useful to assess India’s decision through a wider strategic prism.
First, if India remains outside the RCEP, it will need to redouble efforts to ensure that the World Trade Organization (WTO) functions smoothly and in the country’s favour. However, the US has lately held the WTO to ransom through its veto power—for instance, by demanding sweeping institutional changes in exchange for approving appointments at the WTO’s appellate body. Another US demand is a change in the “developing country" status accorded to emerging economies like India. While graduating to developed country status within the WTO may initially seem like a cause for celebration, what it means is that India will no longer receive special and differential treatment on account of its development needs. It will have to compete on a level-playing field with industrialized nations.
India must reject American demands by building a consensus among developing nations on viable counter proposals. Simply saying “no", as it did in the case of the RCEP, will not yield anything substantive.
However, by leaving the RCEP, India has lost some of the goodwill it requires to mobilize forces effectively at the WTO, especially among its regional Asian allies. India’s inability to champion development is a relatively recent phenomenon in global trade. For several decades, leading up to the Marrakesh Agreement that established the WTO, the country was at the helm of the Group of 77 developing nations. Today, it is scarcely able to engender a consensus even on softer issues like cross-border e-commerce, whereas dozens of developing countries have found common cause with related proposals of developed countries.
Second, India must enhance its ability to negotiate bilateral deals if it wants to stay out of plurilateral engagements like the RCEP. Here, it must take a leaf out of China’s playbook. As far as trade spats go, the US-China trade dispute may be the most shrill and high-stakes one yet. However, both countries are simultaneously engaging each other in several forums, recognizing the exigencies of a global system that has enmeshed them. Their multi-pronged engagement includes discussions on e-commerce at the WTO within a group of 76 countries, excluding India. At the last G20 Summit, the US and China were also among the 24 co-signatories to the “Osaka Track", reinvigorating their commitment on e-commerce. India, however, stayed outside this conversation too.
Importantly, China does not share all of the US’s interests on e-commerce. It diverges on several fronts. For instance, it has an internet firewall that keeps the likes of Google and Facebook out of its domestic market. It also imposes data localization requirements antithetical to the logic of seamless cross-border e-commerce. China also has a poor track record of protecting intellectual property. Yet, Beijing recognizes the value of bilateral conversations. If nothing else, staying engaged with its trading partners sparks regular internal reforms. At the 66th meeting of its State Council last month, China enacted deep regulatory changes, effectively strengthening its intellectual property regime to encourage innovation-linked investments. This is in stark contrast with India, which has been unable to capitalize on the US-China dispute, despite a two-year window.
Last, if India decides to join the RCEP at a later date—an option it can still exercise—it must anticipate suboptimal outcomes. India did not participate in the initial stages of the Trade-Related Aspects of Intellectual Property Rights (Trips) negotiations during WTO’s Uruguay Round between 1986 and 1993. When it eventually joined—as it is likely to do in the case of the RCEP—the key pillars of the agreement had already been established. There are several such instances of delay or inertia inadvertently undermining the national interest. If negotiating strategies don’t improve, history may repeat itself. That would be unfortunate.
Vivan Sharan is a partner at Koan Advisory Group, New Delhi These are the author’s personal views

"Ride the tech wave", Megha Patnaik and Vivan Sharan, The Pioneer, 01 November 2019

Internet adoption has grown manifold in India and at a stunning pace. According to Ericsson, the average domestic smartphone user consumes around 10 gigabytes of data per month, a stark increase from less than a gigabyte five years ago. Consequently, the growth of the digital economy has outpaced that of traditional industries, providing consumers access to seamless communications and diverse content. However, India employs an inconsistent mix of responsive and legacy regulations towards such technological developments.

For instance, a prominent divergence is visible in the progressive approach of the Telecom Regulatory Authority of India (TRAI) towards interconnection regulations in communications markets and the regressive approach adopted by executive branches of Government towards licensing of Intellectual Property Rights (IPRs) in content markets. TRAI’s approach encouraged technology transition for the telecom industry and facilitated communications for consumers, while the executive branch is delaying technology transition in content industries and creating barriers for investment in quality content that consumers can now access online.
Let’s consider the progressive approach adopted in telecom first. In 2017, TRAI reduced Interconnection Usage Charges (IUC) from 14 paisa per minute to six paisa per minute to encourage transition from legacy 2G and 3G networks to modern 4G networks.  Interconnection lets telcos access each other’s networks and the IUC is a compensatory mechanism to enable this. Older 2G and 3G networks are based on circuit switching technology, which requires a dedicated connection for the period of communication between two networks.
Costs of interconnection reduce dramatically in modern Internet Protocol (IP) based 4G networks. IP-based networks rely on packet-switching that allows rerouting of communications from capacity deficit parts of a network to parts with a surplus. This dynamic optimisation reduces network congestion and improves efficiency, reducing costs. A lower IUC dilutes the incentives to run legacy networks and encourages transition to the superior technology. This has led to greater consumer access, borne out by the spike in data consumption in the country.
The increased data consumption enabled by IP-based networks has driven demand for online streaming services. This is best illustrated by the fact that over 90 per cent of music is consumed digitally today. More than 80 per cent of total music record label revenues come from digital music and streaming grew by 50 per cent in 2018 to reach 150 million listeners, excluding YouTube. This growing preference for online services over previously available television (TV) and radio broadcasts reflects consumers’ access to a wider choice of content, personalisation and interactivity.
TV and radio broadcasting are over-reliant on advertising revenues, which has led to dissemination of homogenised and formulaic content. The primary benefit online subscription services provide is access to niche, personalised content, that users are willing to pay for. This is clearly seen in both the explosive popularity of online platforms providing streaming services and the centering of new business models around personalisation. With traditional broadcasting, latent demand for a wide variety of content is seldom realised, given the incentives for broadcasters to cater to popular preferences. Online platforms employ new technologies to incorporate user feedback and facilitate better matching of listeners and viewers with content producers, thus changing the shape of the content market.
On the other side of this new and exciting online content market, a segment of smaller players have a known history of struggling to monetise their niche content. For smaller producers creating vernacular content, demand may be in pockets or scattered. For example, communities of overseas Indians have demand and willingness to pay for quality music content in several regional languages, but the smaller labels that produce this type of content have not found means to reach these audiences through traditional channels. Such labels now have an opportunity via online platforms to reach users in dispersed domestic and global markets.
With smaller producers being able to monetise their content, online platforms will be able to take more diverse content to their consumers to match individual tastes. Leveraging the key benefits of the new technology improves both sides of the market.
However, policymakers appear oblivious to the benefits of new technologies and lean towards legacy regulations. Public policy decision-makers are considering imposition of licencing rules made for TV and radio broadcasts to online streaming. Section 31(D) of India’s copyright law, also known as the provision for statutory licencing, is meant to provide TV and radio stations hassle-free acquisition of music for broadcasting. Policymakers are considering extension of this provision to internet streaming, highlighting a fundamental gap in their understanding of the market barriers today and the opportunities that new technologies offer.
Copyright law is generally designed to help content owners licence their works for public dissemination at market-determined prices. Voluntary licencing under the law is a key mechanism to enable such access while protecting the commercial and moral interests of content owners. Section 31(D) was specifically created as an exception to voluntary licensing, to provide wider access to content through traditional broadcasting. This meant that TV and radio broadcasters could seek statutory licencing in the event that voluntary licencing negotiations with content owners failed.
Involuntary or statutory licensing is a legacy framework that was only relevant when radio and television industries were developing. Without radio stations being able to source music, consumers did not have access to content. The original objectives of consumer access have been met. TRAI reported All India Radio (AIR) as having 420 radio stations in 2017, covering almost 92 per cent of the country by area and more than 99.2 per cent of the country’s population. India has 369 private radio stations on top, including in smaller cities and towns. In addition, the push by TRAI for adoption of modern network technologies has led to an exponential jump in access to content relative to when TV and radio were dominant. Today, when consumer access is no longer a problem, extending the provision of statutory licensing to internet streaming is not justified.
Although consumers have wide access to mainstream content, the pain point that new technology addresses is consumers’ access to variety. Fully leveraging the technology for personalised content provision will transform the listening experience for consumers, offering them music that they do not even know they may enjoy. India’s vast cultural diversity that currently has limited reach can potentially change the music market in a way that listeners cannot imagine going back to old ways of accessing content.
Involuntary or statutory licensing will only prove to be a backdoor for global music streaming giants to access vast vernacular music libraries of Indian music labels for a pittance. By extending 31(D) to online streaming platforms, policymakers will inadvertently keep the local industry from using exclusivity as a negotiating chip for earning greater value in a market where content supply is not a challenge. This move would limit the future investments of smaller producers who have already suffered under the previous regime where mainstream content dominated. It will reduce the impact of new technologies on improving the experience of listeners. 
At a time when India is struggling to stimulate economic activity, it is important to adopt a principles-based approach to governing technology that has the potential to generate growth. TRAI led the way in telecom markets, leveraging technological innovation. Decision-makers must learn from each other and actively desist from path-dependence and legacy regulations, especially in rapidly evolving digital markets.
(Patnaik is an Esya Centre Fellow and Assistant Professor at the Indian Statistical Institute and Sharan is an Advisor to the Esya Centre and Partner at Koan Advisory.)

"RCEP churn: Protecting Indian dairy from itself", Vivan Sharan, Financial Express, 11 October 2019

India’s largest dairy cooperatives have resisted free trade agreements (FTAs) with countries such as New Zealand and trade blocs like the EU in the past, and are staunch opponents to the proposed Regional Comprehensive Economic Partnership (RCEP). The RCEP is an imminent FTA between 16 countries including India, China, Australia, New Zealand, Japan South Korea and members of the Association of Southeast Asian Nations (ASEAN). The RCEP will cover several economic sectors, however, concerns around dairy imports are key to India’s strategic calculus.

India accounts for a fifth of global milk production but holds a negligible market share of global dairy exports. Conversely, most RCEP countries are import dependent, making the combined dairy market ripe for Indian exports, that is if the production capabilities in the country were to mature in the future. However, large dairy cooperatives in India seem to fear a narrowing of their domestic market share to high value imports from New Zealand and Australia; and, therefore, seem far from prepared to face competition in potentially lucrative export markets such as China, Japan and South Korea.
India’s self-sufficiency in milk production is the result of an overall focus on increasing agricultural production following Independence. ‘Operation Flood’ which played a catalytic role in dairy development, was akin to the Green Revolution in many ways. Input costs were indirectly controlled through state-supported cooperatives like Amul, and competing imports were banned outright. The political will of leaders like Lal Bahadur Shastri complemented the vision of technocrats like Amul’s Verghese Kurien, and created perfect conditions for boosting milk production. Unfortunately, this initial production focus has hardwired rigidities that are hard to shake off.
Consider some takeaways from the National Action Plan for Dairy Development prepared by the government in 2018, in relation to the RCEP debate. The plan is unequivocal on two fronts. India’s cattle numbers cannot increase substantially, chiefly because of the immense ecological pressure from water-use and cattle-feed. This puts the onus on improved productivity to expand future production. Additionally, less than half of the marketable production surplus is handled by the organised sector. Cooperatives and private dairies share this organised sector equally, and must, therefore, share responsibilities for addressing the productivity gap.
Thus, both cooperatives and private dairies should participate equally in policy conversations. However, a handful of large cooperatives command asymmetric policy clout stemming from large production volumes. This is problematic on three counts.
First, private sector dairies would undoubtedly benefit from an FTA if it leads to commercially meaningful opportunities for investors in the dairy value chain—particularly at the higher end—in differentiated products like cheese. Private dairies have built their processing capacities much faster than cooperatives despite their first-mover advantage. Global dairy majors like Danone and Lactalis consequently invested in mid-sized and large dairies in India. The market access provided by RCEP could be used to position India as a milk processing hub for Asia. And, at a time when domestic investments are waning across all segments of the economy, the RCEP would be a boon to private dairies. Low private sector awareness and lack of effort by state institutions to bridge such knowledge gaps, mean that the private sector has no real voice.
Second, large cooperatives naturally attract politicians because of their scale and influence. Take Amul as an example—which sits atop 18 milk unions and where most union appointments are political. Congress dominated the appointments of union heads until the mid 2000s when the BJP began to wrest control. This inevitable political interest in large milk cooperatives generates perverse economic incentives. For instance, milk prices are often suppressed before elections to keep consumers happy, even if market dynamics dictate otherwise.
Similarly, many cooperatives siphon off milk to private processors, while enjoying political patronage and protection. This is akin to pilferage of Food Corporation of India stocks wherein cereals are bought by agents of the state at Minimum Support Prices, and then illegally sold to private food processors for a song.
Last, the unit economics of most Indian dairies make little sense. According to the Food and Agriculture Organisation, the global average dairy herd size is 2.4 and according to the National Dairy Development Board, Indian cows average 3 litres of yield. Mother dairy sells one litre of milk for around Rs 44. Since the strength of the cooperative narrative is devolution of profits to the producer, let’s assume full transfer from consumer to producer per litre of milk sold. Feeding bovines typically accounts for 70% of the price at which milk is procured by cooperatives. This leaves the producer with around Rs 100 in hand, which is also optimistic given all liberal assumptions made here.
In fact, the National Action Plan estimates monthly average producer income to be Rs 516 per month! This is roughly equivalent to the daily minimum wages prescribed for unskilled workers in the National Capital Territory of Delhi. The representatives of large cooperatives defend these paltry earnings of their producers.
In 1988, during a speech at the ‘Shastri Indo-Canadian Institute’, Verghese Kurien stated that “there is plenty of room for competition and our only request is that it be a fair competition”. Twenty years on, it seems we are still trying to grapple with this idea of fairness. Whether or not India joins the RCEP and accedes to demands from competing dairy powerhouses is almost a secondary question. We should first explore the reasons why most of the private sector is always mute in FTA discussions, why cooperatives inevitably become political, and why we are all comfortable with the average dairy farmer earning less than the cost of coffee at hotels where governments typically conduct RCEP negotiations.
(The author is Partner, Koan Advisory Group, New Delhi. Views are personal)

Chapter on "Financial Architecture and Financial Flows: BRICS and the G7", by Vivan Sharan and Vikash Gautam, September 2019

This book analyzes the state of global governance in the current geopolitical environment. It evaluates the main challenges and discusses potential opportunities for compromise in international cooperation. The book’s analysis is based on the universal criteria of global political stability and the UN framework of sustainable development. By examining various global problems, including global economic inequality, legal and political aspects of access to resources, international trade, and climate change, as well as the attendant global economic and political confrontations between key global actors, the book identifies a growing crisis and the pressing need to transform the current system of global governance. In turn, it discusses various instruments, measures and international regulation mechanisms that can foster international cooperation in order to overcome global problems.
Addressing a broad range of topics, e.g. the international environmental regime, global financial problems, issues in connection with the energy transition, and the role of BRICS countries in global governance, the book will appeal to scholars in international relations, economics and law, as well as policy-makers in government offices and international organizations.

Saturday, June 29, 2019

Vivan Sharan speaks to NewsX on India-US trade relations, 27 June 2019

Vivan Sharan speaks on e-commerce at a national seminar convened by RIS and CII, 5 June 2019

Vivan Sharan speaks to NewsX on the economic agenda for NDA 3.0, 31 May 2019

Let’s not miss this opportunity to revive ‘Make in India’ , Oped by Vivan Sharan, Mint, 21 May 2019

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