GS Paper III

News Excerpt:

India lags far behind global competitors like Vietnam, Taiwan, and Mexico in leveraging Washington's tariff measures against China to boost electronics exports to the US.

U.S.-China trade war:

• In 2018 the US imposed a 25% punitive duty on a range of Chinese electronics items. 
• The trade duties led to a sharp fall in Chinese electronics exports to the US from $207 billion in 2018 to $140.2 billion in 2019.
• The fall created a vacuum as the US is the largest importer of electronics products globally. Its imports of such products stood at $518 billion in 2023, 16% up compared to 2018.

India’s Electronic export to USA:

• India’s electronics exports to the US rose by $7.6 billion in absolute terms between 2018 and 2023, up at $8.9 billion from $1.3 billion in 2018.  
• Despite this seven-times increase, it represented only 5.5% of the total non-Chinese incremental electronics exports to the US in this period.
  

Other global contenders:

The bulk of the shift of US trade has gone to Vietnam, Taiwan and Mexico:

• Vietnam
• Vietnam has been the biggest beneficiary at China's cost. 
• It saw an incremental increase in electronics exports worth $39.1 billion between 2018 and 2023. Vietnam’s exports rose from $12.1 billion in 2018 to $51.2 billion in 2023.
• This figure represents a 28.3% share of the total non-Chinese incremental electronics exports in absolute terms to the US in the same period.
• Taiwan:
• Taiwan is also ahead of India, having grabbed a 25.6% share of incremental exports, rising from $18.1 billion in 2018 to $53.5 billion in 2023.
• Mexico:
• Mexico, too, has seen a rise in incremental electronics exports to the US in absolute terms that represents 11.2% of non-Chinese exports.

India’s Electronics export target:

• To achieve the ambitious dream of a $5 trillion economy, the government has set a target of $300 billion in electronics production, including $100 billion in exports.
• Components of India’s electronic goods exports include computer hardware, peripherals, electronic components, and medical and scientific instruments. 
• Electronics has also been the biggest beneficiary of the Centre’s Production-Linked Incentive (PLI) scheme, getting the lion’s share of incentives offered. 
• PLI was notified in April 2020, and helped mobile equipment manufacturers and other manufacturers  to set up production units for exports.

What are the challenges faced by Electronics manufacturing in India?

• Infrastructure limitations:

• • The cumbersome process of land acquisition remains a roadblock for establishment of manufacturing units.
  • Absence of a plug-and-play model diminishes its attractiveness for manufacturers, potentially influencing their decision to establish units in the country.

• Supply Chain constraints:

• • The lack of a robust electronic component ecosystem poses a major challenge to the electronics manufacturing industry.
  • In the absence of a full-fledged component ecosystem in India, these components are required to be imported that results in increased costs and lead time for the manufacturers
• Regulatory Environment:
  • Lack of uniform implementation of initiatives across the country also hinders government efforts. As of now, Southern states have been leading the electronics manufacturing.
  • When compared to its Asian peers like Vietnam and Taiwan, India imposes the highest tariffs on inputs of electronic products and such tariffs continue to be subject to amendments frequently.
• Cost Competitiveness:
  • India’s booming electronics manufacturing industry is also being marred by high input tariffs, resulting in cost disabilities and increasing cost of production, despite the PLI scheme in place till 2026.
  • The higher tariffs, combined with an increase in GST rates from 12% to 18%, have resulted in mobile phones being more expensive to produce and sell in India versus other competing manufacturing nations.
  • Vietnam and China have more favourable subsidy structures than India does in areas like machinery used for manufacturing, and research & development.
    • In comparison to China and Vietnam, India offers lower income tax exemptions and reductions to electronics manufacturers. 
    • Unlike India, Vietnam has a provision of income tax holidays which makes it a more favourable destination for manufacturing. 

• Lack of skilled workforce:

• An acute shortage of skilled labour is posing major challenges for the Indian manufacturers in the electronics sector.
• According to a survey 76% of the organisations have reported skilled labour shortage hurting their profitability with 35% defining the impact as “severe”.

What can India learn from countries like Vietnam to become an export giant?

• Foreign investments are not flowing into India at the pace they should be.
• Most of the foreign investment in electronics manufacturing is going to countries like Vietnam instead, because of the tariffs, especially on inputs, or in other words raw materials that go into making an electronics product.

• • If the government tax inputs, it's not protecting the market, it is limiting the market by taxing the output.

• Most nations offer a mix of incentives to lure investors. 
• These include tax breaks, dedicated free-trade or industrial zones, discounted utilities like water and electricity, free land and commitments to supply workers. 
• But India stands out in implementing higher import taxes, which motivate companies to set up in the country to supply local consumers but makes them less competitive in the export market.

Way Forward:

• The vision of a ‘Self-Reliant India’ will only be realized if various sectors in manufacturing scale up their capabilities and technology adoption. 
• The need of the hour is to build an environment that fosters innovation, protects intellectual property, focuses on skill development, and builds infrastructure that supports the ecosystem. 
• Boosting export-led electronic manufacturing will make India’s manufacturing globally competitive. 
• The Production Linked Incentive (PLI) scheme that is aimed at promoting domestic manufacturing is likely to give an aggressive push to ensure large multinational companies bring their global manufacturing and supply chains capabilities to India.