Electronics imbroglio

Following the rupee fall, there were murmurs about a clampdown on imports. However, industry sources say there is little room to manoeuvre

That a crisis is also an opportunity may be an old cliché but it is also sometimes true. The hammering that the rupee has undergone in the last couple of months, when it has slid against all the major global currencies, ought to have been a time when action to cut Indian dependence on imports was initiated. But Indian commitments at multilateral forums such as the World Trade Organisation (WTO) as well has bilateral agreements in the shape of free trade agreements appear to have effectively curtailed the scope for concrete action to reduce the burgeoning dependence on imports.

Alarmed by the rapid decline of the rupee, there were murmurs within the government that it may clamp down on imports of electronics, which now amount to over $30 billion. The suggestion to raise tariffs on electronics that account for about half of the total import bill emanated from the Union Finance Ministry earlier this month in an obvious effort to reduce the widening current account deficit.

However, industry sources, among them the Manufacturers’ Association of Information Technology (MAIT), the apex body representing the interests of the computer hardware industry, while expressing alarm at the runaway increase in landed costs of components that go into computers and peripherals, told

The Hindu that there was very little room to manoeuvre.

Anwar Shirpurwala, executive director of MAIT, said: “We heard some noises and are hopeful that some measures will be taken to restrict imports, but we do not see much scope because of India’s commitments at the WTO.”

Zero duty

He points out the Indian commitments made at the International Telecommunications Agreement (ITA), which came into effect in 1997, mandate that a swathe of electronic components and products are imported at zero duty. “These will clearly be outside the scope of any duty increase that the government may be considering,” he pointed out. The ITA list of more than 200 products includes laptops, printers, tablets and many other common electronics items.

What this means is that it is simply not worthwhile for Indian manufacturers to even consider producing them in India, says an industry source.

The Indian hardware industry, particularly the segment that is focused on manufacturing, obviously sees import restrictions as a fresh opportunity to get back in the game.

Mr. Shirpurwala said although the expectation of a tariff increase appears “unrealistic” at present, if and when it is done, it will remove one of the most important “anomalies” in duty structure in India.

An increase in tariffs would also have a “negative impact”, especially in the case of electronic components that are presently not manufactured in India.

‘Lopsided tax structure’

Although MAIT has never called for barriers to imports, indigenous manufacturing has not taken off because of the “lopsided” tax structure, he argues. “The main anomaly is the inverted duty structure, which results in a strange situation in which the components being costlier than the finished product,” he said.

The “inverted” nature of the duty arises from the fact that the duty on the finished product is lower than the duty on the components that actually go into the product. “An imported laptop, for example, would be cheaper than the option of importing the components and then assembling them here,” he said. This has the pernicious effect of discouraging domestic manufacturing, argued Mr. Shirpurwala.

The National Electronics Policy, which was unveiled last year, was expected to provide a fresh impetus to electronics manufacturing by cutting the vicious circle that it is in. As products need to be available in India, duties have to be lower. But this would also never ensure that India becomes self-sufficient in this critical area.

“Part of the problem in resolving this is that a proposal to increase tariffs is also a deeply divisive issue,” said an industry source.

Preferential market access

For instance, a crucial pillar of the new policy is its emphasis on the provision for preferential market access in government and public procurement of electronics equipment, components and products.

This would ensure that domestic companies were guaranteed a certain proportion of such contracts even if they were slightly more expensive than imported material.

The source said that the move, which would give “a huge impetus” to domestic manufacturing appears to be “still born” because of hectic lobbying by those who stand to gain by allowing unbridled imports.

Meanwhile, imports are expected to amount to nearly $100 billion by 2015, from $51 billion in 2010. And, within five years from then, treble to $300 billion. By then electronics imports is expected to overtake the country’s petroleum bill.