Electronics industry urges cut in import tariffs

‘High rates negate benefits of PLI’

Pitching for a reduction in import tariffs for the electronics sector ahead of the Union Budget, the India Cellular & Electronics Association (ICEA) and IKDHVAJ Advisers LLP said in a report on Thursday that high import tariffs were making India less competitive in global markets as well as negating the effect of supportive policies such as the performance-linked incentives (PLI).

India’s tariffs had to be compared with those of competing countries such as China, Mexico, Thailand and Vietnam, according to the report, which includes a detailed study of 120 tariff lines of electronics priority products in India and these four key competing investment destinations. These imports constitute 80% of the cost of mobile phones —India’s largest product out of the $75-billion electronics sector.

The report stated that similar to India, its competing economies have also relied on a combination of trade and investment policies for their economic progress, with an emphasis on improving domestic capabilities to participate in global value chains and attracting and facilitating investment through subsidies, facilitation of trade and improving operational conditions for investors and domestic producers.

“However, among the policies followed by India and its competing economies, there is one major difference. India has higher tariffs and it relies much more on increasing tariffs compared to its competing economies. India’s policies are thus driven by domestic market rather than opportunities in global markets,” it said.

It added that a significant implicit reason for raising India’s tariffs is that the large market size of India combined with tariff increase would attract FDI. “This presumption may not be true for the electronics sector as a whole…India’s domestic market is not very large compared to the global market. Moreover, the comparison with competing economies suggests that the size of the domestic market does not necessarily result in higher exports or deeper links with GVCs. This implies a need to carefully consider the possible adverse impact of raising tariffs on exports and even investment.”

Further it stated that while the large electronics markets of India may look attractive, they are very small in global terms, and India does not produce about 50% of the components on which tariff has been increased. “Hence The impact of tariffs is likely to be adverse on India’s competitiveness.India’s tariffs have to be compared with that of competing countries. Tariff increase has an adverse effect on cost, prices, output, exports and imports. It also negates the effect of supportive polices,” they said.

The comparative study highlights that while India has zero tariffs on 32 of the 120 tariff lines, others have more zero tariffs, ranging from 53 (China) to 74 lines (Mexico). For non-zero tariffs, India’s tariffs are higher for 85% (Thailand, Vietnam) to 95% (China) of these tariff lines. Vietnam’s effective tariffs are lower also because of its FTAs with major suppliers of inputs. “India has the largest tariff lines for the selected products, with tariffs in 2020 being higher than in 2014,” it said.

“A $300 billion manufacturing target by 2026 requires stability and prior consultation before finalising tariffs. Tariffs go to the core of competitiveness and scale. For Union Budget 2022-23, we request the government to review all tariffs on inputs for PLI schemes and reduce tariffs in areas where there is no local capacity”, said Pankaj Mohindroo, Chairman, ICEA.

The study added that for India to integrate into global supply chains, its tariffs on inputs should at least match or be less than its competitors. Consideration of tariff increases should only be in cases with a large domestic capacity or a clear roadmap with specific, well-identified vendors who can produce components for manufacturers at globally competitive costs, quality, and scale. Not otherwise.

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