PLI schemes are in need of a coherent trade policy

Source: The post is based on an article “Our PLI schemes are in need of a coherent trade policy” published in “Mint” on 23rd June 2023.

Syllabus: GS 3 – Changes in industrial policy and their effects on industrial growth.

Relevance: About the need of a trade policy to support PLI schemes.

News: The debate over the PLI schemes is silent on trade policy. It is a critical aspect of manufacturing strategy.

Why is a coherent trade policy important?

A coherent trade policy reduces tariff barriers and incentivizes technology transfers from countries and companies that dominate the production of ICT hardware and semiconductors.

India wants to emulate China, Taiwan and Vietnam by improving domestic infrastructure and logistics with tax breaks and financial incentives for ICT manufacturing. But their liberalized trade policies are not emulated.

India’s trade policy is marked by a tendency to raise tariffs, particularly since 2015, as Aatmanirbhar Bharat gained momentum. Ad hoc tariff hikes are inconsistent with India’s obligations under the ITA-1, as the WTO has recently ruled in a dispute filed by the EU, Japan and Taiwan.

Data shows that India’s tariff barriers have not reduced Indian dependence on foreign suppliers. High tariffs also make high-quality components from foreign suppliers expensive. Therefore, domestic ICT manufacturers are at a disadvantage as they compete on cost with other global players.

Why are companies not tariff-jumping FDI?

The prospect of accessing India’s rapidly-growing demand should have convinced MNCs to set up local manufacturing or assembly operations via tariff-jumping FDI. (Foreign companies invest in a subsidiary in another country to avoid tariff barriers.)

However, studies have shown that for ICT and semiconductor sectors, tariffs may deter foreign manufacturing investment and Global Value Chain integration, bypassing the benefits of tariff-jumping FDI.

India’s integration into ICT and semiconductor Global Value Chains is in progress.  To speed up the process, New Delhi must discard its protectionist trade policy. That will help leverage its advantages of a large market, low labour costs and strategic partnerships with the US and others.

Recent initiatives like the Indian Semiconductor Mission and National Policy on Electronics, 2019, suggest growing policy cohesion on FDI, fiscal incentives and manufacturing infrastructure. Now it is time to revamp our trade policy.