The Impact of FTAs on India's Electronics Manufacturing

Abstract

India’s FTAs with ASEAN, South Korea and Japan created perverse incentives for the country's domestic manufacturing and innovation ecosystem. The serious adverse impact of these FTAs on domestic electronics manufacturing is a stark reminder of the lessons from development history. These agreements must be reviewed to ensure their coherence with a strategic industrial policy that integrates the country's digital economy policies. Tariff liberalisation must be adjusted to be in sync with the protection accorded by FTA partners to their indigenous firms through national standards. Further, new measures being adopted by the government require significant tweaking both to promote indigenous SME manufacturers and to become effective in increasing domestic value addition.

Full text

The Impact of FTAs on India’s Electronics Manufacturing
Smitha Francis and Murali Kallummal*
Suggested Citation: Francis, Smitha and Murali Kallummal (2020) ‘The Impact of FTAs on India’s
Electronics Manufacturing’, in Promoting Electronic Manufacturing in India, MVIRDC Research Study, World
Trade Centre, Mumbai.
India’s trade policy emphasis on preferential trade agreements (PTAs) got very pronounced
from the mid-2000s after the deadlock in multilateral negotiations under the WTO. This policy
shift has been driven by the perception of PTAs as important tools for accelerating industrial
growth. The latter was to be achieved through India’s greater MFN-plus access to export
markets, increased productivity growth through improved access to “more competitive” parts
and components, and increased FDI-led global value chain (GVC) integration.
It must be noted that by the mid-2000s, the electronics industry was already significantly
import-dependent thanks to India’s embrace of total tariff liberalisation of ICT products and
parts under the WTO’s Information Technology Agreement (ITA-1) (Kallummal 2012). The
further rise in electronics imports from the mid-2000s coincided with both the ITA-1’s full
implementation and the entry into force of India’s Comprehensive Economic Cooperation
Agreement (CECA) with Singapore in 2005 (Francis 2019a). But it can be clearly seen from
the figure that the increase in electronics imports became steeper from 2010 onwards with the
entry into force of the India-ASEAN Free Trade Agreement (FTA) and the India-South Korea
Comprehensive Economic Partnership Agreement (CEPA) in January 2010. India’s electronics
imports jumped from about USD 40 billion in 2008-09 to more than USD 54 billion in 2011-
12, before climbing to 80 billion in 2018-19. This surge in imports hollowed out India’s
manufacturing capacity in the critical electronics industry.
The relative movement in India’s electronics exports and imports, 1999-2020

Source: Calculations using data from the Department of Commerce online database based on a list of electronics products
compiled by the authors.
Meanwhile, India’s electronics exports increased from USD 13 billion to just USD 20 billion
over the same period. The expectation of many economists and policymakers that increased
export competitiveness would materialise as an automatic outcome of import-driven
productivity growth has remained a fallacy.
Considering that ITA-1 tariff lines had been fully liberalised by 2005, we can assess the impact
of these PTAs by analysing the tariff liberalisation of non-ITA-1 electronics products. Non-
ITA-1 tariff lines accounted for 68%, 66% and 78% of the total electronics lines under the
agreements with ASEAN, South Korea and Japan respectively (see Table). Out of these, about
13% non-ITA-1 tariff lines were excluded from the preferential tariff liberalisation under both
the South Korean and Japanese CEPAs. However, with only less than 4% of non-ITA-1 lines
excluded in the case of the ASEAN FTA, the former would not have been of much significance.
ITA-1 Plus Tariff Liberalisation under India’s FTAs with ASEAN, South Korea and Japan
(Percentages)
Tariff reduction categories
Share of non-ITA-1
tariff lines
Average
Base Rate
(MFN 2007)
Applicable
preferential
tariff as on
2020*
ASEAN FTA
Exclusion List (imports at MFN duty)
3.7
9.1
9.0
Normal Track-1 (zero duty from 2013)
72.0
7.8
0.0
Normal Track-2 (zero duty from 2016)
15.0
8.6
0.0
Sensitive Track (duties brought down to 5% by 2016)
9.3
9.2
5.0
Share of non-ITA-1 tariff lines in total electronics tariff lines
68.4
8.1
3.5
Total electronics tariff lines (Number of HS 8 digit lines)
1396
6.7
1.8
CEPA with South Korea (Base MFN rate 2006)
E-0 (zero duty from 2010)
1.1
10.7
0.0
E-5 (zero duty from 2014)
13.4
12.5
0.0
E-8 (zero duty from 2018)
61.1
12.4
0.0
EXC (Imports at MFN duty)
13.6
12.5
9.0
RED (duties reduced to 1-5% from 2016)
7.4
12.5
5.0
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
90.0
Electronics imports Electronics exports

SEN (duties reduced by 50% by 2019)
3.4
12.5
6.3
Share of non-ITA-1 tariff lines in total electronics tariff lines
66.1
12.4
3.4
Total electronics tariff lines (Number of HS 8 digit lines)
1209
10.1
1.7
CEPA with Japan
A (zero duty from 2011)
6.9
0.0
0
B10 (zero duty from 2020)
79.4
8.5
0
B5 (zero duty from 2016)
0.2
5.0
0
X (imports at MFN duties)
13.4
n.a.
8.9
Share of non-ITA-1 tariff lines in total electronics tariff lines
78.1
8.5
2.2
Total electronics tariff lines (Number of HS 8 digit lines)
1182
8.4
1.1
Note: The list of electronics products has been compiled by the authors based on the World Electronics Yearbook, the
OECD list of ICT products, the WTO lists for ITA-1 and ITA expansion, etc.
Source: Authors’ calculations based on the respective agreements and WITS online data base.
This is because ASEAN has been the production base for several South Korean and Japanese
electronics multinational corporations (MNCs) since long and the ITA-1 plus tariff
liberalisation was the most drastic under the ASEAN FTA. Under the ASEAN FTA, the large
majority of the non-ITA-1 tariff lines (72%) had already become zero duty from January 2013
itself and another 15% had become zero duty from 2016 too. The tariff lines that became duty
free in 2016 included products and parts like TV picture tubes, loudspeakers and their parts,
etc. (Francis 2019a). In the case of South Korea and Japan, because of the longer tariff phase-
out periods, the majority of non-ITA-1 lines became duty free only from 2018 and 2020
respectively. However, there were continuous tariff reductions even for many of these tariff
lines from 2010 and 2011 respectively. The tariffs for products under the Sensitive lists and
Sensitive Track in these PTAs too have been getting reduced from 2010/2011 onwards. Further,
while consumer electronics and professional apparatus such as video cameras, photocopiers,
medical equipment, etc. were not part of ITA-1 tariff liberalisation, several of them got
liberalised under the ITA-1-plus tariff reduction schedules under these PTAs (Francis 2019a).
For the industry looking to make investments, the writing was on the wall.
A comparison of base MFN duties showed that India also undertook greater tariff liberalisation
than her partners and granted significantly higher margins of preference to them across most
staging categories (Francis 2019). That is, despite the official acknowledgement by the early
2000s that output and employment in the domestic electronics industry had been severely
affected adversely by the import surge under the ITA-1, the subsequent governments carried
out deep and non-strategic tariff liberalisation under the PTAs. There was no attempt to link it
with a coherent industrial policy for the long-term development of the industry and to reduce
import dependence strategically.
With electronics industry being the largest export sector in the ASEAN countries, India’s non-
strategic tariff liberalisation under the ASEAN FTA has therefore had the most adverse impact.
The ASEAN economies have been deeply integrated into global electronics value chains since
at least the 1970s, with the US, European, Japanese, South Korean and Taiwanese electronics

firms having made their production bases in ASEAN, due to historical reasons and ASEAN’s
regional integration-driven industrial policy choices. ASEAN’s first mover advantage got
subsequently endorsed by Chinese and non-Chinese firms moving away from China from the
early 2010s with the rising production costs there.
The fact that ASEAN has been the production base for firms like Samsung, Sony, Panasonic,
etc. as well as for their tier-1 suppliers like Foxconn and Pegatron, and therefore, the preferred
route for exports to India, is reflected in the evidence that although there was some post-CEPA
rise in the share of imports from South Korea in the interim, this dropped after 2017. Similarly,
there was a visible decline in Japan’s significance as a source of electronics imports for India,
despite the CEPA. Meanwhile, ASEAN’s share in India’s electronics imports went up from
less than 12% in 2009 (pre-FTA) to more than 14% in 2013, and saw a further major rise from
2018 and stood at 17% in 2019.
Without a full-fledged FTA with India, Chinese electronics firms have become the largest
source of India’s electronics imports (with a share of 51% in 2017). They had matured and
attained economies of scale in their large domestic market under China’s strategic trade and
FDI policies, which support its indigenous manufacturers.
On the other side, despite the increase in “competitive” intermediate imports from all these
PTA partners, India’s electronics exports to ASEAN has stagnated around USD 2 billion
throughout 2009-2019, with the region’s share in India’s total electronics exports declining
dramatically from about 15% in 2009 to less than 9% in 2019. The share of India’s electronics
exports going to Japan and South Korea too declined to the pre-FTA levels, despite registering
a marginal increase during 2012-17. It is the share of India’s electronics exports going to “non-
China, non-FTA partners” (those other than ASEAN, South Korea, Japan and China) that has
registered increase with the gradual rise in India’s electronics exports.
As the authors pointed out last year, there has been a re-routing of Chinese electronics imports
through the ASEAN countries driven by the heightened US focus on China’s ICT technology
strength from around 2017 (Francis and Kallummal 2019). Chinese exports have been making
their way particularly through Vietnam, followed by Singapore, both of which showed a
significant increase in their shares in India’s electronics imports in 2018 and 2019. The re-
routing through ASEAN is in addition to the largest re-routing of Chinese exports occurring
through the non-FTA partner Hong Kong, China.
Clearly, these FTAs have led to deeper and wider entrenchment of import-dependent
production (for the domestic and exports markets) as well as import-dependent consumption
in India’s electronics industry. This has been a clear case of market failures getting
compounded by policy failures. A trade policy that promotes duty-free imports clearly perverse

incentives for local procurement and local production, in the absence of other policies and
factors that incentivise it (Francis and Kallummal 2013). Moreover, the fact that there was no
industrial strategy guiding tariff liberalisation in any strategic manner led to many final
products becoming duty-free, while several components had to be imported paying tariffs.
Despite having the advantage of a large domestic market, there has also been no active policy
support to develop the domestic parts and components supplier base. All these became adverse
factors influencing domestic and foreign producers’ incentives for domestic procurement of
parts and components (See the detailed analysis in Francis 2019a).
That is why when we account for the various types of incorrect classifications within official
FDI data, electronics manufacturing industry has received only a tiny part of the total FDI into
India (Francis 2018). That is, another avowed policy objective behind India’s FTAs with East
and South East Asian countries - to attract FDI for enabling India’s integration into GVCs, has
also not been met. This is clearly due to the policy failures in formulating a coherent industrial
policy framework that integrate an appropriate trade policy for developing the industry’s
manufacturing ecosystem. Evidence from literature also shows that a threshold level of
technological capabilities among domestic firms and workers are required for getting included
in GVCs, let alone for achieving technological catch-up through GVCs (Francis 2019a).
The impact of these trade agreements on India’s electronics manufacturing is a stark reminder
of the lessons from development history:
• Free trade robs an industry of the learning-by-doing required for sustainable industrial
development, with maximal domestic value addition and minimal leakages from the
economy.
• Coherent and coordinated industrial policy support for increasing firm-level, industry-
level and economy-wide productivity conditions for acquiring and maintaining
dynamic competitiveness cannot be wished away.
• In a large country like India, local companies require domestic market access for
achieving the economies of scale required for increasing competitiveness and for
promoting employment, the latter being critical to drive aggregate demand.
• The establishment of advanced parts and components production requires government
handholding of indigenous producers in prototype development after competitive
selection processes and guaranteed domestic market access for fixed time periods.
Against the overwhelming evidence of the perverse incentives created by these PTAs for the
domestic manufacturing and innovation ecosystem, these agreements must be reviewed to
ensure their coherence with a strategic industrial policy. This is the most urgent in the case of
the ASEAN FTA, especially with ASEAN’s trade and investment deals with Hong Kong,
China having come into existence since June 2019. A review of these PTAs also assumes more
significance against the backdrop of the escalating US-China trade and technology war, the

COVID-19 pandemic-driven supply chain disruptions, and accelerated digital transformations
across sectors.
The supply chain disruptions caused by the COVID-19 pandemic have led to a clarion call for
an indigenous electronics industry, and this has seen several new measures being adopted by
the government. However, many of the latter require significant tweaking to become effective
in increasing domestic value addition (see Menon and Francis 2020 and Francis 2020). Further,
tariff liberalisation must be adjusted to be in sync with the protection accorded by PTA partners
to their indigenous firms through national standards (see Kallummal 2006 and 2019).
With the increased merging of the cyber and the physical spheres across sectors (including in
those critically integral to national security like defence, energy, agriculture, finance,
transportation, health, etc.) and the rapid evolution of digital value chains, it is also critical for
India to develop a broad industrial policy framework for the electronics industry that integrates
its digital economy related policies (Francis 2019b and 2020). In particular, he country must
not depend on imported telecom equipment and control devices in the age of cyber warfare.
Unless the central and state government bureaucracies work with the indigenous players and
get their hands deep into the pro-active type of industrial policies that have been practised by
the countries where lead firms and tier-1 suppliers originate, the success of India’s efforts to
develop an indigenous innovation-driven electronics manufacturing ecosystem will be a long
time coming. And it may be way too late by then.
* Smitha Francis is Consultant at the Institute for Studies in Industrial Development (ISID) and Murali
Kallummal is Professor, Centre for WTO Studies, New Delhi. The views expressed are personal. This
article is based on a major research study on ‘Global Value Chain Engagement and Industrial
Restructuring: A Study of the Indian Electronics Industry’, which is sponsored by the Indian Council for
Social Science Research (ICSSR).
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