Prime Minister Narendra Modi’s call for a self-reliant India, free of its dependence on imports, means opportunity for the domestic industry. The government has identified six sectors where India could reduce imports and over time become a net exporter. India is one of the world’s fastest growing telecom and internet markets, but two thirds of the $18 billion equipment it imported last year came from China and Hong Kong. India is the world’s hub for diamond polishing, but why does the country then import the same diamonds it exports? Questions like this have to be answered before India becomes an industrial hub, writes Sai Manish.
Sai Manish, Business Standard
India’s industry could get billions of dollars in business and the country reduce dependence on Chinese imports after Prime Minister Narendra Modi in a June 2 speech to the Confederation of Indian Industry (CII) called for self-reliance in certain sectors. Even if six of the sectors the government has reportedly identified to reduce import dependence were to be considered, $204 billion worth of business could be generated within the country. That’s roughly half of India’s imports of major commodities, or almost two-thirds of it excluding crude oil imports. See table below:
Modi, in his speech to CII's virtual conclave, spoke about "Atmanirbhar Bharat" or self-reliant India as he listed a couple of sectors where India could substantially reduce imports. Reports say the commerce ministry has identified key ones where India could reduce imports and over time become a net exporter. Gems and jewelry, textiles, telecom and electronics, capital equipment and industrial machinery, footwear and pharmaceuticals are among sectors identified. The government’s optimism is based on India's strong export potential in some of these sectors that could be leveraged for internal demand without relying on China, which is tackling international skepticism for the way it handled the coronavirus breakout in Wuhan province and its actions lately in geo-strategic and trade matters.
“PM Modi's call for reducing import dependence, in the spirit of Atmanirbhar Bharat is to leverage India's competitive advantage in a vast number of sectors. Besides, there are specific areas like electronics and IT hardware, including mobile phones, where an aggressive catching up is taking place,” said Rakesh Sood, general secretary of business chamber ASSOCHAM.
“The recent scheme for production-linked incentives to global and local champion companies sends a broader message to investors, which is: India is ready for a big lift -up in manufacturing; come and invest. These are not import-substitution measures only; these convey our bigger ambitions to seize the opportunities being thrown by a vast churn in the new world order during and post Covid-19 crisis” said Sood.
One promising sector for "self-reliance" is telecom and electronic equipment. India imported $55 billion worth of telecom equipment, electronics and ancillary components in 2019-20. India is one of the world’s fastest growing telecom and internet markets. Reducing dependence on imported equipment could well be akin to throwing a lifeline to homegrown electronics and mobile phone manufacturers, which have largely succumbed to Chinese brands aggressively spreading in India.
Two thirds of India’s $18 billion telecom equipment imports came from China and Hong Kong in 2019-20. Vietnam repackages a number of Chinese products for trade later. Factor in Vietnam and it becomes clear that India depends on Chinese electronic components and computer hardware used by its domestic companies to manufacture ‘Made in India’ equipment.
India's electronic components and computer peripheral imports stood at $25 billion in 2019-20. The country is a huge producer of electronic appliances, but exports were just a tenth of its imports in 2019-20. Lack of adequate infrastructure, domestic supply chain and logistics, and high cost of finance are among reasons dragging down the electronic equipment sector in the country, said Information and technology minister Ravi Shankar Prasad in a reply to the Rajya Sabha in July 2019.
“Inadequate availability of quality power, inadequate components manufacturing base, limited design capabilities and focus on research and development by the industry, and inadequacies in skill development” were other reasons, said Prasad. India introduced in 2019 a new National Electronics Policy that spoke of achieving a $400 billion turnover in the electronics sector by 2025 and exporting $110 billion worth of mobiles among other things.
Gems and jewellery would be a tougher sector in terms of reducing import dependence. India’s imports stood at over $50 billion; second only to crude oil. India is the world’s hub for polishing rough diamonds, so imports are logical. However, a large chunk of the imports is of polished precious stones and diamonds. It is a puzzle why India imports the same polished diamonds at marked up prices that it sends out. The polished diamond trade business has long been on the radar of investigators for alleged money laundering, and the scrutiny has increased after diamond merchants Nirav Modi and Mehul Choksi were accused of defrauding the state-run Punjab National Bank.
In 2019-20, India imported cut diamonds worth $8 billion despite and exported $19 billion. Two-thirds of the world’s rough diamonds come to India, which then supplies more 90 per cent of the world’s polished diamonds. Curiously, India ends up getting almost half its exports back as imports. India pays twice the price for importing the same commodity that it gets for exporting. In 2019-20, a carat of cut diamond exported from India was worth $777. Importers paid $1,300 per carat on an average to buy back the diamonds. Half of all diamonds and other precious stones imported into India come from United Arab Emirates, US and Hong Kong.
India’s agriculture sector is heavily dependent on imports. Fertiliser imports touched $7 billion in 2019-20 even as much of the country's basic industries rely on billion dollar imports of organic chemicals to manufacture paints, food products and everything in between. The Modi government’s electoral campaigns promote cow protection and promise to usher in a ‘white revolution’ but India relies heavily on China, Japan and Germany to meet machinery demands for its dairy industry. India occupies a pre-eminent position in global pharmaceutical exports. Its strong textile and footwear sectors could get a get a boost next as global companies consider alternatives to China as their production base. German footwear manufacturer Von Wellx recently announced it would move to Agra for production.
India is a major exporter of readymade garments, but imports gave grown significantly over the last few years. An analysis by CARE ratings noted, “Even as exports outpace imports by a significant margin, the rise in imports of finished apparel rather than raw material indicates that a bulk of the value addition is being done overseas, impacting domestic manufacturers negatively. The increase in imports can be attributed to China and Bangladesh. Zero rated duty of imports from Bangladesh has opened gates for big value imports of apparel and other textile products into India.”
As the PM calls for reducing imports with an eye on China’s dominance in India’s trade basket, can India’s industry rise to the challenge? Ajay Sahai, director general of Federation of Indian Exporters Organisations (FIEO) said, “We need plug-and-play incentives where industries can just start producing with all the infrastructure and regulatory clearances for them in place without running into land, labour and other problems. India missed the opportunity to capitalise during the US-China trade war. Now the opportunity has come calling again. If the will of the state is strong, we can make most of this opportunity.”
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