Framing trade, industrial policy amidst Covid presents new challenges

As part of its Atmanirbhar Bharat initiative, the Centre has announced production linked incentive schemes as well as localisation requirements for public procurement in the areas of medical devices, pharmaceuticals and electronics. The intent here seems consistent with the political slogan (a tad hyperbolic) to break free from China’s imports. The need to reduce dependence on a single supplier for crucial products and intermediates has come to the fore the world over, in the wake of Covid and its disruption of supply chains. India’s annual electronics imports, at over $50 billion, accounts for 10-11 per cent of its overall imports. The NITI Aayog, in its paper on free trade pacts and their impact on India, points out that electrical machinery, telecom equipment, audio and video recorders account for 36 per cent of India’s total imports from China, which are in the region of $75 billion. The dependency on China for pharma intermediates is a serious issue. In the case of medical devices, the Centre points out that imports were ₹43,365 crore in 2018-19, while exports were ₹16,300 crore. It says that “as many as 55 various types of chemicals, petrochemicals, pesticides and dyestuff have been identified”, for public procurement and progressive localisation. Organic chemicals account for 9 per cent of India’s imports from China. The production linked incentive schemes are meant for all manufactured goods, and not just what is exported, to ensure that they are WTO-compliant. India will need to replace the Merchandise Exports from India Scheme (MEIS) at the earliest, with the WTO striking it down as an unfair export subsidy. It remains to be seen whether India’s localisation plans trigger WTO scrutiny, even as public procurement remains outside the WTO’s ambit. India ran into rough weather with respect to such a policy on solar panels.

Self-reliance in key sectors must be accompanied by a long-term view on their development. This entails an ecosystem that promotes technology upgradation. While the Centre had its reasons for walking out on the RCEP deal in November 2019, it could reconsider engagement at a later stage if member countries do not insist on market access in sensitive areas. Japan and Australia have been pushing for both reintroduction of India into the RCEP as well as bilateral trade deals. With markets shrinking everywhere, India could take a pragmatic view, entering into technology tie-ups in areas of public interest while leveraging its large market advantage. While encouraging self-reliance, it should be remembered that too much protectionism can encourage inefficiency, particularly in the production of raw materials and intermediates, hurting producers of finished goods. Public sector presence in the production of basic ingredients in pharmaceuticals should be considered. With a world looking to derisk from China, India is in with an opportunity.

However, India must be ready in an institutional sense. Contract enforcement and restoration of basic law and order are a must to create investor confidence.

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