A sure way to manage the current account deficit and the rupee is to jump-start investment-production-exports cycle in critical sectors like electronics, computer, and telecom. Many would consider this to be an impossible task considering that most of our $60-billion electronics imports come from China.

But we must remember that in 1980s India was ahead of China in these sectors. Details of how we stumbled since then provide many lessons in moving forward.

In the mid-1980s, India with an annual export of $70 million was ahead of China in electronics and computers hardware sector. Firms such as Wipro and HCL had end-to-end capabilities in hardware design, manufacturing, sales and services.

To expand operations, firms needed to import components. But despite several meetings at the highest level, import duties on components remained high and clearance a big hassle. The government then was more concerned about the misuse of imported components and future revenue losses. It also did not allow import of Printed Circuit Board, the most critical element for computers.

This went on and, India missed the electronics and hardware bus. China with an incentive-driven strategy reached $600 billion in annual exports and is the world leader. So the lesson here is: do not squander an early lead in an emerging sector.

The Nokia story

We also need to protect the legitimate interests of firms which have made large investments in India. Consider, Nokia’s India story. It has all the elements of a tragic thriller. Attracted by India’s vast market, Nokia decided to set up manufacturing facilities at Sriperumbudur SEZ in Tamil Nadu. This was in 2006. Nokia moved to India along with its seven component suppliers. In the next few years, it started selling phones on a large scale. Exports rose to exceed $2 billion during 2010-13.

But soon trouble began. Local leaders tried to subvert the Nokia workers union, wanted scrap contracts and free phones. The issue escalated with State Sales Tax Department alleging Nokia of showing domestic sales as exports and thus evading sales tax of ₹2,400 crore. Nokia had the Customs documents to prove exports, but the State government would not see these. Nokia got relief from the Madras High Court.

But soon, Noika received a bigger tax notice. This time from the Income-Tax Department, which asked Nokia to pay a tax of ₹15,000 crore. Nokia bought software from its parent in Finland and treated it as standard business payment, but Tax department considered it royalty payment. Both sides have differently interpreted Finland-India Double Tax Avoidance Agreement. The I-T department froze its assets. The Nokia plant shut down in 2013.

The consequences became visible immediately. India’s mobile phone exports collapsed from $2 billion in 2013 to $200 million next year. All 7,000 direct and 10,000 indirect employees of which 70 per cent were women lost jobs. China was the only gainer as most imports of mobile phones came from China. The Nokia story dented India’s image as a robust investment destination.

Boost deep manufacturing

Finally, there are no short-cuts. We need to promote deep manufacturing and not superficial assembly of components. For example, lower import duty on parts and higher on mobile phones made mobile phones assembled in India cheaper than the imported mobile phones. Many firms set units to take the benefit, but they import ready-to-assemble kits from China.

As a result, India’s mobile phone imports came down from $6 billion in 2015 to $3.5 billion in 2017. But the picture changes if we consider the combined import of mobile phones and components. It rose from $15 billion in 2015 to $20 billion in 2017. This significant increase is without much value addition. For becoming a significant player, India has to invest in semiconductor fabrication plants (Fabs) which build semiconductor chips and mobile phones, computers, or telecom products.

The focus should also be on the manufacturing of critical parts like Mother Board/Printed Circuit Board (PCB) assembly and Integrated Circuits. These are the heart of a computer, laptop, tablet, mobile and most electronic devices.

How to do this? China could lure anchor MNCs to set operations there in 1990s through many incentives. Like low-cost land, power, water, labour, tax exemptions and an efficient customs administration. This model made China the lead exporter of electrical machinery, electronic and telecom equipment by 2005.

We may offer a robust incentive package to few anchor firms to set shop in India along with their dedicated component manufacturers. These may include low corporate tax at 10 per cent (better than no manufacturing no tax now) and a 30-year lease of land lying unused at many SEZs.

We must also allow the creation of a component hub that should ease bulk import where duty should be charged only at the time of clearance. This will ensure quick supply of components to meet an export/domestic order.

The electronics story of the past four decades has elements of a thriller: bureaucratic short-sightedness, ambiguous tax regime, and maybe a conspiracy to kill the domestic industry. But it also reveals three principles for attracting large investments:

Clearly worded tax laws that leave nothing on interpretation, freedom from interference in day-to-day operations, and, an attractive tax concession package. Global investors are watching us for action in these areas.

The writer is an Indian Trade Service officer. Views are personal.

Related Topics
comment COMMENT NOW