Breaking into the closed circle - Domestic high-tech manufacturers need help to break into a closed circle and gain market access.
Shyam Ponappa August 1, 2013
The deferral of India's preferential market access (PMA) policy for locally manufactured high-tech products indicates some lack of clarity and/or confusion in the government. There are compelling reasons for supporting domestic manufacturing capacity in India, and high-tech products deserve high priority. Examining the elements of the proposition for developing our high-tech manufacturing and the state of its capacity may help clarify where and how policies should be heading. If domestic electronics production does not increase significantly, India's electronics requirements will be choked by high imports in excess of even oil imports.
The Bogey of Protectionism
The aim of the PMA policy is to give technically qualified domestic manufacturers access to otherwise closed domestic markets. It only provides an opening, and does not provide any protection or price preference. The notification states explicitly that technically qualified domestic manufacturers are eligible only if they match the lowest bid; if there are no qualified local manufacturers, or if qualified vendors don't match the lowest bid, entire orders may be awarded to the lowest-priced vendor/s (from abroad). Perhaps there is some confusion arising from the nomenclature, as "PMA" usually refers to international vendor access to domestic markets. The notion that the PMA is protectionist and shields domestic suppliers from competition is incorrect.
Deferring PMA to Assess Domestic Capabilities
The government's deferral of the PMA pending assessment of domestic manufacturing capabilities appears unreasonable, as there are already qualified manufacturers in India, several of them transnationals, producing high-tech products for global markets. The top 10 global fabless design companies and the top 25 semiconductor companies operate in India. In 2010, revenues were estimated at $7.5 billion, and in 2012, over $10 billion. India is reportedly among the top countries for fabless design skills, and has the critical ingredients for the growth of fabless companies as start-ups slow in the West: design service companies, design engineering expertise and innovation, returning entrepreneurs, and educational facilities. What they need for scale is local market access, equity funding, good logistics, and effective infrastructure. These are the areas where the government can facilitate matters. Deferring access to local companies at a time of rapid growth in networks will entrench foreign products, providing them with an undue advantage against local producers. Instead, we should be capitalising on our domestic strengths.
Closed Circle of Buyers & Sellers
In high-technology procurement, large international vendors, of whom there are relatively few, form long-term relationships with the relatively few large buyers in oligopolistic markets in telecommunications or electricity. This holds whether the buyers are government entities, state-owned enterprises, or private sector companies. Often, the international vendors have strong home government support. This is why domestic manufacturers need mandatory access to break into a closed circle. There is no ambiguity in this, nor is it protectionist, and there are no price preferences - in contrast to the 15 per cent allowed by the World Bank, or 10 per cent for minority-owned businesses in the United States.
Markets & Demand
Of the many reasons for developing electronics manufacturing capabilities in India, a compelling one is our level of demand for electronics. A task force comprising government and industry participants estimated in 2009 that demand in 2009-10 was around $45 billion, going up to $70 billion in 2012, and projected at $400 billion by 2020 (see chart), with government's share being 40 per cent.