Bold policymaking will enable India to become the next hub of production – The Economic Times

Clipped from: https://economictimes.indiatimes.com/opinion/et-commentary/view-bold-policymaking-will-enable-india-to-become-the-next-hub-of-production/articleshow/84387005.cmsSynopsis

In electronics, imports have grown at 7% a year compound annual growth rate (CAGR) in the last seven years, even as overall imports have been stagnant. The share of electronics in total imports has risen from 7% to 13% in the same period. In sum, anywhere between 35% and 40% of India’s total imports every year are on account of these two sectors alone.

Dhiraj Nayyar

Dhiraj Nayyar

The writer is chief economist, VedantaIn the quest for an aatmanirbhar Bharat, two GoI ministries matter more than others: oil and gas, and electronics and information technology (IT). Until last week’s reshuffle, both ministries had been helmed by the same ministers for the seven years of Narendra Modi’s government: Dharmendra Pradhan and Ravi Shankar Prasad. Now, the career politicians have been replaced by technocrats — Hardeep Singh Puri and Ashwini Vaishnaw, the latter supported by another technocrat, Rajeev Chandrasekhar, as minister of state. They have a unique opportunity to script a transformation.

The fact is that import dependence in these two already import-dependent sectors has increased in recent years. In oil, domestic production has been falling every year for the last seven years. Modi’s stated goal of cutting import dependence by 10% by 2022 is more distant now than when he first stated it in 2016. Imports of oil and gas are around $125 billion a year, around 25% of India’s total imports, which stress the current account and affect the value of the rupee.

In electronics, imports have grown at 7% a year compound annual growth rate (CAGR) in the last seven years, even as overall imports have been stagnant. The share of electronics in total imports has risen from 7% to 13% in the same period. In sum, anywhere between 35% and 40% of India’s total imports every year are on account of these two sectors alone.

Both sectors are worthy of the goal of self-reliance as they are highly strategic. Oil and gas underpin India’s energy security (and macroeconomic stability), while the electronics is fundamental to Digital India and India’s communications and connectivity security. There is also a concentration of production and supply globally. In oil, the Opec cartel controls supply and, therefore, price of crude oil. In electronics, particularly the fundamental semiconductors and display fabrication, there are only a handful of producing countries — China, South Korea, Taiwan, Japan — with China beginning to dominate. So, a consuming country like India is particularly vulnerable in terms of supply shocks (of quantity and price).

Major economies respond to these vulnerabilities. The US aggressively pursued domestic production in oil and gas to end its dependence on Opec and West Asia. Now, in strategic electronics like semiconductors, the G7 countries are keen to diversify supply chains to reduce dependence on China. India must also take decisive steps.

Some initiatives have arguably been taken. In oil and gas, the open acreage licensing policy (OALP) brought in a globally benchmarked policy regime for future production and investment. In electronics, a concerted effort has been made to bring assembly of key products like mobile phones and televisions to India by raising import duties and introducing production-linked incentives (PLI). However, much more can be done.

Consider oil first. The reason production is falling is because the oilfields are ageing and it is technically tougher and more costly to extract oil. GoI’s approach to the domestic oil industry has been focused more on revenue than production. Government levies and taxes can go up to 65% of the price of a barrel of oil. This leaves only a limited amount to the producer to be able to invest in the technology to extract more oil while also remaining profitable.

Ironically, there is no levy on imported barrels of oil. By reducing levies on domestically produced oil, GoI can help enhance investment and production. By substituting imports with domestic production, it will gain revenue, because even with reduced levies, it will collect a substantial amount on local production compared with zero on imports.

India has abundant reserves of oil and gas. However, to extract them viably, policy regime needs deregulation. So far, big-ticket greenfield FDI has been largely absent from this sector. That needs to change.

In electronics, there is a need to move beyond final stage assembly of mobiles and televisions. The core of any electronics industry is in semiconductors and display fabrication, the basic, critical components of any electronic device. Like oil and gas, semiconductors and display are capital-intensive segments of the electronics industry. In the initial stages, they need support from GoI to be viable and competitive. That is the experience of China, Japan, South Korea and Taiwan.

India can become the next hub of production because of a large domestic market and potential of exports (as a supply alternative to China). It requires some bold policymaking to attract big-ticket investment from India and abroad. PLI has set a precedent of government support compliant with WTO laws. It must be tweaked to support capital investment in this space.

The electronics sector will grow very rapidly in the coming years. The ownership of electronic devices will only grow as incomes rise. Demand may also rise from other sectors, like automobiles. Some experts believe that very soon, 40% of a car will be constituted by electronics.

Puri and Vaishnaw have plenty of ability and experience to be game changers. With the right policies, they could change the course of India’s economic trajectory, generating jobs, revenue for government and reducing imports.

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