Source: The Indian EXPRESS

URL:
https://indianexpress.com/article/business/economy/electronics-producers-uncompetitive-due
-to-high-import-tariffs-7728650/

Date the article was published :January 18, 2022

Date the commentary was written: Jan 24 2022
Word count: 785
Section of syllabus: International economics
Key concept being used: Intervention
‘Electronics producers uncompetitive due to high import tariffs’

The ICEA said that while China, Vietnam, Mexico and Thailand had focussed on attracting foreign direct
investment, improving domestic capabilities and exports, India had one major difference in policy when it
came to tariff

By: ENS Economic Bureau | New Delhi |

January 18, 2022 12:14:03 am

Since 2019, India has introduced a host of PLI schemes aimed at improving the domestic
production of electronic components such as mobile phones, chargers, light emitting diodes
(LED), liquid crystal display and LED panels. (Representational)

India’s policy of keeping high tariff on import of electronic components to protect the domestic industries
is proving counterproductive to its plans such as Production Linked Incentive (PLI) scheme and making
the Indian electronics manufacturing industry uncompetitive compared to other electronics manufacturing
nations, the Indian Cellular and Electronics Association (ICEA) said in a report.

Comparing the performance of the India to other countries such as China, Vietnam, Mexico and Thailand,
which were the major gainers of electronic products export over the last 20 years, the ICEA said that
while all of them had focussed on attracting foreign direct investment, improving domestic capabilities
and exports, India had one major difference in policy when it came to tariff.

“The main difference in their policy approach is the tariff policy of India compared to others. India has
relied heavily on higher tariffs whereas other countries have not done so. Higher tariffs orient the
approach of investors and domestic producers away from global markets and towards the domestic
market. Notably, the exports for India compared with others have remained low as has been examined in
this report,” the report said.

Since 2019, India has introduced a host of PLI schemes aimed at improving the domestic production of
electronic components such as mobile phones, chargers, light emitting diodes (LED), liquid crystal
display and LED panels, as well as allied components such as charger pins, vibrators for mobile phones,
front and back panels among others. The latest in the series of incentives for electronic components is the
Rs 76,000-crore scheme aimed at encouraging production of semiconductor chips in the country.

However, the last two Budgets have increased tariff and Customs duty on mobile phones and some of
their parts between 15 and 20 per cent, which, ICEA noted, proves to be harmful in the long run for the
domestic industry.
 The article entitled “Electronics producers uncompetitive due to high import tariffs” deals with

the effects of the high tariffs imposed by India on imports of electronics to protect domestic industries. A

tariff can be defined as a tax imposed by one country on the imports of another country.The key concept

being used here is intervention, which is a situation where the government intervenes either fiscal or

monetary policies in order to maintain economic stability. This includes subsidies, taxes and even tariffs.

The effects of the high tariffs imposed by India on imports of electronics can be shown on the following

diagram.

Figure 1: World market for electronic components India tariffs.

As shown in figure 1 above, the imposition of a tariff by India on the electronics imports resulted in an

increase in price from Pw to Pw+t and as import increases, quantity supplied increases domestically from

Q1 to Q3 while quantity demanded decreases domestically from Q2 to Q4. As a result, imports decreased
from Q1-Q2 to Q3-Q4 since because of the tariff other nations are reluctant to export their electronic

components to India because of the extra amount of money they will need to pay. We can also see a fall in

consumer surplus at 1+2+3+4 caused by the increase in price from Pw to Pw+t. This tariff imposed by

the Indian government on imports of electronic components causes domestic suppliers to gain an increase

in producer surplus at area 1. However there will be a net welfare loss at 2+4 since there will be a

substantial increase in domestic production. An increase in government revenue due to the tariff imposed

can also be observed at area 3.

The imposition of this tariff can have a number of advantages on the Indian economy. Firstly, the

tariff imposed on imports of electronic components will reduce these imports which in turn will reduce

the current account deficit of india. Also, as mentioned in the article, the high tariff imposed will “orient

the approach of investors and domestic producers away from global markets and towards the domestic

market” which will tend to increase Aggregate demand of electronics components leading to a shift of the

aggregate demand curve to the right increasing the amount of output domestically. In fact, India

introduced a “host of PLI schemes aimed at improving the domestic production of electronic components

such as mobile phones, chargers, light emitting diodes (LED), liquid crystal display and LED panels, as

well as allied components such as charger pins and vibrators for mobile phones'' but more importantly,

India will be able to protect their domestic industries since they won’t have to compete with more mature

foreign industries. This is so because foreign industries will be reluctant to pay the high tariffs imposed by

India on electronic imports.

The imposition of very high tariffs will also have several disadvantages on the Indian economy.

Firstly, high tariffs could possibly lead to retaliation from other countries which is likely to reduce the

exports of India. In addition to that, the implementation of these high tariffs will lead to efficiency loss

since more efficient worldwide producers like China and Vietnam would be replaced by less efficient

domestic producers of electronic components. However, the key issue for the Indian economy is that the

lack of competition due to the high tariffs will cause a decrease in the quality and quantity of electronic

outputs in India, which will in turn reduce India's net exports revenue from P(Q1-Q2) to P(Q3-Q4). This

decrease in net exports revenue which is a component of aggregate demand will have a contractionary

effect on India's economy as displayed on the Figure 2 below.

Figure 2: AD/AS diagram showing the tariff’s effect of India’s GDP

The decrease in aggregate demand from AD1 to AD2 due to the imposition of tariffs on electronic

components imports is mostly due to a fall in net exports but also due to decrease in Consumption on the

consumer side. The lack of competition due to tariffs causes a decrease in consumer surplus and a fall in

consumer choice which results in the fall of consumption leading to a decrease in Aggregate demand
since consumption is also a component of aggregate demand. In addition to that, the tariffs caused a

decrease in investment, another component of aggregate demand.

In conclusion, India’s decision to impose high tariffs on imports of electronic components in

order to protect infant industries will be successful in attaining this objective. However, several other

features like increase in price levels, retaliations and decrease in consumer surplus may arise from the

imposition of this tariff and can possibly have a negative impact on the Indian economy.