Context: The Prime Minister recently brought up the importance of local manufacturing and consumption of locally produced goods, stating that Indians needed to become “vocal for local”.
India’s import dependency:
- India imported $467.2 billion worth of commodities between April and March 2019-2020.
- Of this, leather and leather products were $1.01 billion, pearls, precious and semi-precious stones were about $22.4 billion.
- Electrical and non-electrical machinery were $37.7 billion.
- Machine tool imports were about $4.2 billion.
Sectors heavily dependent on imports which cannot immediately scale up production domestically
- Electrical and electronics equipment such as smartphones and computers are a key part of India’s import bill.
- The value addition in India’s electronics industry is limited to mostly assembly, while the country depends on imports to access most of the primary and critical components used to make them, including printed circuit boards (PCBs).
- The Indian AC industry, with an estimated Rs 12,000 crore market and sales of over 5.5 million units, is largely dependent on imported compressors — which accounts for 60-65 percent of an AC’s production value.
- Imports due to India-ASEAN Free trade pact: In the split AC category, several Japanese companies that are market leaders have been importing from Thailand and Vietnam by taking advantage of the concessional tariffs available under the India-ASEAN trade pact or bilateral Free Trade Agreements signed with these countries.
- This is especially so in case of the newer ‘inverter’ category of ACs, where the compressor specifications and built-in electronics are different.
- The country’s electric vehicles industry is dependent, “to a large extent” on Chinese imports for chemicals used to make cathodes and battery cells.
- Medical devices: Over 60 per cent of the country’s medical devices are imported as well. Medical devices like ventilators also rely on imports of several crucial components like solenoid valves and pressure sensors.
- Solar cells and modules used by the country’s solar power industry.
- Local dyestuff units in India are also heavily dependent on imports of several raw materials, while specialty chemicals for textiles like denim are also imported, according to CII.
Partially import dependent sectors
- India’s pharmaceutical industry is capable of making finished formulations, and also has domestic manufacturers of several key ingredients used to make them.
- However, the industry also imports some key ingredients for antibiotics and vitamins currently not manufactured in India.
- Import dependent API: India imported around Rs 249 billion worth of key ingredients, including fermentation-based ingredients, in FY19, and this accounted for approximately 40 per cent of the overall domestic consumption.
- Fermentation based APIs, became less competitive when China began receiving infrastructure and logistic support to produce and sell them at cheaper rates.
- Some auto manufacturers depend on imports for various components.
Self-reliant sectors which have minimal dependence on imports or have the capacity to immediately scale up production here
- India is not as dependent on imports for some textile components like yarn. Although the domestic industry argues that China is a major threat, if you look at the global scenario, India’s share in textiles has been going up.
- Many items like hot water bottles, mercury thermometers, were made here in the past, are not made now by manufacturers as they prefer to import and market.
Identified sector for self-reliance scheme
- Sectors already identified by the Department of Promotion for Industry and Internal Trade (DPIIT) in consultation with other ministries include
- capital goods and machinery,
- mobile and electronics, gems and jewellery,
- pharmaceuticals, textiles and garments.
Challenges: A key issue holding back manufacturing in the country and a lack of flexibility in labour laws, high costs and low availability of land and high cost of electricity.
- Resources: The manufacture of some of the key products that India imports such as semiconductors, displays and other very capital intensive electrical equipment may not be possible soon as manufacturing these requires large, stable sources of clean water and electricity.
- Policy certainty: They also need a high degree of policy certainty as these require high upfront investments.
- Logistics: The Indian industry faces much higher costs in inputs such as electricity and much higher logistics costs than Chinese firms. E.g. it costs Rs 4/kg for a shipment of cable to arrive at Mumbai from a city 300 km away from Shanghai but it costs around Rs 14/kg for that shipment to be transported from Mumbai to a factory in Noida.
- Import substitution framework: With Atma Nirbhar Bharat, there is a danger of India going back to an import substitution framework which may not be quite appropriate in the 21st century.
- Criticism of Import substitution industrialization (ISI): It showed following results:
- Production that often did not extend into industries other than consumer goods
- slow employment growth,
- agricultural-sector decline and minimal productivity growth.
- Social strife also emerged and was seen in part as resulting from increased internal migration and greater inequality.
- Trade distortion: Increasing import duties may cross WTO prescribed limits and invite disputes.
- Robust Industrial and innovation policy: You have to work on making the industry efficient first. We need an industrial policy and an innovation policy and you need to look at what the industries need in terms of making their infrastructure more efficient.
- Indian firms can however begin producing less sophisticated components if certain policy measures are taken.
- Relaxing labour laws: Some states including UP and Madhya Pradesh have relaxed some labour laws with Karnataka likely to follow suit.
- Technology transfer and local manufacturing: While technology transfer is required for more advanced and critical medical devices, the country does have the capacity to domestically make products like hot water bottles, mercury thermometers, hypodermic needles, wheelchairs and patient monitoring display units.
- Being strategic: We need to be strategic in terms of the choice of sectors in which we want to be self-reliant. There should be a very strong case for increasing domestic value addition, besides considering aspects of consumer safety and national security.
- Raising import duties: While implementing measures like increasing import duties, we will need to make sure we are not crossing the WTO bound rates.
We have to emphasise Indian production of a certain scale, certain quality and certain standards. Then only the Indian product will match up to the best in the world.
About Import substitution industrialization (ISI)
- It was pursued mainly from the 1930s through the 1960s in Latin America—particularly in Brazil, Argentina, and Mexico—and in some parts of Asia and Africa.
- In theory, ISI was expected to incorporate three main stages:
(1) domestic production of previously imported simple nondurable consumer goods,
(2) the extension of domestic production to a wider range of consumer durables and more-complex manufactured products, and
(3) the export of manufactured goods and continued industrial diversification.