On Monday, July 8, the Indian Prime Minister’s office, after consultations with India’s Department of Telecommunications and Department of Electronics, announced it would conduct a four-week review and reevaluation of the country’s controversial Preferential Market Access (PMA) mandate. The mandate imposed local content requirements on procurement of electronic products with “security implications for the country” by government and private sector entities. If the PMA had been implemented as originally envisioned, a specified share of each electronic product’s market—anywhere from 30 percent, rising possibly up to 100 percent by 2020—would have to be filled by India-based manufacturers, a requirement that could have eventually affected as much as half of the $50 billion spent annually on information and communications technology (ICT) products and services in India. In announcing the policy review, the Indian Prime Minister’s office acknowledged that, “Concerns have been raised in many quarters on different aspects of the PMA Policy, particularly relating to procurement by the private sector for electronic products with security implications.”
India conceived its PMA rules in an attempt to bolster domestic manufacturing of electronic products in India, a goal India has sought both to boost employment and to address what it views as a large current account deficit, in part caused by high imports of computers and electronics products. Unfortunately, the forced localization strategy underlying India’s PMA rules were misguided in several regards. First, the policy failed to acknowledge that, in spurring economic growth, the use of information technology is far more important than its production. Indeed, the vast majority of economic benefits from technology, as much as 80 percent, come from the widespread usage of technology, while only approximately 20 percent come from its production. With the productivity level of India’s economy just 10 percent of that of the United States’, India desperately needs across-the-board productivity growth in all its sectors, something best achieved through the application of cost-effective and best-of-breed information technologies to domestic services and manufacturing sectors.
Second, the imposition of onerous local content requirements would likely have raised the prices paid by Indian firms and consumers for ICT products and services (or forced them to procure inferior equipment by restricting competition from best-of-breed global manufacturers). This risked compromising the competitiveness of India’s successful ICT services (sometimes called the BPO, or business process outsourcing) industry, which accounted for 7.5 percent of Indian GDP and 25 percent of the country’s exports in 2012. ICT services also generated revenues of $88.1 billion and supported 2.8 million direct jobs and an additional 8.9 million indirect jobs. Moreover, because advanced information technologies, in the form of digital-control systems, computer-aided design (CAD) software, integrated sensing, and robotics are increasingly vital inputs to modern manufacturing processes, India’s PMA rules risked raising the costs of production in virtually all of India’s other manufacturing industries. In other words, India’s PMA rules risked damaging the competitiveness of all domestic services and manufacturing industries in India’s economy, all in the interest of trying to bolster activity in one specific (electronic goods) manufacturing sector.
Third, India’s PMA also risked starting a contagion effect with the potential to severely undermine global trade. As a leading BRIC nation, if India starts applying policies that force local manufacturing as a condition of selling into domestic markets, this would only further encourage and incentivize other nations—notably Brazil, China, and Russia—to do the same. This would have had the ironic impact of compromising one of India’s key goals for its domestic electronics industry—to increase India’s ICT exports thirteen-fold, from $5.5 billion today, to $80 billion by 2020. If other countries introduce forced localization policies inspired by India’s own example, India will find those markets closed to its exports not only of ICT products, but also, the ICT services the country has become so competitive at providing to the global marketplace, thus insidiously undermining its own objectives.
To be sure, India’s goal of increasing domestic manufacturing in general, and domestic manufacturing of ICT products and services in particular, is a reasonable one. And the reality is that a large number of foreign multinational ICT corporations already invest and manufacture in India. In fact, they would like to do more of both in the country. But if India wants to maximize that investment, it should be playing an attraction game, not a compulsion game. The best path forward for the nation is to offer globally mobile investment and enterprises all of the attractions of China—a large, fast-growing consumer marketplace, a cheaper labor pool, but one that yet features hundreds of thousands of skilled engineers, etc.—with none of the innovation mercantilist policies that multinational corporations all-too-often encounter in China.
Instead, India should concentrate on investing in its digital and physical infrastructure, the talents of its scientific and engineering workforce, and in scientific research. Unfortunately, there is evidence suggesting that India has room for improvement in all three areas. The country faces an infrastructure investment deficit estimated at $350 billion. Meanwhile, among major developed countries, India is one of the smallest investors in R&D and has one of the lowest number of researchers per capita, with only 120 researchers for every million people, a rate 1/5th China’s and 1/25th Korea’s. Addressing those challenges is where Indian policymakers should concentrate their attention.
Global industry wants to come to India—to the benefit of both parties—it just wants to be welcomed with open arms. Abandoning the PMA would be a great place to start.