Preferential Market Access ? Who Gains? Who Loses?

By Abhilasha Sahay*

The recent decision to keep the Preferential Market Access (PMA) policy (a local content requirement) in abeyance may prove to be erroneous and against the interest of the domestic Information and Communication Technology (ICT) industry as well as the Indian economy. The decision seems to be guided more by political than economic considerations. It has been claimed that the resolution stems from the Indian Government’s anticipation about relaxation of the H1 B regulations by the US Government, which would serve to significantly bolster Mode-4 exports[1]. However no such reciprocity has been signaled till now in the Indo-US dialogue. This article attempts to analyze the proposed PMA from an economic point of view and argues how retraction of the same would have a severe adverse impact on the domestic economy.

The PMA, tabled in February 2010, gives a preferential treatment to domestically produced telecom equipments and other electronic goods, especially to those having security implications. It imposes a local content requirement of 30% on all Government procurement.[2] Government procurement would strictly mean procurement by Ministries, Governmental bodies and agencies.  The policy having a ten-year time frame has no price preferences.

It would be akin to an auction design operating at L1 price, i.e. the least bid price for a tender.[3] Vendors, both domestic and foreign, must declare domestic value addition, standardization, testing and quality certification.[4] This further ensures that the domestic players are not given any quality preferences. In such a scenario wherein no price or quality preferences are offered to domestic players, the PMA would primarily serve to be an enabler for domestic manufacturing production to flourish. It is unlikely to distort markets. This ‘enabling effect’, which would create a guaranteed demand for the industry, is crucial especially because currently the market is entrenched with foreign players leaving little scope for domestic firms to burgeon.

The intent behind this policy is also to create a guaranteed demand for multi-national companies who are otherwise interested in entering the Indian markets but are hesitant in doing so due to frequent policy flip-flops and unstable business climate[5]. Furthermore, the PMA does not distinguish between a domestic company and a foreign company operating within the domestic contours. The company needs to be registered, established in India and engaged in domestic manufacturing. Experts claim that this leverage granted in the policy may in fact encourage domestic and foreign collaborations who could jointly meet the prescribed requirements; hence increasing foreign investment.

The US-India Business Council (USIBC) has been opposing the PMA since its inception. However, its apprehensions may seem unfounded. The main line of argument given by others and US against the policy is the fear of a contagion effect. What if other countries adopt similar protectionist measures? Protectionism, even when defined to the broadest extent, is something that hurts another country’s commercial interests. Whose commercial interests would this policy hurt? The USA economy, which stands as a net importer of manufactured goods from China and India, is unlikely to be at a disadvantage.

On the contrary, in the long -term, a more developed Indian ecosystem may serve US commercial needs better through improved quality and more cost-effective imports. The other contention is the fear of a contagion to private procurement. In case private entities have to choose between domestic and foreign manufacturers, countries that export to India, i.e. China, Japan, Korea and Taiwan maybe affected. USA could have been influenced by India’s past Local Content Requirement (LCR) policies, for e.g. LCR for equipment used in certain power projects and LCR under domestic Solar Mission; however the degree of impact of these policies remains under contention.[6] Also, the same may not apply for the ICT industry, USA being a net importer.

Recently the Information Technology Industry Council (ITIC), United States of America, (a representative body of the IT and Telecom industry in America) wrote a letter to the Obama administration seeking intervention against the alleged “discriminatory” Indian policies. One of the prime concerns as highlighted in the letter was the “Compulsory Registration Order” which would require all imported new equipments to comply with the standards as set by the Bureau of Indian Standards (BIS). However it is difficult to fathom why the US companies would take issue with such a requirement, especially when it could itself deny a batch of imported goods, which are not compliant with the labeling requirements as per a regulation enacted on 5^th August 2013.[7]It has also adopted country-specific measures, for e.g. procurement of Chinese IT equipment would be contingent on FBI certification (26^th March 2013). It has gone to taking company-specific measures too, for e.g. those against ZTE and Huawei, in order to protect its national interest. The letter further alleged that policy has been designed to disadvantage foreign companies in favor of domestic ICT manufacturers and to compel companies to build and finance testing labs in India and force the transfer of technology through reverse engineering.

It has been widely argued that every country has the right to formulate its policies keeping in mind its national interests. The story of India’s PMA is no different. Almost all countries in the world have adopted such measures at some point in time, irrespective of their openness to global trade. Table 1 gives an account of few such measures.

Table1: Barriers to global trade and investment:

Source: Global Trade Alert Database

The idea is not to justify the policy on the lines of others having done it, but more simplistically, because this sector needs such a policy-driven push at this juncture. Electronics and IT hardware would become the single largest item on India’s import bill supplanting oil by 2020[9].Table 2 gives an account of the increase in import value of ICT goods[10]. The PMA, which aims at making the industry self-reliant by bolstering the indigenous ecosystem, would serve to reduce this import dependence.

Table 2: Increasing import bill

Source: Data from UN Comtrade database

In this context, arguing on grounds of the infant industry argument may seem a bit short-sighted and clichéd. What is more crucial is to understand that the industry needs a policy-driven trigger. PMA would be one such trigger, but certainly not the only one. This move unequivocally needs to be amalgamated with domestic reforms in infrastructure, tax-structure, duty-structure and research and development investment. Recent policies like the National Policy on Electronics, National Policy on Information Technology, National Policy on Telecom and the National Solar Mission would enable the envisioned change. PMA, if implemented in the right spirit, would serve to hit two birds from one stone, i.e. strengthen the domestic manufacturing sector and enhance India’s global competitive position, which would lead to the ultimate success of the Indian electronics manufacturing industry. However with the recent abeyance of PMA it may be difficult to envisage the same.