ICT import duties: Keeping India’s house in order

• Taipei, following EU, USA, Japan etc. has raised concerns over India’s custom duties on certain Information and communication products.
• India is alleged to have violated the ITA1 agreement of WTO that binds the signatories to maintain zero tariffs on IT products.
• India’s demand for electronic goods is estimated to reach US$ 400 billion by 2025 while India’s domestic production is able to meet only a third of domestic demand, leaving a huge void for imports to fill in.
• Measures to curb imports and protect domestic industry are understandable in the short term. But in the long run, India needs to build industry competitive across the value chain to control its looming deficit in this sector.

India is a signatory to the Information Technology Agreement, 1996 of WTO along with 81 other signatories. The agreement requires the signatories to bind tariffs and other taxes on IT products at zero i.e. eliminate taxes and tariffs completely. The objective of the ITA declaration was to support and facilitate trade in the information technology sector, thereby achieving free flow of information technology and make the world more connected. 

The agreement, now called ITA1, was expanded at the Nairobi Ministerial Conference in December 2015 by over 50 members. This conference concluded the expansion of the Agreement including countries like US and EU and calling it ITA.

India’s imports in ITA1 products have increased from US$ 1 billion in 1996 to US$ 32 billion in 2015, registering an average annual growth rate of 20%. On the other hand, exports increased from half a billion in 1996 to just US$ 2.2 billion. This tremendous growth in imports probably restrained India from signing the ITA2 agreement.

In recent years, several countries like Japan, USA, EU and now Taiwan have invoked dispute settlement proceedings against India at the WTO alleging that India levies higher than zero bound tariffs on Information and Communication Technology (ICT) products and that these duties are in conflict with the India’s schedule under ITA1. Products under review include 11 sectors such as laboratory/pharmaceutical glassware, apparatus for manufacture of semiconductors, transmission apparatus, measuring instruments, insulated cables, electrical transformers and telephone sets including mobile phones, to name a few. As per WTO, India has increased its custom duties in the union budgets of 2007-08, 2014-15 and 2018-19.

According to data extracted from ITC Trade Map (at 6-digit HS code level), China, Hong Kong, Vietnam, Korea and Singapore are the top 5 exporters of these products in 2018. Imports from China and Korea declined from 2017, while that of Hong Kong, Vietnam and Singapore increased. From Taipei, India’s imports stood at US$ 402.8 million in 2018, up by 25% from 2017. As per the 6-digit level, China, Hong Kong and Taipei are the top 3 global exporters of these products (on aggregate).

On the tariff line level, India’s global imports on the products has been on the upward trajectory for most of the products, except for some products like mobile phones.

 

Overall, on the tariff lines (32 tariff lines have been identified) in Taipei’s notice at WTO, India’s total imports have increased by 50% from US$ 15.3 billion in 2014 to US$ 22.8 billion in 2018. Clearly, rising imports is a concern for the government since it has been trying to make India a manufacturing hub for electronics and communication devices under the MAKE IN INDIA campaign. Higher duties have been imposed to protect and encourage domestic manufacturers, in the wake of imports substitution policy.

Moreover, it has been maintained by the government that the products under scrutiny do not fall strictly in the ITA1 schedule which was signed in 1996 when these products did not exist. They have been developed after 1996 and thus are not a part of the agreement.

Bearing in mind India’s ambitions of becoming a vital part of the global value chain in manufactured products and being able to compete with the other Asian giants, especially China, non-zero tariffs on the products are justified. In fact, value added in electronics has increased from US$ 31.2 billion in FY 2015 to US$ 65.5 billion in FY 2019 because of the government’s measures to improve the competitiveness of Indian electronics manufacturers through tariff structure rationalisation, infrastructure upgradation, simplification and provision of incentives. Electronics exports from India increased by 39% YoY to reach US$ 8.9 billion in 2018-19.  

Domestic mobile phone production has enabled a decline of mobile phone imports (as seen in imports of HS 85171290) as well. This shows that Indian industry is on the right path to shift the status from net importer to manufacturer and exporter. If the trend persists and develops further, the Indian industry has the potential to compete with China and others as well.

Clearly, the electronics import bill is quite unsustainable for India at present, and it necessitates short-term measures to curb imports in dire situations. Given that India’s electronics hardware demand is expected to reach US$ 400 billion by 2023-24, it is even more critical to strengthen the local manufacturing ecosystem for electronics, and components. Otherwise, it could be another pain point for India’s battle against its huge trade deficit.