How ITC imports are affecting India

The Regional Comprehensive Economic Partnership (RCEP), a proposed free-trade agreement (FTA) between several member states of the Association of Southeast Asian Nations (ASEAN), can take credit for about 85 percent of India’s total information and communication technology (ICT) imports during 2016-17. But this percentage dropped to 74 percent in 2018 because of a 15 percent reduction in China’s share (China accounted for about 64 percent of India’s ICT imports in 2016-17).

Although China still made up nearly half of India’s ICT imports in 2018, the decline is notable. Most attribute it to the tensions between the U.S. and China and the resultant rerouting of Chinese imports. Additionally, Chinese exports primarily went through Vietnam, followed by Singapore, both of which conferred an increase in their shares in Indian ICT imports in 2018.

The rerouting through Vietnam was particularly obvious in telecommunication devices last year. China accounted for about 50 percent of Indian consumer electronics imports during 2015-16, followed by Malaysia and Thailand. However, China’s share dropped to 43 percent in 2018 (Malaysia sliced their share in half to six percent and Thailand’s share declined to eight percent).

At the same time, Vietnam’s percentage nearly tripled from six percent in 2016 to about 18 percent in 2018. Vietnam’s imports of telecommunication equipment also jumped four times from about three percent to about 12 percent between 2017 and 2018.

This move to Vietnam was intended to reduce the critical eye of the U.S. overlooking Chinese ICT exports. One concern, however, is that Vietnam is a beneficiary under the India-ASEAN FTA, which brings into question the Rules of Origin Criteria of ASEAN’s Free Trade Agreements. These Rules of Origin (RoO) are guidelines that help importers and manufacturers determine the country of origin of a product. For example, products qualifying as originating under the FTA may be eligible to pay either a lower or no import tariff when arriving from another FTA member country.

These are important considerations for India if the country is to protect its ITC industry. Also, if India accepts the RCEP negotiations, it is wise to ensure the RoO adds domestic value and includes bilateral mechanisms for compliance. It should consider requesting firm-level investment data with the RCEP group so the nature of Chinese investments in different countries is fully understood.

What’s more: the largest re-routing of Chinese ICT exports appears to be through Hong Kong, whose share in India’s total ICT imports jumped from below three percent during 2016-17 to about 14 percent in 2018. Between 2017 and 2018, Hong Kong’s share increased from:

One-and-a-half to 21.5 percent in electronic components
Under four to nearly 15 percent in telecommunication equipment
About 0.7 to 7.5 percent in consumer electronics
One to eight percent in computers and peripheral equipment

Given that Hong Kong is not part of the RCEP, it’s worth evaluating the non-preferential RoO applied to the most favoured nation (MFN) trade, beyond what has been achieved at the WTO.

Advancing chip development in India
India has been taking steps to establish domestic chip manufacturing in the country. Several attempts have been made to develop a semiconductor ecosystem, including discussions with leading chip manufacturers TSMC and AMD to set up fab plants. The country aims to secure local talent from academic institutions as well as startups.

In recent years, several global semiconductor companies (including the likes of Qualcomm, ARM, Intel, Cadence, and Texas Instruments) have established design and software development infrastructure in India, supporting local employment and chip development.

Additionally, local businesses, R&D, and academia-industry incubators have grown in the country, so a community of knowledgeable engineers and entrepreneurs in the microchip and micro-processing fields are available — which will advance domestic manufacturing.

Government initiatives that strive to make the country a center for electronics manufacturing are also providing incentives for exports and high-tech projects, including semiconductor equipment. This should affect fabless chip design and strategic electronics in the automotive, medicine, and energy sectors.

The Make in India initiative, which to attract investments from across the globe and strengthen India’s manufacturing sector, is supporting the electronics sector. In fact, the electronics system design and manufacturing (ESDM) industry is expected to see investment proposals worth Rs 10,000 crore (USD 1.5 Bn) in the next couple of years. Several initiatives outlined in the National Electronics policy and the National Telecom policy are also in the process of completion, such as Electronics Manufacturing Clusters (EMC), Preferential Market Access (PMA) and Modified Special Incentive Package Scheme (M-SIPS).

According to research by MarketsAndMarkets, the Indian semiconductor market is expected to reach USD 32.35 Bn by 2025 — growing at a CAGR of 10.1 percent between 2018 and 2025. The Department of Electronics and Information Technology (DeitY) has also found that about 2,000 chips are already engineered in India, annually. More than 20,000 engineers currently support different aspects of such chip design and verification and that number is expected to grow.