Like with the last episode of Business Matters, this one too was triggered by a headline I saw in an article: “India fears losing out to China in smartphone exports race”. This Reuters piece cited IT Minister of State Rajeev Chandrasekhar’s letter dated January 3 to Finance Minister Nirmala Sitharaman expressing fears that India’s high tariffs could be a deterrent to investments – investments that could help bolster our exports. Why is India struggling to attract such investments? Let’s take a look at what competitors like Vietnam have done right in this space, which India too could, and potentially in quick time. Mr. Chandrasekar’s missive to his colleague in the government emphasises the need for cutting back on tariffs. Lobbies for Apple and other electronic giants describe our tariffs as high and that the likes of China and Vietnam are more attractive for investors. Given that firms from several western nations are looking to shift supply chains away from China, Vietnam and other East Asian nations seem poised to grab a good chunk of that pie, while India, despite its aspirations, has lagged. And in the letter, he says, “The geopolitical realignment is forcing supply chains to shift out of China ... We must act now, or they will shift to Vietnam, Mexico and Thailand.” And sure enough, the change in trends is showing up in statistics. For the first time in 20 years, the US in 2023 imported more from Mexico than it did from China. India would have liked to have been the one to topple China in that ranking but it did not. The Reuters article cites U.S. Ambassador to India Eric Garcetti as having recently said that foreign investments were not flowing into India at the pace they should be, and were going to countries like Vietnam instead, because of the tariffs, especially on inputs, or in other words raw materials that go into making a whole product. “If you tax inputs ... you’re not protecting a market. What you are doing is limiting a market.” So what can India do outpace a rival like Vietnam? After all, India has taken some steps around taxation and performance-linked incentives. In the Feb. 2019 Budget, India announced a 15% flat tax rate for new investments in manufacturing units. Its performance linked incentives have bolstered select sectors such as electronics but not all the others that the country wanted to spur. In a recent article, Biswajit Dhar, Distinguished Professor, Centre for Social Development, New Delhi, said that the aim of the PLI scheme was to raise the share of the manufacturing sector in gross value added from 16% in 2014-15 to 25% by 2022 (PIB 2018). Instead, the share of the sector has declined to below 15%, he wrote. In his piece, we read, “Industrial policy was successfully implemented in the East Asian region because the governments used a combination of policies to 'accumulate physical and human capital, allocate this capital to highly productive investments and acquire and master technology to achieve rapid productivity growth'.” In the video above, we spoke to Prof Dhar to understand exactly what others have done right and India hasn’t, yet. What emerged is that China, and the China model replicated by Vietnam, have shown that physical infrastructure thanks to which companies only need to come in and plug and play, human skills development and an ecosystem that has developed in tandem – such as railway connectivity and port reforms – alongside labour laws are critical to building investor confidence. Did you know? Exports accounted for only 25% of India’s smartphone production worth $44 billion last year, compared with 63% of China’s $270 billion worth of production and 95% of Vietnam’s $40 billion worth. Last week’s quiz question A small amount of inflation is good because it makes people buy items now rather than later to help save on expenditure, in the knowledge that costs will keep going up. This spurs consumption. As demand goes up, companies tend to produce more, invest more in manufacturing and hence create more jobs. Deflation has the opposite effect. It makes people wait before spending, in the anticipation that prices could fall further. This lowers consumption, tempers demand. Companies then tend to produce less, invest less and there are fewer jobs created or worse, potential job loss. In the latter case, workers have even less to spend and this creates a vicious cycle. 00:00 - 00:50 - Intro 00:51 - 02:32 - Why is India struggling to attract investments? 02:33 - 04:50 - What can India do to outpace Vietnam? 04:51 - 21:02 - Interview with Prof. Biswajit Dhar 21:03 - 21:33 - Did you know? 21:34 - 22:45 - Last week's quiz question 22:46 - 23:32 - This week's quiz question