Big Lesson From Small Nation

Context: Lessons from Vietnam’s success in electronics manufacturing.

India’s limited success in telephone manufacturing sector through import substitution

• Shrinking imports: Imports of telephones had risen from $3.2 billion in 2009 to $7.5 billion in 2014 and have fallen to $2.2 billion in 2020.
• Rise in exports: exports had fallen from $3.5 billion in 2009 to $0.6 billion in 2014 and have risen to $3.0 billion in 2020.
• Limitations of India’s success episode: India’s numbers are just a fraction of what Vietnam, a country less than one-tenth of India’s size has achieved.
  • From just $0.9 billion in 2009, its telephone exports rose to $21.5 billion in 2014 and to $31.2 billion in 2020.
  • Its electronic goods exports stood at $122 billion in 2020 against India’s $12.8 billion.

Lessons for India from Vietnam

• Embrace FTAs: Free Trade Agreements pathways account only a minuscule proportion of India’s trade.
  • In today’s world of crisscrossing supply chains, even small tariffs can have big effects: iPhone contains 1,600 components supplied by approximately 200 firms spread over 43 countries.
• Import substitution cannot deliver the objectives of “Make in India for the World”: Tariff manipulation can support manufacturing in India, but in long run, it leads to problems such as
  • Rise in cost as components manufacturing base is inadequate to remain competitive with tax incentives alone.
  • Risk of escalation into a vicious cycle of increasing tariffs.
  •  High tariff also brings smugglers, rent-seekers etc. into business