The Indian government immediately restricted importation of laptops, tablets, personal computers, and other electronic devices on Thursday, August 3.
This action was taken to encourage the production and assembly of these products in India.
The government has been focused on enhancing India's manufacturing capabilities for some time and has introduced a number of measures, such as the Production Linked Incentive Scheme, the Modified Electronic Manufacturing Clusters Scheme, the Scheme for Promotion of Manufacturing of Electronic Components and Semiconductors, and a number of other central and state policies.
The restriction on imports is a continuation of the same strategy. During trading hours, the shares of Indian players in the electronics industry soared, signifying investor optimism regarding the move.
Last year, India imported products worth over $10 billion, including laptops, personal computers, and other devices.
Nearly $6.3 billion of this total was contributed by China and Hong Kong, while Singapore ranked second with $1.7 billion in exports to India. These imported products satisfy the majority of India's demand for electronics, while Indian manufacturers have a limited presence in the sector.
The restriction is anticipated to stimulate assembly operations in India in the short term, while aiding the development of the value chain in India in the long term.
However, the government has made exceptions for laptop imports, including the availability of special licences. However, even with a licence, importation is anticipated to be difficult.
Import restrictions on electronic products are not uncommon. In the past three years, the government has prohibited the sale of fully assembled air conditioners and televisions.
The purpose of these restrictions is to shift some lower-end portions of the value chain to India.
Initially, the government anticipates that companies will import broken down units (components that are not assembled) into India and then have these components assembled in India.
This would aid in the creation of assembly employment in India. In addition, acquiring low-value components in India would be less expensive than importing them, providing a boost to ancillary industries.
Over time, India is anticipated to experience a rise in value addition as production reaches a critical mass and as suppliers gain confidence in establishing significant capacities in the country.
Several critics have spoken out against the PLI programme due to its current emphasis on basic assembly as opposed to value addition.
Increasing value addition requires time, as suppliers will only establish capacity if they are assured of scale, volume, and infrastructure availability.
Unquestionably, the abruptness of the current prohibition would cause a supply chain mismatch, resulting in an immediate increase in the price of electronic goods.
In the next two months, India will experience an increase in demand due to the festive season, and supply chains will need to be reorganised.
In the past three years, the government has imposed bans on a variety of electric products, as previously mentioned.
Every time a moratorium was enacted, discussions ensued about the subsequent price increases that would harm consumers.
However, volume development in the AC and TV market has remained robust to date. The price increases, including those caused by inflation, do not appear to have dampened consumer demand.
Similarly, imports of televisions and related products (HS code 8527), which surpassed $2 billion in 2019 and will fall to $1 billion in 2023.
Similarly, AC imports peaked at $1.2 billion in 2019 and are expected to decrease to $800 million by 2023.
Despite an increase in market demand, imports have decreased, indicating that domestic companies have taken market share from their foreign counterparts as a result of these bans.
Already, Indian electronic manufacturing services (EMS) companies have shifted their focus from low-end contract manufacturing to original design manufacturing (ODM).
Contract manufacturing entails obtaining a design and specifications from the original equipment manufacturer (OEM), acquiring the appliance's components, and assembling it.
In ODM, however, the EMS company owns the design's intellectual property and earns much higher margins for end-to-end manufacturing.
In a similar manner, the complexity of electronic components manufactured in India is increasing.
For example, India has been dependent on imports for relatively complex printed circuit boards (PCBs).
Nonetheless, a number of prominent EMS companies have expressed their intent to increase capacity in the complex PCB market as well.
Several of the listed EMS companies, which are also the largest in the industry, have experienced revenue growth of more than 35% annually over the past five years.
S&P Market Intelligence projects that despite a decline in the consumer goods market, the majority of these companies will report revenue growth of more than 40 percent in FY24.
After analysts recalculate estimates for the moratorium on laptops, the number is likely to rise. This year, established players may also be able to experience higher margins due to the time-consuming nature of rapidly establishing large assembly capacity.
As with the bans on televisions and air conditioners, the import moratorium is unlikely to cause significant harm to consumers, while Indian EMS companies steal market share from foreign competitors.