The PMA Mandate will be Harmful to Indian Economy and Global Innovation
WASHINGTON (March 17, 2014) - In February 2012, the Indian government announced a Preferential Market Access (PMA) mandate which requires a phased increase in the percentage of electronics and ICT products that must be manufactured domestically, to be eligible for Indian government procurement. The policy stipulates that by year-end 2014, 25 percent of value addition for a wide range of electronics and ICT product must be performed in India, rising to 45 percent in 2015 and to 80 percent by 2020.
In a new report, Why India's PMA Will Harm the Indian and Global Economies, the Information Technology and Innovation Foundation (ITIF) argues the policy will do little to help Indian ICT manufacturers, but will raise the costs for government and hurt Indian consumers.
"Some have erroneously stated that the PMA is a temporary, limited, and non-distortionary measure designed to give a slight boost to domestic electronics and ICT hardware manufacturers," says Stephen Ezell, Senior Analyst with ITIF and principal author of the report. "In reality, this mandate is a highly distortive and far reaching policy that will ultimately impact 30 percent of India's $20 billion ICT marketplace."
Ezell argues the PMA is trade-distortionary, by giving preferences to domestic production, and will entail at least a de facto price or quality preference which will harm Indian consumers. It could also lead to retaliatory policies by other nations which will hamper Indian exports.
In addition, the policy will hurt innovation globally by raising overall ICT costs and exacerbating market balkanization. Innovation industries need access to large markets (i.e., economies of scale), which better enable firms to cover fixed costs, so that unit costs can be lower and revenues for reinvestment in innovation can be higher.
"Given these points it is unlikely that the PMA will have any significant long-term effectiveness as an instrument to bolster Indian manufacturing, while raising costs for the Indian government and Indian taxpayers." Ezell says.
The report contends that instead of utilizing the PMA and similar "innovation mercantilist" policies, the Indian government should focus its economic policies on enhancing domestic innovation and productivity which will spur the development of globally competitive industries and promote overall job and economic growth.