Reducing the import of electronics has long been an important requirement for the electronics industry in India and this has often given impetus to the idea of cutting down imports completely. Vinod Sharma, managing director, Deki Electronics, and chairman, National Committee on Information, Communication Technology & Electronics (ICTE) manufacturing, shares his views on the viability of achieving this crucial target
An audacious dream
The world market for electronics is estimated to be worth about US$ 2.1 trillion. This translates to an annual per capita consumption of US$ 300. The corresponding figure for India is US$ 60, with the market size being US$ 75 billion. A major share of this demand, an approximate US$ 45 billion, is met by imports. Electronics manufacturing in India during 2014 amounted to about US$ 37 billion, of which an approximate US$ 7 billion was exported. The manufacturing being done locally has been typically ‘assembly’ work with low value addition, which is estimated to be a mere 10-15 per cent.
The Indian demand for electronics is estimated to reach US$ 400 billion by 2020, at a point where, per capita consumption of electronics in India will be about US$ 300, which is equivalent to the current world average. At our current levels of manufacturing, this will mean imports are valued at about US$ 300 billion, making electronics imports the largest contributor to the country’s trade deficit.
NPE’12 (National Policy for Electronics 2012) was aimed at establishing India as a manufacturing hub for electronics, particularly ESDM (electronic system design and manufacturing). The policy envisaged an annual turnover of US$ 400 billion for domestic manufacturing and US$ 100 billion in exports, creating a whopping 28 million jobs by 2020.
This is not going to happen
The main reason for the dismal share of the electronics manufacturing sector has been the impact of disabilities on competitiveness. The relatively higher costs of finance, energy, logistics and high transaction costs create a disability to the tune of 8-14 per cent, as reported by several studies. The impact of the disabilities is directly proportional to the amount of value addition. It is hence no surprise that most manufacturing is restricted to assembly and testing, resulting in low value addition. Employment and tax revenues, however, are generated only when higher value is added. The manufacturing sector is also rendered less competitive due to an unfriendly regulatory environment. Government officials, especially at the state/ district level, are not recognised or incentivised for the number of start-ups they encourage or for the growth of successful enterprises in their areas of jurisdiction. They are only mandated to regulate, control, govern and extract revenue.
Policy makers find that their hands are tied
While the positive intention to support manufacturing and generate employment is evident at the highest levels, this is not translating into supportive policy measures. This is probably because policy makers find that the options at hand are very limited. The three modes of delivering a supportive policy in the past have been by way of changes in import duty (customs), excise duty (consumer prices) and income tax (relief for sectors or activities such as exports, R&D, etc).
In most cases, import duties are bound by multilateral or bilateral trade agreements. These duty rates are no more a subject that national governments can decide on. In the case of electronics, the government of India signed the ITA-1 agreement, WTO, in 1998, rendering 217 tariff lines in the sector to a zero import duty since 2005. No tariff protection for local manufacturing is hence possible.
Aping the more developed economies, a few sectors (including electronics) have tried non-tariff barriers such as compulsory safety certifications. However, during the last few months, more Chinese firms than Indian companies have received these certifications.
It is also not advisable to tinker with excise duty, which is soon to be combined with sales tax/VAT as GST. A change in the rates at any stage of the manufacturing (supply) chain will result in a disruption of the value (supply) chain. There are several instances of such confusion in IT products, and most recently, in the LED segment. Manufacturing in most sectors uses inputs such as raw materials, components and parts from other sectors. A change in the indirect tax rate in any one sector will hence have a disruptive impact in many other sectors.
Exemptions to rates of income tax have been on the decline and are intended, for the correct reasons, to be permitted only in very exceptional circumstances. This is no more a tool for incentivising any manufacturing activity.
What policy measures does that leave us with?
Fundamental corrections in infrastructure, energy availability, lower costs of finance, an optimally priced rupee and a skilled workforce will deliver the required competitiveness to this ailing sector.
Well, we are waiting! It is certainly not happening by 2020.
Direct compensation for disabilities, in proportion to the amount of value addition, is the way forward. One such measure is to compensate a single disability, say, as an interest subvention. A more holistic approach is to give an incentive as a percentage of value addition.
Establishing electronics manufacturing clusters was envisaged as a method to leverage cluster principles in order to mitigate some of these disabilities. In practice, this may attract new investments which will see a marginal competitive advantage. The attendant issues of land allocation, pricing, multiplicity of agencies involved and the long list of clearances required do not augur well for the target figure of 200 clusters by 2020.
The existing manufacturers, meanwhile, continue to struggle. Their survival so far has been an arduous journey. The weakening of the rupee seems to have been the single log in the sea that is keeping them afloat. The rescue ship needs to arrive soon!
