According to an estimate by ELCINA, if we combine the Union government’s capital subsidy on investments with the cluster subsidy, and add these to the incentives offered by a state government, it will lead to an ROI of a minimum of 30 per cent. Currently, manufacturers get an ROI of 10 per cent
Thursday, April 19, 2012: After years of neglect, the Union government is now aggressively making an effort to boost electronics manufacturing. It is all out to lure domestic as well as global electronics manufacturers by putting on the table a whopping Rs 200 billion to set up shop in India. This amount does not include the fund for setting up two fabs in India. The government is worried that the cost of India’s electronic and hardware consumables imports would surpass the country’s oil import bill, adversely impacting the balance of payments and foreign exchange earnings.
Unfortunately, the electronics industry is not too excited about the recent government policies and many have expressed doubts about their fast implementation. Some are even disappointed with the policies—while the foreign companies want a tax incentive-led manufacturing ecosystem, in order to shift manufacturing bases to India, Indian companies are reconciled to the fact that 25 per cent value addition in the first year is not possible. The industry feels that the government has no option but to continue procuring electronic goods and hardware as it does now, at least for a few more years.
It is true that without government support it is not possible for individual companies, particularly the small and medium enterprises (SMEs), to expand to a larger scale of manufacturing or make new investments. But unfortunately, the industry is too dependent on government support like incentives and tax benefits to help them start manufacturing locally or to expand their existing manufacturing capabilities. According to S Nair, DGM, procurement, HFCL, “Government incentives are essential to encourage entrepreneurs to set up units and commence operations at the earliest to avail the benefits.”
Many industry experts believe that the National Electronics Policy may help local manufacturers to leverage domestic demand, which will provide the high volume base to reduce the cost of production. However, these companies need long term finance at low interest rates to compete with the global players. Also, domestic companies need all the export related benefits too.
However, there are some self-motivated entrepreneurs who believe that individual companies need to take action themselves. Says Deepak Loomba, managing director, DeCore Science and Technologies Ltd, “I strongly believe that instead of depending on the government completely, we as individual companies need to act fast and start manufacturing.”
The big companies that have the ability to fund their own projects with their internal resources, or can get funded by equity and venture capital firms, are not very enthusiastic about government policies, schemes and incentives. “Government support sometimes cripples the growth of a company. When the government stops handholding, companies are left in the lurch,” says Anil Gupta, joint managing director, Havells India Ltd.
The industry associations are, however, concerned about the situation. ELCINA is playing a major role in developing electronics manufacturing clusters (EMCs) by availing the benefits of the National Electronics Policy. It is also playing an active part in encouraging the electronics industry and making independent efforts to boost manufacturing.
Recently, ELCINA has estimated that, now, with all the government incentives put together, a company can manufacture in India at a cost that’s on par with China. But is this possible? Let’s find out.
different subsidies offered by govt
Subsidy on capital expenditure
With the approval of the Modified Special Incentive Package Scheme (M-SIPS), the Union government has approved a Rs 100 billion package of incentives for manufacturers of electronics products and components. Under this scheme, companies that invest in special economic zones (SEZs) will get a 20 per cent subsidy on capital expenditure, and those operating out of SEZs will get a 25 per cent subsidy. Non-SEZ electronics units will be reimbursed the countervailing and excise duties paid on capital equipment.
Subsidies for cluster development
The Cabinet has also approved a scheme for the development of EMCs (electronics manufacturing clusters), for which the government will offer incentives of Rs 500 million each to 200 clusters set up by manufacturers. The financial assistance to the SPV would be in the form of grant-in-aid only. For greenfield and brownfield clusters, assistance would be restricted to 50 per cent and 75 per cent, respectively, of the project cost (subject to a ceiling of Rs 500 million), under the electronics manufacturing cluster (EMC) scheme.
Clusters can reduce manufacturing costs for high value added electronics manufacturing. There is a sales benefit, too, as customers are likely to pay more for just-in-time deliveries. If large portions of the value chain are internalised within the cluster, the central sales tax (CST) liability would be reduced, if not eliminated. An enhancement in labour productivity will also take place due to better working and living conditions and a higher degree of employee welfare.
Similarly, there are cost benefits with regard to power usage too, due to centralised back ups and lower line losses, as well as lower finance costs with better financing options for the entire group of companies. Financing companies in a cluster is typically less risky for lending institutions.
“The objective of clusters development is to provide an efficient ecosystem where components, parts and equipment manufacturers/assemblers can achieve global competitiveness and achieve reduction in costs to the extent of 8-10 per cent,” says Rajoo Goel, secretary general, ELCINA.
State government incentives
State governments are also announcing policies for the electronics industry to boost local manufacturing. Those leading the race are Andhra Pradesh, Madhya Pradesh, Karnataka and Uttar Pradesh. Cluster members will avail additional benefits that the state governments offer through their electronic hardware policies like tax holidays, employment creation-related subsidies, reduced power tariffs, etc.
Let’s take the AP government’s electronics hardware policy as an example. It offers a slew of incentives, including 100 per cent reimbursement of value added tax (VAT) and goods and services tax (GST) for a period of five years to those who set up units in the state. Other incentives offered are 100 per cent reimbursement of stamp duty, transfer duty and registration fee paid on sale/lease deeds; 50 per cent subsidy on power bills to micro enterprises; and 40 per cent to small, 25 per cent to medium and 10 per cent to large scale industries (limited to a Rs 3 million power subsidy on power bills for a period of five years). Other benefits include 20 per cent investment subsidy limited to Rs 2 million for micro and small industries and an additional 5 per cent incentive subsidy for women, SC an ST entrepreneurs; 3 per cent interest rebate limited to Rs 0.5 million per year for five years; 10 per cent subsidy on new capital equipment for technology upgradation limited to Rs 2.5 million as a one time availment by the eligible company; 50 per cent subsidy on the expenses incurred for quality certification limited to Rs 0.4 million; 25 per cent subsidy on cleaner/green production measures limited to Rs 1 million; 25 per cent rebate in land cost limited to 1 million in industrial estates, industrial parks, hubs, etc; and 50 per cent reimbursement/grant of the costs involved in skill upgradation and training of local manpower, limited to Rs 2000 per person.
Reimbursement of central taxes and duties
Besides the above three major incentives, M-SIPS also provides for reimbursement of countervailing duty (CVD) or excise duty for capital equipment for non-SEZ units. For high technology and high capital investment units like fabs, reimbursement of central taxes and duties is also provided.
More preferences for domestic manufacturers
Apart from the subsidies offered by the government to woo investments in manufacturing, the Union government has approved the Preferential Market Access (PMA) policy to support the domestic manufacturers further, and give preference to locally manufactured telecom and electronic products.
Further to this approval, the Department of Electronics and Information Technology (DeitY) has notified all ministries (except the Ministry of Defence), departments and government agencies to give preference in their procurements to those electronics products, including telecom products, that have gone through a minimum of 25 per cent of value addition in India in the first year. “The government wants value addition in all electronics products, including telecom products, to be increased by 5 per cent every year to a maximum of 65 per cent over the next five years,” says Rahul Sharma, president, Telecom Equipment Manufacturers’ Association of India (TEMA).
DeitY has also clarified that the products procured by the ministries and departments have to be utilised by the ministries, departments and agencies themselves for government funded telecom projects and cannot be resold commercially. The policy will be in force for a period of 10 years.
Welcoming this government initiative, Rahul Sharma, who is also the business head, IMS, Sterlite Technologies Ltd, says, “This policy initiative will go a long way in promoting the domestic manufacturing of telecom products in India. This kind of government support will not only encourage the domestic manufacturers but will also motivate global players to do real value addition locally—something that is presently missing in their products manufactured in India.”
Getting returns on investment on par with China
According to an ELCINA estimation, if we combine the Union government’s capital subsidy on investments with the cluster subsidy and add them to the incentives offered by a state government, it will amount to an ROI of a minimum of 30 per cent. While this estimation will vary with different products and different situations, it is a generalised view and can be a thumb rule for all products, which makes for a conducive manufacturing environment.
As explained by Vinod Sharma, member, ELCINA, and managing director, Deki Electronics, while currently, domestic manufacturers get an ROI of 10 per cent, a company manufacturing in China gets an ROI of 21.87 per cent. But after availing incentives under the M-SIPS and EMC schemes mentioned earlier, a company in India can get an ROI of 20 per cent. To this, when we add the interest rebate offered by state governments like AP government, the combined effect of these within the SEZ and a cluster will work out to be more than 30 per cent ROI. Under similar conditions, a company in China will get 32.5 per cent.
ELCINA is pushing the government for a few more incentives like SST and abolition of CST and treatment of domestic tariff area sales of a zero duty items (ITA-1 and FTA) as physical exports, which will also help to increase the 20 per cent ROI mentioned above to 26.42 per cent ROI.
Good political business sense for state govts
These different policies brought in by the union and state governments will also lead to several other advantages. For example, if 50-60 companies open their facilities in a cluster of 100 acres, about 25,000 jobs can be created.
These policies can also bring in good business for the state governments, which can earn by way of taxes from the companies in the clusters, and additional taxes from a township that will develop around the clusters. For example, Rs 25 billion worth of business can be created from just one cluster of 100 acres. This way, the government will start earning Rs 700 million from the first year, and go up to Rs 1800 million in five years, through indirect taxes. Similarly, in the first year, it will earn Rs 4000 million from indirect taxes and go up to
Rs 10000 million in five years. So it makes good business sense for the government as well, since this will provide a stable tax regime both for the Centre and the states.
BS Sethia, director, Elin Electronics Ltd, agrees. “These policies will mean good political business sense for state governments because these incentives will generate good returns for many years and will also lead to a possibility of developing model townships close to these clusters.”
Moreover, if some of the upcoming clusters become success stories, and if a good road map is developed, then in the next 10 years, every district will have a cluster.
One cluster based business can lead to even bigger business opportunities for the government, which has a plan to develop 200 clusters across the country. The initial clusters will come up near the big cities as skilled people are required for the electronics industry, but with the success of these clusters, there is a possibility that by 2020, each district across the country will have a cluster. If one cluster can make a revenue of Rs 25 billion annually, then for the whole country, the turnover will be a whopping amount of Rs 16,000 billion, as India has 640 districts.
Board Parameters of a Cluster Park
1. Gross area: 100 acres
2. 50-60 acres for manufacturing units
A total of 40-50 manufacturing units
Plot areas of 8092 sq m (2 acre), 4046 sq m
(1 acre) and 2023 sq m (1/2 acre)
May be a combination of SEZ and/or DTA units
3. Manufacturing and facilities support
Test and certification, tool room, design house, etc
Plastic moulding, sheet metal, packaging
IT/communications centre
Common training/convention centre
Workers housing complex and related facilities
- Balance 40-50 acres for utilities, roads, backup power generation, water supply, welfare facilities, etc.
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Mathematics of manufacturing in India vis-a-vis China
Source: Vinod Sharma, MD, Deki Electronics Ltd
Electronics Bazaar, South Asia’s No.1 Electronics B2B magazine
