On January 24, the Minister for Electronics and Information Technology, Ashwini Vaishnaw released the vision document on the opportunities and growth of domestic electronics manufacturing. The report was a collaboration with the Indian Cellular and Electronics Association (ICEA) for developing a roadmap to increase and improve the share of India’s electronics exports in the next five years. While the first volume, titled “Increasing India’s Electronics Exports and Share in GVCs”, was released in November 2021, the second volume of the vision document came out this month.
Titled “$300 bn Sustainable Electronics Manufacturing & Exports by 2026”, the report looks at the systemic changes needed to build the manufacturing capability for the domestic sector. While the current estimate for electronics exports is $75 billion by 2026, the report looks at how the government can work alongside the industry to boost manufacturing capacity in the face of increasing digital growth and consumption.
The Current Plan
At present, the government is focusing on broadening and deepening the electronics manufacturing sector in the country. The government’s report mentions a “five-part strategy” to reach the $300 billion goal that it has set.
First, the plan is to build the competitiveness of the domestic industry by attracting global electronics manufacturers to India. This can help improve the quality and standards of the products coming from Indian firms and help in giving them an edge in the export market. The Production Linked Incentive (PLI) scheme remains the bedrock for improving foreign direct investments (FDI) and helping international firms set up manufacturing plants in the country.
Second, an increased focus on sub-assembly and components manufacturing ecosystem has been mentioned. This remains critical for the growth of the sector as Indian firms can get the opportunity to function as sub-contractors for international companies. While some electronics goods require a large number of raw materials, the manufacturing of individual components allows the Indian firms to specialise in and become pioneers in the development of certain products.
Third, building a thriving local design ecosystem is also on the government’s radar as per the report. This remains buttressed by the recent Rs 76,000 crore semiconductor package which has specifically allocated a part of the package for supporting the local semiconductor design ecosystem.
Fourth, the nurturing of Indian companies is a necessity for showcasing growth in the sector. The government aims to identify a specific number of start-ups that would be provided with both financial and government support to undertake research and development in designing electronic products. Along with this, export assistance is to be provided to the Indian firms looking to expand their businesses.
Finally, the importance of removing cost disabilities in the country remains a priority for the government. A recent report by ICEA highlighted how import tariffs for electronic components in India have been significantly higher compared to other comparable markets such as China and Vietnam. This has diluted some of the incentives being offered by the government and a correction to that is imperative if electronics manufacturing can scale the heights that have been set in the report itself.
Lessons from the Defence Sector
When the ‘Make in India’ initiative was started in 2015, one of the key areas of focus was defence indigenisation and ramping up domestic defence manufacturing. Some important policies were introduced to promote this and the electronics industry can benefit from similar policy initiatives.
One of the main features of awarding defence contracts is the availability of different clauses. Buy (Indian), Buy and Make (Indian) and Buy (IDDM) are some of the clauses depending on the process followed for manufacturing. Electronics manufacturing can have similar clauses under which contracts can be provided. This would allow the Indian firms freedom in either manufacturing entire products from start to finish or working as subcontractors for foreign entities manufacturing specific components or importing raw materials from foreign companies to produce finished goods. Such varied clauses would also allow more firms to participate in the manufacturing process thereby growing the domestic sector.
The concept of having Strategic Partners (SPs) or signing Joint Ventures (JVs) with foreign companies is a leaf out of the defence sector’s book that can be taken by the electronics industry. This would specifically help Indian firms in developing key partnerships with established companies that remain pioneers in the electronics industry. This would also mean that the presence of the Indian electronics industry would increase in the global circles and help in gaining a foothold in the electronics export market.
In recent years, the L1-T1 methodology has been used to award defence manufacturing contracts. This means that both price competitiveness, as well as quality parameters, are taken into account for all manufacturing processes. Similarly, the electronics industry should focus on the quality and standards of products being manufactured domestically. The government can devise a scheme to promote and support manufacturing firms that are consistently developing top quality products at a considerably lower cost. This is absolutely critical to increase the export levels of the industry in the next five years.
The Budget Impetus
With the Budget for the 2022-24 financial year coming out in the first week of February, it remains to be seen whether the electronics manufacturing sector will get a financial boost to achieve the lofty goals it has set.
A financial framework that includes fiscal and other incentives is needed to develop the electronics production sector. A cheaper cost of finance in the form of income tax rebates for firms undertaking R&D to manufacture electronics products can be a good incentive for any company looking to get into the electronics manufacturing domain. Along with tax incentives, the Budget can focus on financial support and assistance that the government can provide in the form of upfront capital and micro-loans to start-ups looking to design electronic components for advanced products.
The report also emphasises the role of exports and how electronic products can contribute to the domestic economy itself. The Budget should look at providing excise and custom duties waivers for raw materials needed for the manufacturing of electronic products. A duty-free imports regime of raw materials can help in attracting more foreign companies to the country as well as the quantum of investments coming into the sector of electronics manufacturing. One specific thing that the Budget can do to spur the growth of the sector is to provide a deemed export status for certain electronic goods. This can improve the manufacturing capacity as well as account for the domestic consumption of electronics.
The vision document has clearly set a high benchmark for the growth of the domestic electronics manufacturing industry. While the five strategy approach is a good start, the government can actively formulate policies as well as signal the intent to support the electronics sector. While the five-year roadmap has been laid out, the destination of $300 billion in revenue looks to be far ahead in the distance right now.
Arjun Gargeyas is research analyst at Takshashila Institution. The views expressed in this article are those of the author and do not represent the stand of this publication.
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