Tuesday, May 1, 2012
Indian electronics goods industry is at best a ragtag bunch of businesses
India, to woo investors. In the Indian defence sector, for example, foreign companies are bound by what are called offset obligations, which require them to procure a part of the equipment from local suppliers. The aim is to boost the domestic arms industry. Now, the government has taken the same approach in electronics goods, quietly tweaking its earlier policies for the segment. The welcome mat is a procurement budget for 30 big-ticket government projects -- each worth a billion dollars and at various stages of launch. This is besides routine orders. Taken together, the total orders are estimated to be worth nearly $50 billion a year. Massive? It sure is. Problem is the government will only pick domestically manufactured electronic goods for these projects, according to a recent cabinet decision. The government has in effect asked global hardware makers to set up shop in India quickly. At first glance, electronics manufacturing in India has finally got a boost after years of neglect. The lion's share of electronic products that India consumes is imported.
The Indian electronics goods industry is at best a ragtag bunch of businesses providing value - that too, a mere 5-10 % - to the imported goods. Indians are suckers for these goods thanks to the increase in their disposable income. The total demand for electronic goods is projected to reach $400 billion by 2020. But it is unlikely that India's electronics import bill, which now stands at $45 billion, will keep pace. This difference, it turns out, was both a wake-up call and trigger for the government to come up with a new policy for the electronics goods sector. To make the 'Made in India' cut, the value addition has to be 25% in the first year and 30% in the second year. Currently, electronics giants such as Samsung, LG, Dell and HP import 90% of hardware parts. The value addition in electronics is a mere $2 billion and the government expects a significant jump in future.
The question is will foreign companies play ball? Most companies are disappointed with the new government policy. They wanted a tax incentive-led manufacturing ecosystem to shift manufacturing bases to India. Representatives of electronics hardware manufacturers who ET spoke to said it's impossible for any player to jumpstart the way government wants. "In the long run, the policy will give more opportunities for investment in manufacturing. But companies have reconciled to the fact that 25% value addition in the first year is not possible, not even for competitors," says Alok Bhardwaj, senior vice-president of Canon India and president of IT and electronics hardware manufacturers' lobby, MAIT. He claims the government has no option but to procure the same way as it does now, at least for a few more years. But government officials don't buy this argument. "This is an industry where 100% FDI is allowed. If established players hesitate, new ones will set up shop. The government procurement will be worth thousands of crores of rupees, and no one can afford to ignore it," a senior official of department of information and technology said on the condition of anonymity.
So will the procurement kitty do the trick? The government , which unveiled an ambitious manufacturing policy looking to create 100 million jobs in 10 years, is confident the lure is too big to overlook. The annual procurement budget of ministries and companies they run was a staggering 11 lakh crore in 2010 - comparable to the GDP of nations such as Finland and Chile. That's not all. The so-called government electronics mission projects, which will be rolled out over the next 10 years, also have the potential to benefit hardware makers significantly. The National Optical Fibre Network project, for example, is worth Rs 20,000 crore. The project, which the cabinet approved four months ago, aims to provide broadband connectivity to panchayats so that banking and health services can be accessed online. Similarly, National Knowledge Network, a high-capacity infrastructure project to connect education and research institutes, will spend Rs 6,000 crore in 10 years. These apart, there are also 'missions' such as the e-district programme, IT component of National Rural Health Mission, UID programme and National Population Register, among others. In the near future, government spending on electronics products is expected to rise further. LED and LCD TVs have are common sight in the cabins of high-ranked bureaucrats and ministers. The government's preferential procurement policy will also include all electronics products with security implications.
Industries not on board While approving the policy, the cabinet was clear that it complies with India's commitment to the World Trade Organization (WTO). India is not a signatory to WTO's government procurement agreement. That gives New Delhi room to prefer domestic hardware makers over importers. Federation of Indian Chambers of Commerce and Industry secretary general Rajiv Kumar, however, says that the government's push will work. "It is an impetus both for current manufacturers to increase value addition and for new players to begin afresh," he says. Yet, the government may still not have its way. WTO rules also say no country can impose duty on import of electronics products. As most of the high-valued components are small in size, it makes economic and logistics sense for global hardware makers to ship components from select locations rather than manufacture it in India. And given the possible non-availability of domestically produced electronics products at least in the first couple of years because of the delays in setting up shop, introduction of the policy may dilute its vision, says a government official connected to the policy. Ministries and departments may be given a free hand to choose the items for which they want to apply this policy. "But once a department chooses an item, it has to procure at least 30% of that item domestically," said the official.
In some products, there is already value addition in India. In the case of batteries, 40% of value addition is happening in India. "But every brand has 40% value addition in batteries. Where is the comparative advantage for anyone?" asks Bhardwaj of MAIT. For electronics makers, the challenge is not just to convince their global boards to establish facilities in India , but also to convince their suppliers to do the same. Dell, for example, recently conducted a survey among 35 global suppliers. Half of them said they had never considered India for investment. And those who were toying with an idea to establish facilities in India are mainly driven by a stable tax regime, opportunities for sales within India and possibility of realising operational cost savings among others, says the company's internal survey report. "Preferential market access policy is unique in itself. It is unviable due to lack of a robust component manufacturing ecosystem in India. The government should instead attract investments by announcing an incentives scheme and reducing the impact of taxation," says Chetan Krishnaswamy, director, corporate affairs, Dell India. A Samsung spokesperson declined to comment. Despite the attractive and unavoidable shades of the policy, manufacturers may still not play ball in all categories. "The computer-monitor market has been stagnant for quite sometime. Why will manufacturers then set up factories here? But one can increase value addition in PCs and printers where there has been a robust market," says a senior executive of an IT hardware manufacturer.
Political drivers For its part, the government is not driven by economics. There is a political angle behind its move. To create 100 million jobs in 10 years, the government aims to increase the share of manufacturing sector to 25% of GDP. With land acquisition becoming increasingly difficult and prices of industrial land escalating, the government has no option but to look for those manufacturing units that do not need huge tracts of land. It is easy to see why electronics manufacturing, which needs power and high-quality water but little land, has become the government's focus area. Without the headaches and the potential of job creation, a successful rollout of the new manufacturing policy will be a big help in the 2014 general elections. Ajay Shankar, member secretary of National Manufacturing Competitiveness Council, a government-funded think tank, agrees that the electronics procurement policy is linked to the government's new manufacturing policy. "Yes, employment generation is the basic thrust of the manufacturing policy," he says. But in its enthusiasm to create jobs, the government may have come up with another hurriedly prepared policy. The industries are not on board. That puts a big question mark on the policy's success.
Source: The Times of India