Industry needs support through key policy measures in the spheres of ease of doing business, an integrated approach to manufacturing, an industry-friendly tax regime, skills development and demand generation. Nitin Kunkolienker, vice president, MAIT, shares his insights
As declared by Prime Minister Narendra Modi in his ‘Digital India’ vision, the government aims to achieve ‘net zero’ imports in the area of IT-ESDM products by 2020. So what exactly does this imply? It means reducing imports of finished IT goods and increasing exports of electronic products. Both goals are important because they require us to create substantial industrial activity in the country with a high economic multiplier effect. However, when we attempt to achieve these twin goals, the volume share of Indian shipments will not suffice to sustain the optimal economies of scale in manufacturing. Hence, India-based manufacturing facilities, whether brownfield or greenfield, will have to scale their operations to serve global markets. For instance, the India IT hardware industry should not aim to make just 1 or 2 million PCs annually; rather, we ought to be targeting production of 20-30 million PCs every year.
This is more easily said than done – it will require us creating an end-to-end Indian hardware manufacturing ecosystem, indigenising hardware components and parts for local manufacture, and integrating Indian manufacturing facilities into the global IT-ESDM supply chain. We need to be able to compete effectively with China, Taiwan, Thailand and other emerging countries. While China’s manufacturing costs are rising and the country has become expensive, it has succeeded in building up an enviable and mature electronics hardware industry. So, India needs to create an ecosystem which will be competitive enough to cater to growing local demand for IT-ESDM products, as well as address diverse export markets. While imports of finished goods may be discouraged by creating a duty differential regime, for exports, that can’t be done. Exports have to be able to stand on their own and be competitive on the international stage. So, the government needs to ensure a very competitive enabling atmosphere for manufacturing IT and electronics hardware in the country.
Key disabilities need to be addressed
Let us begin by looking at some key disabilities and the industry’s expectations from the government to achieve India’s national development goals, particularly in terms of developing a world class IT-ESDM manufacturing ecosystem.
Infrastructure disabilities: The first step in this direction will be for the government to remove the ‘infrastructure disabilities’. We compliment the government on announcing important measures in this direction in Budget 2016 but more needs to be done. Infrastructure is the key element that can help Indian companies stay competitive in terms of cost of business inputs. The government must ensure regular availability of affordable power and the rapid development of transport infrastructure so that logistics costs in India, which are one of the highest today, are brought down to reasonable levels. There is a need to iron out structural impediments and bring in a standards based, transparent system of governance to rapidly create infrastructure by the state and central government agencies—international ports/transit hubs and similar ‘game changing’ capacities.
Also, if we look at the India consumption pattern of electronics goods, about 65 per cent is bought in the western and southern regions. Therefore, we need to develop our western and southern transportation corridors to help develop IT and electronics manufacturing capabilities in these regions. The distribution hubs in these regions will benefit the exports sector as logistics costs will become much more competitive vis-à-vis China. This will eventually help Indian companies to increase their share of exports to the markets of the Middle East, Africa and Europe.
Administrative disabilities: We need to bring about a qualitative improvement in the ease of doing business by identifying and fixing administrative disabilities. As India is a federally administered country, companies need to deal with multiple authorities at the central, state and local government levels, separately. Often, this results in many communication gaps between the centre and states, within a state government ministry or between a state department and the water/power utility. For example, many infrastructure projects have to be implemented at the state level, while national policy guidelines are formulated at the central level, giving rise to delays and unnecessary confusion. These gaps need to be identified and eliminated in a time-bound manner. The old backward laws and regressive rules should be either abolished or completely overhauled and made progressive to support the establishment of new business ventures and the smooth running of old establishments. This will change the outlook of the business community towards the legal/taxation system and bring about greater transparency and compliance.
Taxation disabilities: Budget 2016 has not touched on all the legacy issues; rather, it has created some confusion. The government needs to restrict populated PCBs from being imported at concessional rates and incentivise the manufacture of components within the country. Making populated PCBs within the country will automatically create a huge demand for components, thus giving rise to ‘upstream’ component manufacturers.
Again, in terms of customer premise equipment (CPE), the current duty differential rate between imported and ‘Made in India’ modems is only 6 per cent; this differential should be increased to at least 12 per cent to encourage local manufacturing.
Similar differences in tariff should be stipulated for imports versus locally made network switches, routers, access points, USB adapters, set-top boxes (STBs), CCTV and surveillance cameras, digital video recorders (DVRs), and Voice over Internet Protocol (VoIP) products.
Finance disabilities: The finance costs in this country are very high. If at every stage of the ESDM value chain the cost of finance is 15 per cent, then obviously, the higher the value addition, the disability on account of finance costs will also be more. So, the government should consider coming up with a special fund, which makes finance available for IT and electronics hardware manufacturing entities at the lowest possible rate of interest, as part of the mission to encourage manufacturing in India.
Skills gap in the sector: When we talk about creating a world class hardware manufacturing ecosystem in the country, it requires the availability and contribution of many types of skilled engineers and technicians – civil engineers, mechanical engineers, electrical engineers, plastics engineers, electronics engineers, IT engineers, technicians, semi-skilled helpers and so on. So, building skills is a very important prerequisite for the success of this initiative. We believe the HR development roadmap of the Ministry of Communications and IT should be taken forward in right earnest, along with the inputs and contributions of industry players and sectoral skills councils like the Electronics Sector Skills Council of India (ESSCI) and other stakeholders.
Unfortunately, technical education is in poor shape in the country, with no single unified approach. While at the national level, UGC, AICTE, IITs, NITs and ITIs design and run various degree and diploma courses, there is a need for an integrated approach towards other technical and non-technical/soft skills education as well. In fact, I would like to suggest that standard course curricula should be designed at the national level by a statutory body, say, the ‘Electronics Industry Education Council of India’, and each state should set up a university for technical education. Thus, a standards based, industry focused, unified approach will help to remove many of the anomalies that exist today and produce directly ‘employable’ human resources.
How to translate the ‘Make in India’ dream into reality
Keeping in mind the broad development goals outlined in Budget 2016 and other large scale national schemes such as ‘Digital India’, ‘Startups India’, ‘Make in India’, etc , we at MAIT have identified six key factors or ‘pillars’ that can accelerate growth in the IT-ESDM manufacturing industry in India.
While the government’s overall approach to improving the business climate in the country and speeding up the ‘Make in India’ initiatives will benefit the industry at large, there are some specific steps that must be undertaken to enable large-scale growth in the IT-ESDM manufacturing sector. MAIT would like to suggest the following comprehensive approach, covering five key areas:
- ‘Ease of doing business’ in India, in every state: We need to improve the business climate on the ground to be able to achieve the triple objectives of high domestic value addition, skills development and employment generation in a time-bound manner. We have to look at ensuring the ease of doing business across all states – the more developed ones such as Tamil Nadu, Karnataka, Maharashtra and Gujarat, as well as upcoming states like Rajasthan, Haryana, Himachal Pradesh, Uttarakhand, Tripura, etc. The announcement to speed up the construction of the national and state highways, rural roads, and the construction of new freight corridors, as well as revamping and operationalising 160 air-strips across the country will go far to realise the vision of ‘Move in India’.
Further, coordinated development of the air networks, roadways, rail network and inland waterways will give a competitive advantage to goods produced and manufactured in India vis-à-vis countries like China. Interlinked transportation infrastructure development would not only unify our country, but would also go a long way in improving the ease of running a business in India. - Operationalising ‘Make in India’ through an integrated IT-ESDM hardware manufacturing ecosystem: There is a need to closely coordinate and monitor the roll-out of measures envisaged under the ‘Skill India’, ‘Start-up India’ and ‘Make in India’ programmes, so as to synergise the gains achieved under each scheme and maximise all-round effectiveness.
The policies in the last 10 years (2006-2015) largely promoted ‘financial activity’ and insignificant or low levels of ‘economic activity’ due to direct imports.
By incentivising large scale production in India as against merely trading (imports and distribution), the government will not only achieve its goals of raising GDP and incomes while providing employment opportunities, but will also help India become a global hub for IT-ESDM manufacturing.
To achieve the vision of ‘net zero’ imports of IT-ESDM products, it is not enough to substitute imports by manufacturing complete products in India-based plants. To create an economic multiplier effect for the country as a whole, we need to encourage the development of an end-to-end integrated hardware manufacturing ecosystem.
Products like motherboards, SMPS units, cabinets, monitors and populated PCBs, which can potentially be manufactured locally, should be charged customs duty at full rate when imported as components for the PC industry. On the other hand, when manufactured in India and supplied to a domestic PC vendor as inputs, these should be exempt from excise duty. Gradually, in a phased manner, more components should be added to the list. A focus on creating a duty differential will make domestic manufacture of PCs, both laptops and desktops, more viable as the complete IT-ESDM ecosystem takes shape in India.
Most importantly, these developments will create many small and medium level assemblers across the country which will:
- Provide employment opportunities for technically skilled people, in rural and urban India
- Spawn many small/medium scale entrepreneurs across the country to set up and manage assembly-line operations
- Industry-friendly tax regime to boost local manufacturing and government revenues: While Budget 2016 was good in the sense that certain duty concessions were announced to benefit local IT-ESDM manufacturing, some of the key issues were not dealt with adequately. If need be, India should consider an overhaul of the constitutional provisions to address issues related to central versus state versus local government jurisdictions. The long-term goal must be to bring about the much-needed structural changes to simplify taxation laws for greater transparency, as experienced by entrepreneurs in their day-to-day dealings with petty government officials. The government’s goal should be to not just simplify processes but also create more robust and secure processes, so that business owners and entrepreneurs are able to function in a clean and transparent operating environment. In fact, I would go so far as to say that there should be zero interface between companies/entrepreneurs and the tax/local government authorities in the day-to-day running of businesses. All G2B (government to business) processes should be automated to the highest possible extent, including the resolution of tax disputes. There is a pressing need to create and maintain a stable policy environment ‘on the ground’, insulated from political shocks, bureaucratic delays and red tape.
In terms of specific measures, the government should look into the ways and means to provide a duty differential to the extent of at least 11 per cent between direct imports and locally manufactured products for a stipulated timeframe, in order to give a definite boost and bias to locally sourced IT-ESDM products.
Further, the export incentive of 5 per cent under the Merchandise Exports from India Scheme (MEIS) should be made available for all products such as motherboards, SMPS units, cabinets, monitors and all classes of populated PCBs. Clubbing of export volumes with domestic manufacturing will allow manufacturers the benefits of economies of scale and benefit the country immensely through savings in foreign exchange. This measure could be phased out over a period of three years.
Another significant demand of the IT industry is to abolish Central Sales Tax (CST) on all IT products, as this has a cascading effect and makes imported goods cheaper vis-à-vis locally manufactured goods.
By implementing these measures in totality, the anticipated increase in manufacturing will provide an impetus for all-round growth in economic activity and a parallel growth in related services, thus boosting government revenues through service tax.
Additionally, a large scale growth in employment will increase individual spending power, further contributing to government revenues through income tax. Since 85 per cent of customs and central excise duties are shared with states, the revenue impact on the central government would be negligible, whereas states would be compensated by enhanced consumption and VAT collections.
Skills development, with a focus on technical excellence: To sustain the growth of the IT and electronics manufacturing sector in the country, it is very important that the governance structures of the technical education sector are simplified. Modern, industry-relevant curricula must be adopted and offered to youth at the K12, undergraduate and postgraduate levels to lead to industry-ready, skilled personnel being available to run manufacturing operations of high-tech plants. There may be a need to review the role of the ‘educational bureaucracy’ such as that represented by the University Grants Commission (UGC) and All India Council for Technical Education (AICTE). Setting up of a Skills Training State University and Skills Training Institutes at city/district levels should be encouraged through a ‘single window’ clearance system.
To maintain quality in content and excellence in teaching outcomes, members of premier science and technology ‘think-tanks’ like the Indian National Science Academy (INSA) and Indian National Academy of Engineering (INAE) should be co-opted as leaders and mentors.
Eventually, the increased domestic demand for manufacturing professionals will lead to greater local employment opportunities, and reverse the brain drain, which is a big ‘tax’ on the economy of a developing country like India.
Demand generation: Real demand generation will take place in India when the government takes up increasing PC penetration as a mission of national importance and brings all stakeholders on board. Currently, the PC penetration in India is close to 11 PCs per 100 persons, as per MAIT estimates for CY 2015. We believe the government should aggressively fund programmes such as ‘Digital India’, ‘Skill India’, National Digital Literacy Mission (NDLM), Common Service Centres (CSCs), Sarva Siksha Abhiyaan, and the electrification of all villages by May 1, 2018. It should encourage development of rural infrastructure, and promote the growth of microfinance institutions and self-help groups (SHGs) as well as other large scale e-governance initiatives.
Defence or strategic electronics is another significant area where manufacturing in India will result in a win-win proposition for the government as well as industry. By designing and manufacturing more and more defence and strategic electronics systems, parts and components in India, the overall budgetary outlay for defence can be controlled and even reduced. DRDO and the industry need to collaborate more closely in this area.
With high levels of local value-addition on account of the manufacture of intermediate products such as motherboards, populated PCBs, etc, within India, many global suppliers of these items would either shift their manufacturing base to India or collaborate with Indian players. This would generate ‘supply side’ demand for millions of IT and electronics components that will have to be produced and sourced locally. With increase in indigenisation, the manufacturing sector will further create significant opportunities for ‘non-electronics’ industries like metals, moulds, plastics, engineering services, etc. These developments will also help to create and strengthen the base for innovation and R&D, providing growth opportunities for the product design industry.
In this entire journey of identifying and removing disabilities and incentivising ICT hardware production within the country, the Indian economy will be able to raise productivity and grow its GDP by generating employment in manufacturing and related services. This will help to connect the entire nation, from end to end, by means of roads, railways, waterways and airways; create a more skilled workforce; inculcate a more professional work ethic; and transform India into one of the most vibrant, competitive economies of the world.
