The Indian electronics market is growing rapidly and is now one of the largest in the globe. The government is introducing various policies and initiatives so that, in tandem with the booming market, the domestic electronics manufacturing industry too can flourish, and create vast employment opportunities. The government envisages this sector will play a very pivotal role in the PM’s ambitious plan of making this nation a US$ 5 trillion economy by 2025.
By Nijhum Rudra
Back in 2015, the Indian electronics sector was valued at US$ 75 billion. Foreign direct investment (FDI) inflows in the ESDM sector grew from US$ 97 million during the period April 2012-March 2014, to US$ 208 million in the period April 2014-March 2016, according to the government’s Make in India website. And this figure is projected to be US$ 228 billion by the end of 2020, growing at a rate of 16-23 per cent annually. The Ministry of Electronics and Information Technology (MeitY) also predicts a 17 per cent growth in the manufacture of electronic products and a 24-68 per cent growth in electronics manufacturing services (EMS) over the next five years.
But in spite of considerable success in the sector, there are also some serious challenges due to which the small and medium sized (SME) electronic component manufacturers are struggling. Although there are huge opportunities in ESDM for SMEs, hardly any initiatives have been put forward by the government to boost the sector, claim market researchers. A couple of years back, the Ministry of MSME claimed that there are about 30 million SME manufacturing units in India, which contribute about 45-47 per cent of India’s industrial output, 42 per cent of the country’s total exports, adding up to 37 per cent of our GDP, while employing over 60 million, which is over 66 per cent of the 80 million people employed within the Indian manufacturing sector. Industry or the manufacturing sector employs about 22 per cent of the country’s total workforce, the size of which is estimated to be between 430-470 million. The SME sector creates more than 1.3 million jobs every year and produces more than 8,000 quality products for the domestic and international markets.
Though there are dozens of initiatives and policies that have been initiated by the government, these have not been implemented well and so MSMEs in the country are still struggling. Market researchers opine that to make Indian MSMEs stronger, it is imperative to extend programmes like Modified Special Incentive Package Scheme (MSIPS). According to electronicsb2b’s exclusive report, the biggest problem for MSMEs is getting an electricity connection, which takes almost seven to eight months of time. This is crippling, because electricity is the most important requirement for any kind of industrial activity.
What the experts say “The government should encourage Indian and multinational companies to set up semiconductor and other electronic component manufacturing plants in India by rolling out favourable policies and incentives. The ‘Make in India’, ‘Digital India’ and other ambitious schemes of the government can become as successful as anticipated only if the Indian component manufacturing sector is doing well. Because after oil, India’s highest foreign exchange bill is for electronics hardware. And if components are not being made in India, any plan to boost the production of electronic hardware will remain as only ‘Assembled in India’ and not ‘Made in India’.”—Mitesh Modi, president, All India Electronics Association |
 “The government needs to create policies that protect Indian SMEs and level the cost disadvantages of Indian SMEs. First, the government needs to plug the free-flowing dumping of low quality Chinese products. This means a proper grading of product categories is required. Then it needs to look at each product category individually, similar to what it did for the mobile phone manufacturing sector. It needs to impose duties on imported goods to encourage local manufacturing in India. Once we achieve that, we need to incentivise SMEs and ease bureaucratic hurdles. Last but not the least, we need more participation of SMEs in the industry bodies that help the government give shape to industrial policies.”—Hanish Bhatia, senior analyst, devices and ecosystem, Counterpoint Research |
The challenges that SME electronic component manufacturers face
The Indian electronics market is now dominated by consumer electronics and mobile phones, and its retail segment accounted for 30 per cent of overall sales in the electronics domain in FY 2019 as compared to 21.9 per cent the previous financial year. Industrial electronics contributed only 15 per cent of total sales in the Indian electronics sector in 2019. In FY 2013-14, CIRSIL’s research report on SMEs claimed that around 300 MSMEs are engaged in manufacturing electronic components in India. The products they made comprised consumer and industrial electronic components and equipment. MeitY says that the demand for these components and equipment will continue to grow as the Digital India and Make in India programmes are gaining momentum. However, small and medium sized electronic component manufacturers seem to be facing major hurdles.
Mitesh Modi, president of the All India Electronics Association, says, “The Indian SMEs that manufacture electronic components are always facing some challenge or the other, and the current recession has added to their list of woes. Low demand always leads to negative growth for any industry. Electronic component manufacturers in India, especially SMEs and MSMEs, have always struggled to compete against cheaper Chinese substitutes. Due to the latter’s large volume production and exposure to global markets, it is very difficult for Indian SMEs in the electronic components space to compete with big Chinese companies.”
Lack of funds at a reasonable rate of interest is one of the biggest challenges faced by Indian companies. When competing with global players, it is essential to get funds at an internationally competitive rate of interest, with ease in processing. Foreign companies are getting hassle-free funds at an interest rate of around 3 per cent per annum, whereas interest rates in India range between 10-12 per cent per annum. Indian SMEs also need to provide collateral/security against loans and endure a tiresome and time-consuming documentation process.
“Also, it is very difficult for SMEs and MSMEs to cope with the frequently changing laws and compliance requirements under the GST regime. And the complex procedures make compliance very expensive. Age-old labour laws lead to Indian SMEs performing below international, as well as their own, benchmarks,” adds Modi.
Smaller electronic component manufacturers and traders often face debt lockdowns and shutdowns, primarily because of insufficient cheap capital, as well as lack of sophisticated technology and IT infrastructure. Other problems include high collateral requirements by banks, irregular payments from domestic as well as government buyers, lack of skilled manpower, and the high cost of logistics. Compared to competing nations such as China, Taiwan and Korea, among others, the problems mentioned here add up to a disability cost for Indian SMEs that is estimated to be about 10 per cent for components as well as for any high value added manufacturing in the ESDM sector. The disability expenses increase with value addition, in sync with increasing exposure to domestic resources, and seriously impacts competitiveness. This has encouraged trading and low value-added manufacturing in India, claims an ELCINA team.
Highlighting the bottlenecks that Indian SME component manufacturers face, Hanish Bhatia, senior analyst, devices and ecosystem, Counterpoint Research, says, “The biggest issue that Indian SMEs suffer is the major cost disadvantages when it comes to competing against Chinese imports. Chinese manufacturers operate on a large scale, which reduces the total manufacturing cost significantly. China’s efficiency in logistics also makes it easier for other countries to import their products within a short turnaround period, allowing wholesalers and distributors to keep their business streamlined at all times. At the same time, our laws are very lax when it comes to keeping a tab on the quality of imports. This means low-quality products hit Indian shores, undercutting good quality locally-manufactured products.”
What the government should do
Indian electronics manufacturers are facing a 10-12 per cent disability costs in comparison with their counterparts in China, Vietnam, Philippines and Indonesia. This has been acknowledged by the government in various policy documents. In fact, MeitY’s senior director, S.K. Marwaha, recently stated that due to the major hurdles the electronics sector has faced in the past couple of years, the annual production of electronic products in India has fallen. MeitY is trying to address the issue by providing ample incentives under the new National Policy on Electronics (NPE).
ELCINA has advised the government to address this disability and support the ESDM sector through the following measures.
- Redefine the criteria for how an MSME is defined: The current definition of an MSME is archaic and irrelevant today. Companies with a capital investment of just Rs 100 million are considered ‘medium scale’ today. This figure needs to be raised to at least Rs 500 million, while Rs 100 million could be the defining investment for small scale companies. This categorisation should also be done on the basis of sales turnover — Rs 2.5 billion for medium scale companies and Rs 500 million for small scale companies. Only then will the deserving units get the benefits of the MSME Act.
- Protection from delayed payments and unfair treatment in the hands of large and government buyers: This is a chronic problem faced by MSMEs, causing serious constraints in cash flow. So the necessary rules must be devised and implemented. The MSME sector is key to the industrial development of India and needs a fair ecosystem and business environment to prosper.
- Incentives for capital investment in electronics manufacturing: Schemes in line with the erstwhile MSIPS are required for components, PCBs and the ATMP (assembly-test-mark-pack) of semiconductors by providing a direct investment subsidy. It is important that the schemes to enhance competitiveness are simple to implement and are done through a professional financial institution. It is also recommended that MSMEs become eligible for more benefits under MSIPS.
- The EMC scheme: The Electronics Manufacturing Clusters scheme can be given a boost by inviting state governments to take ownership for the smooth operation and success of the clusters. They should provide plug-and-play facilities to interested manufacturers on the basis of attractive lease agreements, reduce investments in land and infrastructure, and hence incentivise manufacturing. This will ensure low operational costs within a cluster.
- Subsidies for opex/working capital: This provision was introduced under MSIPS (vide a notification on August 3, 2015) for high value-added electronics manufacturing in segments such as semiconductor wafers, logic microprocessors, ICs; and components such as PCBs, discrete semiconductor fabs, power semiconductor fabs and ATMP. However, it was never implemented.It is recommended that a production subsidy (opex) should be provided to electronic component manufacturers by giving 6 per cent of the consignment value to them and/or by allowing retention of CGST for a period of five years. This should be done on an automatic basis after one-time approval of the project by MeitY. The subsidy of 6 per cent should be available for a period of five years and subsequently, a 3 per cent subsidy can be provided for the next five years.
