Key budget proposals for electronics industry: Are good days ahead?

The electronics and semiconductor industry welcomes the Budget 2014-15 aimed at boosting the manufacturing sector. The Budget supports growth and is committed to reviving growth in manufacturing, say industry experts. The steps outlined for the ESDM sector will put India on the journey of becoming the ‘design led electronics manufacturing hub’ by attracting investments, promoting entrepreneurship and creating jobs, feels the industry

By Srabani Sen

Thursday, September 11, 2014: The electronics industry had pinned all its hopes on the Budget 2014. It believes that India is poised to become the next electronics manufacturing hub and proper government support can take the industry to the next level. “The electronics industry can create an ecosystem in India, including high tech manufacturing of electronics subsystems, electronics manufacturing clusters, semiconductor fabs and ATMP units, which can provide employment to 27 million people in the next 10 years,” says M N Vidyashankar, president, India Electronics & Semiconductor Association (IESA). Budget 2014-15 spells out the vision of the new government—that it will be committed to boosting the growth in the manufacturing sector in the coming years.

So let’s find out if the finance minister, Arun Jaitley, has lived up to the expectations of the electronics industry.

At first glance, the Budget proposals may give some reasons to rejoice, but once we delve into the details, we find that they all add up to just a drop in the ocean. There is no change in the customs and excise duties applicable for electronic components, except for the removal of: 1) the special additional duty (SAD) on components used in manufacturing PCs, and 2) the customs duty on LCD/LED panels of 48.26 cm (19 inch) and below and on cathode ray tubes (CRTs).

Commenting on the Budget, Rajoo Goel, secretary general, ELCINA Electronic Industries Association of India, says, “It is heartening to see that the new government has given substantial attention to the electronics industry, which is of paramount importance for the growth of our economy. This sector has a multiplier effect on the creation of jobs. We welcome the Budget and hope that the few critical recommendations which have been omitted in it, will be taken up in the near future.”

KEY BUDGET PROPOSALS FOR THE ELECTRONICS INDUSTRY

Commitment to the growth of electronics manufacturing

It is good that the new government has recognised the importance of the electronics hardware industry, as the finance minister in his Budget speech highlighted its role in the growth of India’s economy. He has also tried to make certain imported electronics items more expensive, and realised that it is time that India started manufacturing defence equipment. He even said that the government plans to revive SEZs—another step that will boost manufacturing. The finance minister added that the government will provide an investment allowance of 15 per cent for three years to manufacturing companies that invest more than Rs 250 million in plant and machinery.

Welcoming the government’s commitment to the growth of the electronics manufacturing sector, Arun Gupta, global CEO, NTL Lemnis, says, “This proposed investment allowance is a good step. It will propel growth in manufacturing.”

Arun Jaitley has also said that foreign companies that have entered India as manufacturers will be allowed to engage in e-commerce if they source products from third-party producers within the country. But foreign firms that arrived in India as retailers will not be allowed to do so by merely sourcing products within the country. For example, Apple and Sony, which are also interested in a direct retail presence in India, cannot set up their own venture since they source products from China, Thailand and Malaysia. For electronics firms that have already invested in India like Lenovo, Samsung and Panasonic, this development is a welcome one.

To create a level playing field for domestic electronics manufacturers, Arun Jaitley has imposed taxes on the import of some telecom and IT products. This initiative will encourage the manufacture of VoIP phones and some telecom network equipment, for which demand is on the rise.

“To boost domestic production and reduce our dependence on imports, I intend to impose basic customs duty (BCD) of 10 per cent on the import of specified telecommunication products that are outside the purview of the ITA (information technology agreement),” Jaitley said in his Budget speech. He proposed to “…exempt all inputs/components used in the manufacture of personal computers from 4 per cent SAD,” and, “…impose an education cess of 3 per cent on imported electronic products to provide parity between domestically produced goods and imported goods.”

Consumers may have to shell out more to buy mobile phones because of the proposed education cess on imported electronic products. The move may push up costs of handsets by up to 8 per cent, especially smartphones that are mostly imported, analysts said.

Says N K Goyal, chairman emeritus, Telecom Equipment Manufacturers Association, “The government signed ITA 1 in 1997 and committed itself to allowing the duty-free import of 217 items. However, several items that were not covered under ITA 1 were also being imported duty-free. This has been corrected by levying an import duty on non-ITA-1 items.”

According to ELCINA president Subhash Goyal, this step will encourage the manufacture of telecom products. “However, it is not clear why SAD has not been removed from all electronic components and ICT products. SAD is a regressive tax; it does not serve any purpose and should be removed from all electronic components and ICT equipment,” he says.

“The Budget will help in creating an investor-friendly environment and attract more foreign and domestic investment in the telecom sector. Allowing FDI in telecom will attract more investment across functional technology areas like 4G and Wi-Fi. It will create more opportunities for telecom solutions providers,” states Vivek Varshney, vice president and global head, telecom practice, UST Global, a telecom solutions provider.

With the finance minister proposing to exempt colour picture tubes from basic 10 per cent customs duty to make cathode ray TVs cheaper, domestic production of these TVs may grow significantly, giving more opportunity to domestic companies like Videocon, Weston India, Mirc Electronics, Salora International, etc, which manufacture CRT and LCD TVs. The duty concession will also revive manuacturing of TVs in the SME sector. Says K Subramanya, a global consultant in the solar energy domain, “The Budget is pro-domestic manufacturing, pro-electronics, pro-solar and pro-SME/MSME. It will make business easier for the local manufacturing of certain products.” Industry experts, however, say that the government has not given any such benefits to the largest category of TV sets, that is, the standard 81.28 cm (32-inch) models, which make up 60 per cent of the market.

LCD and LED panels with screen sizes of 48.26 cm (19 inch) or less, will also escape basic customs duty (reduced to zero).

Commenting on this announcement, Consumer Electronics and Appliances Manufacturers’ Association (CEAMA) president, Anirudh Dhoot, says, “This initiative will help in boosting indigenous manufacturing of CRT, LCD and LED TVs, and reduce our dependence on imports.”

CEAMA general secretary, Suresh Khanna, adds, “Removal of duty on the import of the picture tubes of CRT TVs would help small manufacturers, as CRT TVs are mainly manufactured by the small players and sold primarily in rural areas. This market was shrinking in the recent past. This move would make CRT TVs cheaper by Rs 150 to Rs 300.”

According to Abhijit R Vaish, executive director, Instapower Ltd, “The removal of the basic customs duty on LED panels and LED TVs will allow large scale imports into India, and thus, our manufacturing industry will get affected. Though this is good as a short term plan, till we develop enough capabilities and capacity to manufacture LED TVs in India, eventually, the government should impose heavy duty on finished products coming into India as it kills the Indian industry. There is a sizeable quantum of imports for LED products happening in India in both rupee and volume terms. The government should have further increased the duty on LED products that are being imported so as to promote LED lighting companies in India.”

Opening the doors further for foreign investors in the defence sector, Arun Jaitley has raised the level of FDI (foreign direct investment) to 49 per cent from the existing 26 per cent. However, the government wants to keep the management control in domestic hands. Jaitley said that India is the largest buyer of defence equipment, and the increase in FDI in the sector will be helpful to increase domestic manufacturing capacity.
Jaitley also assigned an initial sum of Rs 1000 million to set up a ‘Technology Development Fund’ to support public and private sector companies, including SMEs, engaged in R&D for defence systems. He noted that a separate fund was announced to provide resources to public and private sector companies in 2011, but no action was taken beyond the announcement.

It is interesting to mention that the Confederation of Indian Industry (CII) had urged the government to restrict FDI in defence to 49 per cent. However, the association said that exceptions could be considered on a case-to-case basis. This move was opposed by engineering majors like Larsen & Toubro, which has made significant investments in the sector. The company asserted that the move will not be in the nation’s interests. In an interview to a newspaper, L&T chairman A M Naik had said, “Nowhere in the world, even in the most advanced nations like the US, where they have a hi-tech defence sector, do they allow foreign companies to own a majority stake.”

“Increasing foreign participation but with Indian management control and a thrust to indigenous manufacturing in the defence sector is sure to have a percolating effect in electronics manufacturing,” says T Vasu, director, Tandon Group.

The solar power domain has received the much deserved attention in the Budget. Arun Jaitley said that the government has set aside a sum of Rs 5000 million for the solar power sector. The government plans to take up ultra mega solar projects in Rajasthan, Gujarat, Tamil Nadu and Ladakh. “We will launch a scheme for solar power-driven agricultural pump sets and water pumping stations to energise 1 lakh pumps. I propose to allocate a sum of Rs 4000 million for this purpose. An additional Rs 1000 million crore is set aside for the development of 1 MW solar parks on the banks of canals,” said Arun Jaitley.

According to Raghunandan, VP, Kotak Urja, the Budget creates a good balance between the pro-dumping and anti-dumping factions in the solar products manufacturing domain. “Instead of restricting the imports, which otherwise would have pushed up the price of solar products, the Budget has proposed a wise way of making the domestic market much stronger to fight against imports by reducing duties on raw materials,” he says.

Says Abhijit R Vaish, “The solar industry has got a big boost both in the railway and national Budgets. Now, the optimum way to use solar is to switch to LED lighting, which would help in reducing the size of the solar PV system.”

“The priority that the government gives to the renewable energy sector is commendable. This should give solar manufacturers an opportunity to provide differentiated, technologically advanced and competitive offerings. Both the government and the companies should now focus more on R&D in this area, and build a sustainable solar ecosystem in India,” says Aninda Moitra, president and managing director, Applied Materials India.

“The allocated fund for ultra-modern solar power projects will give the much-needed boost to solar companies to increase generation capacity. The fund for the development of 1 MW solar parks on the banks of canals and for setting up solar power driven pump sets are some unique measures that will further drive utilisation of solar energy and reduce dependency on conventional energy resources. The removal of customs and excise duties on solar equipment on the other hand will incentivise indigenous companies to increase domestic manufacturing and reduce reliance on imports. These moves are most welcome,” says Anil Chaudhry, country president and managing director, Schneider Electric India.

However, Sundeep Gupta, joint managing director, Jakson Group, feels that considering the potential that the solar industry has in meeting India’s future power needs, due priority has not been provided in this Budget. “Of course, there is some emphasis on renewable energy in the Budget. Custom duty and excise duty exemptions on certain solar components is a welcome step as it will promote domestic manufacturing. An allocation for Rs 10 billion for UMSP, agriculture pumps and 1 MW canal solar plants is less, considering the importance of this sector. The government has to come out with policies to promote rooftop solar and distributed power,” he says.

GST by year end: Uniform tax rate across country

Arun Jaitley said that the Goods and Services Tax (GST) will be approved by the end of 2014. Once GST comes into force, it will simplify and streamline the indirect tax regime. GST was proposed to provide a uniform tax structure for goods and services—most Indian states replaced sales tax with value added tax (VAT) from the fiscal year 2005. GST will bring in uniform rates of tax on different commodities in all states across the country. Approval of GST will streamline tax administration, avoid harassment of business owners and result in higher revenue collection, both for the Centre and the states.

Smart cities and seven industrial cities to push ICT deployment

The Budget has allocated Rs 70,600 million for smart city projects. Besides this, the government is planning to set up seven industrial cities across India to boost the manufacturing sector. This will give domestic manufacturing a major overhaul, and will significantly push ICT deployment and ICT device penetration. The focused development of industrial corridors will also generate employment and result in economic upliftment.

To encourage the development of these smart cities, the requirement of a built up area of 50,000 sq m has been reduced to 20,000 sq m and the minimum capital in the form of FDI has been reduced from US$ 10 million to US$ 5 million, with a three year post-completion lock-in. A large number of people are expected to migrate from rural areas to cities, so the aim is to ensure that living standards in these smart cities are good.

Rs 100,000 million fund to boost start-ups and SMEs

The Budget has also proposed a Rs 100,000 million corpus as venture capital to encourage start-ups and entrepreneurs in the micro, small and medium enterprises (MSME) sector. The fund will promote financing in the form of equity, quasi-equity and other forms of risk capital. “MSMEs form the backbone of our economy….Financing this sector is of critical importance, particularly as it benefits the weakest sections. I propose to appoint a committee with representatives from the finance ministry, the ministry of MSME and RBI to give concrete suggestions within three months,” said the finance minister. An entrepreneur-friendly legal bankruptcy framework will also be developed for SMEs, to enable an easy exit. A nationwide district level incubation and accelerator programme will be taken up for incubation of new ideas and providing the necessary support to promote entrepreneurship.

However, there wasn’t any dearth of funds in the past so what is important is how the government ensures that these funds reach the SMEs at the right time. The SMEs face a number of challenges in getting these funds; hence, they prefer not to avail of them.

Rs 5000 million aimed at promoting internet connectivity in villages

The finance minister stated that the government will pump in Rs 5000 million for the ‘Digital India’ initiative—to set up broadband networks spanning across villages and to promote local manufacturing of hardware together with Indian software products. “Digital India will launch broadband connectivity at the village level. This is likely to boost penetration and e-governance. We await the specifics on the scheme for this initiative,” says Amar Babu, president, MAIT.

“We welcome the fund of Rs 5 billion for the Digital India programme. This program’s focus on IT access to villages and broadband connectivity will offer rural India technology solutions, education and training through digital platforms, thereby bringing rural areas on par with cities,” says Ashok Chandak, chairman, IESA.

“Definitely, the Budget 2014-15 gives the thumbs-up to the electronics industry. I think the problems of the electronics manufacturing industry have been well understood by the policy makers and it reflects in the Budget this time. There are a cluster of benefits by which the government plans to promote this industry. It is the first time any Budget has promoted entrepreneurship. There are a number of programmes for start-ups introduced by the government like the Rs 1000 million for start-ups initiated by rural youth; the Rs 100,000 million fund allocated to provide equity and soft loans to startups; and the special Rs 5000 million fund to ramp up software startups are a few examples of the government’s pro-entrepreneur approach. It is for the first time that we have heard words like innovation, startups and accelerators in a Budget,” concludes Sanjay Nayak, CEO and managing director, Tejas Networks Ltd.

Electronics Bazaar, South Asia’s No.1 Electronics B2B magazine