August 7, 2013 | Written by: Murali Tirupati
India’s prowess in Information Technology (IT) is widely known. India is by far the largest destination for IT outsourcing services in the world. Indian companies are among the top IT services providers in the world. But when it comes to a closely related industry – Electronics – India is far behind, lagging many countries that are much smaller in size. The Indian government intends to change this. As if to show its intent, the government changed the name of its Department of Information Technology (DoIT) that oversees both IT and Electronics industries in India to the Department of Electronics and Information Technology (DeitY). May be at times you have to call something by a different name before others can view it differently.
Lest we forget, India is already a major market for Electronics. India’s domestic demand for electronics stood at a healthy $70 Bn in 2011-12. This is expected to grow at an annual rate of about 25% to reach $ 400 Bn by 2020. Compared to this domestic production was $ 32 Bn and without any major intervention, this is expected to grow at 15% to reach $100 Bn by 2020. So there is a large & growing gap between domestic electronics consumption and domestic production. In addition, the value add in the domestically produced electronics devices is small, estimated to be just around 5 to 10%. This means the majority of manufacturing is for peripheral components/devices or is in low-skill assembly operations. India’s government wants to change this scenario in a big way and the rechristening of DoIT to DeitY seems to be part of this effort.
Fortunately for India, the government did not stop with changing the name of a department. It recently approved the National Policy on Electronics (NPE) and announced a number of steps under this policy. The key objectives of the policy are :
- Increase the electronics industry output to $ 400 Bn / year
- Attract an investment of $ 100 Bn
- Create employment for 28 million people
In order to achieve these objectives, Indian government announced several incentives and initiatives :
- Electronics Manufacturing Clusters – Government will provide financial assistance of up to 50% of the infrastructure cost (with a limit of INR 50 crores per 100 acres) to set up special electronics manufacturing zones. The government is targeting 10 clusters in 2013 and a whopping 200 by 2020
- Financial Incentives under a Modified Special Incentive Package Scheme (MSIPS) where the government will reimburse certain taxes and duties for 10 years, amounting to 20 to 25% of capital investment
- Set up a semiconductor wafer fab and called for companies to submit ‘expression of interest’
- Preferential market access – At least 30% of total government procurement of electronics will come from local production. Given the size of government in India and its ambitious plans to roll out computers, tablets etc. to students and employees, government procurement is a very large market in itself
- Electronics Development Fund – a fund of $2 Bn to promote innovation, intellectual property creation, product commercialization etc. The government will fund 25 to 75% of fund value with rest coming from private institutions
- Establishing safety standards for electronic devices – to ensure quality of goods produced
- Human resource development – Large-scale initiatives to create skilled manpower (2500 PhDs in Electronics per year by 2020, additional colleges for electronics education, incentives to students/researchers etc.)
As we can see, these are significant measures and if implemented well can give a real boost to electronics manufacturing in India. But what is the catch?
There are some very critical criteria to be met:
- In India, the majority of approvals that are needed to setup a manufacturing plant have to come from state governments. So enrolling the state governments is very important. As we speak, only a few of the state governments have shown the needed enthusiasm to follow up on the central governments lead
- The lead-time to get the necessary approvals to setup manufacturing plants is notoriously long in India. The government did not announce the necessary measures to simplify or speedup the approvals process. The long process and the uncertainty involved can put off potential investors
- The political climate in many states is not very conducive to new capital investment. Many state governments are facing a crisis of confidence and this has impacted the governments’ ability to act on investment proposals
- Fiscal climate – While the central government in India has a large budget, it is not exactly flush with funds. With a budget deficit of about 5% of GDP, the government may find it difficult to keep good of its promise of investment and incentives.
These are real challenges to be overcome to realize the dream of making India a preferred destination for electronics manufacturing. But as it stands, it looks like this is a good time for companies to seriously consider India as a possible location for their next plant. Apart from the financial incentives announced, India’s reputation in protecting IP and upholding rule of law should tip the balance in its favor.
So yes, there are challenges – but I think India is indeed poised for a big growth in electronics manufacturing. What do you think?