Addressing key disabilities: The way forward to realize a globally competitive IT-ESDM manufacturing ecosystem in India

By: Nitin Kunkolienker, Vice President, MAIT

The ‘Nine-Pillar Approach’ adopted by Finance Minister Arun Jaitley to spell out the measures proposed in Budget 2016 is a good way to identify the key priorities for India’s economic development. In his Budget speech, Mr Jaitley outlined the government’s approach for fiscal year 2016-17 that will set the tone for the Indian economy going forward.

Some Key Trends and Disabilities in the India Market

Let us begin by looking at some key disabilities and industry ‘asks’ of the government, to achieve India’s national development goals, particularly, in terms of developing a world class IT-ESDM manufacturing ecosystem:

As declared by Hon’ble Prime Minister Shri Narendra Modi in his ‘Digital India’ vision, the government wants to aim at achieving ‘net zero’ imports in the area of IT-ESDM products by 2020. What is meant by ‘net zero’ imports? It means reducing imports of finished IT goods and increasing exports of electronic products. This is important so that we can create substantial industrial activity in the country with a high economic multiplier effect. When we attempt to achieve these twin goals, it warrants that the volume share of India 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. So, for instance, the India IT hardware industry should not aim to make just 1 or 2 million PCs annually, rather we must target producing 20-30 million PCs every year.

This is more easily said than done – it will require that we need to create an end-to-end Indian hardware manufacturing ecosystem, indigenise hardware components and parts for local manufacture, and integrate 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 manufacturing costs are rising and the country has become expensive, they have succeeded in building up an enviable and mature electronics hardware industry. So, India needs to create an ecosystem which will be competitive for catering to growing local demand for IT-ESDM products, as well as catering to diverse export markets. While imports of finished goods may be discouraged by creating a duty differential regime, for exports you can’t do that. Exports have to be able to stand up on their own and be competitive on the international stage. So, government needs to ensure a very competitive enabling atmosphere for business for manufacturing IT and Electronics hardware in the country.

i) Infrastructure Disabilities: The first step in this direction will be that government has to remove the ‘infrastructure disabilities’. We compliment government on announcing important measures in this direction in Budget 2016 but more needs to be done – Infrastructure is the key which can help Indian companies stay competitive in terms of cost of business inputs. Government must ensure regular availability of affordable power and rapid development of transport infrastructure so that logistics costs, which are one of the highest today in India, 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 for rapidly creating infrastructure by the state and central government agencies, for building international ports/transit hubs and similar ‘game changing’ capacities.

Also, if we look at the India consumption of electronics goods, about 65% are sold 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 Middle East, Africa and Europe.

ii) Administrative Disabilities: Second, we need to register a qualitative improvement in ‘ease of doing business’ by identifying and fixing ‘administrative disabilities’ – India being 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 establishment of new business ventures and 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.

iii) Skills Gap and Technical Education: 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 to IT engineers, technicians, semi-skilled helpers and so on. So, skill building is a very important pre-requisite for the success of this initiative. We believe the HR development roadmap of 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 Development Council of India (ESSCI) and other stakeholders.

Unfortunately, technical education is an important area that 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 integration of 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.

iv) Taxation Disabilities: Budget 2016 has not touched on all the legacy issues; rather it has created some confusion. Government needs to restrict Populated PCBs from being imported at concessional rates and incentivize 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 rate of duty differential between imported and ‘Made in India’ Modems is only 6%; this differential should be increased to at least 12% 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 Cameras/Surveillance Cameras, Digital Video Recorders (DVRs), and Voice over Internet Protocol (VoIP) products.

v) Finance Disabilities: The finance cost in this country is very high. If at every step of the ESDM value chain the cost of finance is 15%, then obviously, the higher the value addition, the higher would be the disability on account of finance cost. So, government should consider coming up with a special fund where the lowest possible rate of interest is specially made available for IT and electronics hardware manufacturing entities, as part of the mission to encourage ‘Make in India’.

Realizing ‘Make in India’ for IT-ESDM: The Way Forward

Keeping in mind the broad development goals outlined in Budget 2016 and large scale national schemes such as ‘Digital India’, ‘Startup 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 speed up ‘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 on-the-ground business climate 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 creating ‘ease of 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 construction of national and state highways, rural roads, and construction of new freight corridors, as well as revamp and operationalization of 160 air-strips across the country will go far to realize the vision of ‘Move in India’.

Further, coordinated development of the air, road, rail 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 take us closer to the cherished national goal of “Ek Desh, Shreshtha Desh” and go a long way in improving the ‘Ease of Running a Business’ in India.

Realizing ‘Make in India’ through an Integrated IT-ESDM Hardware Manufacturing Ecosystem: There is a need to closely coordinate and monitor roll-out of measures envisaged under ‘Skill India’, ‘Start-up India’ and ‘Make in India’ programmes so as to synergize on the gains achieved under each scheme and maximize all-round effectiveness.

The policies in the last ten years (2006-2015) largely promoted ‘financial activity’ and insignificant or low levels of ‘economic activity’ due to direct imports.

By incentivizing large-scale production in India as against trading (imports and distribution), the government will not only achieve its goals of raising GDP, incomes and 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 with manufacture of complete products in India-based plants. To create an economic multiplier effect for the country as a whole, we need to encourage development of an end-to-end integrated hardware manufacturing ecosystem.

Products like Motherboards, SMPS units, Cabinets, Monitors and Populated PCBs, which have a potential for local manufacturing 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 input 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 manufacturing 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:

A)  Provide employment opportunities for technically skilled people, especially in rural/rurban India;

B) 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, Improve Government Revenues: While Budget 2016 was good in the sense that certain duty concessions were announced to benefit local IT-ESDM manufacturing, however, some of the key issues have not been 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 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 the tax and local government authorities in the day-to-day running of businesses; all G2B processes should be automated to the highest possible extent, including 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 ways and means to provide a duty differential to the extent of at least 11% between direct imports and locally manufactured products for a stipulated time frame, in order to give a definite boost and bias to locally sourced IT-ESDM products.

Further, the export incentive of 5% 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 growth in Manufacturing will provide an impetus for all round growth in economic activity and a parallel growth in related services, thus contributing to increase in government revenues through Service Tax.

Additionally, large scale increase in employment will increase individual spending power, further contributing to government revenues through Income Tax. Since 85% 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, 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 post graduate levels to lead to industry-ready skilled personnel being available for running 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 level 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, electrification of all villages by 1st May 2018, encourage development of rural infrastructure, growth of microfinance institutions and self help groups (SHGs), and 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 industry need to collaborate more closely in this area.

With high levels of local value-addition on account of 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.

As a nation, we should aim to make the PC an affordable device so that we can achieve the desired penetration rate of 33 PCs per 100 persons by CY 2022, as envisaged in the ‘Digital India’ mission.

In this entire journey of identifying and removing disabilities and incentivizing ICT hardware production within the country, the Indian economy would 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 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.

Further, many social benefits and improvement in HDI factors will accrue as higher penetration of IT, better all round infrastructure and IT-enabled e-Governance / e-Commerce services will positively impact key areas of a common citizen’s life – education, healthcare, housing and employment opportunities.