India Looking Forward to Growth

The Indian growth story is back on track. All figures, including the GDP and IIP, point to a resurging manufacturing sector. And if all goes as per the plan and the sector grows by 11% for the next 15 years, India could well emerge as the fourth largest manufacturing economy of the world. The countrys manufacturing sector, 13th largest globally, expanded at 6.8% over 1999-2009. Deloittes Global Manufacturing Competitiveness Index 2010 ranks India only second to China.

However, as the manufacturing growth story unfolds, the electronics and the hardware manufacturing industry has been bit of a slag. While the galloping market for its products has been its trump card, the exasperatingly slow pace of growth in manufacturing has been somewhat of a spoiler.

Electronics is the largest and fastest growing manufacturing industry in the world at $1.75 tn, and expected to touch $2 tn by 2014 and $2.4 tn by 2020. While the US is still in the slowdown mode and with the contagion spreading in Europe, the opportunity for India is obvious.

However, the India story has been lost somewhat in this sector. Far from emerging as a dominant player, India is hardly able to meet its own surging demanddomestic production is less than 45% of domestic consumption. And this gap is expected to widen as the demand grows on the back of a resurging economy, and as domestic manufacturing continues to slacken.

Manufacturing of electronics in India faces significant challenges. High transaction costs are the result of stringent rules and regulations, complex administrative processes and severe infrastructural deficiencies. Cost disabilities, including transaction costs borne by the Indian exporters, vary and range from 19-22% compared to 2-3% in the developed economies, reveal a Federation of Indian Export Organizations analysis. The total return on investment for a manufacturer in India is 12% as compared to 34% in China.

Clearly, it has emerged that we need to refocus our attention on electronics R&D and manufacturing. Our requirements in electronics by 2020 would be about $400 bn. And what will we make in India? Maybe just about $70-80 bn. Clearly our demand supply gap is more than $300 mn.

Mounting Hurdles

The lack of infrastructure, which is posing hurdles to the Indian manufacturers include power, roads, and land. While power drives the manufacturing industry, the country does not have sufficient supply. Lack of adequate roads and transportation facilities are affecting attractiveness of India as a manufacturing destination. Its apathy for good infrastructure is obvious when put in perspective with Chinacompared to the latter investing 20% of its GDP in infrastructure, India keeps aside only 6%.

Compared to the low cost destinations like China and Taiwan, the zero import duty structure makes the final product more costly and less competitive, thus encouraging low cost imports. An unstable taxation system is another issuecompanies cannot plan long term investments in a country where tax structure/policies keep changing. The introduction of GST, however, is expected to make the tax structure simple, rational, and transparent.

India has a poor component manufacturing base, importing from China, Taiwan, and South Korea. This complicates the supply chain as domestic manufacturers have to maintain high inventory levels to ensure uninterrupted production, thus adding to the cost of production and declining competitiveness. The current labor laws curtail the ability of an organization to align employee strengths with demand cycles.

An Eye on Tomorrow

India needs to act fast. When the WTO agreement came up with the zero duty regime in India last year, we didnt bother, unlike China, when it came to looking after the needs of the electronics industry. One of the key changes that the industry would like to suggest is undoing the change of the departments name, from the department of electronics to the department of IT. Once it was done, sadly IT became equivalent to software while hardware and electronics were forgotten.

The Silver Linings

The global IT systems and hardware spending is estimated to have grown at 4% from $570 bn in 2007 to $594 bn in 2008 with the North America and Asia accounting for 28% each, while Western Europe accounted for 25%. The Indian IT systems and hardware industry is still looking to carve a niche in the global market. Though this industry has potential, lack of favorable policies has held it back. The government needs to create an environment to foster demand in this segment, which in turn, could be leveraged for manufacturing investments.

On the telecom front, the demand led manufacturing success of the mobile handset industry in India is a good example as to how policies can leverage manufacturing.

When it comes to semiconductors, the demand consolidation will continue to evolve the dynamics of the industry. The governments role as a catalyst is important here as the experiences of Japan, the US, Taiwan, South Korea, and China have shown.

The governments semiconductor policy is an impressive initiative and a major step towards attracting foreign companies to set up manufacturing facilities in India. The government will bear 20% of the capex for units located inside SEZs and 25% for units located outside the zones. A minimum investment of $555 mn has been proposed for semiconductor manufacturing plants and $222 mn for ecosystem units with state governments likely to provide additional incentives.
The demand for local content in products sold in India is on a rise and the country is being recognized as a design hub by the foreign companies with operations in India. It is expected to continue as the preferred destination for embedded design and development. The potential of the Indian design market is expected to increase to $20 bn by FY14 and $58.2 bn by FY20. Localization of the product design and manufacturing from India will drive significant investments.

The Drivers

The consumption of electronics items is expected to go up rapidly with the rise in per capita income and corporate spend on electronics. The rapid growth in the per capita income in worlds second fastest growing economy has been the major trend driving this market. This segment offers significant opportunities for the electronics products.

The government is one of the biggest consumers of the sector. Its welfare schemes have given a boost to the hardware manufacturing market. The national e-governance plan, with an estimated budget of more than $9 bn for automating processes in its departments, alone would generate enough opportunity for the industry to grow.

The Future

The electronics manufacturing industry can significantly boost the countrys GDP figures, create new jobs, modernize processes and enable countrys inclusive growth. It can also increase employment significantly since it is human capital intensive. It employs around 4.4 mn people and the number is expected to grow to 16.1 mn by 2014 and 27.8 mn by 2020. Given the right impetus, growth in the segment holds the potential to triple the countrys current employment base by 2013-14.

IT intervention is imperative to ensure effective implementation of government schemes and initiatives. A technologically advanced manufacturing ecosystem back home offers a global platform to Indian manufacturers.

The Sum Total

Since China and Taiwan are way ahead in competition, the focus for India, with its abundant talent pool and resources, should be adding value to the existing products and creating new products through increased R&D and manufacturing. With West Asia, Africa, and the CIS countries expected to emerge as future markets, India is uniquely positioned to export to these markets as well as Europe. Establishing business relations in Africa is also easier due the continents openness towards India.