Is Electronic Import the New Menace?

When we say 'small is the next big thing', it really holds true in the current foreign trade experience of the Indian electronics industry. Without need for any number crunching, the small thing is very much identifiable. While foreign products are just flowing into the country like plague, the export numbers are all but crawling. Combined with a weak manufacturing scenario and low value-addition, the industry is going to rely heavily on imports.

Current Scenario

The industry is reporting a growth rate of $1.75 tn and is expected to hit $2.4 tn by 2020. However also by 2020, the domestic demand is expected to reach $400 bn and the current production rate can cater to a demand of only $100 bn by then. So, we are staring at a huge $300 bn of demand to be met by imports.

This will not just dampen the current account deficit but, as experts say, "the import spending on electronics is most likely to surpass even total spending on crude oil in the coming 10-15 years".

With zero customs duty on most electronics items under the ITA-1 protocol of the WTO makes importing easier and less problematic compared to manufacturing. Moreover, higher disposable incomes and growing affluence of the Indian urban population coupled with low penetration levels of consumer goods and higher reach, boost market demand. This market demand is met through imports.

How it All Began

The situation that we are witnessing today did not just happen. It has more than a decade long roots buried in our policy chapters.

There was a time in our economic history, when forefathers of electronics development groups did envision the development of the industry into a self-reliant and 'majorly export' manufacturer. On the back of the newly introduced industrial and economic policies at that time and with a heavy dosage of Soviet style planning, the objective of self reliance was laudable. That was the time in 1963, in much contrast with today's scenario, when the total annual indigenous electronics production was only about $10 mn (roughly a mid three digit number in today's money). The only backing was the strict licensed capacities for manufacturers and an even stricter import licensing regime.

But when economic hobbyhorses argued for economic liberalization, a brave new India was born in 1991, with the hope of gaining foreign exchange. But it opened up a pre-mature industry to the stiff foreign competition. Foreign equipment and components were now to be imported at much cheaper prices and sat substantially at a higher quality and reliability levels.

The consumer electronics business rapidly became dominated by the Korean and Japanese companies, who, having reached viable scale, established local assembly. Even a highly respected and long established company like Philips India had to sell off some of its major production facilities to Jabil.The Issue Today

Unquestionably, with almost 80% of electronics needs being met by overseas manufacturing today, this high dependence on imports sooner or later can easily translate into an absolute reliance on foreign imports.

More than 70% of the domestic market is served by imports, according to a recent study. Not only disappointing the Commerce Ministry through negative Balance of Trade, it will also become a worrisome concern for the Department of Electronics and the Finance Department.

Increasingly becoming the cause for concern for those in the policy galleries, the issue remains untouched by many although the country has abundance of engineering and business minds. Even if there exists a strong availability of human resource and policy blend, being self reliant on electronics seems a distant dream.

Is R&D to Blame?

Where the buck stops is a tough question to pick. While many put the onus on those in the industry, many say that the lack of concentration in R&D is the main reason for the growing dependence on imports.

Despite of a tax exemption of 150%, the Indian industries spend very little on research and development, particularly the electronics industry. At a time when reliance on imports from the US and China is so heavy, the government is just sitting on R&D - the spending could reach only upto $10 mn.

Talking on this, Kiran Karnik, former president of Nasscom says, "It has to be a government funded R&D, we can't wait for corporate funded R&D. It is domestic R&D first and then you have to see what type of ecosystem you can provide to positively incentivize the local manufacturer. If Nokia can make handsets here, then we can too, provided a good ecosystem is in place - fast clearance at Customs can be one. Moreover, it is not just R&D, it is the whole ecosystem that is not conducive to it. You have to get in new technology and you have to compete on costs."

The first step should be taken from the government side, so as to encourage the private players to come in to this sector. This is very vital to keep the industry in pace with the global manufacturers, and competitive. But with the initiative not coming from the government, it is a wait and watch situation!Advertisement

Increasing Manufacturing Can Help

"Dependence on imports can be reduced only if the manufacturing base is expanded, with an emphasis on producing electronic components locally," says K Srinivasan, secretary, ELCINA (Electronic Industries Association of India).

Commenting on what inhibits manufacturing in the country, he added, "Manufacturing is beset with problems due to cascading taxation, poor infrastructure and power situation, high cost of financing, dependence on obsolete technology, etc, which make us uncompetitive."

India has to make a modest beginning in manufacturing, as also laid down in the 12th plan, says Dr K Jayakumar, chairman & managing director, Central Electronics. He added that it is high time that manufacturing capability is nurtured, in fact it is a must! Talking on how we can go ahead to improve manufacturing, he says, "Steps must be taken to build ecosystems in the country by opening up education systems and design capabilities."

"There is a fundamental flaw in the vision of indigenizing electronic manufacturing in India," says Tanmoy Chakrabarty, vice president and head, TCS Government Solutions. Adding that there is no focus on indigenizing technology manufacturing at all, he says, "It is a complete avoidance of investment and risk appetite for indigenizing technology manufacturing. The government has to first start by procuring indigenous technology, so they should first lead by example, so as to create a momentum for Indian manufacturer. The china encourages the indeginoious manufacturing and that is why they are at the 5 times of our GDP".

With manufacturing becoming a critical need to uplift the electronic industry, there is need for a change in the government as well as consumer mindset.

The government should support Indian companies to have manufacturing in the country, says Sandeep Ramani, COO, Envent: "It needs a long term plan, which includes promoting Indian manufacturers, setting up special manufacturing zones near ports, basic infrastructure like approach, water, and electricity, certain exemptions wrt tax and excise, etc."

Will the National Electronics Policy Help?

The new Draft National Policy on Electronics addresses most of these issues even while recognizing the threat posed by the high dependence on imports.

Under the policy, the government has set a target to increase the export in electronic system design and manufacturing (ESDM) from the current $5.5 bn to $80 bn by 2020 and provide a stable tax regime for a period of 10 years. The government also aims to promote around 200 clusters across the country under the policy which will house a full eco-system for manufacturing electronic products like design houses, training centers, manufacturing facilities among others.

"The electronics policy will be able to clear all these problems being faced by the electronics industry," says R Chandrashekhar, secretary, Department of Telecommunications in a response to how effective the policy would be. He added that there is a clear plan that will take care of these problems.

But then policy in this country is never a problem, the problem is its implementation.