Manufacturing: It’s Time for a 2nd Freedom

The potency of IT can never be over stated. Compelling evidence is pervasive both internationally as well as in India. Numerous studies
have shown that a 1% increase in IT penetration results in a more than proportionate increase in GDP. Beyond this, the increase in
GDP has a direct and positive impact on employment and is estimated to generate approximately 1.5 mn new opportunities. This perspective does make it an urgent need for the Government of India to treat IT penetration on a mission
mode basis.

It is true that in some spheres of activities, the government has indeed ushered in the use of IT: A range of e-governance initiatives have seen many of the citizen-related services benefit and in a sense revolutionized the delivery of these services to the ordinary citizen. Land records, birth and death certificates, RTO licenses, ticketing, issuance of passports, and criminal records are but some of them that have brought in a lot of ease to the common person. And the industry too has worked closely with numerous government agencies in enabling

In the drive to make IT more integral to all walks of life, enabling policies are necessary. And simplicity and consistency are necessary adjuncts. So now, how do they measure up at the ground level? It is a sad commentary that day-to-day operations are mired in a range of illogical procedures and interpretations. Let us go through some instances which illustrate these.

Illogical Procedure 1: MRP Abatement Based Duty Determination: In early 2008, the Government of India, vide Central Excise Notification
5/2008 dated January 24, 2008, changed the method of levying excise/CVD based on an abatement on the MRP. At the time of this change, it was assured that it would be ‘revenue neutral’ and that it would not lead to any increase in costs. Sadly, this has been vitiated since the abatement provided is just 20%. And the nature of the industry makes application of MRP quite self-defeating. The supply chain for the PC industry is concentrated in the far East (mostly China and Taiwan).

Almost all Original Design Manufacturers (ODMs) are in this region; and almost all PC brands source their products from one or more of
these leading ODMs. Given the huge volumes of manufacturing there are strict disciplines of forecast and lead times. Typically, the industry follows a 13 week forecast.


The IT hardware industry is extremely price competitive and so the usual industry practice is to operate with very low overheads-thus often
sea freight is preferred. Hence the lead times for forecasted materials can be anywhere between 6 to 8 weeks to account for the sea-sailing
from the far East to India (Chennai port). Since the duty levied is on MRP, there is a lot of sensitivity to fix the MRP level as close to reality as possible. But the real challenge here is that the MRP label gets affixed from the overseas factories as part of the manufacturing process.

Thus, about 20 weeks before the goods reach India (forecast + shipping lead times), the actual figure of MRP needs to be declared and
integrated into the manufacturing process. Being extremely dynamic in nature, the IT industry faces its own challenges on price variations-the sudden calamity of HDDs last year is a case in point where the price for this item more than doubled. Beyond that on account of the long
time between MRP declaration and actual receipt of goods in India, there are other external factors which vary-forex rate and duty levels
being primary contributors (the US $ has appreciated from a `45 to `51+ within 3 months last year; and now the duty rates have gone up from 10 to 12% as per the recommendations in this year’s budget).

This leads to a major variation in the correct MRP level-often it leads to the vendor having to affix a new MRP label at a higher level, hold the goods, pay the differential duty to the government and then clear the time sensitive as the PC industry, the cumbersome process detailed above leads to huge uncertainties and delays in the sales cycles.

The current level of abatement provided for is a meagre 20%. Since MRP is required to cover all conceivable levies in the land,
a minimum of 10.5% goes away just to accommodate the levies (VAT=5%; Octroi=5.5%). If indeed the MRP based levying of duty is
done, with the attendant promise of ‘revenue neutrality’ then in effect it means the vendor and its partners are left with just 9.5% for account for all costs in distribution, marketing, sales, and after sales support of the product through the complete supply chain.
For sure, the costs are more-at a minimum this figure (9.5%) has to be about 30% to account and adequately account for various overheads.
(Vendor 10%~12%; Distributor 6%~7%; Retailer 8%~10%). The argument above should clarify on the abatement figure to be at least 40% (10.5% for all levies and 30% for the vendors and its partners). As a reference point-for peer products in the consumer durable space like
refrigerators, washing machines, and telephones the abatement is indeed 35%. And these products do not face the complexities of supply chain
experienced by the PC industry.

Illogical Procedure 2: Import of Refurbished Spares for Warranty Support Another area of procedural nightmare is that of the process adopted
for importing refurbished spares for warranty support. The practice of using repaired sub-assemblies in-warranty administration is standard
both from being environment friendly as well as being cost effective. To avoid India becoming a dumping ground the government has rightly
insisted on a license for importing such refurbished spares. Vendors are expected to justify the quantum of such requirements based on their
scale of business.

Not often is full credence given to the quantum applied for. Be that as it may, the procedure requires that the licenses are granted after a meeting involving 3 ministries/departments (director general of foreign trade, ministry of environment and forests Studies have shown that a
1% increase in IT penetration results in a more than proportionate increase in GDP Services & department of IT). This meeting is scheduled to be monthly. Yet there are instances of the meeting getting postponed- often quite indefinitely-due to absence of the full quorum. There
are instances of some license reviews pending for over 6 months. This has led to hardships for vendors in fulfilling their warranty
obligations. Due to delays in getting the requisite spares, often this has also led to customers seeking legal help and redressal from the consumer forums. For want of appropriate spares to support the warranty cases, the vendors are compelled to take back the unit and either replace the same with a new one and/or pay compensation. All for no attributable fault of the vendors.

Illogical Procedure 3: Data Projectors-8528.61.00- Classification Issues at Customs In today’s visual, multimedia world, a data projector is an integral part of any organizational set-up. However the industry today is facing difficulties at the customs on the classification
of data projectors which are primarily used along with an automatic data processing system. Data projectors which are principally
used with ADP machines are exempted from basic customs duty vide Notification No 24/2005-Cus dated 1.3.2005 as amended by Notification No 132/2006-Cus dated 29.12.2006. In spite of this being settled legally and unambiguously, customs authorities continue to the industry unjustifiably. The classification adopted by the custom officers for these projectors has resulted in frustrating ITA’s objectives of simplifying things; and importantly it breaches the government’s intent in spirit and words to abide by the WTO provisions.

So clearly the government has an important role to play. It needs to promote the ‘adoption of IT’ as an action item with mission-critical priority. Some elements of this could include the pan-India publicity for expounding the benefits of IT use (literacy, education, transparency, productivity, employability). There is also an urgent need to accelerate the automation of numerous govtcitizen
services interface. Presently, the spectrum of such services is vast and only some forward looking states have taken initiatives. Getting
it done across the country, will definitely improve efficiency, bring in transparency, and boost the productivity quotient for India.
The willpower and gumption to usher in a friendly working ambiance and provide opportunities for IT to thrive and grow is the missing link
currently. It is critical for the government to quickly recognize this and create rational policies so that the masses at large are benefited through technology.

The author is chief marketing officer,
Acer India

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