Tonic for a New High

It's a hattrick no doubt. After years of impassivity for the Indian hardware segment and the government's soft spot for the software segment, 2002 seems to be the year for hardware. Consider this, in January, the government came out with the Medium Term Exports Strategy 2002-2007 giving clear indications on the directions for the export sector with notable references to hardware. In case of hardware manufacturing, the endeavor was to revitalize the hardware exports growth to a CAGR of over 10% in the next five years from the existing 2%. Also, the strategy dwelt on how to develop India into a major contract manufacturing base and a design center in the next five years. However, given the government's inaction, the industry was a bit skeptical about its intentions. 

Then came the 20002 budget and the government announced a reduction in duties on capital goods from 25% to 15% and also on certain electronics components to 5%, thus rectifying the inverted tariff structure of the domestic hardware manufacturing industry. Earlier, the import duty on capital goods and on certain input components was higher than the peak rate of import duty on finished goods i.e.15%. The industry welcomed this step but cautioned that there are miles to go before we can even think of competing with the South East Asian countries in the hardware-manufacturing sector. With the recently announced Exim policy for 2002-07, the government has reiterated its determination to boost exports, including hardware.

As China continues to race ahead in hardware manufacturing, Indian companies are still grappling with procedures and the lack of infrastructure coupled with unclear government direction. For example, look how the Electronic Hardware Technology Park (EHTP) Scheme failed due to the lack of government intent to make India an ideal hardware- manufacturing destination. Launched in 1992 as a modified version of the EoU scheme, it was hugely successful as it permitted the import of capital goods and input raw materials at nil import duty. It also allowed sale into the domestic market to the tune of 50% of goods exported from the unit at half the rate of the existing levies - customs and local. However, as the customs tariff rates became significantly lower, the latter concession no longer remained attractive. Also, as the government continued its policies on stringent Exports Performance (EP) and Net Foreign Exchange as Percentage of Exports Positive (NFEP) criteria, hardware manufacturing lost its flavor in India.

However this time around, the government seems to have taken into account the importance of exports and hardware manufacturing and its impact on the country's economic development. The government has announced that the supply of IT products to the domestic tariff area (DTA) from the Electronic Hardware Technology Parks (EHTP) and Special Economic Zones (SEZ) is to be considered as the fulfillment of the exports obligation, provided that the items are manufactured in the unit and attract zero rate of basic customs duty. This will help the industry to fight the impending WTO zero duty regime. The government has also announced that NFEP will be calculated on a cumulative, rather than an annual basis. This will give companies a breather as logic dictates that any manufacturer needs some gestation period before the sales start happening.

Another malaise for Indian hardware manufacturing was the large number of procedures and regulations. The introduction of a new eight-digit classification system and better coordination between customs and Directorate General of Foreign Trade (DGFT) along with minimal physical examination, will help reduce turnaround time and increase competitiveness vis-à-vis the South East Asian tigers. 

As per a Mait-Ernst & Young study, the Indian hardware industry has the potential to reach a size of $62 billion by 2010, with the domestic market accounting for $37 billion and exports accounting for another $25 billion. However, a lot needs to happen before this potential can be converted into actual numbers. The $4 billion Indian hardware industry has been struggling to push exports, currently pegged at around $200 million. We still have miles to go before we can come closer to countries like China, Taiwan and Singapore. Nevertheless, the government has taken the first step with an industry friendly policy. Given the huge competition from other countries in the hardware-manufacturing segment, it will take more than just an Exim policy to show India's commitment for the same. Also unlike other industries, major investments can come only from global players and it's imperative to build a conducive ecosystem to attract these. With the policies tackled, India needs to get the other components of the ecosystem in place, in order to make sure hardware manufacturing is going places. And time's a luxury India does not have. 

Yograj Varma  in New Delhi