Making India an Electronics Manufacturing Hub

Whether it is IT, electronics or services, India presents a rare opportunity vis-à-vis the rest of the world. The country is already a world leader in IT software and services, and with the Make in India initiative, the government hopes to bring rapid growth to the electronics sector

Indians bought 53 million smartphones in 2014, out of this 21.6 million smartphones were sold in the fourth quarter of the year (Source: Market pollster GfK)—this makes the country the world’s third-largest smartphone market in terms of the number devices sold. While millions of smartphones are being “sold in India”, hardly any are being “made in India”. The government is running a strident “make in India” campaign, but there is no sign of people planning to invest for making smartphones in India. There are many policy related bottlenecks that the government needs to address for making India a global manufacturing hub.

The Task Force Report (Source: Department of Electronics & Information Technology) projects that the demand for electronics products will increase to $400 billion by the year 2020 and this will lead to a situation where the electronics import bill exceeds the oil import bill. The projected production in 2020 will reach $104 billion, leading to a demand and production gap of $296 billion. This shortfall seems large enough for making companies in IT and ESDM sectors to look at India as the next destination for catering to the domestic Indian demand and as an exports hub.

Dr. Ajay Kumar, Joint Secretary, DeitY, says, “The demand for electronics goods is very high today. We are one of the few countries in the world where the demand for electronics products is steadily rising. The government is taking a number of steps to encourage electronics manufacturing. 100% FDI is permitted under automatic route in Semiconductor Fabrication Plants. Government will also provide assistance for setting up of world-class infrastructure for the semiconductor fabs and its ecosystem units. We have identified many electronics manufacturing hubs, where the companies will be eligible for incentives, including subsidy for setting-up such facilities. Electronics manufacturing has significant strategic implications. In defence 49% FDI has been allowed by the government, but the thing is that about 60% of all defence goods is electronics.”

“The Make in India program represents an attitudinal shift in how India relates to investors: not as a permit-issuing authority, but as a true business partner. Our youth will be a part of this drive and we shall ensure their fruitful participation,” Dr. Ashwini Kumar Sharma, MD, National Institute of Electronics & Information Technology (NIELIT).

The growth of hardware and electronics manufacturing in India is not only related to government polices for the sector, it is also linked to the availability of trained professionals who can be employed by the companies. The ease of doing business is also a cause for concern. Prior to the present government coming to power, the World Bank published a report, which ranks India 142 out of 189 countries in the category for ease of doing business. But Jaijit Bhattacharya, Partner, Infrastructure & Government Services, KPMG in India, is of the view that with the proactive steps that the government is taking the few bottlenecks that are there will be removed.

Jaijit says, “Clearly India has the depth of skills and the ability to scale and is therefore a natural destination for global manufacturing. Electronics companies will also be keen to setup base in India given the large Indian domestic market and the need to de-risk their manufacturing by spreading to more than one location. Also, given that the labour costs are going northwards in China, India is indeed an attractive alternative destination for both foreign and domestic investors.”

“Clearly, much needs to be done before the trickle of manufacturing can become a significantly large flow. Land acquisition and ease of setting up of business is just two of the key issues. Contract enforcement and infrastructure availability are other major deterrents. The central government and the state governments are taking earnest steps for improving the ease of doing business in India. These are complex issues with multiple stakeholders, and it will take some time before we see the impact of these initiatives on the ground,” adds Jaijit.

Electronics Industry for Jobs
Currently the manufacturing sector is contributing over 15% to the national GDP. With the Make in India initiative the government is aiming to increase the contribution of the manufacturing sector to 25% by 2022. India is already a leading electronics consumer, and it is possible that the country may transform into a manufacturing hub.

“The Make in India programme is a good initiative from the government. With huge success in IT, ITeS space,  our IT Industry has created a great reputation for India, now it is time for us to leverage the success model and replicate it in the manufacturing space. There is a technology driven paradigm happening in the manufacturing space and so, India should position for both volume and value manufacturing. India has the great opportunity of leveraging its strength in semi-skilled and skilled labor force, along with automation expertise, which IT can bring about, and together these can create significant value,” says Balaji Mahaligam, Director, IDC India.

When the electronics goods are being produced in India, it will lead to the creation of millions of manufacturing jobs. Dr. Ajay Kumar of DeitY says, “Our estimates show that an electronics manufacturing industry of $400 billion can provide direct jobs to 28 million people in India. Unless we revive manufacturing in the country, the so called demographic dividend, of young Indians, will never be realised.” When the electronics goods are being produced in India, many new manufacturing jobs will come into being. An infrastructure of ancillary industries will also get created, leading to the generation of even more jobs. Many decades ago, Japan started its growth path by making goods for USA. Today China is a leading electronics manufacturer in the world; India can also grow in the same way.

Providing the right kind of skills to the nation’s youth so that they can serve as the human resource for the growing electronics industry, is high on the governments agenda.“Taking the dream of ‘Make in India’ forward, DeitY has setup the Program Management Unit (PMU) for the skill development initiative in the Electronics sector undertaken in the form of its two schemes:‘Scheme for financial assistance to select States for skill development in ESDM’ and ‘Skill development in ESDM for Digital India’. These Skill Development schemes are to be implemented jointly by all the  States, UT Governments, Industry and Skills Providers,” says Dr. Ashwini Kumar Sharma, MD, National Institute of Electronics & Information Technology (NIELIT).

Amar Babu, President, MAIT, & Managing Director, Lenovo India Pvt. Ltd., informs that the member organisations of MAIT have currently invested over $2 billion on ICT manufacturing facilities across India. The current market size of these sectors is close to $13 billion. “While we are looking at growing this figure and attracting more investments into the sector, it is important that the ‘Make in India’ initiative becomes a key enabler for the success of existing investments,” says Amar Babu. MAIT has strongly recommended that a Task Force consisting of government and functionaries from domestic ICT hardware companies should be created for drawing a roadmap to achieve full capacity utilisation in existing manufacturing facilities and build a robust ecosystem.

Scope for Rapid Growth
The devices industry, primarily the smartphones, tablets, laptops, etc., is a major driver of the electronics industry. The expansion of the smartphone and tablet market has also led to a massive rise in the data traffic—this in turn has led to the development of high-speed communication networks in the developed countries. As India is home to a large youth population and a burgeoning middle class, it is natural for the electronics sector to see rapid growth. In the Indian ESDM market, the devices segment forms a large chunk, with an estimated market share of 79% in 2012.

The government is also one of the largest creators of demand in India’s electronics sector. The overall IT spending of the government was close to Rs. 262 billion in FY13. The government IT spending is estimated to be growing at 11% year-on-year. Out of this expenditure, close to 48% goes to the IT hardware segment. Other than directly spending on IT and hardware, the government is also giving a boost to the electronics sector through several policy initiatives such as larger government spending on laptops and tablets for schools; rollout of the National Knowledge Network; rollout of various eGovernance initiatives including the UIDAI scheme; initiatives for promoting broadband connectivity in the villages.

Amar Babu of MAIT is of the view that the Government’s initiatives on ‘Make in India’, ‘Digital India’ and ‘Smart Cities’, are not only proving to be a means for tackling issues that are related to ‘Ease of Doing Business’, they have also made India an attractive FDI destination. “Initiatives like the ‘National Manufacturing Policy’ and ‘National Policy for Electronics’ will lead to boost in electronics manufacturing in the country,” says Amar Babu.

“One of the pillars of the Digital India Programme is electronics manufacturing,” says Dr. Ajay Kumar of DeitY. “The focus is on promoting electronics manufacturing in the country so that by 2020 we are completely self-sufficient in electronics. The initiatives that we are taking put India high on the list of potential places to invest.”

Incentives for Electronics Industry
Dr. Ajay Kumar informs about the scheme for Electronic Manufacturing Clusters under which government pays 50% of the cost of development of infrastructure and the common facilities in greenfield clusters and 75% of the cost in brownfield clusters. “Currently around 30 Electronic Manufacturing clusters have been notified and the government is targeting for 200 Electronic Manufacturing clusters by 2020,” says Dr. Ajay Kumar. “In order to give preference to the domestically manufactured goods, we are ensuring that the extent of government procurement will not be less than 30%. Around 30 electronic products have already been notified under this scheme,” he adds.

Many industry players feel that a lot more can be done to promote the electronics sector in the country. Although the government has now started providing incentives to the IT and electronics industry, at an absolute level, China still offers several cost advantages as compared to India. Piyush Somani, MD & CEO, ESDS Software Solution Pvt Ltd., says, “We can’t expect significant growth in electronics manufacturing in the country, as we still don’t have the proper policies in place.” He says that in China manufacturers enjoy the advantage of interest free loans and a simple tax structure, which India is yet to match.

Balaji Mahaligam of IDC points out the problems that are cropping up due to the procedural complexity and infrastructure challenges. He also mentions the problems that are being faced by companies due to taxation related issues. “There have been recent concerns on the unpredictability of taxation, due to issues like retro-active taxation in few cases. The government is taking many new initiatives to improve the overall investment climate.” However, he is also of the view that India is an attractive destination for foreign companies to invest,  given the cost competitiveness, the availability of labor and the potential of a huge domestic market.

Jaijit Bhattacharya talks about the sector based policies such as M-SIPS that government of India has launched for electronics hardware manufacturing. He informs that the state governments bring in their own policies which include innovative taxation policies, subsidies and other incentives. “The combination of sectoral incentives at the central government level and various policies promoted by the state governments, together make India a very attractive destination for FDI,” says Jaijit.

“Companies looking to invest in India should understand the market in terms of sector opportunities, wage cost arbitrage, distribution channels for finished products, availability of raw material, and other factors. They must have a clear and precise understanding of the FDI policy governing the sector that they are looking to invest in,” says Amar Babu of MAIT.

Challenges Ahead
For attracting investments from IT and electronics companies some of the critical factors like connectivity to good seaport, air and road connectivity; availability of talent; and adequate availability of power and water, is a must. The global perception of India as a destination for electronics manufacturing is not as high, as that of other low-cost destinations, so greater efforts have to be made on not only creating the infrastructure that can serve the needs of the investing companies but also on branding and promotion.

Piyush Somani of ESDS points out that transportation is major hurdle for India’s manufacturing sector. “Average speed of the goods trains and vehicles on the roads is less than 25 Km/Hr, which shows how bad our internal transport system is. Air connectivity is also very poor if we exclude the metro cities. We don’t need speed of Bullet Trains in India, we can do far better even if we manage to achieve average speed of 150 Km/Hr for trains and speed of 100Km/Hr for goods carriers on the road,” he says. Well developed and well maintained infrastructure, particularly roads and highways are vital for an efficient inbound and outbound logistics of a manufacturing firm to ensure efficient movement of raw materials and finished goods across the country as roads carry 65% of the freight in the country.

Jaijit Bhattacharya of KPMG agrees that India has a long way to go before it can have an infrastructure of the same level as China. But he also points out that some of the core infrastructure projects for creating key highways, port to hinterland connectivity, dedicated freight corridors and energy supplies are on the fast-track of development. “India will definitely need to keep pace with the larger deadlines laid out by the Prime Minister,” he says optimistically.

Mahalingam of IDC accepts that China is far ahead of India when it comes to infrastructure.  “We need to keep in mind that China opened its economy 14 years before India, hence India is playing catch up. In aspects like labor development, water management, healthcare facilities, civic amenities, China is clearly leading India from an infrastructure point of view.  The current Indian government is focusing on infrastructure development as a priority area and so, there is a good opportunity for India to strengthen its infrastructure,” he says.

“Companies considering India for investment decisions should plan for the long term horizon.  Given the fact that India will be one of the top markets in the world by next decade—given that the country has a vibrant democracy, robust institutional framework and cost competitiveness—India is and will continue to be an attractive destination for investments. However, the companies need to be mindful of multiple stakeholder management (like central and state government departments), the importance of local knowledge and the lack of good infrastructure,” Mahalingam adds.

The lack of Semiconductor Wafer Fabrication Manufacturing Facilities (FAB) in the country is often regarded as a major stumbling block to the growth of electronics industry in the country. A FAB can lead to the development of an entire ecosystem for electronics manufacturing, but till now investors have not shown interest in setting up a FAB in India because, such units can cost up to $5 billion and the technology involved is also very advanced. Very few companies in the world have the expertise to set up a FAB.  But Dr. Ajay Kumar of DeitY is hopeful that India will have two FABs in few years time. He says, “The government has already approved the setting up of two FABs in the country. Two business consortia are involved in setting these up. Once these FABs become operational they can create direct job opportunities for more than 20000 people.”

If the Make in India initiative continues to advance in the current manner, we can definitely hope to see significant and sustainable growth in electronics sector and progress towards India becoming a global manufacturing hub.

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