By Himanshu Yadav
India is heavily dependent on imports of electronic goods from countries like US and China to meet its domestic demand. More than 70 per cent of the domestic market is served by imports, according to a joint study done by the Associated Chambers of Commerce and Industry of India (Assocham) and Ernst and Young. The report revealed that Indian industry spends only $10 million on research and development (R&D).
Despite India being a preferred investment destination for global players to expand their business considering the potential benefits they derive from the nation, cutting down on R&D expenditure doesn’t seem to present a favourable situation for the Indian electronics industry. The industry which took off long back in 1920 with valves and vacuum tubes have come a long way with achievements made possible in the field of space, defence, consumer electronics, information technology and telecommunications. But despite the industry reaching out to wider segments, the R&D spend continues to shrink. This seems to be the key factor for buyers to rely mainly on imported goods. Sajjan Jindal, President, Assocham, says, “In spite of 150 per cent tax exemption under Income Tax Act Section 35 (2AB) the scanty spending on R&D by electronics industry is increasing India’s dependence on electronics imports.”
The Assocham report said, “Imported electronic goods counted to $19.77 billion in recent times, as export earnings were $3.17 billion. More than 35 per cent of imports in India are sourced from China.” China has always been at par when it comes to electronics manufacturing and R&D aspect. There production volumes are high leading to cost-effectiveness and with favourable policies in terms of technological, economical and social aspect they have placed themselves as a strong force both locally and globally.
Imports from China pose a big threat to Indian manufactures as heavy number of imports leads to competition for the local players. “Due to heavy imports in this segment, manufacturing and R&D had both taken a backseat for the last five years. Manufacturing and R&D both go hand-in-hand and require major consideration,” states Kunal Supnekar, director, Tara Relays Pvt Ltd. Further R S Saini, partner, Sunrise Electronics adds,“Overall 85-90 per cent of the components are imported and only 10-15 percent are locally made. Lack of component manufacturing and unavailability of components like semiconductors and microcontrollers leads to dependency over imports.”
What’s lacking, what should be done
Initiatives taken by the govt
New incentive policies covering tax holidays, subsidies and duty exemption on capital expenditure and other incentives.
• The maximum number of approved Special Economic Zones (SEZs) for electronics and information technology service sectors (348 of the 568 formally approved SEZs)
• Introduction of goods and services tax by April, 2010, a consolidated tax structure for both goods and services that could result in the reduction of indirect tax cost through removal or cascading
Initiatives should be taken by the govt
- A dedicated department for the electronics industry should be explored to promote the domestic market, investment in R&D and to attract investment from global firms.
- Investment-promotion activities should be strengthened to provide customized incentive packages for attracting global companies to set up manufacturing facilities in India.
- The government of India provides an incentive of 150 percent exemption on R&D expenditure. Despite that, the R&D spend was only USD 0.1 billion in the electrical and electronics sector. The uptake of the policy should be reviewed and a framework designed to promote innovation of products for Indian consumers through a public private partnership mode.
In order to reduce the number of imports and promote Indian manufacturing certain measures needs to be adopted. As suggested in the report, the market for electronics manufacturing should be developed through balanced strategy to promote both domestic consumption and exports.
Vinnie Mehta, executive director, MAIT shares, “When it comes to R&D government cannot do much but it can create an environment facilitating for R&D. For example, if we talk about semiconductors or embedded space, a lot of good things are happening. It is unfortunate that India’s track record in terms of R&D has been very poor but if corporates come forward and invest in R&D a lot can happen in this space.”
India’s manufacturing potential has been realised by multinationals like Hewlett-Packard, LG Electronics, Nokia, which have set up there base in the country and plan to expand further. As Moon B Shin, managing director, LG Electronics Pvt Ltd, elaborates, “We have presently two units in India. India is the only country that can compete with China and we further plan to invest in manufacturing. We source more than 50 per cent of our components from Indian players and over the last five years we have invested close to Rs 2,000 million on R&D in India. And from this year onwards we intend to double the sum to Rs 4,000 million for the next three years. Till now our Indian R&D was focusing on development of products for the Indian customer market along with developing few products some products for the Middle- Eastern and African markets. In future we intend to establish a strong R&D base which would contribute to our global operations as well.”
A joint effort between the industry and government can help India emerge as a strong force in the global arena. A master plan with a long-term vision is essential for the growth and expansion of the electronics industry. This can be in terms of attracting more manufacturing facilities in India and thereby increase in R&D activities. Also there should be proper approach in terms of policy promotion to attract big multinationals. For instance, India’s semiconductor policy, despite offering good incentives is still not able to attract any foreign investment. This can be the result of lack of right promotion activity. As mentioned by Mehta, “The policy is probably one of the best for investments. In terms of incentives and quality of package it is very good. But as it has not been marketed well this is going nowhere.”