“Inverted taxation is the biggest problem today"

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India Semiconductor Association (ISA) was set up seven years ago to represent companies in the semiconductor and embedded software space as well as electronic systems design and manufacturing (ESDM) organisations. It is currently very actively spreading the message that India has to boost domestic manufacturing in electronics so that it doesn’t face adverse balance of payments issues in the near future. Speaking to Jalaja Ramanunni and Dilin Anand of Electronics Bazaar, PVG Menon, president, ISA, highlights some of the major issues being faced by the Indian electronics industry and some possible solutions.

EB: How has the Indian electronics industry grown over the years?

In the early 1980s, the electronics industry was worth about US$ 100 million. Today, the industry is worth US$ 70 billion and is estimated to grow by four times this pace to reach about US$ 400 billion in the next eight years. Here, we are talking about growing from an industry that currently hires 160,000 engineers to one that will require about 3 million engineers. Whether it is in monetary or employment terms, the industry is growing by leaps and bounds.

EB: What are the growing verticals within the electronics industry?

Telecom has been the fastest growing and biggest vertical, and so are consumer and office automation. We are also seeing increasing traction in industrial electronics, apart from automotive and medical electronics. You will also see new verticals opening up, like energy efficiency, which is becoming critical to the success of many companies. Indian companies are working towards products which will consume much lesser energy. For example, in large data centres, a simple change in the design of the fans can considerably reduce the amount of energy consumed. It is evident that a market with a potential to grow to US$ 400 billion will require Indian companies working towards innovative products.

EB: Can you explain how design changes can lead to energy efficiency?

Last year, India made 500 billion fans. On an average, a fan consumes about 70 watts of power. A very simple built-in variable digital logic controller circuit, which costs about one dollar, can cut a fan’s power consumption to 30 watts. So we can save more than half the amount of power consumed by 500 billion fans.

Similarly, there are also LED lamps, 5 star rated air conditioners, mobile phone circuits and mobile phone chargers that switch off automatically. These also save energy.

In India, we have 800 million cellphones. Ninety per cent of users do not switch off their mobile phone chargers these days. Standby current on the charger consumes 4 watts, and at any point of time, about 600 million chargers are connected. With very simple electronics, this can be reduced to half a watt.

Again, 95 per cent of people switch off their televisions with a remote, not from the wall socket. This consumes 40 watts of power, which can be cut down to 10 watts.

EB: What are the problems being faced by the electronics industry today?

The biggest problem we are facing today is inverted taxation. To promote domestic manufacturing, we need to make sure that it is better to manufacture in India than to import a fully assembled product. Currently, the tax structure is such that in some categories it is cheaper to import a fully built unit than to import the components, design the product and build it in India. That is what we call the inverted tax structure.

The second problem is universal talent. It is becoming very difficult to hire quality engineers. Organisations have to spend a large amount of money to train students just out of engineering colleges.

Access to money is another problem. Both companies and entrepreneurs find that the cost of capital is too high. For companies that are trying to get into manufacturing, the cost of working capital has gone up. SMEs find it even harder to get capital as most of them do not have any collateral to offer. Banks are asking for 100 per cent collateral for any loan and the cost of capital is 16-18 per cent.

EB: What are the possible solutions to these problems?

These are problems of immense magnitude that do not have overnight solutions. It requires intervention at multiple levels. Consider the issue of capital. If you walk into a commercial bank, it is very difficult for an electronics company to get itself funded through the debt route. If you approach venture capitalists, they do not understand products, let alone electronic products. They understand services.

Getting the right talent is a very complicated issue. We are talking about curriculum intervention, training the trainer, motivating more people to stay in the educational system to pursue higher education degrees, etc. I was very enthused when Dr Ajay Kumar, joint secretary, DIT, talked about a Ph D programme. We all know that we have a critical shortage of Ph D holders in this country. When the government talks about schemes under which needy students can be supported while they pursue higher education, it is like music to our ears. That will mean a high quality workforce. We are in preliminary discussions with NASSCOM, the universities and our own member base to see whether we can get Ph Ds from the workforce to join as part time faculty members in colleges around the country and share their knowledge and experience.

EB: Is there space for more players in the electronics market in India?

Absolutely. We have expanded and built on the government’s projection, which under the National Electronics Policy, talks about 200 successful startups in this space. Going by the law of averages, we are talking about 2000 firms starting up with about 200 of them surviving through mergers and acquisitions. We need 50 fabless semiconductor companies in India, each with a turnover of US$ 200 million. That means there need to be 500 startups, of which about 50 would consolidate.

EB: Does India stand a chance in competing with China in terms of manufacturing?

I surely hope so. I do not intend to hand over three times the current domestic market for semiconductors and electronics to China. We have to give as much impetus as possible to domestic companies, because China is already at a high level and any further growth would be on an already large base, enabling them to further bring down their per-transaction costs. In India, that is not the case. Many parameters still have to be put into place. For example, if I want to build a fab, I have to invest in a 100 per cent power backup system, water treatment plants, transport infrastructure, cafeteria facilities, etc—all of which adds to the cost. In China, I can depend on the utility company to give me power and bus services, and there would be a series of accessible hotels, which would spare me from having to invest in catering services.

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