“With new policy initiatives, we will see a big jump in electronics manufacturing in India

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While India is already late in realising the importance of electronics manufacturing, Dr Ajay Kumar, joint secretary, Department of Information Technology (DIT) of the Central Ministry of Telecom and IT, Government of India, believes that the nation does stand a chance of becoming a global manufacturing base. “Today, the world is looking at a ‘China plus one strategy’, which will be an advantage for us,” he says.

In a conversation with Rahul Chopra of Electronics Bazaar, Dr Kumar speaks about the dire need to strengthen the electronics manufacturing base of the country, and how government initiatives can make this possible.

Dr Ajay Kumar, joint secretary, Department of Information Technology (DIT)

Wednesday, March 21, 2012: EB: How, according to you, is the Indian electronics industry doing?

Currently, the Indian electronics industry is at a watershed; in some ways, it is on the cusp of growth. The industry has been facing serious competition because of various factors. And now, with the new policy initiatives that the government is promoting, we will see a big jump in electronics manufacturing in India.

EB: When the dollar was stronger against the rupee, what was its impact on the electronics industry?

Actually, the Indian electronics industry was not affected directly by dollar prices, but it was hit by the sudden devaluation of the Indian rupee because the orders and agreements the industry had in hand was difficult to meet. So that was the short term impact. However, in the long run, it is going to be neutral because most electronics hardware is imported, and most products manufactured in India use imported components. So, the prices of completely imported goods and partly imported goods are going up. If today we are able to do complete manufacturing in India, it will be more competitive because of the devaluation.

EB: Do you think a stronger dollar is actually good for the industry because now products are more competitive in the local market?

Not as of today, since most products are imported and value addition may be low. But the industry will benefit if in the future we see more value addition because of more manufacturing within India. Then the industry will have the additional capability of going up to whatever the devalued amount is.

EB: The draft National Policy on Electronics has been announced recently. What is the current status of the policy? Kindly explain to our readers the lifecycle of this policy.

The draft policy is under public consultation. We have received requests from several organisations that they need to consult their members and come back. We are getting very useful inputs from the industry as well. The process of compiling these comments will start shortly and once this is done, the policy will be put up for the consideration of the Union Cabinet and after its approval, it will be the final policy.

EB: Is there any time frame for the final policy to be released?

It is difficult to put this within a time frame, but another aspect to this is that we have come out with trial policies for electronics, IT and telecom. There is a good synergy and integration between these sectors, and therefore, my guess is that these three policies may go up, more or less together, to the Cabinet.

EB: One section of the industry feels that the policy is more in favour of semiconductor manufacturing? Please comment.

No, I don’t think there is any intent to focus only on semiconductors. The policy talks about development across the value chain and across all the verticals of the electronics industry.

EB: Are there any benefits for the trade channels in the policy as they are now becoming more organised?

I think the trade channels are already fairly developed. Remember, if manufacturing starts off properly in India, a huge demand for electronics will shape up fast, and so distribution channels will have a very important role to play. So, at the moment, the government is actively trying to work on that front.

EB: The draft policy also mentions that the department will be renamed as the Department of Electronics & IT. Will this decision be a part of the final policy announcement?

A proposal has already been sent in regard to this and it is under consideration by the government.

EB: Please comment on the developments regarding the establishment of semiconductor fabs in India.

The process for setting up a semiconductor fab has already started; we have constituted an empowered committee which is in the process of finalising the required technology and the investors to set up the fab. A decision is yet to be made on who these investors could be. We have solicited responses from several leading players, which are in the process of being evaluated. Once these are evaluated, we will arrive at some understanding with respect to the technologies, investors and incentives. Currently, it has been decided to set up two semiconductor fabs, which will help in developing a semiconductor fab ecosystem including suppliers for equipment and their maintenance, raw materials and chemicals, etc, which are used in the process. Currently, we don’t have the ecosystem in the country.

EB: What are the top elements of the policy, which will be beneficial to the manufacturing industry?

The first is the Modified Special Incentive Scheme (M-SIPS), which is very comprehensive and covers more sectors across the value chain. The second is the preference for domestically manufactured electronic goods. The third element is the proposal to set up an electronics development fund to provide risk capital for innovation and intellectual property (IP) generation in the country. With this, there will be a major R&D thrust because it is largely funded through academic institutions and government labs. The fourth element involves providing support for electronics manufacturing clusters, where the special purpose vehicle (SPV) floated by the units within that area would get support to set up infrastructure, logistics and other such common facilities that may be required.

Apart from this, the policy also talks about promoting exports, developing human resources for the industry, and promoting specific centres of excellence in verticals that are growing fast in terms of demand and where we don’t have much expertise like in automotive electronics, avionics and medical electronics.

EB: What is the progress on M-SIPS?

There have been several rounds of discussions on the proposal with the industry itself. It is now under an advanced stage of government consideration.

EB: What benefits does M-SIPS offer to a Rs 50-200 million organisation?

They can expect some investment subsidies on CAPEX, and some tax benefits depending on whether it is a SEZ or a non-SEZ company.

EB: With the new digitisation bill being passed by the Parliament, do you see it as an opportunity for the Indian electronics industry?

Yes, it is a huge opportunity. Most of the service providers are today giving set top boxes (STBs) on lease. When domestic manufacturers sell them to service vendors, they have to pay VAT on it and thereafter it is leased. Whereas when service providers import them, they do not have to pay VAT on it but can straight away lease them. So this is the disadvantage a domestic manufacturer has. Having said that, we are trying to see how this can be rationalised, but if you see the number of set top boxes that are domestically manufactured, the growth rate of domestic manufacturing is very high. The good news is that there is sufficient EMS capacity in the country to manufacture these and we can easily meet the rising demand of STBs in the coming years. Once the tariff structure is such that it becomes viable for the domestic manufacturers to make STBs, this can be done.

EB: But local manufacturing is more about assembling rather than manufacturing.

Yes, it is true. Indian manufacturers are doing just 15 per cent of value addition. We need to get to the next level. Currently, few companies globally hold the licence to offer the decoder—the software that is needed to encrypt and decrypt the contents of the STB. It is possible to create it domestically, but this is something that we need to think about. The second point to consider is the tuner, which is put on the STB. This will require a fab as it is a chip based activity. So, we should target increasing the value addition. Till these issues are resolved, we should focus on assembly. If we are assembling a large number of STBs, it will create demand for a fab. That is why these linkages are important.

EB: The government plans to increase exports by 15 times. What has been planned to achieve this target?

If Indian manufacturers are producing for the domestic market, they can also export in large quantity, as it is a globally integrated market. Today, Information Technology Agreement (ITA) is our biggest challenge but if you become competitive, then ITA is the biggest advantage. The industry has an open market to cater to. So I think if manufacturing happens in India, export will happen automatically. If you can compete with Chinese imports, there is no reason why you can’t compete with Chinese goods elsewhere in the world. The world is today looking at a ‘China plus one strategy’, which will be an advantage for us. China has developed its industry through an export oriented strategy. That’s an important lesson for us to learn. So we will have to keep supporting exports as we go along.

EB: What role does DIT play in the marketing schemes?

We do propose to support initiatives for exports development, as well as market and brand development for electronics.

EB: India’s strength has always been in design and software development. Now, is the government trying to invest in manufacturing because it is a political compulsion or are we really challenging the economics?

I think we are focusing on our strength. If we use the term ‘compulsion’ in this context, it is because of two reasons. The first is that electronics is becoming pervasive, and we need to have a certain amount of domestic production for strategic reasons because if we totally import what we use, we are under severe security threats. The second reason is the opportunity we will miss out on. For instance, in the coming decade, we will lose out on nearly Rs 2 trillion worth of imports if we don’t address this issue.

But the real driver for investing in manufacturing is actually what we believe is our strength, something we think we can do well. Electronics is different from normal manufacturing because it involves creating an intelligent device. For example, the chip industry, where we are doing well, is growing at the rate of about 21 per cent per annum. Most of the chips in the world are now either designed in India or by Indians across the world. We now need to translate this design ability into manufacturing. In this game, where the most important element is innovation, you see products changing everyday. Therefore, innovation and R&D efforts are a must for India, and we are doing well in that space.

Another point is that the proportional cost of developing a chip is increasing. Earlier, it used to take about Rs 10 million to develop a complex chip. Today, that cost has gone up to Rs 100 million, which is ten times more. Therefore, chip development, which is the core competence of India, is becoming more important in the development of electronic products for tomorrow. It is actually becoming ‘natural’ that chip development will happen in India—unless we close our doors to it.

EB: You have headed Keltron for a few years. What mantras related to managing a PSU would you like to share with other leaders in a similar position?

I was at Keltron more than 10 years back and times have changed since then. Keltron was a victim of ITA and domestic manufacturing was then getting hit by imports. While I was there, it was more about management initiatives in terms of restructuring the organisation rather than technology inputs—which I could do and it resulted in the change. The principles were very simple; we closed down operations that were not profitable and pursued what was profitable. Initially, things were so bad that we were looking merely to survive and there was no money to invest in technology or human resources. It was only after a couple of years that we could revive.

EB: Were there any lay-offs in the process?

Yes. We completed two major VRS. In the first round, we laid off nearly one-third of the labour force which included mainly non-technical staff. The second VRS was smaller and also included the subsidiary companies of Keltron.

EB: Do you think that in the current scenario there is space for an electronics organisation backed by PSU investments?

Yes. One opportunity for investment is in strategic electronics. That does not mean that whatever strategic production takes place has to be done by PSUs. In fact, I think there will always be scope for PSUs to continue producing strategic electronics apart from the other work that they do.

Electronics Bazaar, South Asia’s No.1 Electronics B2B magazine

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