National policy on electronics: Will it be a game changer?

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Despite the telecom boom over the last two decades and the sharp rise in the use of electronics across industries, India still remains heavily dependent on imports for much of the hardware. This dependence also poses serious risks, as it involves strategic industries like atomic energy, space and defence, apart from telecom and civil aviation.

By Srabani Sen

Monday, December 12, 2011: THE PRESENT SCENARIO

India’s demand for electronics hardware is likely to increase from the current level of US$ 45 billion to US$ 125 billion by 2014, and to US$ 400 billion by 2020. Going by the current levels of import, the domestic supply from the electronics systems design and manufacturing (ESDM) sector is likely to meet only one-fourth the projected demand in 2020. If things continue the same way, India will need to import US$ 300 billion worth of hardware. That means, Indian imports of electronics would be about two-and-a-half times more than its current oil imports.

“While large companies, especially the multinationals, can fend for themselves, small and medium players in the

PVG Menon, president, ISA

electronics hardware industry need to be offered ‘hand holding support’ by the government,” says PVG Menon, president, India Semiconductor Association (ISA). Small companies need better financial terms on which they can access funds, especially working capital. Since capital goods used in the industry are prohibitively expensive, Menon suggests that the government should support the establishment of ‘incubators’ in the electronics clusters across the country, such as those in the national capital region (NCR), Sriperumbudur (near Chennai), Baddi in Himachal Pradesh, Bengaluru and Pune.

But financial help only in the form of subsidies, implicit or explicit, will not be enough. Sourcing from Indian companies could be a pillar on which strategic self reliance is built, feel experts in the electronics industry. Menon points to one estimate of government procurement of electronics equipment, including what was spent by the publicly owned Bharat Sanchar Nigam Ltd, which amounted to Rs 480 billion (Rs 48,000 crore). If, for instance, it becomes mandatory for 30 per cent of all government procurements to be from domestic players, it would be a way of supporting Indian capability in hardware, Menon says. The major players of the world, like the European Union, the US, China and Brazil, all have provisions that mandate that a certain proportion of national requirements be sourced from the domestic players. This will give an impetus to Indian companies, especially the small and medium ones.

Gautam Awasthi, GM, marketing, electronic measurement group, Agilent Technologies India

Compared to other countries in the region, India’s manufacturing sector contributes the least to the national GDP at 15 per cent. On an average, manufacturing accounts for 26-30 per cent of GDP in the region. It is a known fact that no major country in the world has become economically prosperous without going through long periods of manufacturing dominance. This is true for the US, and cannot be an exception for India. Currently, the manufacturing industry absorbs a meagre 12 per cent of the total workforce, which when compared to other countries, is very low.

“Electronics consumption in India is growing by a CAGR of about 23 per cent, while figures for 2012 are slated to be nearly US$ 9.86 billion. Of this, we would be spending US$ 4.71 billion on the import of components, which is nearly 50 per cent of the consumption,” points out Dr Pradip Dutta, chairman, ISA.

In verticals like mobile phones and telecom equipment, where, according to a recent TRAI report, India consumed about Rs 430 billion (Rs 43,000 crore) worth of products and services, the country’s import bill is on the increase, while the domestic industry has completely failed to gain from the growth, says Sanjay Naik, CEO and managing director, Tejas Networks.

According to Paresh Vasani, managing director, Circuit System India Ltd (CSIL), the country is missing the bus in terms of PCB manufacturing. “The PCB industry here comprises just 0.2 per cent of India’s manufacturing output, despite the quantum jump in consumption. We import most of the motherboards from China and

SA Srinivasa Moorthy, VP, design engineering, India Design Centre, Sanmina-SCI Technology India

other far eastern countries, and not one of the world’s top 200 companies has shown interest to set up business in India due to almost total absence of infrastructure and lack of quality standards,” he says.

For manufacturing to become a strong pillar and help balanced growth within the country, it is imperative that there is a strong policy framework to support the growth of this sector. Will the National Policy on Electronics (the final policy is expected in December, this year) and the National Manufacturing Policy (which received the Cabinet’s nod) be the game changers? There have been mixed reactions across the electronics industry. While industry representatives see these two policies as a move in the right direction, let’s find out more about their expectations, appreciation and disappointments, regarding these policies.

 

THE EXPECTATIONS…

The electronics industry is divided over the National Policy on Electronics and the National Manufacturing Policy. While some feel that this initiative of the government is commendable, and could result in increased manufacturing and in the overall growth of the industry, others see the policies as an eyewash.

The industry has raised some issues at regular intervals with the government to create an enabling environment for the growth of Indian manufacturing. One

Paresh Vasani, MD, Circuit System India

important item on the wish list has been a comprehensive manufacturing policy for the electronics industry that addresses issues like high transaction and compliance costs, inadequate infrastructure, rigid labour costs, stringent exit mechanisms, and lack of skilled manpower, all of which are further compounded by high inflation, rising interest rates, and current global and domestic uncertainties.

“The need of the hour is a structured plan to grow the local electronics industry. The government has to play the role of an enabler to encourage the local electronics industry in scaling new heights. Creating the right ambience for growth is the prerogative and duty of the government, as an empowered electronics industry will act as the game changer for GDP growth,” opines Deepa Doraiswamy, industry manager, electronics, Frost & Sullivan, South Asia and Middle East.

According to Sujay Santra, founder director, Ikure TechSoft (P) Ltd, there should be special focus on manufacturing quality products that can help the industry compete globally. “Special emphasis should also be given to develop the next generation of technologies related to green energy like solar power, etc,” he adds. 

THE RIGHT MOVE, say some…

Many industry representatives welcomed the objective and intentions of the Draft National Policy on Electronics, as this is the first time that an attempt has been made to establish clear targets for the growth of the electronics industry in India. “The idea of electronics manufacturing clusters and identifying sectors for developing core competencies are appreciable points,” says Gautam Awasthi, general manager, marketing, electronics measurement group, Agilent Technologies India Pvt Ltd.

ELCINA has also welcomed the draft policy, as it outlines the much needed impetus required for electronics manufacturing to act as an enabler of economic growth and prosperity. “The document specifies that its vision is to transform India into a global hub for ESDM so as to meet the growing domestic and global demand. The announcement of providing a Modified SIPS (M-SIPS) is welcomed, as it aims to eliminate most of the disability factors that plague the industry,” says K Srinivasan, secretary, ELCINA.

ELCINA has also appreciated the document’s emphasis on creating a pool of trained manpower, developing and maintaining standards to curb sub-standard

products, and enabling R&D to attract some of the best brains and enhance product quality. “These measures announced by the government convey its seriousness

Sujay Santra, founder director, Ikure TechSoft

and that its priority is to boost electronics manufacturing, which was sadly lacking for many years. The decision to rename the department as the Department of Electronics and Information Technology (DeitY) will help to enhance the role of electronics as a creator of national wealth,” adds Srinivasan.

Many also feel that this government initiative could result in increased manufacturing and in the overall growth of the industry. “I strongly feel that this policy will boost electronics manufacturing in India. Almost every point in the draft is important and is linked with others. Some significant points relate to developing a local supply chain specially for wafer fabs, preferential markets, simplification of tax structures, skill development, and so on. However, the need of the hour is to execute this fast as we are lagging behind the competition. It should not get delayed or lost due to any differences within the government; it has to be looked upon as an integrated approach to boost the Indian economy,” opines BN Shukla, head, quality and Lean Six Sigma, Jabil Circuit India Pvt Ltd.

Rajiv K Bapna, director, Amkette, also feels that if implemented properly, the policy can boost the design and manufacturing environment in India. “The policy is well drafted with clear objectives. The strategies listed are comprehensive and reflect the basic understanding of growth realities, addressing the entire electronics ecosystem,” he says.

Dr Pradip Dutta, chairman, ISA

The component manufacturers are also hopeful that by working in clusters they can reduce the cost of power consumed while manufacturing. “Also, the various monetary schemes that the government is proposing will bring down the cost of borrowing. With economies of scale, we will be able to compete favourably with the Chinese imported components like capacitors,” says Anil Bali, vice president, Deki Electronics Ltd.

According to Aditya Arora, chief operating officer (COO), Base Corporation, the draft policy is the thrust that is required to nudge the electronics industry forward, and the points related to ensuring employment to 28 million people in the electronics sector, the setting up of over 200 electronics manufacturing clusters, the creation of an ‘Electronic Development Fund’ to promote innovation, R&D and commercialisation in ESDM and nano-electronics, are welcome points.

“The policy is a good start and will give a much needed fillip to the domestic electronics and systems design industry. Its focus on creating intellectual property (IP), the lack of which has been the primary reason for many good companies not being able to move ahead, will be beneficial for the industry. The intent to provide a stable tax regime is also a good move,” says Biju Bruno, managing director, Greenvision Technologies Pvt Ltd.

BN Shukla, head, quality and Lean Six Sigma, Jabil Circuit India

Measures like the Electronics Product Development Fund focus on talent development. The preferential market access to local products has also been appreciated by the industry.

 

SOME DISAPPOINTMENTS…

One section of the electronics industry has expressed its strong disappointment over the draft policy, stating that it is too little, too late. Moreover, it is not a comprehensive policy, as it largely addresses the ESDM, with a thrust on domestic R&D and IP. “The policy does not suggest any measures to boost the electronics components manufacturing sector. Some issues need immediate attention from the government—the dumping of low cost components by Chinese suppliers must be checked, and a duty must be levied on imports to compensate the injury caused to Indian manufacturers. This will enable local manufacturers to improve their ROI. It should, therefore, be mandatory that 50 per cent of the components used by domestic electronics product manufacturers be made in India,” points out Mukund Shah, president, IPCA.

Sharing his disappointment, Pankaj Gulati, executive vice president and COO, Continental Device India Ltd, says that the government is trying to attract only the MNCs, while ‘killing’ the domestic manufacturers. “When one can import duty free components, then why will one manufacture components in India? Components

Rajiv K Bapna, director, Amkette

manufacturing will never take off in India,” he says. However, he feels that since PCB manufacturers will benefit to some extent, EMS companies

will also benefit from the policy as they manufacture PCBs. Regarding LED lighting, he believes that in 5-7 years, the market will pick up, but it is difficult to start LED manufacturing in India.

Aditya Arora also feels that the policy is “too far fetched”. “The draft policy seeks to address the major barriers, which include lack of a strong base, an adverse international environment and the failure to build an enabling ecosystem. This, if well rolled out, will take care of many policy issues that lagged for a long time. But it seems a bit far fetched at this stage,” he says. Arora also points out that many areas have been left untouched in the policy. How exactly the policy plans to cater to the battery industry is something that is not outlined in detail. Adds Biju Bruno, “The policy talks about too many things and there is too much to accomplish. It would have been much more effective if the policy focused on a few key areas like infrastructure for EMCs, tax benefits, a stable tax regime and human resource development.”

Anil Bali, VP, Deki Electronics Ltd

Raj Kapur, CEO, JCT Electronics Ltd, is of the opinion that the draft policy on electronics is silent on a structured roadmap to achieve the goals. He says the policy needs to be made more specific and more emphasis should be laid on application engineering. “The policy mentions that attractive fiscal incentives

across the value chain of the ESDM sector through a modified incentive package scheme will be offered. However, it is silent about the method of quantifying the same and also on the impact of changing government policies, particularly in relation to the WTO requirements. For example, recently, the Duty Entitlement Pass Book (DEPB) scheme was withdrawn, as it was not WTO compliant. So all future fiscal incentives need to be WTO compliant,” he says.

The manufacturers’ community also feels that a specific focus on R&D is needed. The policy does not encourage the providers of basic raw materials like magnet wires, ferrite cores and plastic parts. It mentions that requisite incentives may be provided by streamlining the procedures and logistics to facilitate imports of components, sub-systems and the import of products. Such a policy framework has a high risk of being misused and at times works as a disincentive for investment into core technologies, says Raj Kapur. Also, there is no incentive or benefit for the export of electronics hardware for consumer electronics, points out Satish Gupta,

Aditya Arora, COO, Base Corporation

director, GSP Electronics.

PCB production is a capital incentive business and, hence, there is a higher interest on capital costs (which is 14 per cent in India and 8 per cent in China), while the power tariff constitutes a major portion of the cost in manufacturing. The policy measures announced by the government do not address these issues faced by the exporters. “The policy did not speak about relief on the interest on capital costs nor about lowering the power tariff, which can make Indian PCB

industry globally competitive,” says Mukund Shah of IPCA.

N Chandramohan, country head (SMT division), Juki India Pvt Ltd, points out that the policy does not mention the real numbers. In particular, the inverted duty structure has not been mentioned, besides which, it is not clear how and by when the policy will be implemented.

Uma Reddy, president, CLIK, points out that the policy lacks a special focus on SMEs. “The success of this policy would lie in the speedy implementation of thestrategies, schemes and programmes within a given time frame,” she adds.

Biju Bruno, MD, Greenvision Technologies

The policy has not given due consideration to independent innovators. The need of the hour is to give special attention to innovators, particularly from the grassroots level. “Only giving attention to PhDs and higher education is not enough. For sincere implementation of this policy, parallel implementation programmes with yearly targets are needed,” says Mandar Thite, inventor of the photo clipping machine. Neither does the policy speak much about LEDs, solar PV and medical electronics, which are considered as the future of the electronics industry.

SOME APPREHENSIONS…

While the draft policy elicited mixed reactions, it has also raised some strong apprehensions. Many expressed grave doubts about its implementation strategies and its ‘too many’ thrust areas. “There has to be a focus on yearly targets and achievements, with a definite time frame. But the policy has not touched upon any time limit; it has not even mentioned the time limit within which the government needs to respond to an application for a project,” says Dr Suresh Nair, CTO, SFO Technologies. Vishal Borker, CEO and technical director, NextBiT Computing Pvt Ltd, also shares the same view. “We need to see what kind of strategies are in

Mukund Shah, president, IPCA

place to ensure that the actual benefits reach the industry. Today, we are unable to compete with Chinese ODMs due to the high cost of material components, which need to be imported. This disparity needs to come down tremendously with government support, if we want to build a significant local manufacturing ecosystem.Meanwhile, the policy’s aim to increase the fund flow for R&D and enable venture capital (VC) for startups should not make us over dependent on VC funding. It would be a good idea to create an umbrella organisation that is as active as NASSCOM, but is specific to this industry.”

STILL HOPEFUL…

The industry, however, unanimously feels that actions speak louder than words, and is hopeful that the policy will be implemented fast. “Success would depend on implementation and clearly defined time lines to achieve these aggressive milestones,” concludes Gautam Awasthi.

Highlights of the Draft National Policy on Electronics 2011

  • To achieve a turnover of US$ 400 billion by 2020 involving investment of about US$ 100 billion
  • To create employment for 28 million people
  • To increase export in the ESDM sector from US$ 5.5 billion to US$ 80 billion by 2020
  • To enhance the availability of skilled manpower in the ESDM sector
  • To develop standards and certifications for electronic products and services
  • To develop core competencies in sectors like automotive, avionics, industrial, medical, solar, information and broadcasting, etc, through use of ESDM in these sectors
  • To use technology to develop electronic products catering to domestic needs and conditions at affordable price points
  • To bring in a Modified Special Incentive Package Scheme (M-SIPS) to eliminate the disability costs in manufacturing on account of infrastructure gaps relating to power, transportation, etc, and to mitigate the relatively high cost of finance, etc
  • To facilitate the setting up of semiconductor wafer fab facilities with an ecosystem
  • To provide preferential market access for domestically manufactured electronic products
  • To provide incentives for setting up over 200 electronic manufacturing units
  • To establish a stable tax regime conducive to attract global investments
  • To provide for a 10 year stable tax regime for the ESDM sector
  • To aggressively market India as an investment destination for ESDM
  • To focus on exports to generate volumes and economies of scale by providing requisite incentives and by streamlining procedures and logistics
  • To create an Electronic Development Fund to promote innovation, IP and R&D
  • To encourage usage of LED lighting solutions
  • To facilitate environment friendly e-waste handling policies
  • To set up a National Electronics Mission with industry participation
  • The Department of Information Technology to be renamed as Department of Electronics and Information Technology (DeitY)

NATIONAL MANUFACTURING POLICY

The recently approved National Manufacturing Policy aims to increase the sector’s share in the economy to 22 per cent and create 100 million jobs over 10 years.

Uma Reddy, president, CLIK

Among the key instruments for realising these goals is the setting up of the National Investment and Manufacturing Zones (NIMZ). The minimum land area of each NIMZ is to be 5000 hectares. The first phase of the NIMZ will be established along the Delhi-Mumbai industrial corridor, which will see early results in the next few years. Initially, seven such zones will be created. The first three will come up in Maharashtra, Rajasthan and Gujarat.

The policy also offers a host of fiscal incentives mainly for micro, small and medium enterprises. A ‘tax pass through status’ for venture capital funds will be available if they focus on manufacturing. It also offers fiscal incentives for manufacturing units that are located outside the zones. Units located within the zones would get additional incentives. However, the incentives would be given on a case to case basis depending on the preparedness of a particular state that wants to attract industry and make it a manufacturing hub.

Other significant features are the single window clearance mechanism to cut red tape and the high priority for skill development. The private sector will be given a

Vinod Sharma, MD, Deki Electronics

standard deduction of 150 per cent of expenditure for skill development institutes.

The focus will also be on ‘green manufacturing’. In this regard, a Technology Acquisition Fund will be set up to acquire global technologies and build a patent pool

Mandar Thite, inventor of photo clipping machine

especially for equipment manufacturing that seeks to reduce energy consumption. SMEs will be given access to this patent pool to acquire patented technologies with the aid of up to a maximum of Rs 2 million (Rs 20 lakh).

The promoters of SMEs, which will be located both inside and outside the zones, will be given relief from long term Capital Gains Tax on the sale of a residential property if the proceeds are invested in setting up a new SME firm in the manufacturing sector (the funds have to be used for buying new machinery and setting up the unit). SMEs that are involved in green manufacturing will be getting more fiscal sops.

Reactions from the industry

Raj Kapur, CEO, JCT Electronics

The reception to this policy has been warm, and now the focus needs to be on its implementation. Electronics Bazaar tried to find out if the electronics industry’s expectations would be fulfilled through this policy.

“The implementation of the National Manufacturing Policy could go a long way in generating employment in the country and achieving our growth aspirations. The

Dr Suresh Nair, CTO, SFO Technologies

quick finalisation and announcement of the policy is critical to raise the falling business confidence and help the manufacturing sector come out of the slowdown and moderation phase,” states B Muthuraman, president, CII.

According to S A Srinivasa Moorthy, vice president, design engineering, India Design Center, Sanmina-SCI Technology India Pvt Ltd, the National Manufacturing Policy will help in reducing our dependence on the imports of electronics hardware, at least for large volume consumer goods, to a great extent. However, this policy needs to remove some obstacles. Currently, customs clearance outside SEZs is an issue and this is increasing the time to market. This has to be addressed, he says.

Will the policy boost electronic components manufacturing in India? “For components, it will be a mixed bag. It may not make much impact on electronic

Satish Gupta, director, GSP Electronics

components like ICs and semiconductors, but the policy will boost the mechanical and electromechanical component industry, where it is not economical when you import. So this policy will help the component industry in this sector,” explains Srinivasa Moorthy. “In India there is a requirement for low volume high mix (LVHM) manufacturing, and small tier II and III EMS vendors will benefit from this policy,” he adds. Srinivasa Moorthy, however, points out that the policy misses out on some major issues:

  • The EMS industry needs people trained in SMT and other current manufacturing skills, and there is no plan to address this skill gap Similarly, current engineering institutes focus only on software and there are not enough hardware designers, especially mechanical designers, and the policy does not address this.
  • For easy availability of electronic components, there should have been local bonded warehouses where the large distributors can keep their stocks, pay duty and sell, in order to reduce the shipment delays and customs processes.
N Chandramohan, country head (SMT division), Juki India

According to Vinod Sharma, managing director, Deki Electronics Ltd, there are certain issues with respect to hardware manufacturing because of which India is lagging behind China and the new policy has addressed these issues very well. These are higher costs of power, land and lack of skilled manpower. “However, the government should have kept a long term view with regards to the policy to make sure the new measures are actually implemented within a set time frame. It is also important to have a consistent policy so that there are no changes made once the new measures are implemented. This policy is also silent about issues like labour laws, and finance requirements of the SMEs. It still doesn’t have any provision to make sure that SMEs get cheaper finance,” he says.

Industry representatives are also concerned that the basic benefits under the policy will be available only to select firms who put up in the proposed NIMZs. The rest of the companies, which will not operate from such a zone, will be deprived of the additional benefits. So, there is a good possibility that only a group of specially privileged manufacturers will be created.

Another concern is that the policy has made it easy for the companies working from NIMZs to hire and lay off workers. In other words, there would be an easing of the existing labour laws. As a result, it will be easier for those units to deal with labour problems, but at the same time this may result in labour exploitation.

The industry is also concerned that if it has taken two years to frame the policy, will the government be able to implement the measures in a limited time frame?

Implementation is the key challenge, with a comprehensive long term agenda

Rajoo Goel, secretary general, ELCINA

Global experience shows that clustering and agglomeration of manufacturing units provides distinct advantages as it gives substantial economies of scale in the use of industrial infrastructure, enhances supply chain responsiveness, provides easier access to market and human resources, and substantially lowers logistic costs. This concept was operationalised earlier by the government through special economic zones, which catered broadly to the export sector, and cluster development schemes were formulated for the SMEs. The new manufacturing policy attempts to further broadbase these efforts by using the cluster approach as one of the key instruments to catalyse the growth of manufacturing as a whole.

Implementation of the policy is as important as policy making itself, as unless properly implemented, the policy by itself will not deliver the desired result. State governments would need to be equal partners in giving effect to this policy.

Basic change in our national strategic thinking is required

Rajiva K Srivastava, director, Su-Kam Power Systems

The National Policy on Electronics has some very desirable objectives, which could develop a very strong ESDM sector in India with a focus on both the domestic and global markets. For this to happen, a basic change in our national strategic thinking is required—not just by the government but also by our scientists, academics and industry leaders.

Leveraging country’s buying power

While India has enhanced its presence in knowledge driven industries like embedded software, chip design and software development, it has generally lost the initiative in the field of manufacturing to many competing economies of East and South East Asia. This is as much true of manufacturing in electronics as in other consumer and capital goods. The proactive approach of the governments in countries like China has contributed to their success story. There are many instances where the Chinese government has leveraged the country’s buying power, particularly in high technology areas, to compel multinational companies to enter into technology transfer agreements with home grown Chinese firms and source 50 per cent of the products from them if they are to successfully access the local market.

Since global companies will be keen to get a share of the US$ 400 billion Indian electronic and communication goods market, we too can leverage our buying power in the interest of developing India as a major hub for ESDM sector. A proactive government initiative that encourages the growth of the domestic ESDM industry, using the buying power of the nation, is a must. The government should use policy tools like mandatory domestic value addition and technology transfer in all sectors, including consumer products, automobiles and strategic segments like space and defence. The initiative by the government in leveraging our market of 20 GW grid-connected and off-grid solar systems by making the use of domestically produced cells and modules mandatory in photovoltaic power plants, has already given a major boost to the local industry. The government will do equally well if it encourages such moves for electronic power conditioning units, inverters and charge controllers for use in solar projects.

Fiscal and financial support

Special incentive packages must be developed that make the return on investment attractive as was done with the earlier SIPS scheme, which provided a 25 per cent capital subsidy to manufacturing investments meeting certain conditions. Additionally, in the initial stages, the Indian industry would require fiscal support that encourages domestic manufacturing and discourages the import of final products, especially where we have the capability to manufacture them.

Differentiation on technology

I would argue in favour of developing a strong alliance that connects research labs, academic institutions and the domestic industry. This would help us to assimilate technology that the country leverages through its buying power in electronic products and systems, and build national differentiation in terms of technology and quality, rather than just on cost. Such initiatives would, of course, require efforts by the Indian industry as well as the scientific and academic community, with the government providing the necessary encouragement and support.

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

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