The world today sees India’s economy growing into what’s expected to be one of the biggest global economies by mid-century. Although India is still viewed by manufacturers as an economy where the risks are higher and the business environment more problematic than other rival Asian countries, India does offer some advantages for investors/manufacturers. Analysts say that the legal framework in India that protects investment is one of the best in Asia. The country also offers an abundance of technical and managerial talent. Above all, it has the demographic advantage of a young, working age population that will keep growing well into the century.
By Srabani Sen
Friday, October 15, 2010: According to Sukhvinder Kumar, general manager, Elcoteq Electronics India Pvt Ltd, there are ample growth opportunities in the electronics manufacturing market in India due to the strong domestic demand and also due to its proximity to tomorrow’s markets like Africa and the Commonwealth of Independent States (CIS) countries. “The demand for electronics hardware is increasing in India at a fast pace and is estimated to reach US$ 400 billion by 2020. At the same time, the gap between the demand and local manufacturing will widen and can reach US$ 300 billion, if the necessary measures are not taken on time. This throws up a big local electronics manufacturing opportunity for anyone to grab. The major sectors driving this growth in India are telecom, consumer electronics, automobiles, defence, medical electronics and the EMS industry, the last of which is expected to grow at a CAGR of 9 per cent over the next five years,” Kumar reports.
India is changing fast. There is no comparison with what it was 10 years ago. So what prevents manufacturers from setting up production on Indian soil? Some manufacturers from the electronics industry not only shared the major challenges they face, but have also suggested some solutions.
“There is an urgent need to pay attention to these challenges and we need to find solutions very fast. There has to be a willingness and sense of urgency in the concerned government departments to solve these issues at the earliest,” says Kumar.
The burden of licensing and involvement of the bureaucracy has significantly reduced in India, since 2000. In terms of the companies’ perception of the burden, India is rated better than either China or Brazil, on business regulation. As Subhash Goyal, managing director, Digital Circuits Pvt Ltd, says, “Licensing is no more a requirement in India, after liberalisation. Only in very few areas of manufacturing or services, is a licence applicable, as in the case of 3G services, etc. But there are a lot of other formalities that have to be fulfilled before any industry can be started, which is a waste of effort, time and money. A few examples are registration with the department of industries, clearance from the Pollution Control Board, registration under the Factories Act, registration for VAT/CST, excise, service tax, etc.
Says Jagdeesha M P, VP operations, SRV Telecom, “There is lack of a standard procedure and no clear cut information about the formalities that are required to start manufacturing. Startups are in the dark as to what licence is required and what are the different requirements of the government departments. We need to depend on various consultants for these matters, to avoid penalties and legal hassles.”
Mukesh Gupta, managing director, Smile Electronics, points out, “A lot of procedures have to be followed for importing and exporting. These are very complicated and need to be simplified.”
Companies also complain of the time it takes to secure a wide range of approvals. One manufacturer reports that after many years of operation in India, the company has just secured an ‘approval agreement’, which is considered a routine agreement in any other nation. Companies are largely in agreement that one of the most significant regulatory burdens in India is related to labour legislation, which remains a significant drag on business.
As suggested by Jagdeesha, there should be one common body to handle all licence and registration related issues. This body should educate the industry, periodically.
“The procedure for imports and exports needs to be simplified for the smooth flow of business. The government should release a list of all the requirements by different government departments, from time to time,” says Gupta. Companies are in agreement that the government needs to simplify the bureaucratic procedures of securing approvals and cut down on the time taken to get them.
India’s commercial taxation system is unusually complex, especially where indirect taxes are concerned. While income tax, excise and customs duty are set by the Central Government, states and municipalities also levy their own taxes and provide discretionary exemptions to attract investment. Although the tax policy and many tax rates are set by the Centre, states and municipalities also levy their own taxes, which can often overlap with state taxes. A manufacturer has no option but to take professional assistance to understand the tax structure.
Says Goyal, “The rate of taxation in India is very high when compared to other countries. In some cases, it has a cascading effect, as well.The tax structure is also quite complex as many different types of taxes are levied, like CST, VAT, BED, cess, service tax, surcharge, entry tax, TOT, octroi, etc, and it becomes difficult for a small industry to understand and comply with all these regulations. Both the implementation of and compliance with these tax rules is quite difficult, as the regulations are not very clear and there could be different interpretations leading to legal proceedings. Besides this, tax rates are different in different states, giving rise to regional imbalances and confusion.”
As Madhusudan Mudgal, senior manager, business development, India, Flextronics, puts it, “The duty regime applicable to special economic zones (SEZ) is at par with imports; for example, on STBs, the BCD is 5 per cent for imports as well as what’s produced in the SEZ. This is a big disadvantage for manufacturers in India.”
N Jehangir, vice chairman and managing director, SFO Technologies, agrees, saying, “Presently, units operating in an SEZ are at a disadvantage when making DTA sales because of differential tax structure. While DTA units and EOUs are exempted from payment of custom duty, the SEZ units have to pay customs duty for the full value of the product. This is discriminatory, and SEZ units are not able to compete with EOU and domestic units, as they pay customs duty only on components imported and not on the whole product, as is the case with SEZ units.”
Says Goyal, “The government is aware of the problem related to the complexity in taxation. It is, therefore, implementing the goods and service tax (GST) to overcome this problem.” Under GST, there will be one single tax and this will replace many different types of taxes being levied at present. “The government should, however, ensure that the rate of GST is reasonable and at par with other developed countries. Implementation of GST should be simple and maintaining records should have the least bureaucratic procedures. If the rate of GST cannot be made at par with other developed countries, there should be incentive for exports and some sort of trade barrier for imports to provide a level playing field to Indian industry.”
According to Kumar, there is an urgent need to optimise the duty and tax structure. “The structure should incentivise and promote local manufacturing, which is not the case today. GST should, hopefully, be able to address this but one needs to wait and watch exactly what GST brings about, and in what time frame. The inverted duty structure should be put in place more dynamically. This means that the possibility of lower duties and taxes on inputs and components needs to be considered, whereas the duty rates for final products should be enhanced. This will reduce the cost of components and will encourage local manufacturing. Also, duties on input components and finished goods should be aligned.”
The special additional duty (SAD) on finished goods being imported is either refunded or exempted, and now rules are being framed to make the refund of SAD faster and more efficient. And in the case of local manufacturing, central sales tax, which is in lieu of SAD, is neither exempted nor refundable. This enhances the cost of local manufacturing. There should be a consideration where SAD and CST are treated at par and have no differentiation. Also, SAD on raw materials, components and machinery are eligible for Cenvat credit. However, in practice, these cannot be effectively utilised and, hence, keep accumulating in the balance sheet. There should be a consideration in the structure where these credits can be more effectively utilised.
Mudgal suggests a uniform duty rate for any product physically manufactured (whether in an SEZ or not) in India. “If a product is manufactured in a SEZ, all FTA incentives should be extended as the product is still ‘physically’ manufactured in India,” he says.
A decision to manufacture in India is quite likely to be affected by government policies. “Government policies are one of the major deterrents to entrepreneurs starting their ventures. There are many registrations required before an enterprise can be started. All the concerned departments have a bureaucratic attitude and harass the entrepreneurs rather than help them. These policies are also complex and difficult to implement. A lot of valuable time of the enterprise is wasted in complying with these complex requirements, which is totally non-productive work. Besides, tax rates are high, making Indian products expensive compared to imports from China, Vietnam, Indonesia, Malaysia, Thailand, etc,” explains Goyal.
Mudgal feels that policies on security related requirements for telecom equipment are not clear enough, which is what causes delays in procurement.
Says Gupta, “Even today, after so many years of liberalisation, in schemes for exports like EHTP, EOU, etc, one has to go through too many rules and regulations. A lot of time and money is spent on collecting and presenting data to authorities like EHTP, EOU, etc. The import and export rules and procedures are also very cumbersome and consignments are held at the airport for the slightest of discrepancies.”
Gupta also points out that grievance redressal procedures are virtually non-existent in matters regarding customs and excise. “The industry is at the mercy of the lowest level officials who interpret the laws and rules as per their convenience, and no escalation helps in the case of disputes,” he says.
Jehangir opines that government policies should encourage companies in India to set up state-of-the-art electronics manufacturing units in India. “As setting up these units is highly capital intensive, the government should participate in the investment and set up joint venture companies,” he says.
Gupta stresses that government rules and procedures should be simplified. “A procedure should be in place to ensure smooth clearance of consignments without any delay. Customs and excise matters should be customer friendly to avoid bottlenecks. And they have to provide solutions to the escalated problems, in case of disputes,” he adds.
Above all, the government lacks a good system to keep the industry informed about the schemes and plans it has put together for the benefit of the industry. There are some very good schemes for manufacturers, but there is no proper way to get to know about them or about the procedures to apply for them. Government websites are also inadequate and not user friendly. There should a very simple interface between the government and industry.
Weak infrastructure remains a significant cost factor for companies, although most infrastructure indicators are showing an improvement. Yet, there is little doubt that infrastructure is top of the agenda for corporate planners.
Goyal points out that for the efficient running of any industry, good infrastructure is of prime importance. Infrastructure helps in improving efficiency, quality, cost and service. The basic infrastructure for any industry comprises good roads, power, water, telecommunication, finance, raw materials, components and logistics. In India, availability of these facilities is not up to the mark, even in the established industrial estates.
The most significant infrastructure constraint for manufacturing is the unreliability of power supply, points out Kumar. On an average, a company can expect nearly 17 significant power outages per month, against one per month in Malaysia and fewer than five in China. At the same time, power costs are higher. “Transport is also a constraint, with road and rail systems deteriorating,” says Kumar.
This translates to two primary added costs, as a result of delays in distribution and delays at ports. Transport delays increase the cost of distribution, although companies believe that other factors also contribute to distribution difficulties.
“This is another area where the Chinese competitors have an advantage. With first class infrastructure, faster and safer movement of materials from place to place is possible in China, compared to India,” says Jehangir.
“Due to poor infrastructure, it takes days to clear imports and exports, resulting in further delays for customer dispatches,” points out Gupta. Imports are constrained by inadequate facilities at ports of entry. There are barely 2,000 miles of expressway throughout India, and distribution costs are correspondingly high.
Kumar says that the government has to speed up its building of highways. The targets of the National Highway Development programme should be achieved. India’s budget for building and maintaining roads is also less than that of its neighbours. For instance, China invests 2.5 per cent of its GDP on roads as compared to 0.3 per cent in India. This results in higher freight costs in India. Procedural bottlenecks in imports are also significant obstacles, and as a result the processing of imported goods takes a longer time. Kumar goes on to advise, “These improvements suggested are to provide world class infrastructure in identified manufacturing clusters. And they should include good road and rail connectivity to the nearest airport. There should also be a better dispute resolution mechanism for road development.”
According to Kumar, India’s infrastructure at airports and ports needs urgent attention. He says, “The ports are congested and inefficient, they need to be expanded and modernised. The target should be to remain ahead of the growth of traffic at ports, which is expected to touch almost 1000 million tonnes by 2012. Therefore, India’s ports need to significantly ramp up their capacity and productivity to meet this surging demand. Some ports rely on labourers to unload cargo from trucks and lug it onto ships. We need to have modern equipment for speedy and effective loading/unloading. There should also be proper warehouses at the local airports; dock space for cargo carriers to load and unload also needs to be increased.”
Power shortage and costs are really high, which creates a big challenge for local manufacturers to remain competitive. Adequate action therefore needs to be taken to improve this situation. Power shortage in rural areas is also hampering the penetration of consumer electronics products in rural areas. The peak electricity shortfall in India is 12.1 per cent. Power to industrial consumers is twice as expensive in India as in China. Due to frequent outages, most units need to generate their own captive power. There should be some clear subsidies to make the cost of power comparable to competing locations such as China. “Also, we need to push distribution reforms in the power sector through various policies and programmes,” suggests Kumar.
Mudgal suggests developing more integrated townships around industrial areas to attract the best talent. A long term policy with allocation of substantial funds is required to improve the infrastructure; only then can Indian industry expect to be competitive. Many companies point out that infrastructure difficulties remain critical, yet at the same time they see rapid improvement.
Over the last 15 years, India has changed much faster than many predicted. Yet, things are still not to the level that allow us to compete on a global scale. Unless a concerted effort is made by industry and the government to resolve these problems, India cannot compete with its rivals. (to be continued…….)
In the November issue, we will talk about some more challenges and their solutions.
Electronics Bazaar, South Asia’s No.1 Electronics B2B magazine