Is NPE 2.0 the silver lining in the dark cloud hindering Indian manufacturing?

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In order to establish India as a manufacturing hub for electronic products, the government has come out with a draft National Policy on Electronics 2018. Though the draft is still in the approval stage, this article looks at whether the policy can boost the electronics manufacturing ecosystem in the country.

Indians have wholeheartedly embraced electronic products. This can be seen from the rising electronics imports, which have doubled in the last five years. The traditional love for gold in India has been seemingly overtaken by the love for electronic products and gadgets like mobile phones, cameras, iPads and smart wearables, as well as consumer durables such as washing machines, air purifiers, etc.

Though the booming demand in India for electronic products might be great news for retailers, the fact is that the country’s electronics industry is still struggling to catch up with the rest of world. Most components for electronic products such as mobile phones are being shipped to India from other countries, primarily from China. Thus, there are a lot of opportunities lost due to the country’s dependence on imports, leading to less value addition in the entire electronics manufacturing chain. According to a PriceWaterhouse Coopers (PwC) report, domestic value addition in manufacturing in India is below 50 per cent for appliances and consumer electronics products and only 7 per cent for smartphones – which is far less than the global average.

And if we go by the consumption trends, the insatiable desire for electronic products is only going to increase even more sharply in the coming years in India. Hence, the Indian government needs to take immediate steps to boost the local electronic components manufacturing industry to feed domestic production. This can prevent the high import of electronic products. Currently, the manufacture of mobile handsets has emerged as a flagship segment in the Indian electronics manufacturing space.

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Recently, the central minister for electronics and IT, Ravi Shankar Prasad, said that the production of electronics hardware in India has grown three-fold in the last three years. Manufacturing is not something that can be done in isolation, but is part of a larger narrative. The government is aiming to transform Indian society through the application of technology.

Prasad pointed out the huge potential for electronic products in India, saying, “There is a huge consumer base waiting to lap up new electronic products—from TVs, refrigerators and washing machines, to mobile phones, LED lights and unconventional energy products.”

Tapping the huge potential
To leverage the huge potential of the domestic industry, the government of India is looking to capture a larger chunk in the entire electronics manufacturing value chain. Hence, the Ministry of Electronics and Information Technology (MeitY) came up with the new draft National Policy on Electronics 2018 (NPE 2018) or NPE 2.0 for the electronics systems design and manufacturing (ESDM) sector, on October 10, 2018. This new policy draft is the revised version of the existing NPE 2012. Prior to finalising the NPE 2018, the government is having the widest consultations possible with industry and all the stakeholders.

  • The new policy is still in the draft stage; so the questions that arise include the following:
    How will the new policy give a push to the manufacturing ecosystem in India?
  • How will the target set in the policy draft be achieved?
  • What are the electronics industry’s expectations from the policy?
  • How will NPE 2.0 boost investments and R&D in the electronics industry?

To know the answers to these questions and many others, let’s take a detailed look at the draft NPE 2.0 and analyse the industry’s take on it.

The NPE 2018 is the outcome of the roadmap created under NPE 2012, which recognised the electronics industry’s unique dynamics, as well as its considerable opportunities and structural challenges. The 2012 policy paved the way for the Indian electronics sector’s development. The NPE 2018 draft is focused on upgrading the infrastructure, offering incentives to offset disabilities, encouraging innovation and developing human resources.
The NPE 2.0 draft states that the approximate global production of electronics was US$ 1.74 trillion in 2017. Electronics hardware production in India has increased from ₹ 1.9 trillion in 2014-15 to an approximate ₹ 3.9 trillion (US$ 59 billion) in 2017-18, witnessing a compound annual growth rate (CAGR) of 26.7 per cent, as compared to a growth rate of just 5.5 per cent in 2014-15.

The US$ 400 billion target: Ambitious or achievable?
The NPE 2.0 is aimed at positioning India as a global destination for ESDM by developing an enabling environment for the industry to compete internationally. The policy sets an ambitious target of creating a US$ 400 billion electronics manufacturing industry by 2025, with the mobile phone segment alone accounting for three-fourths of the entire electronics manufacturing output. This includes a targeted production of one billion mobile handsets, valued at around US$ 190 billion, with 600 million mobile handsets for export alone.

About the possibility of achieving the ambitious target in the NPE draft, Rajoo Goel, secretary general, ELCINA, says, “I think it is quite challenging to achieve the US$ 400 billion target by 2025, but I think we are moving in that direction.”

He adds, “However, the growth of the market is one thing and the growth of manufacturing is another. I think our market is growing faster than manufacturing. And a lot of growth recently has been because of the assembly of mobile phones in the country.”

On the other hand, Keerthi Laal, VP – policy and innovation, India Electronics and Semiconductor Association (IESA), is confident that the domestic industry will achieve the set production target. “Yes, we should meet this target, and optimistically speaking, we should exceed this target by some estimates. The localisation of a significant part of the ESDM supply chain along with the promotion of indigenous products, designed in India for Indian and global markets, will be key to achieving this target,” he states.

Why local manufacturing is essential for India
Recently, there have been growing concerns regarding security and data breaches worldwide. Therefore, it is essential for India to focus on the manufacturing of electronics hardware right down to the chip level. The new draft policy aims to promote local manufacturing in the entire ESDM value chain, including materials and core components. This is to increase the value addition and reduce the country’s dependence on imported electronic items by focusing on scale, technology and skills.

According to Laal, “The policy has tried to strike a balance between focusing on product design and on manufacturing capabilities, and the incentives thereof, in order to enable self-reliance in significant components of the ESDM value chain.”

R&D: A major need
The other major focus of the draft policy is to encourage research and development (R&D) in the sector as well as promote concept-to-market innovation for next-generation solid-state batteries and power electronics for electric vehicles, intelligent transport systems, drones, automation and personal safety devices.

The renewed focus on R&D in the sector has been welcomed by the industry. Laal says, “R&D support has been enhanced compared to previous policy efforts, which is welcome. We at IESA have confirmed to the ministry our intent to lead the growth of indigenous IP creation through a 10K IP effort. The ministry has kindly agreed to support this effort under the new policy and we look forward to launching this at the Vision Summit 2019 in February. The initiative will focus on the generation, protection and exploitation of 10K IPs in the next three years to give a fillip to indigenous R&D efforts.”

An emphasis on emerging technologies
With emerging technologies becoming crucial to the ESDM sector, the NPE 2.0 has laid emphasis on supporting a comprehensive ecosystem for startups in such technologies. The policy draft also stresses on leveraging 5G, the Internet of Things (IoT), artificial intelligence (AI) and machine learning (ML), and their application in various sectors such as defence, health, agriculture, automation and smart cities to solve real-life challenges.
According to Laal, “While the role these emerging technologies will play in our daily lives is clearly visible, these new technologies are evolving as we speak, both in terms of the technology itself and their applications.”

“The ESDM sector will be the key enabler for these technologies. In this context, the NPE 2.0 sets out to define standards by establishing a standards body. This is a welcome and much needed move, and we from IESA have volunteered to partner in and steer this effort,” Laal adds.

MSIPS: Vital but under-utilised
In the NPE 2018, the government is considering replacing the MSIPS with schemes that are simpler to implement such as credit default guarantees, interest subsidies, etc, in order to promote new units and expand existing units in the electronics manufacturing sector.
MSIPS or the Modified Special Incentive Package Scheme was introduced in 2012 to compensate the shortcomings in the domestic manufacturing domain. Under the scheme, there is a provision for a capital subsidy of 20 per cent for electronics companies situated in special economic zones (SEZ) and a 25 per cent capital subsidy for those in non-SEZ areas.
On the under-utilisation of MSIPS, Faisal Kawoosa, founder and principal analyst, techARC, says, “The draft NPE 2018 states the progress of the MSIPs, EMC, EDF and other initiatives that were introduced in NPE 2012, and clearly indicates underperformance. For instance, in all these years, the government has received investment proposals worth only ₹ 619.25 billion, out of which ₹ 409.22 billion worth of proposals have been approved. Unfortunately, actual investments are just worth ₹ 83.35 billion.”

Goel from ELCINA agrees and says, “In spite of being the most successful scheme, only 50 per cent of the target, or less, has been achieved under the MSIPS since 2012, because it became difficult to provide the funds to various projects.”

He explains, “This is due to the challenges related to coordination between the Centre and the state governments. Sometimes the state government is not on board and sometimes it is just an issue of the funds. I think these are the big problems with the MSIPS scheme.”
“The second version or NPE 2.0 is going to overcome the shortcomings which were there earlier, and the government is trying to do away with the direct payment of subsidies to the beneficiaries and give them benefits in some other way. For example, the government is talking about interest subvention or a credit guarantee scheme. We are also expecting exemptions in direct tax or corporate tax, at least for the exporters,” Goel adds.

The PMP success story
The increased manufacturing of mobile phones in India is the result of the Phased Manufacturing Programme (PMP), in which, the government had identified 12 components that are used in mobile phones to be assembled locally in phases until 2019-20. The PMP is aimed at promoting the indigenous manufacture of populated PCBs, camera modules, connectors, display assemblies, touch panels, vibrator motors and ringers in 2019-20.
According to Laal from IESA, “The aim of the NPE 2.0 is to build on the success of PMP for mobile manufacturing and introduce sim­ilar programmes for other segments, which is a welcome move. In parallel, there’s a focus on enabling horizontal aspects such as PCB manufacturing, EMS and ATMP (assembly, testing, marking and packaging) in the country, which will enable local value addition to increase. Aspects such as the promotion of startups, the setting up of centres of excellence (CoE), and a focus on sectors such as medical electronics, strategic electronics and automotive electronics will boost product design capabilities as well.”

NPE 2012 was launched to overcome the disadvantages that were being faced by the local electronics manufacturing industry. This policy did have some positive impact on the electronics manufacturing ecosystem, but there is still a lot that needs to be done. For instance, the NPE 2012 aimed for a turnover of US$ 400 billion by 2020 (which some said was ‘a very inflated number’) in local electronics manufacturing with an investment of US$ 100 billion in ESDM, and targeted generating employment for around 28 million people by that year. However, the NPE 2018 draft stretches the timeline to 2025 to achieve the same target.

Interestingly, the new draft mentions that 450,000 opportunities for direct and indirect employment were created in the past three years by 118 mobile manufacturing facilities, but it does not set any specific objectives regarding the employment opportunities and investments for the future.

Since 2012, several companies have opted out of their proposed investments made under NPE 2012 because of the slow pace of approvals when it came to the disbursement of incentives.

Also, investments committed under the Modified Special Incentive Package Scheme (MSIPS) were only around ₹ 914 billion as on April 2018 as against ₹ 1.57 trillion proposed previously.

A lot remains to be done
Though the government is talking about promoting domestic manufacturing of electronic products, the results on the ground are not too encouraging as the trade gap for these products is increasing with every passing year. According to data from the Ministry of Commerce and Industry, the trade deficit for electronic products has almost doubled in the past five years. The deficit for electronic goods stood at US$ 38.94 billion in the financial year 2017-18 as against US$ 18.86 billion in 2013-14. The steep rise in electronics imports required appropriate measures in the new NPE draft.

India’s share in the world’s electronics hardware production is a mere 3.4 per cent. And local electronics hardware production contributes just 2.3 per cent to the country’s gross domestic product. In 2017-18, the country imported US$ 53 billion worth of electronic goods. The demand for electronics hardware is likely to increase rapidly to around US$ 400 billion by 2023-24. Accordingly, the endeavour of NPE 2.0 is to promote ambitious government initiatives like Make in India and Digital India.

With the draft NPE 2018 still in the approval stage, it is to be seen how the final policy will turn out. The industry is waiting with bated breath. Will the NPE 2.0 establish India as a global destination for electronics manufacturing and attract international players to make the country their home? Is it really going to boost the electronics manufacturing ecosystem in India? The industry is waiting and so are we.

By: Aamir H. Kaki

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