Lack Of A Strategy Is Hampering Local Production Of Electronic Components


The Indian electronics industry is highly dependent on China and other Asian countries for the components it needs, the import of which accounts for approximately 80 per cent of the finished product. The manufacture of these components in India is still at a nascent stage, and that must change soon, say the experts. There are a number of schemes the government has introduced in an effort to boost local manufacture, but these are taking time to bear fruit as the industry faces quite a few challenges still.

By Nijhum Rudra

With the outbreak of the coronavirus pandemic, many countries, including India are worried about the availability of chipsets and other essential electronic hardware components, as most of these were being supplied by China. Both the US and India are now looking to set up manufacturing bases on their own soil to reduce their dependence on China and other Southeast Asian countries. The government of India has taken up electronics hardware manufacturing as a priority because it is one of the most pivotal elements of the Make in India programme. As we depend excessively on other countries for up to 80 per cent of the components required, the government now plans to enhance the electronics supply chain and implement policies that will substantially increase domestic value addition.

In 2009, MeitY had assessed India’s electronics market and pegged demand at US$ 45 million back then, with an estimate that this would grow to US$ 400 billion by 2020, which we are soon to witness by the end of the year. Many experts also feel that the growth could have been more if the coronavirus had not impacted the ecosystem.

Rajoo Goel, secretary-general ELCINA, says, “The EMS sector in India is largely dependent on imported components and other inputs. The domestic as well as international supply chain has been adversely impacted due to the COVID-19 crisis. It may take at least two to three quarters to return to normalcy as the manufacture of components and the logistics networks have been disrupted across the globe. Component suppliers are committed to regularise supplies to EMS companies in their own country first and then to the larger buyers. As the Indian EMS industry is dependent on the supply of components and PCBs from global suppliers, it is facing hurdles and is likely to take longer to regularise supplies.”

Since the government is now determined to ensure that India becomes a global ESDM hub, all the stakeholders have felt the need for reliable data on domestic manufacturing, electronic components, and the equipment market. This will be crucial to assess the current condition of this sector, before finding out appropriate solutions for its sluggishness, which will ultimately boost investments in the hardware component industry.

According to ELCINA, the electronic components produced in India include, among others, picture tubes, diodes, transistors, power devices, resistors, capacitors, switches, relays, connectors, magnetic heads, etc. Currently, local manufacturing is dominated by electro-mechanical components (like printed circuit boards, connectors, etc) and passive components (like wound components, resistors, etc). However, active components (like integrated circuits, diodes, etc) and optical discs, magnets, RF tuners, etc, are also being manufactured locally now.

Lack of strategy in electronic hardware components manufacturing
In spite of numerous policies, initiatives, and investments unleashed by the government of India, experts feel that the electronics hardware industry remains dependent on imports and also suffers from scores of disabilities. According to the Manufacturers Association of
Information Technology (MAIT), the basic problem is that the country still requires a crystal-clear exports-driven electronics hardware manufacturing strategy. The key to success on this front is for giant component manufacturers to find it feasible to set up their production bases in India. This is critical because the sector is exports-driven and price-competitive.
With this goal, over the past decade, the government had launched two important schemes—the Modified Special Incentive Package Scheme (MSIPS) in 2012 and the Merchandise Exports from India Scheme (MEIS) in 2015. But, on December 31, 2018, MSIPS was discontinued, while recently at the WTO, the MEIS was challenged by several countries. Nonetheless, the government needs to launch another policy that can attract major global electronic hardware brands from South Korea, Vietnam and China to ‘Make in India’. According to MAIT, there is also a need for tax rebates or financial incentives, particularly for domestic electronics hardware component makers, such as the elimination of taxes embedded at various levels of the value chain and in the export of products. MAIT has recommended a rebate on state and central taxes and levies, and a tax holiday for those entering the electronics manufacturing industry for the initial five years, following which a corporate tax of 15 per cent should be levied. It has also recommended production based incentives on components that are meant for domestic consumption and those exported from India.

Though many major global companies are opening their manufacturing units in India, in the case of PCs/laptops, India still relies excessively on imports due to several issues like no incentives on exports and no domestic production. According to MAIT, India’s PC penetration is only 15.5 PCs per 1,000 people, vis-a-vis 784 per 1,000 in the USA and 41 per 1,000 in China.

The obstacles faced by electronics hardware manufacturers
At a recent ASSOCHAM conference on electronics manufacturing, the ex-central Minister of State for Corporate Affairs, as well as Law and Justice, P.P. Chaudhary highlighted that demand for electronics hardware is expected to continue growing and hence offers huge investment opportunities. He added that there is a requirement to develop a commercially viable research ecosystem funded by the government, industry and academia to promote the next wave of innovations in electronics technology, within the country. There are a number of other challenges faced when manufacturing electronic hardware and components, as pointed out by ELCINA:

  • The government has allowed zero-duty imports of inputs/components for the assembly of high volume and high growth products such as mobile phones, PoS machines, micro ATMs, set-top boxes, etc, which has depressed local demand for components and discouraged new investments in the segment.
  • There are many tedious processes and obligations involved to avail benefits under Customs Notification 25/99 on inputs for the manufacture of components. This issue has never been fully resolved, though some changes have been made in the rules.
  • The high cost of finance is a big disadvantage for local manufacturers, and this cost increases as value addition increases due to the greater requirement of capital.
  • Duty-free imports of PCBAs reduce the demand for domestically manufactured PCBs and components. Now, the government has imposed custom duty on some PCBAs, but a majority are still imported at zero duty as inputs for ITA-1 equipment and data processing products. It has long been suspected that a large share of PCBAs that are liable for duty are misdeclared and imported at zero duty.
  • The existing component manufacturing ecosystem in the country lacks global scale and capabilities and thus remains uncompetitive. It needs a big stimulus to attract both domestic and foreign investors, with an injection of new technology so that the segment can grow rapidly and achieve economies of scale.

Several other challenges have emerged due to the COVID-19 crisis. These include major changes in demand patterns, compared to what was planned for. Seasonal demand for products that witness an upswing in Q1 has been deeply compromised. Costs are rising due to production inefficiencies, which are likely to continue for the foreseeable future, along with delays due to staggered supplies from different vendors and increasing overheads across the supply chain.

The role of the government in boosting component manufacturing
ELCINA points out that the government has been proactive in encouraging electronics manufacturing in the country. It notified an upgraded and revised National Policy on Electronics in 2019 and implemented various schemes under this umbrella. These policies are meant to provide capital investment and production incentives to set up modern infrastructure with plug-and-play facilities for the electronics sector. This will help in attracting domestic and international investments, and move Indian electronics manufacturing up the value chain. The schemes announced to encourage the sector are listed below.

—Rajoo Goel, secretary-general, ELCINA

“While the Central government has recommended a long awaited change in the definition of MSME industries and businesses, I feel that this change is not adequate and needs to be brought in line with global benchmarks. The revised government definition is a maximum capital investment of ₹ 200 million and a sales turnover of ₹ 1 billion for medium-sized units.

We at ELCINA recommend a sales turnover based criteria with a minimum limit for capital investment, with the objective of ensuring that trading and manufacturing can be distinguished and benefits provided accordingly. We believe that manufacturing needs much greater focus and support, and trading MSMEs should not avail the benefits that are provided for manufacturing MSMEs. In view of this, we recommend the following:

Sales turnover Capital investment
Micro enterprises Up to ₹ 50 million Minimum ₹ 2.5 million
Small enterprises ₹ 50 million up to ₹ 750 million Minimum ₹ 20 million
Medium enterprises ₹ 750 million up to ₹ 2.5 billion Minimum ₹ 100 million

Additionally, ELCINA has recommended a minimum incentive under MEIS at 4 per cent to promote the export of components. Other key recommendations include providing efficient infrastructure with plug-and-play facilities, support to MSMEs in testing and certification to global standards, and an Innovation and Technology Fund for the acquisition of contemporary technologies.

Production Linked Incentive Scheme (PLI) for large scale electronics manufacturing

  • This scheme offers a production linked incentive to boost domestic manufacturing and attract large investments in mobile phone manufacturing and specified electronic components, and it covers assembly, testing, marking and packaging (ATMP) units.
  • Offers a 4 per cent to 6 per cent incentive on incremental sales (over the base year) of goods manufactured in India which are covered under the target segments, for a period of five years. The target segments are mobile phones and specified electronic components.
    Under this scheme, the government has budgeted for an amount of up to ₹ 409.51 billion to be disbursed over a period of five years.

Scheme for Promotion of manufacturing of Electronic Components and Semiconductors (SPECS)

  • This scheme will provide an incentive of 25 per cent on capital expenditure pertaining to plant, machinery, equipment, associated utilities and technology, including R&D for the identified list of components, semiconductors, ATMP units, specialised sub-assemblies and capital goods.
  • The government has earmarked an outlay of ₹ 32.85 billion, which can be awarded over a period of eight years.
  • The scheme focuses on high value added manufacturing, the lack of which hampers the design, development and assembly of the downstream value chain of electronic products.
    The scheme will be applicable to investments in new units and for the expansion of capacity, as well as the modernisation and diversification of existing units.
  • Modified Electronics Manufacturing Clusters Scheme (EMC 2.0)
    The EMC 2.0 scheme is a successor to the EMC Scheme of 2012 with the objective of setting up world class infrastructure for electronics manufacturing in clusters (with a minimum area of 200 acres) along with industry-specific common facility centres, ready to use factory sheds (plug-and-play facilities), social infrastructure, etc.
  • The scheme will provide 50 per cent of the project cost as a grant, subject to a ceiling of
    ₹ 700 million for every 100 acres of land for common infrastructure development.
  • Apart from providing for the common facility centres (CFC), it also offers financial assistance of up to 75 per cent of the project cost, subject to a ceiling of
    ₹ 750 million.
  • The government has earmarked a budgetary outlay of ₹ 37.62 billion for this scheme over a period of eight years. The scheme is expected to create around 1 million direct and indirect jobs.


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