The government has recently announced its decision to select only domestically manufactured electronic goods for its various projects, each worth a billion dollars and at various stages of launch. As a result, it has asked global hardware makers to set up shop in India quickly, says a Times of India report.
To make the ‘Made in India’ cut, the value addition has to be 25 per cent in the first year and 30 per cent in the second year. Currently, electronics giants such as Samsung, LG, Dell and HP import 90 per cent of hardware parts. The value addition in electronics is a mere US$ 2 billion and the government expects a significant jump in future.
The question is will foreign companies play ball? Most companies are disappointed with the new government policy. They wanted a tax incentive-led manufacturing ecosystem to shift manufacturing bases to India.
“In the long run, the policy will give more opportunities for investment in manufacturing. But companies have reconciled to the fact that 25 per cent value addition in the first year is not possible, not even for competitors,” says Alok Bhardwaj, senior vice-president of Canon India and president of IT and electronics hardware manufacturers’ lobby, MAIT. He claims the government has no option but to procure the same way as it does now, at least for a few more years.
But government officials don’t buy this argument. “This is an industry where 100 per cent FDI is allowed. If established players hesitate, new ones will set up shop. The government procurement will be worth thousands of crores of rupees, and no one can afford to ignore it,” a senior official of department of information and technology said on the condition of anonymity.
Federation of Indian Chambers of Commerce and Industry secretary general Rajiv Kumar, however, says that the government’s push will work. “It is an impetus both for current manufacturers to increase value addition and for new players to begin afresh,” he says.
Yet, the government may still not have its way. WTO rules also say no country can impose duty on import of electronics products. As most of the high-valued components are small in size, it makes economic and logistics sense for global hardware makers to ship components from select locations rather than manufacture it in India.
And given the possible non-availability of domestically produced electronics products at least in the first couple of years because of the delays in setting up shop, introduction of the policy may dilute its vision, says a government official connected to the policy. Ministries and departments may be given a free hand to choose the items for which they want to apply this policy. “But once a department chooses an item, it has to procure at least 30 per cent of that item domestically,” said the official.
In some products, there is already value addition in India. In the case of batteries, 40 per cent of value addition is happening in India. “But every brand has 40 per cent value addition in batteries. Where is the comparative advantage for anyone?” asks Bhardwaj of MAIT.
For electronics makers, the challenge is not just to convince their global boards to establish facilities in India , but also to convince their suppliers to do the same. Dell, for example, recently conducted a survey among 35 global suppliers. Half of them said they had never considered India for investment. And those who were toying with an idea to establish facilities in India are mainly driven by a stable tax regime, opportunities for sales within India and possibility of realising operational cost savings among others, says the company’s internal survey report.