Incentivising human resources, timely approvals & quick financial closure are key recommendations for revised M-SIPS

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By Shweta Sengar

January 27, 2015: The recent announcement made by the Department of Electronics and Information Technology (DeitY) to revise the Modified Special Incentive Package Scheme (M-SIPS) policy has been welcomed with open arms by the industry. The move is aimed at making the scheme more investor friendly. Introduced in 2012 to promote large scale domestic manufacturing by drawing local as well as global players to invest in the Indian electronic system design and manufacturing (ESDM) sector, the revised version of M-SIPS is expected to be released soon. To expand its reach to cover several new categories, including the most significant one of white goods, DeitY is working on this revision in consultation with the industry.

The 45 applications made by companies under this scheme, amounting to a value of Rs 802.13 billion, validates the fact that the industry is very positive about the M-SIPS. However, the recent developments indicate that the policy may get an extension. According to a government official, this scheme may be extended for another three years, beyond the earlier expiry date of July 2015.

The new verticals included under the M-SIPS are nuclear fuel cells, smart cards, capital equipment and white goods. The M-SIPS now also covers consumer durables, which is expected to attract big ticket investments into the country. There are several big names that have already approached DeitY for the incentives offered to electronics manufacturers. The incentives under the policy are available for investments made in a project within a span of 10 years from the date of approval of the project. Nano electronics, EMS, raw materials for electronics products, LEDs, semiconductors, etc., are also included under the policy. Consumer electronics like televisions, digital cameras, camcorders, refrigerators, ACs, fully automatic washing machines, microwave ovens, etc., are all a part of this scheme.

However, one does need to take into account the delays in approvals and the somewhat lethargic attitude of the bureaucracy when it comes to implementing a policy. We spoke to some industry experts to find out what they expect from the policy and what, according to them, were the improvements that could be made in it.

According to Vinod Chippalkatti, vice president, Centum Electronics, “The policy is a welcome move by the government to encourage investments in the electronic system design and manufacturing sector in India. The manufacturing base of electronic products in India is grossly inadequate in comparison to the demand for such goods. Also, there are significant challenges like high transactional costs, complex administrative processes, etc. We hope this policy will also address these challenges and provide the momentum for the growth of the electronics industry.”

Timely approvals and financial closure are the key tasks

Many government policies fail because they lack timely implementation. There are numerous schemes that died in the past as they lacked proper implementation and working mechanisms. According to Nagaraj Kulkarni, Jabil Circuits India, “The M-SIPS is a very smart scheme covering all the aspects of the electronics industry. This is a very good policy and it is also very beneficial to the industry. However, the policy needs certain improvements and emphasis should be on timely approvals of projects.”

As Vinod Chippalkatti, VP of Centum Electronics says, “Over a period of time, the approval procedure has improved. However, there should also be emphasis on financial closure. One of the important requirements is that the applicants need to get a financial closure from the financial institution or bank for the full value of the project. The intention is highly appreciated but there are practical difficulties. While the banks may be willing to consider an ‘in principle’ approval for the value of the project, they will be reluctant to give a sanction for the project’s full value. As the incentive will be disbursed based on the actual investments only, DeitY need not insist on the financial closure.”

Speaking about the approval delays, Sanjay Nayak, CEO, Tejas Networks shares, “The M-SIPS approval process takes a long time (up to 18 months) from the date of submission to final approval. The incentives should be eligible from the date of application, since the investor has already made the investment decision, and government procedural delays should not deprive him of the incentives.”

He adds, “The process of M-SIPS incentive disbursement is still not clear. This should be streamlined and payment should be made within 30 days of submitting claims. Alternatively, the government can give scrips, which can be used to set off payments for excise/customs duties, service tax or income tax.”

Revision and rectification on asset listing

Highlighting the need to include the listing of plant and machinery in the project’s cost, Vinod Chippalkatti of Centum Electronics adds, “Another important point is that the applicants are required to submit the detailed list of plant and machinery along with the supplier quotation. The point to be noted is that if the application being submitted is for a project of 10 years, the list of plant and machinery that is required to be given is for machines that will be procured right up till the 10th year. But in today’s world, technology is changing rapidly, and the plant and machinery under consideration today may be obsolete by the time the actual investment is done. Hence, the department need not insist on this list for projects covering 10 years.”

Incentivising human resources for more R&D.

According to Sanjay Nayak, CEO, Tejas Networks, “While the M-SIPS allows 50 per cent investment in R&D, the investment in manpower/salary costs of R&D personnel is limited to only 15 per cent. Given that manpower costs are the main contributor to R&D costs, the policy should allow this to go up to 80 per cent of the total R&D budget (instead of 15 per cent). This will encourage more R&D and IPR creation and, in turn, higher domestic value addition in India.”