Electronics Manufacturing in India

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By Dezan Shira & Associates

Feb. 16 – Electronics and strategic electronics are at a similar point of inflection as the information technology IT/ITES industry was a decade ago, according to the draft National Policy on Electronics, 2011.

The global electronics industry, valued at US$1.75 trillion, is the largest and fastest growing manufacturing industry in the world, according to the Indian Ministry of Communications and Information Technology, and the industry is expected to reach US$2.4 trillion by 2020.

Yet, while India is a recognized global player in software and software services sector and is increasingly becoming a destination for chip design and embedded software, it lags behind in electronic hardware manufacturing capabilities. The Indian electronics hardware production constitutes only around 1.31 percent of global production.

Demand for electronic hardware in India is growing, driven by growth in income levels, automation demands of the private sector, and the government focus on e-governance. The current demand for electronics in India stands at US$45 billion and is projected to grow to US$125 billion by 2014 and US$400 billion by 2020.

In recent years, India has had to import electronic products from China, Taiwan, South Korea, etc. But, as the value of India’s electronic imports is expected to overtake the value of its oil import bill by 2020, the Indian government is working to strengthen domestic electronics production.

Beyond merely satiating domestic demand, the Indian government sees the electronics industry as key to economic growth. It aims to tap into demand abroad in emerging regions like Africa, South America, and Asia, among others. Exports of a large number of electronic components and projects are tariff-free under the World Trade Organization Information Technology Agreement-1 (ITA-1) (1997), making the manufacturing of such goods for export particularly appealing.

An Overview of the National Policy on Electronics
The key push under the National Policy on Electronics is to transform India into a global hub for electronics system design and manufacturing (ESDM).
Given India’s growing strength in chip design and embedded software and the increasing importance of design in product development, India has great potential as an ESDM destination.

The 14 objectives of the National Policy on Electronics are to:

  1. Create an eco-system for a globally competitive ESDM sector in the country to achieve a turnover of about US$400 billion by 2020, involving investment of about US$100 billion and employment to around 28 million people at various levels.
  2. Build on the emerging chip design and embedded software industry to achieve global leadership in VLSI, chip design and other frontier technical areas and to achieve turnover of US$55 billion by 2020.
  3. Increase the export in the ESDM sector from US$5.5 million to US$80 billion by 2020.
  4. Significantly enhance the availability of skilled manpower in the ESDM sector. Special focus for augmenting post graduate education and to produce about 2,500 PhDs annually by 2020.
  5. Create an institutional mechanism for developing and mandating standards and certification for electronic products and services to strengthen quality assessment infrastructure nationwide.
  6. Develop an appropriate security ecosystem in ESDM for its strategic use.
  7. Create long-term partnerships between EDSM industry and strategic sectors like defense, space, and atomic energy, etc.
  8. Become a global leader in creating intellectual property in the ESDM sector by increasing fund flow for R&D, seed capital and venture capital for startups in the ESDM and nanoelectronics sectors.
  9. Develop core competencies in sectors like automotive, avionics, industrial, medical, solar, information and broadcasting etc through use of ESDM in these sectors.
  10. Use technology to develop electronic products catering to domestic needs and conditions at affordable price points.
  11. Expedite adoption of best practices in e-waste management.
  12. Create specialized governance structures within government to cater to specific needs of the ESDM sector, including high velocity of technological and business model changes.
  13. Facilitate loans for setting up ESDM units in identified areas.

To implement the above objectives, the policy created establishes the National Electronics Mission, a nodal agency for the electronics industry within the Department of Information Technology, with direct interface to the Prime Minister’s office, and renamed the Department of Information Technology as the Department of Electronics and Information Technology.

The policy is split into sections, including:

  • Human Resource Development
  • Developing and Mandating Standards
  • Cyber Security
  • Strategic Electronics
  • Creating an Eco-system for Vibrant Innovation and R&D in ESDM Sector
  • Nanoelectronics
  • Handling E-waste

Three of the most prominent sections (described in detail below) are:

  • Creating an Eco-system for Globally Competitive ESDM Sector
  • Promotion of Exports
  • Electronics in Other Sectors

Creating an Eco-system for Globally Competitive ESDM Sector
The term “eco-system” truly underscores the widespread nature of the steps envisioned under the policy to create a globally competitive ESDM sector. These include:

  • Providing fiscal incentives through a Modified Special Incentive Package Scheme: Such incentives will be provided across the value chain and are aimed to mitigate costs from infrastructure gaps relating to power, transportation etc. and the relatively high cost of finance.
  • Facilitate the setup semiconductor wafer fab facilities.
  • Provide preferential market access for domestically manufactured electronic products: These include mobile devices, SIM cards with enhanced features, etc. with special emphasis on Indian products for which IPR reside in India
  • Provide for a 10 year stable tax regime (both at the Central and State level) for the ESDM sector.
  • Include mobile phones and other electronics data communication products as goods of special importance under the Central Sales Tax Act.
  • Provide priority sector lending loans for procuring computers and related peripherals including software by individuals and small businesses.

Promotion of Exports
Specific actions for the promotion of ESDM exports include:

  • Reforming procedures and logistics to assist the import of components/subsystems and export of products
  • Expanding the ESDM sector items (including the Electronics Manufacturing Services industry) under the Focus Products Scheme
  • Extending the benefit of export schemes to DTA sales of ITA-1/zero duty electronics products and treating them as physical exports
  • Building incentives for electronic hardware manufacturing units in developed countries to relocate to India
  • Marketing and showcasing chip design, product design and embedded software industry capabilities globally

Electronics in Other Sectors
While the National Policy on Electronics focuses most heavily on the ESDM sector, it also specifies goals for other sectors in the electronics realm. These include:

  • Automotive Electronics: To develop a Centre of Excellence (a team of people that promote collaboration and best practices) for the development of micro-controller units, micro-electro-mechanical systems and other advanced electronic devices to enable India to consolidate its position as one of the global auto hubs.
  • Avionics: To facilitate research and development and outsourcing of engineering design and related software for avionics and the maintenance, repair and overhauling of avionics.
  • LED: To encourage the usage of LED lighting solutions (especially in rural markets) through innovative products like solar LED lamps, public places like street lighting, traffic lights etc. to promote the manufacture of LED and LED lights.
  • Industrial Electronics: To develop a Centre of Excellence for innovation in industrial electronics, with a focus on making affordable standardized products which help India to maintain its growth in industrial segments in which it has core competence, including textiles, food processing, steel, engineering and electrical gods like motors, compressors, inverters, etc.
  • Medical Electronics: To consolidate the design and development of an affordable medical electronic device industry and to develop downstream manufacturing activities through sector specific clustering.
  • Solar Photovoltaics: To build the manufacturing capacity of solar photovoltaics to support 20 GW of solar power by 2020.
  • Information and Broadcasting: To create an eco-system for manufacturing of set-top boxes and other broadcast equipment in the country as part of the digitization of the broadcast network of the country.

Content for this article was taken from the December 2011 issue of India Briefing Magazine, titled “FDI and Manufacturing Electronics in India” In this issue, we walk you through the National Manufacturing Policy, the draft National Policy Electronics, and other related policies and schemes key to foreign investment in the sector. This issue is immediately available as a PDF download on the Asia Briefing Bookstore.

Dezan Shira & Associates is a boutique professional services firm providing foreign direct investment business advisory, tax, accounting, payroll and due diligence services for multinational clients in India. For more information, please contact india@dezshira.com, visit www.dezshira.com, or download the firm’s brochure here.