The Hindu Business Line : Reality catches up

The computer hardware industry has long played second fiddle to software. Neither did the government dole out sops, nor were sales encouraging. But that has changed - sales are brisk and the government is a huge buyer. The potential is no more an illusion. Reality is closing in on the promises made.

USUALLY we wouldn't like our forecasts to go wrong. But Vinnie Mehta, Executive Director of MAIT, was all smiles when he told a press conference earlier this year that his prediction on personal computer sales in 2002-03 proved to be way off the mark. MAIT, the apex body of hardware manufacturers in the country, had expected a 20 per cent growth in PC sales for the financial year to touch around two million units. But when the year was over, sales of computers had surged by 37 per cent and crossed 2.3 million units.

The growth is still on in India's PC market. After a couple of years' slowdown, PC sales have picked up dramatically thanks to a computerisation overdrive by the government, banks, financial institutions and manufacturing sectors. Individual buying is also happening in a big way as more and more households are going in for PCs.

"The prime reason for this buoyancy in the market is the return of the feel- good factor. We have had a good monsoon, stock markets are doing well and generally the economy is in a good shape, so that is reflecting in PC sales as well," says Aman Munglani, Computing Products Research of IDC India, an IT market research firm. Munglani believes that the growth will persist in the next two quarters as well.

According to forecasts by MAIT, the PC market will grow by 18 per cent in the current financial year to touch 2.7 million units. In the first quarter of 2003-04, PC sales grew by 26 per cent to 6.4 lakh units, and in the first half, it is estimated to be over 14 lakh units, beating - once again - an earlier forecast of 12.1 lakh units.

Growth drivers

"The telecom, banking and financial services, manufacturing and IT-enabled services are the major drivers of growth. Apart from these sectors, small and medium enterprises, IT training institutes and small enterprises such as DTP operators are also buying computers," says MAIT's Mehta. The computerisation drive by the central and state governments for e-governance initiatives is also helping accelerate the growth. MAIT also found that in the first quarter, smaller towns and cities continued to buy computers, as sales from this segment accounted for 37 per cent of the total PC sales.

The spirited mood in the PC market is corroborated by the performance of PC manufacturer HCL Infosystems in the July-August-September quarter. The company announced a 10-fold jump in its net profit and declared a 30 per cent interim dividend. Revenues from PC business soared 52 per cent in the quarter to Rs 334.5 crore from Rs 219.6 crore in the corresponding period last year. HCL Infosystems had earlier this year sold off its software business to HCL Technologies in order to stay focussed on the hardware business. Ever since, the company's stock price has risen to Rs 347 in the first week of November from a yearly low of Rs 75.

"Another reason for this kind of growth is the fact that there was a pent-up demand in the market in the past due to dull economic conditions prevailing then. Towards the end of 2002, we started seeing the momentum picking up," IDC India's Munglani points out. That PC prices have come down by 7-8 percentage points also helped fuel the sales. "Today you can get a branded PC at prices similar to that of an assembled machine," Mehta says.

Nevertheless, branded PCs continued to rule the roost in the market place. In the first quarter of this year, they accounted for as much as 65 per cent of total PCs sold, and in fact, improved their share from the previous quarter. "Yes, the growing share of this segment is a concern to us," admits Mehta, who now hopes that the Government will implement a policy for IT manufacturing sooner than later. The draft of this policy has already been formulated by the Ministry of Communications and IT. Once implemented, the policy will remove the existing anomalies in the duty structure and give incentives to IT manufacturing in the country.

Some problems too

In spite of the current euphoria, there are some long-standing problems persisting for the Indian hardware industry. PC sales are clocking sound growth rates, but in absolute terms are still quite paltry. "We still have only nine PC per 1,000 people, as compared to the global standard of about 28 PCs per 1,000 and China's 30 PCs per 1,000," says Mehta. A market size of below three million PCs a year will not attract any major investments for manufacturing, though India is keenly eyed of late by global computing majors for investments.

"The challenge before us is whether we can grow the market to size that will attract people," he says. The competition to attract investments comes mainly from China which today has a PC market 6-7 times bigger than India's. With the IT agreement of the WTO coming into effect from 2005, a zero-duty regime will be in place for IT and telecom products and electronic components. However, inputs for components such as chemicals do not fall under this agreement and will have import duties. So unless India has a huge domestic market, it will not make sense to invest in component manufacturing in the country.

How to fuel demand

MAIT believes that one major way of fuelling demand is through price reductions.

"There are four factors such as technology, input components, economies of scale and duty structure. Among these, the only controllable factor is the duty structure. If we can reduce the duties and taxes, which today add up around 30-32 per cent of the price of a PC, that would dramatically drive the growth," Mehta claims. The industry has been asking for a reduction in excise duty to eight per cent from the existing 16 per cent.

Another step that will help increase the PC penetration is allowing 100 per cent depreciation of computers in one year.

This will induce many corporates to donate their PCs to schools since the book value of the computer will be nil in one year's time.

MAIT will make such proposals to the Government in its recommendations to the Union Budget 2004-05. Now that the industry has shrugged off its image of a perpetual cry baby and become a performer, the Government should listen to its wish list.

vipin@thehindu.co.in

Picture by Bijoy Ghosh

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