Localising electronics

The Government, in the past few days, has launched two new schemes aimed at giving a leg-up to electronics hardware manufacturing in the country. The first one seeks to provide financial support for the development of electronics manufacturing clusters. The promoters setting up such enclaves — offering basic infrastructure to enable concentration of units producing components, sub-assemblies and other products in the electronics value chain — are eligible for grant-in-aid covering 50 per cent of their project cost, subject to a cap of Rs 50 crore for every 100 acres. The second scheme is specific to individual companies investing in manufacture of 29 identified product categories, from telecom hardware and semiconductor chips to solar photovoltaics. These units can avail of subsidy amounting to up to a quarter of their capital expenditure, sans any absolute ceiling.

Both schemes make sense in the current context, where India’s electronic products market, now at roughly $70 billion, is projected to grow to $400 billion by 2020. With domestic production at the present rate expected to reach only $100 billion — in terms of actual value-addition, it would be even lower — much of this demand would have to be met through imports. Apart from the balance of payments implications involved, there are security concerns arising from the pervasive deployment of imported electronic systems, not just in strategic establishments like Defence, space or atomic energy, but even in telecom, railways, power or civil aviation — where the vulnerabilities go beyond mere disruption of services. At the same time, promoting domestic manufacturing is not easy, with India being a signatory to the World Trade Organisation’s Information Technology Agreement, obliging it to maintain a zero import duty regime on most electronic/telecom items. The inability to grant tariff protection means exploring alternative avenues — capital grants in this case — to incentivise the development of an indigenous electronics hardware industry and offset the higher transaction costs and other disabilities that Indian manufacturers in general face.

At a basic level, therefore, one would support the latest schemes, especially the one directing subsidies towards development of clusters — which, on their own, generate cost efficiencies and synergies from suppliers operating in a contiguous area. But the Government should ensure strict standards, both in appraising the projects qualifying for capital grants as well as linking disbursements to progress in implementation on the ground: One cannot rule out the danger of investors padding up costs to avail of a higher quantum of incentives, which can be prevented only through establishment of benchmarks that are valid internationally. Secondly, it should not discriminate between foreign and local players. The sole objective must be focused on building local manufacturing capability rather than the nativity of those putting up these projects. If a foreign equipment maker can help create such a manufacturing ecosystem benefiting the local economy, there is no reason to deny it policy sops extended to others.

COMMENT NOW