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India's global dreams need local solutions

February 19, 2013 14:44 IST


Indian flagIf we do a few things right, there will be a gradual shift in the way India is viewed by the global community when it comes to manufacturing, writes V Raja

The national electronics manufacturing policy approved by the Cabinet will work if we fix the operating environment & tax structures

It has become common for our trade pundits to make emphatic claims that India is set to become the next major global manufacturing hub.

An aspiration or wishful thinking?

Attaining this goal demands a realistic view, and a policy that reflects the intention to accelerate local manufacturing.

In that context, the national policy on electronics manufacturing approved by the Cabinet in October last year demonstrates proactive thinking because of the potential economic and demographic challenges that stare at us in the years to come.

The policy is driven by two major imperatives: providing employment opportunities to the large number of youth that will enter the employment age in the next seven to 10 years, and reducing the burgeoning import bill on electronics, which threatens to overtake the oil import bill in the next decade.

The challenge is to create a manufacturing-friendly ecosystem, which calls for significant improvements in power, ports and people issues plus a tariff structure that promotes manufacturing.

Without progress on these fronts, this policy will remain another unrealised promise.

Any economy in which growth is dependent on manufacturing must witness a contribution from this sector in excess of 20 per cent to make a worthwhile impact.

If we do a few things right, there will be a gradual shift in the way India is viewed by the global community when it comes to manufacturing.

First, for the electronic industry, the key ingredient is semiconductors or chips.

A semiconductor fabrication (fab) plant in India has been the subject of discussion for several years but seems to be a ‘glittering phantom’ with no clear timelines or proposals in place.

We need to understand that this involves large investment running into thousands of crores, a clean environment and large local demand for it to be viable.

The Andhra Pradesh government almost got a large multinational to commit to a fab plant but it was aborted subsequently.

For global corporations, which alone have the technology and funds to set up fab plants, there is nothing visible to excite them to commit to this investment.

Suffice it to say, nothing has changed dramatically in the last five years or so, ever since the last fab plant proposal was shelved, to make us believe that things could change soon.

More than the investment, the ability to provide water, clean air and uninterrupted power by any state or the Central government is a challenge, and the biggest threat to translate the policy document to reality.

Second, every country in the world provides equal, if not better, opportunities for local manufacturing over imports. In India, however, taxation is so skewed that it is often easier and cheaper to import equipment than manufacture it locally.

This is the biggest impediment for the growth of the manufacturing industry. For example, the customs duty on connectors is zero, while the import duty is 3.75 per cent.

Import duty on medical devices is only five per cent, and with Special Additional Duty put together, the total duty is 10 per cent, which is passed on to consumers.

Value-added tax is not applicable, since the product is imported on a SICOI (sale in the course of imports) basis.

If, however, one were to import the components for the equipment and manufacture them in India, the import duty would be similar, if not more, followed by excise and VAT, the sum total of which would be far higher than the 10 per cent paid on import of the finished products.

The total cost of taxation on domestically manufactured equipment can go up to two times the cost of taxation on imports!

This is one reason more than 80 per cent of medical equipment is imported. It is the same skewed structure that applies to cellphones.

So, there is virtually no manufacture of cellphones in India, although the country is one of the fastest growing markets and the second-biggest cellphone market in the world.

It is imperative that the government addresses this anomaly by not increasing import duties but by streamlining the tax structure on locally made products that would enable a level-playing field for manufacturers in India.

The goods and services tax should resolve this problem but given its delayed birth, it would be prudent to tackle this paradox immediately and pave the way for local manufacture of electronic items.

The policy also talks of building a strong supply chain network that would enable local availability to go up from 20 to 60 per cent.

To achieve this, we must understand that some of these components -- parts and finished products -- need a clean environment for transportation, and the freight costs and time to reach the destination must not become a deterrent.

This is vital if we are to look at the export market for our manufactured products.

Today, it is often cheaper to move products from the US than from Japan and Korea, or even China, because of freight costs.

The same would apply to products moving out of India and negate any cost advantage that may accrue for local manufacturing.

We need to get our dedicated freight corridors working, and for overseas markets, we have to come up with aggressive and competitive freight cost structures.

This is no different from the issue of large quantities of fruit and vegetables perishing for want of efficient cold chain systems.

Unless we have served both the export and domestic markets, at least in the short term, economics would not justify large investments in fab or any manufacturing plant in India.

Third, India’s labour laws have been talked about so much that they have become a political issue at the national and state levels. But industry needs government support and understanding of market dynamics.

Comparing ourselves with China and aspiring to be a major manufacturing hub like it is a good way to drive our adrenaline and accelerate growth but pursuing this goal without the same rigour and commitment will not get us anywhere.

We need to create an environment where labour practices are fair and flexible to the needs of the industry, driven by market considerations.

Unfortunately, this is an issue that keeps being debated but not decided.

It is paradoxical to see the way this sector is treated by our public sector organisations.

On one hand, we want more local manufacturing to create more employment, increase tax revenues and create ancillary industries.

On the other hand, when we become buyers, tenders specifically ask for imported equipment and even specify the country of origin, and locally made products are not accepted more often than not.

It is not uncommon to see large public sector companies send tender enquiries directly to the global parent of the Indian subsidiary with a well-established presence in the country.

In conclusion, the new policy suggests a positive momentum for the growth of manufacturing in India with all its positive spin-offs.

But unless the issues outlined above are tackled with urgency and sincerity, India will never become a brand for manufacturing. The author is president and managing director, TE Connectivity India

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