A new policy regime for electronics that is on the anvil offers hope, but worries remain

The much-awaited and much-delayed national policy on electronics has not yet been announced, but the key elements of a new strategy to reduce the country's overwhelming dependence on imports emerged earlier this week when the top leadership of the Ministry of Communications and Information Technology assembled in Bangalore at the Vision Summit organised by the India Semiconductor Association (ISA).

The announcement by Kapil Sibal, Union Minister for Communications and IT, that the Union and State governments would provide “preferential market access” to Indian hardware companies was obviously the most significant announcement at the event.

Although there is no precise estimate of the extent of Government procurement of electronic hardware, the industry expects significant gains from the move. According to one estimate, the public procurement market is about Rs. 1,70,000 crore per year. If 30 per cent is set aside for Indian companies on a “preferential” basis, this would imply the value of sourcing to be at least Rs. 50,000 crore.

Mr. Sibal said the preferential access would be conditional on suppliers achieving an initial minimum value addition of 25 per cent within the country, which will go up to 45 per cent in the fifth year. Also implicit in the move is the condition that intellectual properties should be registered within India, evidently to discourage transfer payments overseas in the guise of royalty payments.

The trump card

The announcement, which is far-removed from the officially stated policy that the free play of markets is what drives innovation, is also significant for another reason. It perhaps marks a realisation — gained from the experience of the evolution of the industry in countries such as Taiwan, South Korea and, particularly, China — that State intervention is the trump card in this business.

Mr. Sibal's announcement that the Government aims to fully indigenise the Aakash — the low-cost tablet that is to be given free to Indian students — indicates that state intervention is not merely in terms of tax concessions or other sops, but one that addresses the ecosystem in which the industry operates.

The scaling up of batch sizes, from the current level of one lakh tablets to one million tablets would reduce costs from Rs. 2,276 per unit to Rs. 1,500 per unit, Mr. Sibal said.

Multipronged approach

Indicating that the move to offer preferential marked access to Indian hardware companies is just one element of the unfolding policy initiative, Mr. Sibal said the Government is committed to the establishment of a National Electronics Fund, which would have an eventual corpus of Rs. 10,000 crore.

Operating through a special purpose vehicle, the fund would invest in new ventures and would support research and development activity, invest in the development of intellectual property and enable transfer of technologies.

Recognising that India does not yet have a semiconductor fabrication unit, which is highly capital and scale intensive, last year, the Government invited expressions of interest for setting up such a unit in India.

Mr. Sibal's deputy, Sachin Pilot, announced at the ISA that the winning bid — either by a single bidder or by a consortium of companies — would be finalised by the end of the year.

ISA president P.V.G. Menon said such a venture would involve an investment of at least $2.2 billion and would act as “magnet” that would enable the creation of an ecosystem for the electronics hardware industry in India.

While a National Electronics Mission would develop strategies for the industry, identifying the priorities a National Electronics Board would oversee the implementation of the policy.

A massive boost

Mr. Menon said the creation of a dedicated fund, enabling preferential market access to Indian hardware companies and the network of incubation centres envisaged in the draft National Policy for Electronics released last year by the Ministry, would “provide a massive boost” to the industry.

He argues that the standard practice of tendering, which focusses on the lowest bid, may only encourage dumping of imported equipment. The move to assign a portion of government contracts to Indian companies would enable them “to at least get their initial set of orders that would stabilise their cash flows”.

“The focus on value addition instead of a mere assertion that manufacturing should happen within India, will force companies do research and development within India, hold the patents here, which will further boost revenues and also manufacture locally,” said Mr. Menon.

“The policy can be tweaked further, by adopting Chinese best practices,” he added. For instance, the excise duty levied on companies that source locally manufactured components could be lowered to provide further impetus to the industry.

Growing demand

According to the Task Force on Information Technology constituted by the Union Government in 2009, the demand for electronics hardware is projected to grow from $45 billion in 2009 to $400 billion in 2020. In 2020, projected that domestic supply would account for just one-fourth of the demand. The extreme dependence is illustrated by the fact that the value of imported electronics is likely to surpass crude oil imports soon.

Worries remain

Although the new policy focus has raised hopes that the Government has finally got its act together, worries remain.

Ironically, even as the Union Government was unveiling its grand vision for the industry, the Managing Director of the Bangalore Electricity Supply Company, P. Manivannan, said the utility would be importing one million “smart” meters.

Admitting that such meters are not manufactured in India, an industry source said, “It would have been much better for Bescom and other government agencies to have engaged industry and encouraged the development of an ecosystem within the country in order to protect their long-term interests.”

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