How duty differential incentives in Union Budget 2016-17 can boost IT hardware manufacturing in India, generate up to 400,000 jobs in five years

By: Anwar Shirpurwala, Executive Director, MAIT

As the government moves forward with initiatives like Make in India, there is a need to rationalize the existing regulatory infrastructure to create a more conducive business environment for manufacturing companies based in India. We need to streamline our tax norms and procedures in a way that they do not act as impediments in the way of business growth. Policymakers must look for ways to incentivize more companies to invest in manufacturing and participate in the true spirit of ‘Make in India.’ The IT hardware manufacturing industry, in particular, is looking for duty incentives that can strengthen their position.

The government had offered such duty benefits to boost local manufacturing of mobile phones and tablets in Union Budget 2015-16. The excise duty structure for mobiles was reduced to one percent without CENVAT credit or 12.5 percent with CENVAT credit, giving domestic manufacturers a benefit of about 11 percent over imported phones. IT equipment makers are seeking extension of this differential duty incentive to other categories of electronic products i.e. all ITA goods including Laptops, Desktops, Personal Computers, e-Readers, Wired and Wireless Customer Premises Equipments (CPEs) like Routers, Modems, Access Points, Networking Switches, Adapters and Surveillance Equipments like CCTV Cameras and IP Cameras.

By extending concessional excise duty and exemption of customs duties on import of parts and sub-parts, the government will be able to encourage IT manufacturing companies in a big way. This will also help achieve the dual vision of ‘Make in India' and ‘Digital India’ campaigns. While the relevance of desktops and laptops in ‘Digital India’ is apparent, even other electronic equipment such as the e-reader can prove to be effective in enhancing literacy levels and accomplishing the government’s mission of connecting people across the remotest corners of the country.

As per an independent MAIT report titled “Policy Interventions for ‘Net Zero Imports’: India IT-ESDM Sector” (February 2016), 100,000 direct jobs and 300,000 jobs in components manufacturing can be created, if estimated demand for 30 million PCs is fulfilled entirely through domestic production over the next five years

Developing the Indian Manufacturing Eco-system

The government aims to develop a complete value chain in India for IT & Electronics hardware under their programmes Make in India and Digital India by boosting domestic manufacturing.  In order to develop India as a strong base for Electronic System Design & Manufacturing (ESDM) for domestic as well as global markets, the government must take concrete measures to promote manufacturing of electronic components and sub-parts. For example, direct imports of Populated PCBs (Component Mounted Circuit Boards)/ Motherboards, Add-On Cards, RAM, LCD Monitors, SMPS should be curbed by levying tariffs so as to create duty differentials in favor of domestic manufacturers as a controlling measure. In 2015, we believe the share of domestic manufacturers was only 45 per cent of the total ESDM market of USD 31.6 billion. For the IT products market of USD 5.8 billion this proportion was even lower at around 32 per cent. The policy interventions by the government for enabling domestic manufacturing by the IT-ESDM sector would help in immediate import substitution by utilising existing installed capacities, thus doubling domestic IT production to USD 2.6 billion within one year.

It may be noted that smartphones or other computing devices are of little use in the hands of the users unless they are connected to Broadband Networks, either wired or wireless.  Goods classified as Customer Premises Equipment help the users to get connected to the internet and computer networks. PCs and CPEs are the main tools and links that will connect the masses to the internet and bring them together in the e-revolution triggered through Digital India.

The duty differential scheme can go a long way in encouraging domestic manufacturing of IT and electronics equipment and making it much more viable. It will also benefit intermediary goods manufacturers as OEMs will be compelled to procure components like Motherboards, SMPS, RAMs, Monitors manufactured in India. Increased volumes of intermediary goods will bring component manufacturers to India, thereby helping build a complete ecosystem. This will in turn provide huge employment opportunities and create additional revenues for the government.

The Socio-Economic Impact

The above reforms will have a significant impact on the domestic IT manufacturing sector resulting in numerous social and economic benefits as well. Electronic components that are being currently imported will get manufactured locally, creating huge cost advantages. The initial cost incurred in creating a manufacturing eco-system in the country will be compensated by virtue of huge economic activity that will take place across the PC, CPE, mobile and tablets value chain. This would further result in the increase of related service sector activity which would contribute substantially to service tax and also generate huge employment opportunities – direct as well as indirect.

Increased economic activity in ancillary and related service sectors will also have a multiplier effect. With more and more component manufacturers setting up base in India, we will be able to build a complete value chain in electronics and hardware manufacturing. A sound base for ESDM and indigenous components manufacturing shall be laid. That will also reduce the dependency on imports in strategic electronics sectors, and thereby achieve the Prime Minister’s vision of ‘Net Zero Imports’. In fact, as increased volumes help achieve economies of scale we will be able to cater to global demand through exports. Innovation and R&D activities will also get a boost, creating an overall positive business environment.

It is our fervent belief that by appropriately incentivizing the domestic IT manufacturing sector and by extending the duty differential benefits to the aforesaid product categories, the government will be able to truly realize the vision of “Make in India” for India as well as for the global market.