Electronics imports of India is raising and it deems necessary to boost indigenous manufacturing in the sector.
What was the scenario before?
In the mid-1980s, India with an annual export of $70 million was ahead of China in electronics and computers hardware sector.
Firms such as Wipro and HCL had end-to-end capabilities in hardware design, manufacturing, sales and services.
But the import duties on components remained high and clearance for it stayed as a big hassle, making it difficult to expand operations.
This was done because the government was more concerned about the misuse of imported components and future revenue losses.
It also did not allow import of Printed Circuit Board, the most critical element for computers.
These measures continued in the following decades which made India lag behind in the manufacturing of the electronics and hardware sectors.
On the other hand, China with an incentive-driven strategy reached $600 billion in annual exports, which also became the world leader in the same period.
What was the Nokia story?
Nokia decided to set up manufacturing facilities at Sriperumbudur SEZ in Tamil Nadu in 2006, attracted by India’s vast market.
Nokia moved to India along with its seven component suppliers and in the next few years, it started selling phones on a large scale.
Exports rose to exceed $2 billion during 2010-13, but the local leaders tried to subvert the Nokia worker’s union, demanding scrap contracts and free phones.
There were also allegations of showing domestic sales as exports on part of the company and it has also received a bigger tax notice from the Income-Tax Department in the later period.
Both the tax department and the company have differently interpreted Finland-India Double Tax Avoidance Agreement, which ultimately ended in the plant shutting down in 2013.
This made India’s mobile phone exports collapsed from $2 billion in 2013 to $200 million in the following year.
All 7,000 direct and 10,000 indirect employees including 70% women lost jobs.
China was the only gainer as most imports of mobile phones came from China.
The Nokia story dented India’s image as a robust investment destination.
What should be done?
Focus - India needs to promote deep manufacturing and not superficial assembly of components.
For example, lower import duty on components and higher on mobile phones made mobile phones assembled in India cheaper than the imported mobile phones.
This made many firms to set up units to take the benefit, but they import ready-to-assemble kits from China.
Investment - Although India’s mobile phone imports came down in 2017, the combined import of mobile phones and components rose from $15 billion in 2015 to $20 billion in 2017.
Thus India has to invest in semiconductor fabrication plants which build semiconductor chips and mobile phones, computers, or telecom products.
The focus should also be on the manufacturing of critical parts like Mother Board/Printed Circuit Board (PCB) assembly and Integrated Circuits.
These components serve as the heart of a computer, laptop, tablet, mobile and most electronic devices.
Model - India could also follow a Chinese model of attracting MNC’s through incentives like low-cost land, power, water, labour, tax exemptions and an efficient customs administration.
This model made China the lead exporter of electrical machinery, electronic and telecom equipment by 2005.
Measures - India could offer a robust incentive package to few anchor firms to set shop in India along with their dedicated component manufacturers.
These may include low corporate tax at 10% and a 30-year lease of land lying unused at many SEZs.
We must also allow the creation of a component hub that should ease bulk import where duty should be charged only at the time of clearance.
This will ensure quick supply of components to meet an export/domestic order.
The electronics story of the past four decades has suffered from bureaucratic short-sightedness and ambiguous tax regime.
Thus, clearly worded tax laws that leave nothing on interpretation, freedom from interference in day-to-day operations and an attractive tax concession package could attract large investments into this sector.
It would also kick-start investment-production-exports cycle in critical sectors like electronics, computer, and telecom, which will also pave the way to manage the rising current account deficit.
