What is the issue?
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.
Source: Business Line
