Is it the dawn of an electronic age in India?

The National Policy on Electronics 2012 has the potential to change the way India produces and procures chips and gadgets. The key, as always, lies in implementing it

r-swaminathan

R Swaminathan | January 4, 2014




There is an element of tautological rhetoric in India's claim to be an Information Technology superpower all set to enter the era of ubiquitous digitalisation. It has all the visible bells and whistles of an electronics giant, from software revenues touching $100 billion last year to consumption of electronic goods and gadgets breaching the $125 billion mark this year. If all goes to script, with nothing to indicate that it will not, India would be gobbling up $400 billion worth of gadgets and goods by 2020. That’s a 300 percent increase in just about seven years.

Yet amidst this healthy, prosperous glow there is an underlying structural flaw that’s been bedevilling our policy makers for at least four decades. The flaw in simple terms is that India doesn’t produce enough of what it consumes. In fact, it just about produces 10% of the electronics goods internally. The rest of it is imported. And this flaw is only expected to get bigger with over 70 percent of the 2020 demand, that’s $300 billion, being sourced from outside the country. The coming decades are going to see an intensification of digitalisation, so much so that our daily life will necessarily get intersected and interwoven with chips, intelligent electronics, smart algorithms and digital devices. That’s the future.

In short, India’s dreams of becoming a superpower will remain just that if the country doesn’t establish an electronic design and manufacturing foundation.

Some history is necessary before we jump into the National Policy on Electronics (NPE) of 2012. To its credit India started quite early in establishing a technological base with the first two five-year plans channelising a substantial amount of the Indian state’s resources in building up institutions devoted to fundamental research, higher education and research and development. In fact, a 22-member committee of scholars and entrepreneurs under the chairmanship of NR Sarkar was set up immediately after independence to set up world-class institutions of higher science education. The renowned Indian Institutes of Technology (IITs) were a product of this commission. By the late 1950s the government had acquired computers, EVS EM, from the Soviet Union to use in large companies and research laboratories. Unlike the popular perception that ties in India’s exposure to computerisation to the early 1990s, the country experienced it way earlier during the last years of 1950s. Of course the story of Tata Consultancy Services, established in 1968, is quite well known to bear any repetition here.

The country appeared to be on the right course in establishing what were then romantically referred to as ‘temples of modern India’ when the first Electronic Commission was set up in the early 1970s under the legendary science and technology policy leader MGK Menon. The Mission received support of the United Nations Development Programme (UNDP), and it formulated a strategy for establishing regional computer centres. The idea behind setting up such centres was to create hubs of manpower development and diffuse informatics and technology into the local economic processes. One of the crucial decisions of the Commission was to channelise the country’s resources and energies into creating intellectual capital and knowledge base, rather than large-scale hardware production base.

Almost every single institution, from the National Informatics Centre, set up in 1975, the iconic Computer Maintenance Company (CMC), established the following year, to Tata Infotech, Patni Computer Systems and Wipro, can trace their roots to that single decision of MGK Menon Commission. However, in retrospect, that single decision can also be held largely accountable for India missing the microchip revolution of the 1980s; a revolution that propelled Taiwan and South Korea, and later on China, to leadership positions in the world. First Indira Gandhi and later Rajiv Gandhi recognised the importance of developing an ecosystem for electronics and telecommunications as future drivers of India’s growth. They were right. Yet despite efforts to set up an indigenous electronics manufacturing base, the most notable being the effort to set up semi-conductor manufacturing plants in Mohali, the growth remained stymied due to a variety of factors, ranging from the easier access to electronic goods and gadgets post-liberalisation, a flawed tax structure that made imported gadgets cheaper than domestically produced or assembled ones, a weak R&D culture to economies of scale fostered by a globalised economy and a weak system of vocational and technical training. While the two decades between 1990 and 2010 saw a massive growth in software services sector, with a major push coming from exports, the growth in the hardware sector was primarily fuelled by imports. The worldwide electronics industry is one of the fastest growing in the world, with an estimated billing of $1.75 trillion. Ironically, the Indian market has contributed over $100 billion to that bill, with over 90% as imports. Of course, as indicated earlier, the Indian import bill will be over $300 billion in 2020. The National Policy on Electronics has to be positioned against this background. It directly tries to address three interconnected challenges.

The first challenge is an old one, pertaining as it is to creating a base for manufacturing of electronic products and goods. It’s also a particularly trenchant challenge considering that even today the actual value addition in domestically produced good range only between 5 to 10 percent in most cases. In fact this was the jolt that got the government scrambling to set up the new policy.

Using the practical experience that it had garnered through its complicated, but ultimately successful, process of the defence offsets policy, the new electronics manufacturing policy gives a relative primary to the ‘Made in India’ tag. It sets clear benchmarks of 25% in the first year and 30% in the second year for value addition. It directly puts pressure on international giants like Samsung, LG, Dell and HP that today import as much 90% of their hardware. These benchmarks are also directly tied in with the procurement norms for the 30 mega mission mode electronic governance projects that are to be rolled out in the next 10 years. It must be mentioned that the combined budget of '11 lakh crore for these projects are comparable to the GDP of Finland and Chile. If at all there was a carrot of all carrots, this is it. Through this Pinzer strategy the government aims to achieve two ambitious objectives. The first is to create 100 million jobs in the electronics manufacturing sector in the next ten years, an absolute imperative to achieve the government’s dream to increase the share of manufacturing sector to 25% of the GDP.

The second is to substantially increase India’s share in the global electronics production, currently at 0.5 percent, to over 15 percent. It’s a really steep climb, and one that would require India to take China directly head on. Our Asian neighbour is currently the third largest electronics manufacturing centre in the world, just behind South Korea, and contributes close to 20 percent of the world production.

The second challenge is more practical and logistical, than one of vision. Over the last two decades India has acquired a certain degree of expertise in chip design, primarily due to its indigenous efforts to develop high-end defence products. A notable mention is the downstream and upstream technologies associated with chip design that have accrued from the light combat aircraft (LCA) project. The challenge then, as is the potential, is to develop the Electronic System and Design and Manufacturing (ESDM) sector on a commercial scale so that technologies, systems, processes and trained manpower are diffused enough to create a commercial base. This is where the policy mandarins should creatively extend the 2012 policy to tackle the twin issues arising from information technology agreement-1 (ITA-1) of the World Trade Organisation (WTO), that came into effect in 1997, by which a large number of electronic components and products are bound with zero tariffs making trade unrestricted across international borders, and India’s own inverted tax structure that makes domestically manufactured and assembled products costlier than fully integrated kits imported from China, Taiwan, South Korea, Malaysia, Indonesia and Philippines. The 2012 policy seeks to tackle the twin issues by focusing on building and enhancing expertise in Very Large Scale Integration (VLSI) and chip design to achieve an ambitious turnover of $ 55 billion by 2020. Additionally, the policy wants to build a strong supply chain of raw materials, parts and electronic components to ensure that finished products have at least 60 percent indigenous parts by 2020. It’s estimated that ESDM exports will shoot up from the current $5.5 billion to $80 billion by 2020.

The third challenge is one of national security. Jolted by a number of cybersecurity attacks, and the increasing awareness of the vulnerabilities of relying on externally sourced hardware, a key example was the manner in which the Siemens-supplied hardware of the Iranian nuclear plants was compromised by a cyberattack, the government understood the need to have complete control over the hardware infrastructure, right from production to deployment, in certain strategic and core infrastructure systems. The 2012 policy seeks to create long-term partnerships between ESDM and core infrastructure sectors of defence, atomic energy, space, railways, power and telecommunications. The policy specifically aims at increasing the fund flow for R&D through seed capital and venture capital for start-ups in ESDM and nanoelectronics sector. Additionally, the policy is committed to producing 2,500 high quality PhDs in a year specifically for the electronics manufacturing sector.

In order for all the three challenges to be surmounted in an effective manner, the government requires to provision for fiscal incentives, like the setting up of national electronics development fund, a rationalised tax structure, one that’s a paradigm shift from the inverted tax structure prevalent today, setting up of electronic manufacturing clusters, preferential market access for domestic manufacturers, setting up of semiconductor wafer fabrication facilities and an enhanced investment in research and development and higher technical education. The National Policy on Electronics 2012 creates the framework for establishing the right ecosystem for a self-sustaining development of an electronic manufacturing base in India. The key, as is the case with every policy, lies in implementing it.

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