India aims to become a leading mobile handset manufacturing hub by 2025. It seems like an ambitious target for an industry which has been a laggard due to weak government policies both at the national and international level. This has systematically crippled a sector that usually thrives in middle-income economies. Thus, the focus on electronics manufacturing by the Digital India mission presents a pronounced opportunity for the languishing sector especially at a time when India’s GDP growth has been sliding. But India might once again miss the boat.
The world’s electronics manufacturing base has been shifting to countries like Taiwan and Vietnam. Companies set up their manufacturing plants there because these countries provide a conducive environment for manufacturing growth. India needs to reduce the transaction costs for companies and give them the right incentives to become globally competitive and thrive in the global market.
India ignored electronics manufacturing for almost a decade. The country signed the WTO’s Information Technology Agreement (ITA) in 1996. As per this agreement, India eliminated tariffs on several IT products, including mobile handsets. The domestic market was flooded with cheaper, imported electronics and no attention was paid to the domestic industry. Japan’s NTTDocomo launched the world’s first smartphone in 2001. The first IPhone was launched in 2007. But there was no focus within India to manufacture smartphones. The government’s first electronics manufacturing policy was released in 2012 and that too saw a very dismal response. Until 2014 there were only two mobile handset manufacturing units in the country.
India’s electronics goods demand is increasing with a Compound Annual Growth Rate (CAGR) of 22 percent and is expected to touch $400 billion by 2020. A large part of this demand is linked to mobile handsets and it is currently being met through imports.
Imports on the rise
During the past five years India’s electronics imports have doubled to $57 billion and by 2020 India’s electronics import bill may cross the oil import bill. A large part of the electronics import include mobile handset components. According to a PriceWaterhouseCoopers study, India’s domestic value addition in manufacturing for mobile handsets is 7 percent. This doesn’t augur well for the country’s trade balance. India needs to manufacture the more expensive electronics components domestically.
Under the Digital India Mission, the country has set a target of producing mobile handsets worth $190 billion. Out of this the country aims to export mobile handsets worth $110 billion. The government has released the National Electronics Policy 2019 to meet its objective. While the policy offers various incentives to the mobile handset manufacturing units, it cannot be successful until the core issues plaguing the Indian manufacturing sector are addressed.
In 2019, electronics giant Samsung expanded its Indian plant to set up the company’s biggest mobile-phone manufacturing site globally. The company promised to manufacture 120 million mobile phones annually by 2020. This was seen as an achievement of the Digital India Mission. In less than a year the company informed the government that it cannot end-to-end manufacture handsets in India. The company wrote that it will continue to import components like display and touch panels to remain globally competitive. These two components account for almost fifty percent of a mobile phone’s production cost. Importing just these two components effectively makes the Samsung’s India factory more of an assembly unit versus a true mobile handset manufacturing unit.
Like Samsung, Chinese firm Xiaomi also claims to manufacture handsets in India. The company has seven units in India; the first set up in 2015. It still imports 35 percent of the handset’s components and sources 65 percent of them locally.
The situation at Samsung and Xiaomi is no exception. India boasts of 268 mobile handset and accessories manufacturing units. But all of them are either manufacturing the cheaper parts of the phone or are only assembling the imported components without any value add. Such manufacturing does not solve India’s problem since it continues to import the more expensive parts.
The issues with electronics manufacturing in India are linked to the broader sectoral issues. India’s manufacturing sector is marred by structural challenges which add 10-12 percent to the costs. Between 2016 and 2018, the share of manufacturing in GDP in India has remained stagnant at around sixteen percent. The government wants to increase the manufacturing sectors share to twenty five percent by 2025. But this target is not easy to meet. Fitch Ratings has cut India’s GDP growth forecast for FY20 citing manufacturing sector slowdown as one of the factors.
In the case of electronics manufacturing, India can lead only if the government facilitates the development of domestic infrastructure, supply chain and logistics, reduces the cost of finance, makes quality power available, invests in human resource development, and encourages research and development.
The government has set up electronics manufacturing clusters to address structural issues. These designated manufacturing areas have well-developed roads, regular power supply, and availability of cheaper credit. Andhra Pradesh and Karnataka, two South Indian states, have taken a lead in this regard. The government is also using temporary tariff barriers to protect the domestic industry. These measures partially address the situation at hand but they cannot make India competitive in the long run. They incentivise production of more expensive goods domestically rather than their import. This hurts the customer in the short run as she has to buy more expensive goods and it makes the industry unviable in the long run as the demand plummets due to higher prices.
Lackluster policy intervention
Competitiveness in the electronics manufacturing sector is closely linked to innovation. Innovation in electronics manufacturing requires intense research and development. The government is creating a Sovereign Patent Fund to promote the development of intellectual property to boost export competitiveness. But the private sector still needs to lead independent research and development initiatives. In most countries that have become manufacturing hubs, governments have offered large tax incentives to companies for research and development. India is not offering sufficient tax incentives to become attractive enough for companies.
India stands at an important juncture in its economic journey. While at one hand, a few potent structural changes promoting research and development, incentivising manufacturing and improving the core skills can change the manufacturing story in India, on the other hand, a lackluster policy intervention is further squeezing the ailing sector. India’s true opportunity lies in understanding the developing landscape of needs in the electronics sector -- ranging from micro-sized IoT devices to large electronic equipment that form the backbone of any modern day infrastructure, and then incentivising the production of such equipment. The key to success in this sector is in diversification of products and then supporting the entire ecosystem with the requisite policy framework and resources. Else, Prime Minister Narendra Modi’s Digital India push shall stay confined to a story of 268 mobile phone assembly units.
Malvika Jain is a Masters Degree Candidate (Journalism) at Harvard University.