India lost the first manufacturing race to China, but a second manufacturing revolution is just shaping up. Will India catch this bus this time? Will the Union Budget 2008 deliver what it takes to build the manufacturing ecosystem?
India has been a strong player in software and services. However, our competencies in hardware manufacturing will decide our competitive advantage in the global electronics industry.
Today, India contributes less than 1% of global production, where China outnumbers us almost 100 times. India has a great opportunity to be a part of the global supply chain but we have to realize that there is only a small window of opportunity and we are fighting tooth and nail with countries such as Vietnam, Czech Republic and Mexico City where manufacturing clusters are fast emerging.
This is an industry of scale—a key driver to bringing down costs. For countries such as India, this is a chicken-and-egg situation. The first thing is to build the size of the PC market, which is the door opener for the entire ecosystem. Over a period of time, with the right policy and logistics environment, the ecosystem will build, but there are no short cuts. It is no coincidence that the mobile phone manufacturing ecosystem began to develop, once a critical scale emerged.
The focus should be on building a large domestic market, supporting existing computer manufacturers and thus encourage them to pull in their suppliers to India. The instability in tax structure has led to a “wait and watch” policy especially among manufacturers of components and sub-assemblies since these are significantly capital-intensive. The immediate priority is to have a stable, simple and transparent taxation regime for a period of 5-10 years so vendors can take a long-term view on investment.
Over the last few years, frequent changes have resulted in shaky long-term plans, leading to companies trying to solve the taxation maze instead of doing business planning. The excise duty itself has changed three-four times from 0% to 16%, and each time representations have led to “re-adjustments”. Even as recently as a few weeks back, a change in taxation rules founded on MRP (maximum retail price)-based excise duty on IT products with low abatement rates have led to an upward revision in costs. What the finance minister did for direct taxation where a reasonable, stable and transparent structure has been created, is the need of the hour for indirect taxation.
We need to build a common taxation rate across all products and sectors in the electronics industry. Sometimes in trying to resolve a problem for one group, we create a problem for another group. As a consequence, we are always trying to find that elusive state of equilibrium.
The IT ministry’s recommendations on reducing excise duty on all electronics, IT goods, components and parts to 12% from existing 16% and to ensure this as a stable and transparent tax structure across all parts of the value chain will create the right environment for the ecosystem to take root. The IT industry is currently undergoing a transformation in terms of form factor with a shift towards portables. There is an opportunity for India here as China has a smaller head start on notebooks compared with desktops that may make it easier for India to catch up. The notebooks are currently not being manufactured in the country and it is very important to encourage notebook manufacturing and further drive the shift towards notebooks by expanding market size. We should look at a zero duty regime across the entire value chain for products such as laptops and TFT (thin-film transistor) monitors, which are major power savers.
A strong emphasis on building infrastructure and eliminating logistical bottlenecks such as road permits, octroi, etc. will encourage manufacturers. These are not “glamorous areas” but working on soft infrastructure or self-created obstacles will ensure that the industry is enabled to be globally competitive.
Our initiatives today will decide whether this revolution will emerge stronger in India or elsewhere in the world. The Union Budget 2008 is the key.
(Ravi Swaminathan is president, p ersonal systems group, Hewlett-Packard India.)
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