New policy to earmark purchases from domestic electronics firms

New policy to earmark purchases from domestic electronics firms

New Delhi: India is considering a move that would make it mandatory for all government departments to make at least one-third of the annual purchases of computers and other electronic equipment from domestic manufacturers, according to an official at the department of information technology (DIT) who did not want to be identified.

The move is aimed at giving a boost to electronic manufacturing in India. While parts of the initiative may be in breach of international trade rules, the government is looking at ways of ensuring compliance, the official said.

The government is one of the biggest buyers of hardware in India. According to market research firm International Data Corp., 6-8% of the $10 billion (Rs 47,000 crore) that will be spent on computers, servers and other hardware in India in the current fiscal to March will be accounted for by the government.

The idea has been welcomed in some quarters, but several experts said it’s impractical because India lacks the electronic components industry backbone that would make local manufacturing work. Most companies that manufacture in India merely assemble components imported from China and Taiwan.

There are several who consider the move a bad idea and some of them, according to the DIT official, have begun lobbying against it. Mint couldn’t independently ascertain this.

In 2009-10, India’s electronics import bill was $29 billion and this is expected to rise to $323 billion (at current growth levels of 16%), which in turn will lead to a trade deficit of $296 billion in fiscal 2020, according to a report by Avendus Capital Pvt. Ltd.

The draft DIT policy has been sent out for comments to other ministries, the DIT official said.

The ministry’s policy note is based on recommendations by the Telecom Regulatory Authority of India. A government task force on manufacturing also said in a report that India will spend $400 billion on electronics in 2020, up from around $45 billion in 2009. In a recent interview to Business Standard, minister of state for planning Ashwani Kumar said that it was possible that by 2030, the import bill for electronic equipment will outpace the petroleum, oil and lubricants segment unless domestic manufacturing kicks in. India spent around $106 billion on oil imports in 2010-11. According to the same newspaper report, the Planning Commission had proposed 30% preferential access, or reservation, be given to domestic manufacturing in government procurement.

According to the policy being considered, companies that are selling products not based on patents registered locally, can sell to government departments only if the products have had 25% of their value added locally in the first year. This has to increase to 45% by the fifth year. In the case of companies selling products based on local patents, the corresponding proportion has to be 40% and 60%.

Although most technology multinationals have research and development facilities in India, few make products locally and even those that do, will be hard-pressed to meet the criteria laid out in the policy.

“Even companies that manufacture in India are mostly assembling components imported from mainly China and Taiwan. No company manufactures everything themselves or has all suppliers in one country," said an executive at one of the top IT companies operating in India, who spoke on condition of anonymity.

The executive added that there are hardly any component makers in India and that in the case of some products, such as servers, there is little scope for localization.

“The maximum localization that can be done in any product is 10%," said a second executive at another IT company, who too didn’t want to be identified. He added that even though India has a large domestic market and cheap labour, the reason IT manufacturing isn’t a thriving activity is because of poor infrastructure and logistics, besides the tax regime and labour laws. “Why is the government forcing companies to set (up) shop; they should just fix these issues and companies will come on their own."

The DIT official said that the government would aim to ensure that the support systems are also established.

“We are setting up semiconductor fabs (fabrication units), which command 10-40% of the value of the product, giving incentives to the industry and setting up clusters, which will be islands of good infrastructure," countered the DIT official. “And for the rest, there are electronic manufacturing services companies such as Foxconn, Flextronics, which manufacture products across the board in bulk. Currently, their operations are very small in India, but if they expand, then the industry can procure from them."

The department’s only concern is that some aspects of the policy could violate World Trade Organization (WTO) norms. “Government procurement is exempt from the WTO framework," the DIT official said. “However, private procurement is not. Some of the government-licensed agencies may fall into that category, so we have to figure out how to include them in the policy."

Poornima Shenoy, founder and former president of the India Semiconductor Association, said the proposal does not look like it violates any of WTO terms. “The government is only saying that if it gives business worth thousands of crores to these companies, then some part of it has to be returned to the country in the form of investment," she added.

This isn’t the first time the government is trying to give a push to the domestic manufacturing of electronic equipment. In 2007, it unveiled the Special Incentive Package Scheme to turn India into a chip production hub. Under the policy, the government offered to underwrite 20-25% of the capital expenditure. Not only was the policy ill-timed—it coincided with the global economic crisis—but domestic industry found the threshold limits for investment unreasonable.