State of Electronic System Design and Manufacturing (ESDM) industry in India
Part 3/3: Setting the India ESDM strategy
After decades of hesitation and disbelief, India seems determined to shake off its past and become a global electronics manufacturing and export hub. But will it work? In this concluding 3/3 part series, we take lessons from strategies adopted by earlier successful east Asian economies and recommend a possible path to India’s success trajectory.
What’s different now and why can it work?
- Economically, India now has the critical mass, momentum and capacity to commit required resources; besides having favorable business friendly political environment to implement bold policy reforms.
- COVID-19 and changing geopolitical climate has necessitated a shift in global supply chain strategies. As countries look to diversify trade options, India finds itself in a sweet spot to deliver.
- Purchasing power of Indian market is rapidly scaling resulting in strong consumption led production growth, as witnessed by consumer electronics boom. This can also act as a springboard to build scale and export competitively to global markets.
Lessons from the East
Several East Asian economies have successfully charted the path to developed economies with electronics and semiconductors as the primary vehicle. Japan, South Korea and Taiwan in the last century and more recently China have executed a well-planned strategy to build domestic ESDM industry and become global electronics powerhouses.
We saw in part 2 to this article how China and Vietnam carefully calibrated the interplay of Scale and DVA to navigate their path to reach domestic industry targets.
India Approach
Indian policy approach, in general, shows a mixed thrust to improve Scale and DVA simultaneously:
- Policies towards increasing Scale: National Policy on Electronics (2019), Duty and Tax remissions on exported products (2021), PM Gati Shakti (2022)
- Policies towards increasing DVA: Budgetary updates to gradually increase basic custom duties (FY 2018–23), Phased Manufacturing Program for mobile handsets and components (2017), Public procurement norms for electronics (2020)
- Policies towards increasing both Scale and DVA: National Manufacturing Policy (2011), Make in India (2014)
Strategy Options
Option 1: Increase Scale and DVA sequentially
While China exhibits high Scale and DVA now, it is critical to understand it’s strategy to dial down the DVA to low rates, allow unimpeded component imports, build domestic production before refocusing on DVA development. As we saw in Part 2, both China and Vietnam have successfully applied this sequential strategy.
Option 2: Increase both Scale and DVA simultaneously
Attempting to simultaneously increase Scale and DVA, which is the path India appears to be currently taking policy-wise, does not seem to be guided by empirical evidence. Countries like Thailand which have tried to maintain relatively higher DVA while achieving Scale have typically lost out on investment opportunities to countries that have not insisted on DVA requirements like Vietnam and Cambodia.
Opinion
India has had low Scale and DVA in electronics sector in the past two decades. Despite repeated attempts, strategy Option 2 to simultaneously increase Scale and DVA has not yielded results.
Our considered opinion is that India should take a nuanced, objective and evidence-based approach to reach Vision 2026 goals.
A. 2023–27: Meet USD 100–125 billion export goal by focusing on Scale alone.
B. 2027–30: Set USD 300–400 billion export goal where we continue primary focus on Scale while selectively focusing on priority and strategic areas to increase DVA.
C. >2030–35: Set USD 1–1.25 trillion export goal where we can assess and mandate minimum DVA requirements while growing Scale.
If we adopt a nuanced strategy as outlined above, what are the immediate next steps?
- Immediate cessation and absolute clarity in short-medium term basic custom duty (BCD) policy in favor of Scale and not DVA: This would mean signaling a near 0 BCD commitment until we meet our Vision 2026 export goals. BCDs like 2.5% on PCB assembly, camera modules, etc., 10–15% on charger related elements, etc. need urgent removal.
- Negotiate and close Free Trade Agreements (FTA) with key export markets on war footing: There are several FTAs that are under negotiation and have been dragging for years. For realistically meeting Vision 2026 goals these need to be expedited with favorable terms for providing access to electronics market in these key geographies.
- Suspend policies that support DVA while further incentivizing policies that support Scale: Policies like PMP that insist on minimum local content must be withdrawn in favor of policies like PLI which need to be tuned with enhanced time frame commitments that would encourage more investments.
Conclusion
India has a realistic shot at becoming an electronics powerhouse that it has long aspired and deserves to be. There are also favorable circumstances that can potentially catalyze this transformation. It is time to seize this opportunity window to catapult India to electronics leadership. This is possible only if we play our strategy and execution right over the next 10-15 years.
Plug
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- Stay connected with me on LinkedIn or Medium
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Series Links: State of Electronic System Design and Manufacturing (ESDM) industry in India
- Part 1/3: Taking stock
- Part 2/3: Understanding challenges
- Part 3/3: Setting the India ESDM strategy
Sources
MeITY, ICEA
