Did Modi's policies for electronics help achieve 'Make in India' dream?

The Make in India policy for electronics has achieved modest targets and manufacturers balk at stiffer ones

Electronics, principally mobile devices and telecom equipment, were the cornerstones of Prime Minister Narendra Modi’s “Make in India” policy to reduce the burgeoning import bill on these items. To this end, the government announced in 2017 an ambitious phased manufacturing programme (PMP) to transform India into a major hub for domestic mobile device production and increase value addition by creating a large component vendor base. Backing this was a punitive import duty on components that were not manufactured in India during the financial year set under the policy.

To boost “Make in India” the government also offered preference to companies that met the mandated local content levels in public procurement contracts.

Did the two policies help achieve the “Make in India” dream?

According to the Indian Cellular Association (ICA) —the association of mobile device players — it has been a raging success. ICA says it has achieved the PMP target of Rs 500 billion for domestic component manufacturing a year ahead of schedule (2019-20). And its members have manufactured over Rs 1,650 billion in terms of value of mobile devices in the country, ahead of the target of Rs 1,500 billion. Also, over 120 manufacturers have set up units in India and imports as a percentage of total production has fallen to 10 per cent.  

A closer look tells a different story. Local manufacture of crucial components has still not taken off as a result of which the average industry value addition on mobile devices is around 20 per cent, though the target is double that by FY2020 for smartphones. Indeed, ICA admits that production of microphones and receivers, die-cut parts and camera modules have not taken off though they were listed as key components under the 2017-19 PMP programme.

To this incipient problem came a move by the government last fortnight to advance by two months the target for locally manufacturing a new set of key components — display assembly, touch panels, cover glass assembly, vibrator motors and ringers — under the 2018-19 PMP, creating an uproar in the industry. The reason: Manufacturing these components requires large investments and between 18 and 24 months to set up, and most manufacturers have not invested yet. So manufacturers are demanding the deadline be postponed for a year. If not, they say the stiff 10 per cent duty on importing these components will increase the cost of producing mobile devices in India and encourage many manufacturers to simply import the entire device.

“All we are asking is that we should strengthen our domestic manufacturing base for products like camera modules and other items which are under the earlier PMP, rather than adding more components to the list for which large investments would be required,” said Pankaj Mohindroo national president of ICA.

Display panels alone account for 25 per cent of the cost of a mobile device. Even Samsung, which is investing $100 million to put up a display plant near Delhi, says that it will temporarily stop local production of flagship Galaxy S9 and Note 9 and import them. This route, say trade experts, makes sense for many global players that have factories in countries like Vietnam from where they can import without duty under the free trade agreement.

The preferential purchase policy to domestic manufacturing has not created the magic either. One, government contracts account for just one sixth of total equipment value (Rs 20,000 – Rs 30,000 annually ) and the rule does not extend to private mobile operators. Two, domestic manufacturers complain that public sector tenders are often tweaked with additional specifications, so that they cannot participate, leaving it to global players.  

The Telecom Equipment Manufacturers Association (TEMA), which represents Indian telecom equipment makers, say they should follow the auto industry policy, where high import duties were imposed to force indigenisation. Says TEMA chairman emeritus N K Goyal: “We are against a deferment of duty on displays. If import is cheaper than manufacturing in India we should increase duty to 35 per cent instead of 10 per cent to 20 per cent on devices and components.”

Global players say they would like to manufacture more in India but the value addition norms are too steep. “The local content requirement ranges from 50 to 100 per cent in 2019-20 and that is impossible to do so as the component vendor base is poor. Even in Vietnam and Taiwan the value addition is less than 20 per cent,” says a senior executive of a leading global telecom gear manufacturer.  

At the heart of the problem is inadequate incentives to set up a global component base. Unlike in the auto industry, global vendors for key components are limited to five or six big players and they prefer to set up a few mega plants to leverage cost through volumes. So they set up units in countries from where they can serve at least a fourth or fifth of their global market. “By merely increasing duty on components and hoping manufacturers would be forced to come to India, is far-fetched. They are not looking only at the domestic market but at an export hub. For that they are looking at how efficiently they can export, the government’s incentives and ease of doing business,” says a senior executive of a leading global component manufacturer. India, he says, has to compete with countries that have more aggressive policies to woo them like Vietnam.

The slowdown in China and the trade war has offered new opportunities as mobile device manufacturers and telecom equipment makers and their vendors to search for an alternative. India has an opportunity, but it is Vietnam and Malaysia that are grabbing the spoils.