Electronics Manufacturing in India and the Import Conundrum

Indian consumption has grown consistently during the previous two decades and has achieved critical mass in the previous few years. Unfortunately, however, India reduced barriers to external trade much earlier than it reduced barriers to internal trade within the country. As a result, manufacturing in India remained mired in red tape and cascading taxation while its home consumer market was exported away. In some industries like textiles, a combination of low cost labor, factor endowment in cotton and high barriers to imports kept manufacturing in the country whereas in other industries like electronics, the entire market was exported away.

India is a large consumer of electronics and consumption is growing rapidly. It consumes electronics both on the capital as well as the consumer side. India imports almost its entire requirement of telecom equipment, power systems, industrial automation, medical devices, consumer electronics, white goods, brown goods, small appliances etc. etc. It is estimated that by 2020, India’s imports of electronics will exceed its imports of crude oil.

65% of India’s population is directly or indirectly dependent on agriculture. India urgently needs to move people off the farm and needs to create jobs in manufacturing and services for them. Electronics manufacturing is a large potential employment generator for the country. However, there are several challenges in making this happen. The biggest problem is that labor forms a very small part of the value addition in most electronics. The flood of electronics imports into the Indian market resulted in the closure of almost all electronics manufacturers and therefore in the closure of their entire component vendor ecosystem. Today, India does not make any electronic components or parts. The second problem is that the engineering skills and capabilities required for electronic product development and manufacturing has been lost in the country. An entire generation has not been trained in the skill-sets needed for the electronics industry. While these skill-sets are not rocket science, training in them will take time and will require the overcoming of a high level of inertia. Finally, the capital intensity combined with high rate of technological obsolescence of several core components like semiconductors, displays, photovoltaic cells, lithium cells etc. will require that the barriers to imports and profitability of manufacturing are large enough to justify the investment.

The implementation of the Goods and Services Tax (GST) is likely to be a big catalyst in the emergence of the electronics manufacturing industry in India. The elimination of inter-state distortions and the creation of a single national market have put Indian manufacturing on a level playing field with imports.  However, to give capital allocators the incentive to invest in an electronics manufacturing ecosystem in India, the market will require some protection. There is a very large and powerful electronics consumer lobby in India. The opportunity is ripe for the government to ignore the lobby and to put a material progressive import duty regime that becomes higher as the value addition in a potential imported item increases. This will first ensure that finished product imports into the country come to a halt. Once a large enough universe of assemblers / box builders emerges, demand for components in India will reach critical mass and it will become viable for components to be manufactured in the country. The emergence of a component ecosystem will make Indian manufactured electronics so competitive that the emergence of an Indian electronics export industry will become inevitable. It is possible that some very low return and high capital intensity components like semiconductors that require a global market may never be made in India. However, that may not be the worst thing in the world. India should always remain a capital disciplined economy and compete on merits and capabilities rather than capital destroying distortions.

The future of manufacturing is shifting from mechanical to electronic whether in electric vehicles, autonomous cars, industrial automation or 3D printing. It appears that the Indian government is seized of this opportunity and that it is working on putting the necessary policies in place. Once this juggernaut gets started, it will become unstoppable. Electronics manufacturing in India is a space worth watching.