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India Can Ride the Wave of Hi-tech Manufacturing

Published: 29th August 2015 06:00 AM  |   Last Updated: 29th August 2015 12:22 AM   |  A+A-

With the call for ‘Make in India’ campaign by Prime Minister Narendra Modi, many industrial countries are now exploring the possibility of making India a manufacturing hub. In the last few years, China’s manufacturing capacity has hit stagnation, owing to the growing labour cost and its discouraging policies towards foreign companies. And in the recent weeks, China’s economy has started to show signs of weakness that could probably be systemic in nature.  Countries like Japan and Taiwan that have traditionally set up manufacturing units in China have slowed down their investments into that country for the last three years.  Most other East Asian giants are now looking for alternative destinations. This could be a golden opportunity for India if it positions itself proactively, both as a growing market and a preferred manufacturing destination.

India happens to be one of the fastest growing markets, adding millions of consumers to the global market with each passing year. Due to availability of non-agricultural jobs in expanding industrial and urban areas in the last two decades, India has been creating one of the world’s largest middle-class groups through economic upward mobility. Nearly 120 million Indians moved into the middle class during 2004-2010 – that’s more than one-third of the US population. According to the World Bank, India may have a billion people in the middle class by 2025. One of the modern trends of Indian middle class has been its growing appetite for consumer electronics. Gadgets like TV, PC, mobile phone, which were considered luxuries a few decades ago, are now considered basic necessities. India’s young and ambitious population is ready to spend twice the monthly salary to own an electronic gadget that has a lifetime of two years. Plus, the Indian businesses are buying more telecom equipment gear and enterprise electronics each year – already our communication equipment import exceeds $30 billion. Currently, India is consuming $100 billion worth of electronics, about 5% of our GDP, and this is increasing at a Compound Annual Growth Rate (CAGR) of 37% to reach $400 billion in five years, soon to overtake oil as India’s biggest import.  Alarmingly, the bulk of this consumption is met by imports.  The current domestic electronic production is increasing at a snail’s pace of 15%, further widening the yawning gap with domestic consumption.

India is creating one of the world’s largest workforces on the planet – adding 13 million each year, out of which 1.5 million are engineers.  Thanks to the demographic dividend, India has the largest youth population in the world. While more than two-thirds of India’s population will be younger than 45 by 2035, nearly half of China’s population will be older than 45 – mainly due to their one-child policy.  This is an opportunity as well a challenge for India. If this we can increase our manufacturing base, it could provide employment to this growing workforce; and if it doesn’t, it could create large-scale unemployment leading to discontent. Of late, many manufacturers in China bemoan that they are finding it tough to hire qualified labour at reasonable cost. With India’s wages roughly at two-thirds of China, it offers a competitive advantage.  

How India reacts to this unique opportunity offered by changing dynamics in the manufacturing sector in Asia will decide the next three decades of its economic growth.  Modi’s government started off the ‘Make in India’ campaign in the right direction by creating a differential duty structure to mobile phones and tablets, encouraging manufacturing in India.  Already 14 mobile manufacturers have evinced interest in making their phones in India. Recently, Foxconn, world’s largest electronic manufacturer, announced $5 billion investments. Learning from this, the Central government should extend the same differential duty structure to all consumer electronics and telecom equipment. This will spur local manufacturing on an unprecedented scale.

An even better option is to extend tax holiday to electronics manufacturing akin to what India did to software services for nearly 20 years that created a $80 billion  export industry. While India already captures more than 50% of world’s software outsourcing market, it contributes to less than 1% to the global $2 trillion electronics industry. Also, it is time for some radical thinking to boost manufacturing across all domains. India could reduce the corporate tax for manufacturers from the current 30-40 per cent to a flat 17 per cent like in Taiwan. While this may look like a huge loss in receipts, it will actually increase the manufacturing base and employment base compensating for the loss many times over.

Nowadays, states in India have realised the potential of manufacturing industry to boost their GDP and provide employment — they have been wooing investors as if they are in a race. We already see states like Telangana going a step ahead in the game, creating one of the friendliest industrial policies and pragmatic tax exemption structures. Such a competition is in fact quite healthy where each state offers aggressive tax subsidies and incentives. While moving towards GST, New Delhi should allow each state to reduce the taxes while capping the upper limit.  This flexibility will allow the states to choose what kind of industry they want to pursue. While some may incentivise automobiles, some may choose to pursue electronics, while others may pursue chemicals, textiles or pharmaceuticals.

India could learn a lot from the Taiwan miracle. An island that had per capita similar to that of India 50 years ago is now one of the Four Asian Giants.  With a population less than that of Chhattisgarh, it has a GDP nearly half of India’s. Most importantly, the Taiwan government played a pivotal role in the rapid industrialisation and growth of economy, starting off with a series of bold initiatives three decades ago.

With state incentives to SME industry, tax subsidies to manufacturing units, R&D grants, and establishment of premier industry research institutes like ITRI, Taiwan promoted entrepreneurs and businesses units to create companies like Foxconn. Taiwan government created Hsin Chu Science Park that hosts public-funded companies like TSMC and Mediatek which take up 64 per cent of the market share in global semiconductor manufacturing.

By being proactive, India could take this opportunity that is knocking on its door to take on the next wave of hi-tech manufacturing to boost its economy and provide massive scale of employment to its youth. And the Government of India has to play an important and vital role.

The writer is  Director Electronics with IT E&C Ministry, Telangana. E-mail: sujai@sloka.in

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