August 2012

Encouraging IT Manufacturing in India

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Dr Jaijit Bhattacharya, President, Centre for Digital Economy Policy Research; Director, South Asia, Hewlett Packard
The current market for IT hardware and electronics in India is USD 36 billion per annum. This is expected to grow to USD 400 billion by 2020. As of now there is insignificant value add domestically for the IT hardware and electronics sold in India. As one of the policy measures to mitigate the above issue, Ministry of Communication and information Technology, Government of India has therefore recently come out with Preferential Market Access (PMA) notification. The Preferential Market Access policy provides for at least 30% of government IT market for domestically manufactured equipment as long as the equipment matches L1 (i.e. the least price bid for the tender) and Q1 (i.e. the best quality offered by any other entity for the tender). As per the PMA, products will be considered as domestically manufactured if they have at least 25 percent local value add. To implement PMA, the government has to construct detailed guideline and processes by which one can track the percentage of local value add for each kind of equipment. For example, if the equipment is a computer, then the government would need to validate how many components of the computer are domestically manufactured. In addition the government would need to define what constitutes a domestically manufactured component. For example, if the hard disk is imported into India and locally only casing is added to the hard disk, would this be considered to be a domestically manufactured component? Clearly, such processes would be cumbersome for the manufacturer to comply with and cumbersome for the government to monitor. Therefore the proposed rules will lead to significantly increased compliance costs and significantly  increased interference by lower levels of the government machinery as it would provide them with discretionary powers. The above process would also divert the attention of the manufacturer from manufacturing better product at lower cost to focusing on accounting procedures to prove larger domestic value add. The above regime would also lead to extremely complex processes to be adopted for allocating general expenses and common expenses such as sales and marketing, accounting, guest house expenses, ERP costs etc to each SKU manufactured. Such allocations will also get challenged by procuring agencies, leading to higher costs of litigation. The industry will get retarded as the industry will loathe moving to newer products since, for each new product, the entire process of demonstrating percentage of local content will have to be done from scratch. Even currently, government procurement, especially through DGS&D, inhibits newer products from being introduced as the rate contracts are for a year and does not factor in obsolescence and introduction of better products at same or lower prices. This is inimical to an industry where products get obsolete within three months. Moreover radically new products will have radically different architectures which will make it even more difficult for the innovators to prove the levels of domestic production to the government procuring agencies. The PMA policy also needs to be strengthened to ensure that it is able to accommodate radical innovations. The monitoring of PMA becomes more complex when one has to factor in and value domestic innovation and IPR as there is no watertight market based price discovery mechanism. MSME’s are the backbone of innovation. MSME’s already face significant challenges for manufacturing which is compounded by  manufacturing inspections and compliances which hold them back from innovation. It would be extremely challenging for MSME’s to face additional burden of having to prove domestic value add for their innovative products. Therefore, to promote innovation in domestic manufacturing the Government of India should consider updating its procurement processes to ensure that government can procure innovative products and thus promote innovation in  domestic manufacturing. In addition, the government should consider funding ICT manufacturing  research and development, adopt pro-manufacturing  tax rates and labour laws, and establish ICT manufacturing educational programs, and otherwise incentivize investment in the ICT manufacturing sector on a non-discriminatory basis. The government may also consider adopting labour laws that are specific to IT and electronic manufacturing industry to ensure an uninterrupted manufacturing environment. Specifically for the Greenfield and Brownfield clusters proposed to be developed under the Triad of IT policies should have all clearances and approvals a priori so that potential  manufacturers need not face the hassle of running from pillar to post to get clearances. In addition, these clusters should be declared as “Inspector- raj-free” zones. It is indeed a challenge to rapidly increase domestic content in electronic goods. Domestic Content can be increased in a phased manner with the development of component industry. A combination of good infrastructure, favourable tax regime, appropriate labour laws, conducive policies, capital at globally competitive costs, availability of skilled manpower and a proactive implementation of the manufacturing policy roadmap would go a long way in speeding up domestic manufacturing of IT hardware and electronics.
the author
is President, Centre for Digital
Economy Policy Research; Director,
South Asia, Hewlett Packard

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