What India needs to become an electronics manufacturing hub

India does not have any capability to make nano chipsets


AUGUST 3 WOULD have been just another Thursday for the electronics industry but for a seemingly business-as-usual notification issued by Directorate General of Foreign Trade. As the fine print of the notification became clear, realisation dawned across time zones that this was anything but business-as-usual. It ordered an immediate ban on import of personal computers, laptops, tablets, ultra-small computing devices and servers without a permit. About 65 per cent of India’s Rs66,000 crore market for these devices is imports.

Putting up an overnight ban does not immediately develop a local industry. ―Arjun Bajaj, director, Videotex

While alarm bells rang and heads of electronics giants lined up outside ministers’ offices in the following days, the order was given a three-month breather a few days later, now set to come into effect from November 1. The hardware retail sector is bracing for an upending of the laptops and tabs supply chain, leading to price rise and reduced availability when the Diwali shopping season kicks off.

“Nothing is being disrupted,” said Ashwini Vaishnaw, Union minister for communications, electronics & IT. “We had eight to 10 months of detailed discussions with leading hardware and electronics manufacturers. Already 44 companies have registered for the production-linked incentive (PLI) scheme. We are implementing only what has been discussed and decided. A clear transition period has already been set [and] notified, too.”

Industry doyens are sceptical. “Overnight policy decisions is not the right way,” said Arjun Bajaj, director of Videotex, a leading contract manufacturer that churns out 14 lakh televisions a year and is aiming at doubling its capacity. “Industry has to be prepared, recommendations from experts have to be taken. Changing policy and implementing it the next day? Global majors are watching and they get scared.”

Ironically, it is these same global majors that the government is hoping to entice with this move.

It started long before the Covid-induced global supply chain and logistics mismatch that led to scarcity of many goods and awakened western countries to the dangers of putting all its manufacturing eggs in the China basket. What was earlier some loan support to MSMEs or tax sops for startups expanded in scope into a ‘Make in India’ campaign in 2015, whereby Prime Minister Narendra Modi unveiled his vision of turning India into a production-oriented economy.

At the forefront of this thrust was the PLI scheme, which gave incentives to companies to set up manufacturing in India. Currently available across 14 categories such as medicines, telecom equipment, automobile components and solar photovoltaic modules, its biggest success has been in mobile phone manufacturing.

Until Nokia, then the market leader, set up a factory in Chennai in 2006, India imported all its mobile phones. The PLI scheme for large-scale mobile phone manufacturing aimed to get big brands to set up plants. The idea was that the 4 to 6 per cent incentive on incremental sales will offset the cost advantage of importing from China or Vietnam.

The result? India became the second-largest mobile phone manufacturer in the world, after China. Exports of mobile phones in financial year 2023 was worth nearly Rs1 lakh crore. All the big handset makers are making in India, not just for the domestic market, but for exports as well.

The government is obviously hoping to replicate the model―manufacturing incentives coupled with import restrictions and tariff hikes―in other critical areas, from lithium-ion batteries to electric cars and semiconductors. Just like the big fanfare over Apple’s contractors setting up production in India a few years ago, all efforts are on to hook in American electric vehicle maker Tesla and Taiwanese semiconductor giant TSMC.

But, in all this Arjuna-like focused push to become big, is the Indian government losing track of the finer nuances, the fallout on local manufacturers, or even violating WTO regulations? And, isn’t the PLI just the old ‘licence raj’ packaged in post-millennium jargon?

“PLIs and import restrictions are aimed at developing domestic manufacturing capabilities, reducing excessive import dependence and improving the country’s trade balance. Unlike permit raj, where it was not possible to import or export beyond a certain limit, these restrictions are positive in nature and encourage manufacturers to expand their production capacities,” said Saket Dalmia, president, PHD Chamber of Commerce and Industry.

Running afoul of WTO’s trade and tariff agreements is a possibility, but it depends on other countries raising the dispute, an unlikely scenario. “India always puts its best efforts to comply with WTO agreements while undertaking various moves related to import restrictions, duty hikes on exports and PLIs,” said Dalmia, pointing out that the country recently settled six disputes with the US.

There has been a global shift in dynamics after the pandemic, where countries are trying to protect their trade and geostrategic interests by not getting too dependent on one exporter, in most cases, China. “Post-Covid realities do call for sea change undoubtedly. India has been flexible while using these trade measures to serve the best possible interests of the nation and its industrial sector in particular and increasing the export trajectory of the country,” said Dalmia. The ‘China plus one’ strategy, whereby countries that depend on China for manufacturing are now looking for an alternative factory base, also works in India’s favour.

Not that it is all win-win. In the rush to woo global majors to set up manufacturing plants in India, domestic manufacturers are getting the short end of the stick. More crucially, how much of ‘Make in India’ is actually ‘make’ in India?

“India is all assembly manufacturing,” said Bajaj. “We are not manufacturing them here, we are reliant on other countries.”

This is where having an ecosystem of component manufacturers and semiconductors is needed, and for India currently, that is sorely lacking. “Putting up an overnight ban does not immediately develop a local industry. Ultimately components come from abroad and we assemble it here and call it ‘Make in India’,” he said.

More than 90 per cent of components that go into a mobile phone are imported from countries like China and Taiwan, even though the phone eventually has a ‘Made in India’ tag. It will be similar for parts like printed circuit board, transistors and integrated circuits that go into making computers and tabs, even if the import restriction forces companies to set up plants in India.

The country simply does not have any capability to make nano chipsets used in computers, and with some recent collaborations like Foxconn and Vedanta not getting off the ground, it will be years before India gains this capability. “We are not backing out. We do see a future of India as a manufacturing hub,” said Bajaj, “We have the ability, we just do not have the capability or the infrastructure.”