India is becoming home to a growing middle class population. Increasing disposable income has led to increased consumer demand for electronics products specially advanced TV’s, mobile phones and computers. The demand of electronic products is expected to grow at a CAGR of 41% during 2016-2020 to reach USD 400 billion by 2020. This surge in demand is huge which shows a positive outlook for the industry. However, what needs to be addressed to meet government’s vision of turning India into a manufacturing hub is the domestic production.
From the supply side, The government has placed electronics manufacturing on high priority with major focus on initiatives such as Digital India, Make in India and supportive FDI policies to bolster electronic manufacturing. As a result, domestic production is expected to grow at a CAGR of 27% during 2016-2020 to reach USD 104 billion in 2020, as compared to the CAGR of 9.6% during 2010-2016.
Electronics market has witnessed a growth in demand with market size increasing from US$ 145 billion in FY16 to US$ 215 billion in FY19. The advanced electronics market has witnessed a growth of 14% CAGR from 2016-19. According to the DPITT, FDI inflow into the electronics sector stood at US$ 2.91 billion from April 2000 to June 2020. Chinese companies like Xiaomi, Huawei and Lenovo group, and even Korea’s Samsung, are already announcing plans to open manufacturing plants in India. India has now surpassed Vietnam and has become the world’s second-largest producer of mobile phones. Even though China is the default option for most importers, India’s new policies may provide lucrative new opportunities. With the outbreak of trade war between the US and China, India could end up benefiting by capitalizing on international trade.
In April 2020, the Indian government approved three key schemes to position India as a global hub for Electronics System Design and Manufacturing (ESDM). This move is anticipated to attract minimum investments worth US$ 6 billion into the country. Another motive was to further strengthen the ESDM ecosystem with a complete value chain and position India as the global hub for the electronics industry.
The 3 Schemes are:
- Production Linked Incentive Scheme (PLI) for large scale mobile manufacturing.
- Scheme for Promotion of Manufacturing of Electronic Components and Semiconductors (SPECS) for domestic electronics supply chain of components.
- Modified Electronics Manufacturing Clusters Scheme (EMC 2.0) for infrastructure and common facilities for large manufacturers and value chain companies.
Currently, only a few electronic products bear a “Made in India” tag, and the Indian government is trying to increase the metrics. In the past decade, the average disposable income of Indian consumers has been rising. More disposable income is creating a greater domestic demand for electronic products. But imports satisfy 75% of that demand. In efforts to solve this issue, the Indian government has launched a “zero imports by 2020” policy. It features a combination of tax breaks, industry-wide incentives, ease in foreign direct investment rules and a rise in import duties.
The ESDM sector plays a key role in the government’s goal of generating US$ 1 trillion of economic value from the digital economy by 2025. For this reason, the Indian government has allowed 100% FDI under the automatic route in the advanced electronic sector. In case of electronics items for defence, FDI up to 49% is allowed under automatic route and beyond 49%, government approval is required. The sector in India is predicted to reach US$ 220 billion by 2025, expanding at 16.1% CAGR between 2019 and 2025.
The government is focusing on the electronics manufacturing industry mainly for two reasons – (1) It is a highly labour-intensive industry that will create job opportunities and help reduce unemployment in India. (2) If India does not utilise its manufacturing capabilities, it would need to import consumer electronic goods. It will result in the outflow of the valuable foreign exchange.
Although there is a huge leap in the projected production figures for 2020, the domestic production is projected to meet only 26% of the domestic demand. Government intends to squeeze this demand-supply gap so that the “ Make in India” dream becomes a reality. Looking at several initiatives and policy reforms that have been put in place to bolster domestic manufacturing, we think that this proportion of 26% is bound to increase. Apart from progressive government policies and reforms, the growing demand is also another major reason for increase in domestic production.
The growing demand coupled with government support for the sector has encouraged domestic players to invest in the sector. Initiatives such as Make in India, Digital India will not only provide quantifiable benefits but will also bring about intangible benefits, in terms of changed mindset of foreign investors towards India, wherein, they will start treating India as a true partner which can add significant value in the production cycle rather than being just a low cost manufacturing destination.
Multiple economies worldwide are devastated due to the pandemic. Yet, one country gained an attractive investment from some of the biggest tech and electronic companies- India. More than 15 companies invested almost 20 billion dollars in india between April and July this year. Some of the investors were Google, Walmart, Facebook, Apple and Qualcomm. The International Monetary Fund Predicted that there will be a negative growth rate of minus 4.9 percent for the world economy in 2020 and also projected a sharp contraction by 4.5 for the indian economy. But even after these predictions these investments were made.
So why are these companies investing in india? What benefits could they gain from this well?
Due to COVID-19, a new cold war has started between the U.S and China and. Due to this, many electronic manufacturing companies are relocating their facilities. For example, a major contract manufacturer for apple is shifting six production lines from China to India with a target to export around five billion dollars worth of iphones from India along with simultaneously catering to the Indian market. Apple vendors aren’t simply looking to make only iphones but also planning to shift manufacturing of ipads, macbooks and other products in the next few years. Similarly, manufacturers like Wistron, Pegatron, Foxconn and Samsung are also thinking to expand their manufacturing facilities in India
India is already the second largest mobile phone manufacturer in the world. Yet, to attract more electronic manufacturing companies and to create an ecosystem, the Indian government has recently announced production linked incentive schemes. The Indian government already has received 22 applications from firms ranging from assemblers to electronic component producers.
This scheme will provide a six percent financial incentive on additional sales of goods produced for over a five-year period. As per the government, these companies will produce mobile phones and components worth 153 billion dollars during this five-year duration and 60 of these products will be exported to other countries. Also these companies agreed to offer direct and indirect employment opportunities to 1.2 million indians.