Making India the hotspot of electronics manufacturing
India’s PLI (production linked incentives) scheme, while by no means a golden bullet, does address this disability of higher component costs to some extent.
The demand for ACE (appliances & consumer electronics) in India is growing, indicating a rise in consumer wealth (there has been a 151.7% increase in per capita GDP at constant prices between 2011-12 and 2019-20). The ACE market is expected to double in size to ₹1.48 lakh crore by 2025 (IBEF) as a result of tailwinds like low-cost consumer credit at point of sale, climate change, and changes in consumer behaviour. There is a significant growth opportunity for Indian companies operating in ACE. But like it is with most opportunities, there are significant challenges – the most pressing of which is India’s dependence on electronics imports.
Indian companies have not invested in electronics R&D and manufacturing capacities in a significant way thus far, largely because of the limited market size and challenging investment climate. They have fulfilled a majority of their market demand through the import of finished products or the low tech assembly of imported modular subsystems. This has resulted in a significant reduction in our domestic value add in these products and, perhaps more dangerously, stymied the generation of domestic IP. Consequently, India is a net importer of electronics. ht (ELCINA).
A matter of national interest
The economic value generated by manufacturing ACE that India consumes must be realised within our own borders. However, India still has a large distance to cover before we capture the majority of the value generated by our domestic demand. The union government has recognised that this is a matter of national importance and is taking several steps to boost electronics manufacturing, reduce import dependence, attract investments and create employment.
Policy measures such as the Production Linked Incentive for White Goods (air conditioners and LEDs) and other such PLIs are a good start. These schemes help address a critical constraint that makes it difficult for Indian companies to compete with their Chinese counterparts – higher component costs. Indian companies find it difficult to keep pace with the positive economics Chinese companies enjoy as a result of their large local manufacturing base, lower logistics costs, and strategic local costing. This disability has been estimated to be as high as 8-10% of BOM costs for ACE.
PLI scheme, while by no means a golden bullet, does address this disability of higher component costs to some extent. Approved manufacturers will enjoy incentives of 6% of the selling price in year one, gradually reducing to 4% in year five. The max sales value that is eligible for incentives is capped at five times the minimum investment threshold. For example, a company that invests INR 50 crore over 5 years may be eligible for a maximum sales incentive of INR 37 crore in the event they generate sales of INR 750 crore.