The Manufacturers’ Association of IT (MAIT) has urged Ministry of Finance, Ministry of Commerce & Industry and Ministry of IT & Communications to address the critical challenges faced by Indian hardware industry due to the existing foreign exchange volatility.
MAIT pointed out that the IT hardware industry has already proven to be the backbone of nation’s growth as it is critical enabler in enhancing inclusion, reach, productivity and speed in all kinds of economic activities. It is relevant to all government projects and programs like those of education, e-governance, healthcare, financial inclusion, etc. as technology is widely adopted. Every nation considers IT as integral to their success which has made this industry worldwide as one of the fastest growing in the world. The World Bank’s reports state that 10% increase in computer and broadband penetration increases GDP by 1.38%. This is particularly relevant to emerging economies like India.
As per the estimates of Ministry of IT & Communications, the demand for IT hardware & electronics is expected to touch $400 bn by 2020 in India. With the current rate of domestic production, a significant $320 bn worth of IT Hardware & electronics will be imported to cater to this need in 2020. Electronics imports may even exceed oil imports and add to the deteriorating fiscal deficit. Therefore, the promotion of domestic manufacturing is key for future growth. This is possible only with high scale of investments and as a nation, we have to make such propositions attractive.
The current size of Indian IT Hardware industry is estimated to be Rs 70,000 crores. The industry suffered enormously during 2011-12 due to supply line disruptions caused by Japanese Tsunami and Thailand floods, which increased the prices of key components. However, the biggest impact to the industry is the Rupee devaluation and industry has been bleeding for the last three months with all IT hardware companies in the red regardless of domestic manufacturers or multinationals as the industry has over 85% import content.
Constantly raising prices is not possible. Almost 50% of IT hardware in India is consumed by the government in its operations as well as in various projects and programs. These contracts are time bound and locked on prices currently. Even for the commercial and consumer segments, the overall economic slowdown has prompted slow expansion and consumption which is impacting the topline in any case. The MRP-based duty structure is also an impediment to rapid price increases. The abatements for laptops and peripherals like printers and scanners is just 20% and insufficient to cover higher costs.
“Thanks to the Rupee devaluation we are all in red for the last three months. Losses are accumulating, causing cash flow challenges and blocking investments. Almost 85% of the entire industry has import content and more than 50% of our industry’s consumption is government contracts centric. It is impossible to honor such contracts with 10% devaluation in just 90 days. The Forex volatility is an area of grave concern and we are knocking on all doors in the government with a strong request to immediately bail out the Indian IT hardware Industry,” said Dr Alok Bharadwaj, President, MAIT and Senior VP, Canon.
“MAIT has approached Ministry of IT, Commerce & Finance to impress upon the plight of the industry. The officials recognize the urgency. While the industry strongly supports the cause of enhancing domestic manufacturing in India, we also realize that this will take time to become a reality. Till then, we will need to continue importing components and sub-components to cater to the burgeoning demand of IT hardware in the country. In pursuit of that, the industry has to be attractive for investments and hence must build sustained profitability,” added Dr Bharadwaj.
The recent union budget increased the CVD adding to the cost of procurement. Supplemented with the extreme depreciation of the Rupee against the Dollar, the industry is now struggling with a sharp rise in the price of the components, sub-components and finished IT products. This has posed severe challenges to the Indian IT industry—especially for fulfilling long term projects.
The Rupee against the US Dollar has depreciated steadily over the past one year (from 45 in May, 2011 to 56+ in May, 2012). This 24% devaluation in one year has been amongst the steepest declines among the Asian currencies. During last three months, the Rupee has slipped by over 10%. Experts expect this volatility may continue for the foreseeable future.
Ajai Chowdhry Chairman, Department of IT’s Taskforce, and Founder and Chairman, HCL highlighted the concrete steps that industry and the government should take collectively to counter the forex volatility challenge. He said “This is an unprecedented situation arisen due to the hardening of the dollar. Many critical sectors are getting adversely affected. If not corrected immediately, suppliers will shy away causing delays in the procurement process, which might impact all major economic activities including Industrial Production. While the industry wants to go all out and support the government in this time of crisis, it is unable to do so because there is no protection against the volatility of foreign exchange. The government must incorporate exchange rate variation formula in all IT hardware procurement contracts or else industry particularly domestic manufacturing will begin to crumble.”
He assured that the inclusion of the ERV clause would in no way inhibit the growth of the domestic IT Hardware industry. Further, once the Rupee turns around and appreciates against the Dollar, the industry would give the benefit back to the government, as it has done in the past.
Sabyasachi Patra Executive Director MAIT, on behalf of Indian IT industry, urged Ministry of Finance, DGS&D, Ministry of Commerce and Industry, Ministry of Communications and IT, and RBI to provide immediate interim relief to support in this time of crisis. He specified, “Public Procurement Policy should definitely include the ERV clause. This will ensure that all government procurement secures interests of the government and the suppliers. The exchange rate is revised by Indian customs every month to collect duties at current rates. The same principle should be exercised for procurement too.”
S Rajendran, Chief Marketing Officer, Acer India, said “The impact of Rupee devaluation on the IT industry has been quite severe. It is imperative that the pricing be indexed to reflect the reality. There are numerous large long-lead government projects, which currently are facing execution challenges since price retention is both impractical and unsustainable for an industry which already operates on wafer-thin margins.”
MAIT made four recommendations to the Government:
- Implement the Exchange Rate Variation (ERV) clause as mentioned in the ‘Manual on Policies and Procedures for purchase of Goods’ released by the Department of Expenditure, Ministry of Finance. In fact, the purchase organization should quote an appropriate exchange rate on the date of tender release so that the vendors can apply accordingly. This should be applicable for long term and short term contracts.
- For tenders that have been awarded and are in implementation stage, give an option to the vendors to ask for inclusion of this clause on ERV. To begin with, all DGS&D rate contracts should be revised with that clause. This should then be followed for other tenders and state Government nodal agency contracts etc.
- To mitigate some of the impact of component price escalation (e.g. in hard disk) and impact of exchange rate volatility, import of raw materials should be exempted from CVD and SAD for a period of next four months (and some period thereafter should the situation persist). This will also help domestic manufacturing which has been hit harder by these supply chain disruption than the international companies with larger procurement clout to ride the current situation.”
- Extend the 35% abatement concession to all IT hardware devices particularly laptops, printers, scanners which are given just 20% abatement. This can be done immediately through a notification of CBEC as was recently done to rationalize flat panel monitors and multifunctional devices.