How PC Manufacturing can accelerate the ‘Make In India’ initiative

By Anwar Shirpurwala, Executive Director, MAIT

Almost 62% of India’s demand for IT products is currently being met through imports from China and Taiwan. Policymakers need to encourage domestic IT manufacturers by creating a more tax-friendly environment. Incentives given to mobile phone manufacturers must be extended to PCs and other IT products to boost overall production of IT.

The “Make in India” initiative launched by Prime Minister Narendra Modi envisions an increase in manufacturing sector growth from 6.7% per annum currently to 12-14%, over the medium term, and an increase in the share of manufacturing in India’s GDP from 16% to 25% by 2022. Considering the poor growth rates in the sector over the last decade, these are ambitious targets. The growth of IT systems adoption and hardware manufacturing is key to realizing this vision, given their widespread use across services and the manufacturing sectors.

The size of the IT Hardware market in India comprising of PCs, servers, smartphones, tablets and printers, was estimated at around US$ 15.87 billion in FY15. Most of the growth in this segment is accounted for by mobile phones and tablets, up from 44% in FY14 to 63% in FY15, while the share of the PC segment comprising of desktops and notebooks fell from 32% in FY14 to 21% in FY15 during the same period.

The current scenario
Currently, over 62% of the demand for IT products is met through imports, mainly from China and Taiwan. Indian manufacturers suffer from a variety of fiscal and other disabilities, relative to imports, leading to idle capacity in excess of 75% of the installed capacity. The disability as percentage of sale price on account of tax factors is estimated at 7.05%, while the disability on account of infrastructure and business environment factors is estimated at 9.40%, adding up to 16.45%.Such significant disabilities make domestic manufacturing un-competitive and encourage imports of IT products.

With the aim of rejuvenating Indian manufacturing, the Government introduced a differential duty regime by reducing the excise duty in Budget 2015 to 1% for mobile phones and 2% for tablets without CENVAT credit, while maintaining the option of paying excise duty at 12.5% with CENVAT credit. Importers of these products are restricted from availing the concessional excise duty regime. In addition, parts, components and accessories of tablets were fully exempted from excise duty, subject to actual user condition. This announcement has encouraged many mobile phone manufacturers to draw up plans for manufacturing in India over the last one year. Budget 2016 has extended a similar differential duty regime to more IT products such as chargers/adapters, battery and wired headsets/speakers, for manufacture of mobile handsets and consumer premise equipment (CPE) viz., routers, broadband modems, set-top boxes, CCTV camera/IP camera etc.

The way forward

While these are welcome steps, keeping PCs out of the ambit of the differential duty regime remains an aberration. Mobile phones and tablets are consumption devices, whereas PCs are creation and productivity enhancing devices. Increased investments in such devices will boost overall productivity and GDP, besides creating employment and improving balance of trade of the Indian economy. Extending the scheme to PCs at the current levels of production and consumptionin India, the loss in indirect tax revenues would range between Rs. 50 crore to Rs. 320 crore, depending upon the level of import substitution.

On the other hand, the gains accruing from such a policy measure would be substantial. The Indian PC market currently accounts for only 2% of the world market share. If India were to target 10% of the world market share, it would need to enhance its current manufacturing capacity of 40 million units to 180 million units per annum. This would create additional jobs in assembly and component manufacturing to the tune of four lakh fifty thousand personnel, depending upon the level of localization of high value add components, parts, sub-assemblies and accessories, and the extent of backward integration.

The concomitant increase in employment and value addition is expected to yield higher direct and indirect tax revenues to the tune of Rs 250 crore, assuming complete import substitution of current imports. Gains in tax revenues can go up by as much as Rs 4,700 crore if India is able to increase its share of world market to 10% in the coming years. Extending the differential duty scheme to PCs would thus be a win-win for the manufacturers and the Government and enable India to emerge as the world leader in the segment.

Start of PC manufacturing under Differential Duty regime will also kick-start end-to-end production of ancillary products and accessories such as monitors, keyboards, mouse etc. thus realizing the dream of ‘Make in India’.