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India Calling: Decoding the Country’s Electronics Manufacturing Journey and the Way Forward

India’s organic growth in the consumption of electronics, coupled with the Government’s target of achieving USD 300 billion worth of domestic electronics manufacturing by 2025–26, creates a unique opportunity for global firms to look at India as the manufacturing hub for the Silicon Age. Mohammad Athar and Sujay Shetty perform a reality check

India’s population has reportedly surpassed that of China’s, having reached 1.4 billion.1 It is now the most populous nation in the world. Supported by a demographic advantage where around 26% of the population belongs to the age group of 15–29 years and another roughly 26% is in the group of 0–14 years, India is positioned to become the largest global market for a tech-savvy young population.2 

The country has emerged as the second-largest mobile phone manufacturer in the world with more than 200 mobile phone manufacturing units having been set up on its soil.3 With some commodities gaining aspirational value and an increase in discretionary spending, this decade is poised to bring major market opportunities for global players to enter India and leverage its markets along with its young demography.

Further, the increasing spending power of the aspirational Indian middle class is expected to drive India’s GDP at nearly twice the global rates.4 As per International Monetary Fund (IMF) projections,5 India is poised to become the third largest economy in the world by 2028 with an estimated nominal GDP of USD 5.58 trillion, growing at an average rate of 6.55% per year between 2021 and 2028. Per capita GDP is set to cross USD 3,000 by 2025, further accelerating discretionary spending and fuelling demand in the electronics sector.

Competitive wages, highly skilled human resources and geopolitical nudges are pushing companies to explore India as the ‘next’ manufacturing destination.

India’s stable policy climate, synergies between the Central and state governments on the overarching direction of industrial growth, and holistic operational policy measures have fuelled the demand for translocating manufacturing to India. A growing push towards supply chain diversification by large firms in the aftermath of the COVID-19 pandemic and globally emerging geopolitical fault lines have further facilitated this. In addition to these factors, India has continued to maintain competitive manufacturing wages. Sustained reduction in infrastructure gaps within the country through the implementation of programmes such as Bharatmala, Sagarmala and PM Gati Shakti, together with supply-side incentives from the Government, will further improve capital productivity and the greater investment-to-GDP ratio, creating a virtuous cycle.

India’s digital push and changing lifestyle choices are increasing the demand for discretionary merchandise such as smartphones, electronics and related products.

There is more. The concerted push for digitisation across the country has prompted the start of a digital era. With the needle moving on the Digital India initiative, people of all age groups desire an improved quality of life. Between 2017 and 2022, the total number of internet subscribers in India has grown at a compound annual growth rate (CAGR) of 15%, reaching 850.95 million by September 2022.6

India continues to rank high on several macroeconomic parameters – financial attractiveness, consumption pattern, people skills and availability, and need for technology.

India ranks first in terms of global mobile commerce wherein consumers are engaging in e-commerce transactions exclusively from their mobile phones. Digital payments too have seen a CAGR of 46% between FY18 and FY22, reaching 91.9 billion transactions until December 2022.7 Even the consumption of personal entertainment in India is shifting from cable to over-the-top (OTT) platforms. Devices such as mobile phones and tablets as opposed to ‘unsmart’ television sets of the past have prompted multiple discretionary purchases by the consumer. The pandemic further spurred digital use cases in the domain of education, healthcare and governance, with app-based solutions being rolled out for each of these. Besides, the demand quotient for mobile and electronics in India increased, creating a case for these companies to encash on the India opportunity.

Electronic and mobile companies have emerged as successful first movers to capitalise on the India opportunity in manufacturing.

It comes as no surprise then that electronics has emerged as one of the fastest growing industries in the Silicon Age when the double movement of globalisation and the World Wide Web created a massive demand for electronic commodities. An increasingly digitalised world has ensured that there is no slowdown in the global electronic trade. Along with energy security, the pandemic also prompted the need for ‘electronic security’ with supply chain disruptions stalling the production of components in some sectors – from automobiles to healthcare devices – and resulting in a shortage of electronic components.

Today, due to the explosion of the Silicon Age paradigm and the digital era lifestyle globally, electronics system design and manufacturing (ESDM) has emerged as one of the fastest growing industries globally. In fact, it has also led to a surge in the need for rapid expansion in cost-effective manufacturing, which is mostly done at cost-competitive locations in East and Southeast Asia through electronics manufacturing services (EMS) companies. The collective EMS market is projected to reach USD 1,145 billion by 2026 with a CAGR of 5.4% between 2021–26.8 India’s domestic demand for consumer electronics is also witnessing growth and is expected to touch USD 21.18 billion by 2025.9

India’s capacity to manufacture for the world has been demonstrated across four major segments – mobile phones, consumer electronics, IT hardware and electronic components – that account for over 70% of India’s domestic manufacturing profile.10 Global firms can readily leverage these domestic capabilities to achieve supply chain diversification and scale up production by manufacturing in India.

The result – India is the second largest mobile phone manufacturer globally and is also the second largest market for smartphones in the world, making it the fastest growing smartphone market in the world.11 Production of mobile phones has gone up from 60 million in 2015 to 310 million in 2022 at a CAGR of 26%. The consideration of mobile phone manufacturing and its sub-assemblies or sub-components as flagship initiatives under the Make in India initiative has further supported this growth. As on date, the over 200 manufacturing units of mobile phones, sub-assemblies, parts and components that have been set up in the country during the last couple of years have employed around 700,00012 people in the country – a success story of successful manufacturing localisation worth emulating in other sectors.

HS Code 85171290 is the eight-digit merchandise class that incorporates finished smartphones. The graph above shows the drastic decline of the product category into India. The first dip happened with the establishment of assembly players in India’s EMS as phones started to be manufactured in India under the Make in India initiative. Thereafter, with supply-side initiatives and targeted incentive structures discussed in the subsequent sections, the steady decline continued. In 2020–21, the decline was further accelerated owing to minimum imports from East Asian countries due to their stringent COVID-19 measures and assembly and manufacturing activities – even for premium segment phones.

The unprecedented spike in demand for phones created a huge demand and supply gap in the market which was serviced primarily through the import of finished goods. Indian players in the segment were mostly white-label retail brands importing manufactured handsets from East Asia and selling them in India. Import of smartphones peaked around 2014–15, after which the opportunity represented by Indian markets gained recognition and manufacturing in India took off. It also marked a landmark shift in India’s manufacturing endeavour when new and existing supply-side impetus on manufacturing was synergised under the Make in India initiative of the government. The staggered results of the same followed through 2017–18 with sub-component manufacturing significantly taking off in India. It was no surprise that the import-driven electronics sector became the cornerstone for initiatives focused on reducing India’s import burden and promoting Indian manufacturing for the local and global consumer. As mobile phones were the largest segment by proportion within electronics, the supply-side initiatives targeted the segment head on. These initiatives catalysed India’s mobile phone manufacturing ecosystem, thus reducing India’s dependence on imports and simultaneously enhancing India’s export capabilities.

A paradigm shift in the incentivisation of investments coupled with infrastructure upgrade has played a significant role in attracting anchor manufacturing units and their ancillaries.

India has witnessed a surge in the focus of the Central and state governments on the overall development of the electronics ecosystem, by attracting investments across the value chain. In the early years of the last decade, the Indian electronics industry faced a wide demand-supply gap amid import dependency, limited quality infrastructure, a complex tax structure, limited localisation of supply chain, staggered logistics and last-mile connectivity, inflexible labour laws, limited R&D focus, inadequate funding and negligible domestic value addition.

In 2012, the first National Policy on Electronics (NPE) was implemented to offset shortcomings in the Indian electronics industry. Under the policy, schemes such as the Modified Special Incentive Package Scheme (M-SIPS) and Electronics Manufacturing Clusters (EMC) Scheme, followed by the Phased Manufacturing Programme (PMP) and Electronics Development Fund (EDF) Policy, were introduced. The Make in India and Digital India initiatives provided yet another boost to the dedicated national efforts in the electronics sector.

In 2016, the GoI prepared a phased roadmap to promote domestic manufacturing of mobile phones. The GoI’s PMP notified a 12.5% countervailing duty on imports and a 1% excise duty without input tax credit for domestic companies manufacturing mobile phones. Further, basic customs duty was exempted for parts, components and accessories.

In 2019, the GoI revamped the National Policy on Electronics, adopting an integrated approach to build India’s capacity in core technology development, incentivising capital expenditure (Scheme for Promotion of Manufacturing of Electronic Components and Semiconductors), promoting scale of production (Production Linked Incentive [PLI] schemes) and expanding the scope of the Electronics Manufacturing Clusters Scheme for supporting new age infrastructure for electronics manufacturing. These efforts are also being complemented by extensive skill development initiatives across the electronics manufacturing value chain.

To attract investments for smartphone manufacturing, the GoI is incentivising 20–25% of the capital expenditure, combining it with a differential excise duty dispensation on mobile phones and its components/accessories.

Given that core electronics manufacturing is highly capital intensive, the GoI’s M-SIPS scheme provided incentives to the tune of 20–25% on capital expenditure to electronics manufacturers, including those manufacturing smartphones and their ancillaries. Target products include mobile phones, telecom equipment such as optical fibre equipment, terrestrial communication equipment, satellite communication equipment, IP-based new generation soft switches/routers, data networking equipment, transport systems, cross-connects, radio over fibre (RoF), carrier ethernet, packet optical transport platform, wireless technology, and distributed antenna systems

To further promote domestic mobile phone manufacturing and offset the manufacturing cost disabilities, the GoI is incentivising annual sales in the form of PLI schemes.

In 2020, the GoI launched the PLI scheme for large-scale manufacturing, providing incentives of 4-6% on the incremental sales of manufactured goods as a means to offset the disability of 8.5–11% that the electronics sector was suffering in terms of the high cost of finance, inadequate availability and cost of power, water and logistics. Mobile phones are one of the two broad target segments under this PLI scheme.

Production-linked and capital incentives are also being provided to the value chain of mobile phones, giving impetus to the drivers of demand for mobile phones and potentially localising the critical supply chain ecosystem which is pertinent for core mobile phone manufacturing.

For specified telecom and networking products, the GoI introduced another PLI scheme for goods such as core transmission equipment, 4G/5G, next generation radio access network and wireless equipment, access and customer premises equipment (CPE), IoT access devices and other wireless equipment and enterprise equipment (switches and routers).

In addition to the PLI schemes, the GoI has also initiated schemes like Scheme for Promotion of Manufacturing of Electronic Components and Semiconductors (SPECS) and the Programme for Development of Semiconductors and Display Manufacturing Ecosystem in India, providing capital incentives to the overall value and supply chain of semiconductor manufacturing which has the potential to further substantially promote domestic manufacturing of mobile phones in India.

Commitment from state governments with the support of the Central government to prepare large infrastructure spaces for investments in the electronics sector with first-class facilities is now at the forefront.

Under the National Policy on Electronics 2012 and 2019, the GoI introduced infrastructure interventions focused on promoting electronics and semiconductor manufacturing. Under the EMC Scheme, the Central government provides financial assistance to state governments for setting up of EMCs and Common Facility Centres (CFCs) across the country. These EMCs are expected to provide a package of best-in-class services to investors who plan to set up their manufacturing facilities within the country. Within this scheme, 23 EMCs and three CFCs are being set up across India in sub-segments such as mobile phones, printed circuit board (PCB), consumer electronics, medical electronics, solar cells and modules, electronic components and automotive electronics.

Infrastructure upgrade projects have been undertaken to improve multimodal connectivity and promote development of industrial clusters.

Several infrastructure upgrade initiatives have been taken up by the GoI to develop multi-sector and dedicated industrial clusters and further improve multimodal connectivity from prominent gateways to economic zones. Projects for revamping of roads, development and upgrade of airports, mass transport, logistics infrastructure, railways, ports and waterways are being taken up to transform the infrastructure landscape in India. Such infrastructure projects are helping companies efficiently manage their supply chain logistics and connect to key domestic markets.

Public private partnership initiatives have consistently made a skilled talent pool available, supporting the talent requirement of electronics manufacturing companies.

Under the National Policy on Skill Development and Entrepreneurship, 2015, a Skill Qualification Framework was designed. The GoI created an institutional framework to implement and monitor the various initiatives which have been undertaken to skill and upskill the youth of the country. Under this institutional framework, the Electronics Sector Skill Council was set up to bring the industry and government together and design a national curriculum for the job roles in demand in the electronics sector, enhance the quality of skill training centres and promote skill training in the electronics sector in India. As of 2022, around 1.6 million candidates have been trained across an array of sub-sectors such as semiconductor and components, consumer electronics and IT hardware, EMS, solar and LED, PCB design and manufacturing, industrial automation, e-mobility and battery, communication and broadcasting, and security and surveillance.

While there are nationwide programmes such as Pradhan Mantri Kaushal Vikas Yojana (PMKVY), Pradhan Mantri Kaushal Kendras (PMKK), Deen Dayal Upadhyaya Grameen Kaushalya Yojana (DDU-GKY), and skill training at Industrial Training Institutes which are providing training to the masses across job roles, industry partners have undertaken initiatives under programmes such as Recognition of Prior Learning (RPL) under public private partnerships in order to provide on-the-job training to apprentices and new employees, and upskill the existing workforce.

A total of 314 companies in the electronics sector have received an approval under M-SIPS with a proposed investment of INR 86,824 crore.14 Besides, 32 companies have been approved under PLI for large-scale manufacturing.15  The PLI scheme is expected to generate an additional production worth INR 10,69,432 crore and create employment opportunities for 7,00,000 people.16 It will also facilitate the production of diverse electronics merchandise in India.

The PMP has provided a boost to domestic manufacturing of mobile phones. About 120 new manufacturing units for mobile phones and components were set up in India by 2017–18. These units led to an increase in the production capacity and India manufactured mobile phones worth USD 20 billion in 2017–18 compared to USD 3 billion in 2014–15.17

Sustained policy stability, continuous focus on delivering with ease and lowering the cost of doing business can incentivise organisations to set up manufacturing units in India.

A consistent focus on designing and implementing policies based on medium-term and long-term development goals is essential for the potential growth envisioned for the Indian electronics sector. Given the dynamic nature of the trends in the industry and the current stage of development within the sector, policy learning – i.e. course correction based on feedback from different stakeholders – is as important as policy formulation in the electronics sector.

A streamlined approach based on stakeholder interactions and a need–gap analysis across critical success factors are needed for the growth of the electronics sector in India, along with a concrete implementation and monitoring mechanism to build long-term manufacturing competitiveness in the country.

Source : Pwc News