“India cannot become competitive by levying import tariffs. Lowering customs or excise duty is not the solution”

Thursday, September 18, 2014: M N Vidyashankar, president, India Electronics and Semiconductor Association (IESA) and former additional chief secretary to the government of Karnataka, joined IESA in May 2014. He has over 33 years of experience in the management of various government offices, autonomous bodies, boards and corporations. He is serving on the board of various industry and academic committees. In conversation with Srabani Sen of Electronics Bazaar, Vidyashankar, a techno-economist talks about how India can become a ‘design-led electronics manufacturing hub’. This development could lead to more investments, higher levels of entrepreneurship and job creation. He strongly believes in encouraging domestic manufacturing, as that is the only way to put India on the global map.

EB: Under your guidance, what role will IESA play for the benefit of the electronics industry?

My agenda would essentially ensure that all IESA’s objectives are achieved. Our key objective is to make India an electronic systems design and manufacturing (ESDM) powerhouse and to create global awareness for the Indian semiconductor and electronic systems industry as a separate entity, outside of the generic IT umbrella.

IESA wants to create win-win interactions between the semiconductor and electronics product and services companies on the one side, and the government, academia, venture capitalists and industry bodies on the other, by enabling an ecosystem that catalyses industry growth and leadership—all of which will eventually impact and help the citizens of India. We also need to ensure active collaboration between industry and universities to further expand the available world-class semiconductor and electronics talent pool, and drive investment opportunities.

EB: Is the new government moving in the right direction towards making India a manufacturing hub for electronics?

IESA lauds the new government on the major initiatives taken towards manufacturing and also welcomes the Budget, which is aimed at boosting the Indian electronics and semiconductor industry. The Budget is growth-supportive, anti-inflationary as well as committed to fiscal consolidation and reviving growth in manufacturing. However, much more could have been done. But it is a good start.

The key initiatives around incentives for companies to set up factories across eight cities and the go-ahead for greenfield electronics manufacturing clusters (EMC) in seven locations, apart from the support to promote chip-making facilities in the country, emphasise the Union government’s strategic thrust to boost our economy by strengthening design-led electronics manufacturing, accelerating employment generation and attracting substantial foreign capital inflows into the country.

We believe the steps outlined for this sector and the commitment from the industry will put India on track to becoming a ‘design-led electronics manufacturing hub’ by attracting investments, promoting entrepreneurship and creating jobs. Correcting the inverted duty structure on a few ITA-1 products such as TVs, computers, smart cards, etc, and levying 10 per cent basic customs duty (BCD) on some of the non–ITA 1 telecom products, which is aimed at making locally-made products competitive, will boost manufacturing activity. The speed and focus with which the Union minister for communications and IT and DeitY have captured the needs of the electronics sector is very heartening and is a major milestone in realizing the vision of making India an ESDM powerhouse.

Being a techno-economist, I can emphasise that no country in the world has become competitive by levying import tariffs. Lowering customs duty or excise duty is also not the solution. We have to encourage domestic manufacturing by promoting R&D, innovation and start-ups, by encouraging market access, and by subsidising CAPEX—and all these are a part of the National Policy on Electronics (NPE).

We should now concentrate on scale and consumption. For example, Samsung is what it is today because of India and China. The vast markets of these two countries offer the scale and the volume for Samsung products. What we really need to ensure is to develop the local ecosystem for domestic manufacturing.

EB: What, according to you, needs to be done immediately to give relief to electronics manufacturers in India?

IESA feels that the EMCs with an independent Electronics Commission can provide the much required relief to the manufacturers. In one of the major steps towards realising this vision, IESA is collaborating with state governments for setting up electronics manufacturing clusters across the country. Several states in India have got enormous potential to be the next manufacturing hubs of India. EMCs acting as hubs of the ESDM industry will provide common facilities for production and R&D support services, which will benefit the local companies in terms of cost competitiveness and faster turnaround times. EMCs will strengthen the ecosystem and also pave the way for increased employment opportunities. Leveraging the initiatives of the government and an entrepreneurial ecosystem, EMCs can drive innovation in the electronics sector and catalyse the economic growth of the region.

Apart from EMC setups, an Electronics Commission will be equally vital as, along with industry representation, it will be an independent entity specialised in addressing the crucial issues in the ESDM sector. The presence of industry representatives will help identify the key challenges the industry is facing and will help find measures to solve them too. The heavy imports of electronic products cast a dark shadow on the future of the ESDM sector and there is an urgent need to boost manufacturing. The Electronics Commission will also help in speeding up the setting up of EMCs and clearing any hurdles on the way.

EB: Since IESA will now look at the larger picture and not just semiconductors (reflected by the change in name from ISA to IESA), how have its activities changed?

ISA’s transformation to IESA is indicative of a new charter that will represent a broader spectrum to include not just semiconductor companies but the larger ecosystem of companies and organisations involved in the design and manufacture of electronic products.

The semiconductor industry cannot grow unless the larger electronics industry grows. While consumption of electronic products is growing explosively in India, 66 per cent of these products are imported and this number is growing. Considering this growth in consumption and imports, it is critical that India takes urgent steps to bridge this gap. With the renewed focus, IESA is committed to fostering a conducive domestic ecosystem for the design and manufacture of electronic products so that India can take on a leadership position in the ESDM domain.

EB: The MSIPS was introduced quite some time ago, yet companies aren’t exactly rushing to avail the benefits of the policy? Why is that so?

It has been over a year since the policy was notified. IESA suggests that it is reviewed in accordance with clause 5.1.2 of the notification (with a provision for further periodic review) to include the following modifications, which can help to improve the scheme’s adoption in the industry.

Since manpower and other non-CAPEX related costs also form a significant part of the overall cost of manufacturing electronics, it is recommended that the scheme is expanded to include overall project-related expenses (including capital expenses) instead of capital expenses alone. For the purpose of this scheme, the definition of ‘capital expenses’ needs to include any items that can be capitalised under the Income Tax Act. The government should expand the MSIPS to include overall project costs. This should cover the R&D manpower expenses of ESDM units and of the companies involved in standalone R&D/design.

EB: Do you see any limitations in any of the recent government policies?

We would like to see a provision for ‘deemed export status’ for electronic products manufactured in India. Also, correcting the inverted duty structure that is currently applicable for all ITA-1 products and levying BCD for all non-ITA 1 products will also give a boost to domestic manufacturing.

Deemed exports will lead to cutting down on exports, thereby giving rise to localisation of products. This will also lead to customisation of the products as per Indian markets, resulting in technology innovations, increased employment opportunities, lower logistics costs, better forex reserves and many more benefits. All this will build a stronger and more independent ecosystem and hence a stronger nation.

EB: According to you, how soon can we expect the two proposed fabs in India to see the light of day?

A wafer fab in the country will help put India on the semiconductor manufacturing map along with the US, Taiwan, China, South Korea, Singapore and Japan. There are security considerations with regard to a fab because such chips are also used in atomic, space and power sectors. Therefore, if it is manufactured in India, it will serve the country’s strategic purposes as well. The fab will boost India’s manufacturing credentials and will substantially reduce the country’s import bill.

We currently consume about US$ 8 billion worth of semiconductor chips in India. This is projected to rise to as much as US$ 60 billion by 2020. All of this has to be imported. So building this capability in India is vital from an economic standpoint. If we fail to do so, our electronics industry will always be vulnerable to being held hostage by the nations we import these chips from.

A semiconductor fab generally needs around three years to get established. While the core shell needs 12-18 months to be built, installation of equipment also needs 12-18 months.

It is good to start with semiconductor device fabrication nodes, as nodes are not moving as fast as they used to. It is possible to produce 45-65 nanometer nodes faster. Bigger wafers reduce the cost of manufacturing since more chips can get packed onto a single wafer.

EB: Can you identify the areas in which the domestic industry is currently lacking?

Well, it’s currently lacking in productisation. From just being global experts in design, India needs to focus on full product development and manufacturing, to address its local demand.

EB: Is IESA working on any new projects with the government?

We are working with DeitY and a number of state governments on a number of fronts.

EMCs, incubation centres, ‘electropreneur’ parks, etc, involve constant interaction with the states and DeitY.

We work in tandem and that is the best way forward. Working together helps in sharing knowledge about the best-of-breed solutions and implementing them. IESA also comes out with research papers on different segments of the industry, in partnership with DeitY and the states.