Electronics Manufacturing in India

• 25 Jul 2020

Why in News

Recently, the Government of India unveiled three schemes with an outlay of about Rs. 48,000 crore to promote electronics manufacturing in India. These schemes are:

• Production Linked Incentive (PLI) Scheme.
• Scheme for Promotion of Manufacturing of Electronic Components and Semiconductors (SPECS).
• Modified Electronics Manufacturing Clusters (EMC 2.0) Scheme.

Key Points

• The Indian electronics sector is tremendously growing with the demand expected to cross USD 400 billion by 2023-24.
• Domestic production has grown from USD 29 billion in 2014-15 to nearly USD 70 billion in 2019-20 (Compounded Annual Growth Rate of 25%).
• Most of this production takes place in the final assembly units (last-mile industries) located in India and focussing on them would help develop deep backward linkages, thus inducing industrialisation.
  
  • This was an idea propounded by economist Albert O Hirschman in his theory of ‘Unbalanced Growth’.
  • The Economic Survey 2019-20 also promoted this idea and suggested “assembly in India for the world”, especially in “networked products”, in a bid to create four crore well-paid jobs by 2025 and eight crore jobs by 2030.
    
    • This is the strategy that helped China become the economic superpower it is today.
  • The recently launched PLI Scheme plans to achieve this goal by granting an incentive of 4-6% for domestic production.

Challenges

• Missing Profits:
  
  • Despite the impressive growth of electronic production in India, the net value added by production units is very low.
  • The net value addition ranges between 5% and 15%, as most components are imported rather than locally sourced.
  • It implies that local value addition is a mere USD 7-10 billion out of a global market of USD 2.1 trillion.
• Limited Indigenous Capability in Upstream Industries:
  
  • In the era of global supply chains, the value addition at the final stages of production is very low, especially in electronics because the more complicated processes, involving greater value addition, occur prior to assembly, in ‘upstream’ industries.
  • These include the production of processors, display panels, memory chips, cameras, etc.
  • Currently, these imports nearly constitute 80% of these components, with approximately 67% of the imports coming from China alone.
• Absence of Foundries:
  
  • In the absence of foundries (semiconductor fabrication plants where microchips are produced), India has to rely on foreign contractors to produce microchips.
    
    • There are about 170 commercial foundries globally but India does not have a single one.
    • Chip manufacturers like Intel, TSMC and Samsung choose other countries instead of India citing uncertain domestic demand and poor cost efficiencies here.
  • Challenges in Set-up of Foundries:
    
    • It requires massive capital expenditure to the tune of USD 2 billion and more.
    • Foundries are also required to adopt newer technologies and processes almost every 18 months to ensure competitiveness which means high capital depreciation and often accounts for 50-60% of the production cost.
    • Domestic players have also shown low interest due to their inability to compete with tech giants in research and development (R&D) and investment.
    • Due to this, proposals to develop foundries in Gujarat and Uttar Pradesh in recent years were abandoned.
  • Many industry experts also cite the lack of a foundry as contributing to low R&D in this sector in India, which results in poor talent retention and eventually ‘brain drain’.
  • The Indian Space Research Organisation (ISRO) and the Defence Research and Development Organisation (DRDO) have their own foundries but their use is restricted for space and defence systems, respectively.
• National Security Considerations:
  
  • Most of the chips, as well as components used in Indian communication and critical systems, are imported.
  • This could hamper national security and sovereignty as backdoors could be programmed in chips during manufacturing, which could compromise networks and cyber-security.
    
    • Backdoor refers to any method by which authorized and unauthorized users are able to get around normal security measures and gain high-level user access on a computer system, network or software application.
• Increasing Imports:
  
  • It is expected that electronics imports will soon overtake crude oil as India’s largest import commodity which will result in assembly units ending up as little more than mere packaging units.

Suggestions

• Increasing Investments: The total outlay of Scheme for Promotion of Manufacturing of Electronic Components and Semiconductors (SPECS) must be increased from the current Rs. 3300 crore, to attract the microchip giants.
  
  • The government launched SPECS to provide a 25% incentive on capital expenditure for semiconductor manufacturing among other core components.
  • The economic impact of a foundry is immense and ranges from 6 to 23 times the investment in the plant.
    
    • According to a recent report, a single foundry can offset imports worth USD 8 billion over a projected period and have a further multiplier effect of USD 15 billion on the Gross Domestic Product (GDP).
• Profiting from Anti-Chinese Sentiments: Due to the USA’s allegations on China for worsening Covid-19 and India-China conflict and recent developments as a result of it, numerous multinational companies (MNCs) are shifting their production out of China.
  
  • The USA and the UK have blocked China's access to chip making tools and designated Chinese telecom giants as national security threats.
  • It is a golden opportunity for India to act fastly on it and attract this outgoing investment.
• Pushing Make in India: There is a need to promote semiconductor manufacturing alongside assembly units in India.
  
  • This will induce greater local production of components and also fuel the growth of the industry as a whole, making Make in India successful.
  • In 2019, the Union Cabinet gave its approval to the National Policy on Electronics 2019 which envisions positioning India as a global hub for Electronics System Design and Manufacturing.

Way Forward

• Today, India is one of the upcoming hubs for microchip designing with hundreds of start-ups making substantial progress in this field. Even some IITs have developed indigenous microchip designs like Shakti and Ajit.
• The schemes to promote electronics manufacturing combined with the Prime Minister’s call for an ‘Atmanirbhar Bharat’, have rejuvenated hopes of a rise of the indigenous electronics industry, allowing India to be truly self-sufficient.
• It is only through such actions, India can hope to realise the dream of being a truly indigenous electronic ecosystem encompassing all aspects of the electronics industry.

Source: BL