The current market for IT hardware and electronics in India is USD 36
billion per annum. This is expected to grow to USD 400 billion by 2020.
As of now there is insignificant value add domestically for the IT
hardware and electronics sold in India. As one of the policy measures to
mitigate the above issue, Ministry of Communication and information
Technology, Government of India has therefore recently come out with
Preferential Market Access (PMA) notification. The Preferential Market
Access policy provides for at least 30% of government IT market for
domestically manufactured equipment as long as the equipment matches L1
(i.e. the least price bid for the tender) and Q1 (i.e. the best quality
offered by any other entity for the tender). As per the PMA, products
will be considered as domestically manufactured if they have at least 25
percent local value add. To implement PMA, the government has to
construct detailed guideline and processes by which one can track the
percentage of local value add for each kind of equipment. For example,
if the equipment is a computer, then the government would need to
validate how many components of the computer are domestically
manufactured. In addition the government would need to define what
constitutes a domestically manufactured component. For example, if the
hard disk is imported into India and locally only casing is added to the
hard disk, would this be considered to be a domestically manufactured
component? Clearly, such processes would be cumbersome for the
manufacturer to comply with and cumbersome for the government to
monitor. Therefore the proposed rules will lead to significantly
increased compliance costs and significantly increased interference by
lower levels of the government machinery as it would provide them with
discretionary powers. The above process would also divert the attention
of the manufacturer from manufacturing better product at lower cost to
focusing on accounting procedures to prove larger domestic value add.
The above regime would also lead to extremely complex processes to be
adopted for allocating general expenses and common expenses such as
sales and marketing, accounting, guest house expenses, ERP costs etc to
each SKU manufactured. Such allocations will also get challenged by
procuring agencies, leading to higher costs of litigation. The industry
will get retarded as the industry will loathe moving to newer products
since, for each new product, the entire process of demonstrating
percentage of local content will have to be done from scratch. Even
currently, government procurement, especially through DGS&D,
inhibits newer products from being introduced as the rate contracts are
for a year and does not factor in obsolescence and introduction of
better products at same or lower prices. This is inimical to an industry
where products get obsolete within three months. Moreover radically new
products will have radically different architectures which will make it
even more difficult for the innovators to prove the levels of domestic
production to the government procuring agencies. The PMA policy also
needs to be strengthened to ensure that it is able to accommodate
radical innovations. The monitoring of PMA becomes more complex when one
has to factor in and value domestic innovation and IPR as there is no
watertight market based price discovery mechanism. MSME’s are the
backbone of innovation. MSME’s already face significant challenges for
manufacturing which is compounded by manufacturing inspections and
compliances which hold them back from innovation. It would be extremely
challenging for MSME’s to face additional burden of having to prove
domestic value add for their innovative products. Therefore, to promote
innovation in domestic manufacturing the Government of India should
consider updating its procurement processes to ensure that government
can procure innovative products and thus promote innovation in domestic
manufacturing. In addition, the government should consider funding ICT
manufacturing research and development, adopt pro-manufacturing tax
rates and labour laws, and establish ICT manufacturing educational
programs, and otherwise incentivize investment in the ICT manufacturing
sector on a non-discriminatory basis. The government may also consider
adopting labour laws that are specific to IT and electronic
manufacturing industry to ensure an uninterrupted manufacturing
environment. Specifically for the Greenfield and Brownfield clusters
proposed to be developed under the Triad of IT policies should have all
clearances and approvals a priori so that potential manufacturers need
not face the hassle of running from pillar to post to get clearances. In
addition, these clusters should be declared as “Inspector- raj-free”
zones. It is indeed a challenge to rapidly increase domestic content in
electronic goods. Domestic Content can be increased in a phased manner
with the development of component industry. A combination of good
infrastructure, favourable tax regime, appropriate labour laws,
conducive policies, capital at globally competitive costs, availability
of skilled manpower and a proactive implementation of the manufacturing
policy roadmap would go a long way in speeding up domestic manufacturing
of IT hardware and electronics.
