Finance Minister Nirmala Sitharaman’s proposal to launch a new scheme to promote the manufacturing of mobile phones, semiconductors, and other electronic devices should be translated into reality quickly. The focus on developing India as a manufacturing hub for exports in addition to the growing domestic opportunity is timed well — the global electronics ecosystem has been looking beyond China due to various reasons, including rising labour costs and the risks associated with a possible trade war with the US. The challenge lies in getting the policy right. Since 2012, successive governments at the Centre have been trying to make India a global hub for electronics equipment, but have achieved limited success. At least six schemes have already been introduced over the past few years, such as the Merchandise Exports from India Scheme, the Special Economic Zones Scheme and the Modified Special Incentive Package Scheme. As a result of these schemes, the number of mobile handset and accessories factories in the country has gone up from just two in 2014 to 268 units in 2019. Almost 95 per cent of mobile phones sold in the country are being produced domestically. The value of electronic equipment manufactured in the country has increased to ₹4.58 lakh crore in 2018-19 from ₹1.90 lakh crore in 2014-15. While this sounds great, what is of concern is that the local value addition is only around 7-8 per cent, as most of the critical components are imported. As much as 93 per cent of revenues generated from selling locally assembled phones go back to China, from where components for the product originated. With the demand for electronics hardware expected to rise rapidly to about $400 billion by 2023-24, India cannot afford to bear a huge foreign exchange outgo on the import of electronics.

Therefore, the new scheme should look at incentivising creation of a local components ecosystem, especially semiconductor fabrication units. It should also create sops for companies to create high skilled jobs in manufacturing, including in the area of research and development. The National Policy on Electronics unveiled in 2019 spells out clear goals including, achieving a $400-billion turnover by 2025 and providing employment to over one crore people. Under the earlier schemes, a number of proposals have been received but the actual investment flow into the components ecosystem has not been very impressive. For example, an incentive package for setting up semiconductor fabrication unit in the country has had no takers. The semiconductor is the heart of any electronic product, and getting a global player to start manufacturing it in India will be key to the Make in India vision.

The real problem is that the manufacturing industry is caught in a vicious circle of zero-duty imports, high domestic production costs and manufacturing ecosystem challenges. Instead of import duty tweaks, the focus has to be on creating an ecosystem in which the industry can be globally competitive without import protection.