Budget 2024: Electronics manufacturing seeks incentives to build a robust component ecosystem

Production has nearly doubled from $48 billion in FY17 to $101 billion in FY23—driven primarily by mobile phones, which constitutes 43 percent of total electronics production; Image: Shutterstock

India’s share of electronics in merchandise exports has surged to 6.6 percent in FY24, up from 2.7 percent in FY19, according to the Economic Survey 2023-24. This significant increase highlights the country’s growing role in the global electronics market.

The survey stated that there is a focus on smartphone manufacturing and assembly, and the production linked incentive (PLI) scheme, including tax breaks and subsidies, plays a significant role in attracting companies. “The rise in India's domestic smartphone demand is also a key factor in companies' decisions to invest there. For instance, Apple assembled $14 billion worth of iPhones in India during FY24, constituting 14% of its global iPhone production,” the survey said.

India should aim to touch $500 billion in electronics manufacturing, in terms of value, by FY30, stated a recent report by the NITI Aayog. The size of the sector in FY23 was at $155 billion. Production has nearly doubled from $48 billion in FY17 to $101 billion in FY23—driven primarily by mobile phones, which constitutes 43 percent of total electronics production. The report further stated that India is now manufacturing almost 99 percent domestically, reducing reliance on smartphone imports significantly.

Globally, the electronics manufacturing market is valued at $4.3 trillion, dominated primarily by countries like China, Taiwan, USA, South Korea, Vietnam and Malaysia. Currently, India exports approximately $25 billion annually, representing less than one percent of the global share despite the four percent share in global demand.

“Leading electronics manufacturers expect policies [from Budget 2024] that will increase domestic production and exports, enhance R&D capacity, and encourage innovation to produce globally competitive products from India,” says Kathir Thandavarayan, partner, consulting, Deloitte India. Increased focus on the electronics value chain, especially critical components such as semiconductors that are completely import dependent, is the key to driving domestic manufacturing, enhancing exports and sustaining sector growth.

Focussing simply on localising the manufacturing of components in India is not enough. “We also need to look at growing the indigenous design capability, so that the IP [intellectual property] remains within the country, to gain control over crucial components, and not remain reliant on exports,” explains Tarun Pathak, research director, Counterpoint Research. The current government policies focus on attracting capital investments to enhance size and scale of electronics manufacturing in India.

The production-linked incentive (PLI) scheme for large-scale electronics manufacturing has been successful in ramping up domestic manufacturing of mobile phones and scaling of exports. But experts do believe that a PLI scheme, particularly for component manufacturing will help the sector significantly. "We anticipate that the upcoming budget will maintain the current policies supporting the semiconductor ecosystem. The government's ongoing efforts over the past few years to enhance this sector should continue, with a focus on extending the design linked incentives (DLI) and PLI schemes for additional years," says Srini Chinamilli, co-founder and CEO, Tessolve. 

Also read: Can India truly become a global semiconductor hub?

The finance ministry is reportedly believed to have opposed a proposal for a capex-linked subsidy for electronics components manufacturing. Reason? The risk in supporting proposals with upfront capital expenditure and not linking it to specific targets. Pathak agrees, “I think the important thing here is sustainability. Rather than a one-time incentive—which a capex-linked scheme would offer—we need to push existing players to look at the entire value chain.”

The current investments in the sector have been largely directed towards the back-end of the value chain. Thandavarayan explains, “This would cover assembly, testing, marking and packing (ATMP) resulting in domestic value addition (DVA) in the range of 15-20 percent. With the objective of enhancing the DVA to 40 percent to 50 percent, the government would target investments upstream value chain focusing on components. This will also address the gaps in development of electronics manufacturing ecosystem in India,” he says.

Also read: What does the Modi 3.0 government need to do to scale India's electronics manufacturing industry?

Rationalise Tariff Duties

Despite efforts to localise component manufacturing, some components will still need to be imported. Experts suggest that import duties for these items should be reduced until we can localise their production in India.

High tariffs on inputs increase costs, making the Indian industry less globally competitive, thus hindering its ability to join Global Value Chains (GVCs). According to India Cellular & Electronics Association (ICEA) competitiveness is critical for building scale and attractive foreign direct investment (FDI). “Sustaining the tremendous growth in mobile phone production and exports, requires matching the competitive tariff regimes of China and Vietnam. Current high tariffs increase manufacturing costs in India by 7-7.5 percent on the bill of materials (BoM), deterring local ecosystem development, hampering exports and adversely impacting job creation,” stated Pankaj Mohindroo, chairman, ICEA.

Focus: Skill Development

As the electronics manufacturing sector continues growing, as per NITI Aayog, it is anticipated to provide jobs for around 5.5 to 6 million people by FY30. Recent news reports suggest that India is looking to offer short-term visas to Chinese technicians, for no more than six months, to help with the implementation of projects related to the PLI scheme. Given the existing skill gap in the industry, the knowledge and expertise of Chinese workforce will further help boost domestic manufacturing. “Enabling technology access in upgrading the manufacturing processes holds the key in creating globally competitive products and the companies need support to streamline the polices which can facilitate technology transfer from established electronics ecosystems such as Japan, South Korea, and USA,” says Thandavarayan.

The sector needs highly skilled, cost-effective workforce and an environment that supports growth. “While looking at scaling up the ecosystem, skill development also needs to go hand in hand. For this ideally, curriculums need to be updated,” explains Pathak. For instance, the Indian Institute of Science (IISc) and Synopsys, Inc, a global leader in electronic design automation, have signed a Memorandum of Understanding in an effort to foster the next generation global semiconductor workforce. This initiative, called the India Semiconductor Workforce Development Programme (ISWDP) aims to address the existing labor shortage in the rapidly advancing semiconductor sector. Pathak adds: “More such initiatives need to be pushed for, especially for chip design.”

In the long-run, the regulators, academia and industry organisations need to collaborate to develop highly specialized curriculum in the domain of engineering and technology for key skills such as VLSI design, embedded systems, power electronics, nanotechnology, artificial intelligence (AI) and machine learning (ML). “Crucially, we look forward to an expansion of the Pradhan Mantri Kaushal Vikas Yojana to specifically target the automotive and electric vehicle (EV) sectors. This scheme has been instrumental in skill development, and its focus on our industry could create a pool of talented professionals ready to drive innovation and manufacturing excellence,” says Vivek Tyagi, managing director of field sales, Analog Devices India. 

“There should also be greater focus be on job training as it produces significant benefits by imparting sector-specific, value chain -specific and task-specific skills. Significant investments on learning programs in the field of large scale automation will help improve the overall productivity of the sector,” Thandavarayan says.

Fostering Export Growth

The ambitious target of reaching $500 billion by FY30, will comprise of $350 billion from finished goods manufacturing and $150 billion from components manufacturing. Additionally, electronics exports are expected to reach $240 billion and domestic value addition to increase to more than 35 percent.

In advancing exports, India must establish itself as a globally competitive manufacturing and export hub. Indian manufacturing companies need to establish global-scale factories and warehousing to ensure just-in-time delivery. Policy measures shall enable domestic manufacturing addressing disablers such as costs, efficiency etc. while discouraging imports. “As we strive to increase our electronics production by 3-4x in the next few years, integrating with GVCs will be key to boosting production and exports from India. While we have proven our capabilities by reaching $115 billion in electronics production, the next level of growth hinges on our ability to attract and integrate with GVCs,” adds Mohindroo.