1. How to breathe new life into domestic manufacturers for electronic products

How to breathe new life into domestic manufacturers for electronic products

The amendments as a tool for more FDI to achieve net zero import by the year 2020 may not be tenable.

By: | Updated: October 28, 2016 4:11 PM
The government has come out with a draft proposal for amendment in the existing PMA norms—to introduce and incorporate a new concept of deemed domestic manufacturer (DDM). (Reuters) The government has come out with a draft proposal for amendment in the existing PMA norms—to introduce and incorporate a new concept of deemed domestic manufacturer (DDM). (Reuters)

Domestic manufacturers for electronic products have been dwarfed by the large global players. The growth of domestic players was virtually stymied by International Technology Agreements (ITA-1) signed by India under WTO that provided for duty-free imports—a situation that was a death knell for the domestic players afflicted by disadvantage of scale and cost of financing vis-a-vis the foreign players.

In its wisdom to promote and incentivise the domestic players in an arena where demand is expected to be about R28,00,000 crore by 2020, the government had brought in a policy of preferential market access (PMA) that provided for at least 30% quota in government procurement of electronic productions for domestic players. The present demand for the products is about $40 billion and government procurement is only a miniscule part of it. Even as an incentive to promote zero-import should the proposed amendment in the policy come at the cost of domestic industry.

The government has come out with a draft proposal for amendment in the existing PMA norms—to introduce and incorporate a new concept of deemed domestic manufacturer (DDM). Under this, a committed investment of $1 billion in the next five years can enable a company to take benefits under the PMA policy even for products which are fully imported. One wonders if the move is consistent with the basic premise of the PMA policy to promote domestic manufacturing and whether it may be construed as self defeating.

This move has created quite a flutter in the domestic telecom manufacturing industry. Many are perplexed that this amendment may stifle the aspirations of the large domestic electronic industry players who have already made huge investments in innovation and manufacturing of products.

The argument behind the policy relaxation, proposed by the ministry of electronics and information technology, is to attract large investments in India. The guiding principle of the preferential market access policy was an important strategic consideration to promote domestic manufacturing in high technology products with progressive value addition by providing them market access in an oligopolistic market structure. The existing frame work is non-discriminatory, without offering any price preference or lowering of quality and provides fair chance to any manufacturer in India—small or large to compete for such business.

One of the nine pillars of the ‘Digital India’ vision is ‘net-zero import’ in electronics sector by 2020 to meet a domestic demand of $400 billion. While It remains compelling to attract large FDIs, the proposed amendment may be construed as if by allowing import of products equivalent to 50% value of domestic manufacturing for large project through such FDIs , the effective target of $400 billion domestic manufacturing is getting diluted due to the 50 % import- deemed domestic content.

As one reads the terms of the draft proposal—some inconsistencies vis-a-vis the original policy are too obvious.
Large companies will get qualified under the proposed scheme by just providing commitments of making future investments/annual turnover/forex generation within the next five years. None of this is measurable at the time of taking initial benefit, but no checks and safeguards are visible to ensure new beneficiaries meet the target and commitment. Any policy objective must lay down clear year-on-year performance criterion based on which qualification shall be ascertained.

In the proposed amendment, qualified company will be provided with a credit of 50% of the total value of products they manufacture in India. Against this value, they will be allowed to import products which will directly get qualified as domestic products under the PMA scheme. Other deceptive feature of the policy is allowing of value addition to be calculated based on the entire product portfolio (including many products) on weighted average basis. Original policy set the qualification of value addition on product basis to ensure that efforts are measurable on respective complexity of each product and, so that the domestic industry can move up in the value chain to achieve net-zero import. Apprehensions are that intended beneficiary companies will get unfair advantage of getting some products qualified without meeting their individual value addition.

Surprisingly, amendments also stipulate investments made by other industry partners including EMS supplier to be considered as part of company’s investment under consideration for the eligibility qualification. This is quite unreasonable, as how can an investment by any other market player, who would be extending services to more than one customer and has no direct legal association with the company, be clubbed for such consideration. Proposed relaxed terms are not consistent with the spirit of the PMA policy and have a tendency to provide the preservation of an element of special and differential treatment to those foreign investors who qualify under this category.

The last few years have seen domestic IT & Telecom manufacturers grow significantly because of policy support. In telecom alone, projects worth about R10,000 crore are being executed by domestic players under government procurement. The proposed changes, however, are tilted towards interests of large foreign investments. And hence, the amendments as a tool for more FDI to achieve net zero import by the year 2020 may not be tenable .

The author is president & chief strategy officer, Vihaan Networks Limited (VNL). Views are personal

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