In the run up to Union Budget 2022, FinancialExpress.com is collecting a series of comments from industry veterans on what they expect Finance Minister Nirmala Sitharaman to announce in her Budget Speech this year. Will the Union Budget give a fillip to the manufacturing sector? Has enough been done with the PLI schemes announced a while ago? What can be done to aid education as the pandemic has drastically affected many school children in the country.
FinancialExpress.com caught up with a couple of industry veterans for their inputs. Here are excerpts from an interview with Dr Ajai Chowdhry, founder, HCL, and Dr Satya Gupta, Advisor, India Electronic and Semiconductor Association (IESA)
What do you expect from Ms Nirmala Sitharaman this year in Union Budget 2022?
Dr Ajay Chowdhry: I would like to focus on the issue of loss of learning in schools, because this is a very serious problem. And as a result of the loss of learning in schools, due to the COVID, what we have seen is that the non-availability of devices to access the Internet has actually created a huge digital divide. I think for the children who will be joining back in school after nearly two years, it is going to be quite critical that they have a hybrid situation of learning. They have lost one year, if not more, in what has happened in the last two years. For them to catch up will not be easy. To catch up they will have to go to school. They will also have to spend time after school using technology to get back to where they were two years ago.
Now, the challenge during the last few years has been that – some organizations have put out online lectures – but the children never had the right device. Some of the homes have a smartphone, but the smartphone is too small a screen for children to learn from. If you want to play videos and use newer technologies like AR, VR, etc, that’s not an adequate screen size. My expectations on the budget would be that the government will go all out to provide tablets to schoolchildren. There are 25 crore school children and a lot of them are in the lower end of society. I think the time has come for the government to actually think in terms of providing tablets to all schoolchildren all over the country and also enable the internet to be available everywhere. I mean, my dream has always been to see that broadband becomes a fundamental right.
In the last year, many industries and businesses have faced a slow down or even shut down because of the pandemic. Dr Satya Gupta, since you are associated with the semiconductor association, many industries like the auto and allied industries have been hit by a shortage of semiconductors. There is talk of setting up semiconductor fabs in India, what do you think the budget will address on this?
Dr Satya Gupta: If you look at the activities in the last two months, the government has already announced a package of Rs 76,000 crore towards building semiconductor manufacturing and semiconductor design in August. If you look at the auto industry, there are basically multiple layers between them and the fabs. So, although there has been some allocation towards the end products in the current semiconductor scheme, we emphasize more on the product creation. For example, if you’re using a chip in a semiconductor area, in an engine control unit, there are multiple layers from the fab. It goes to a basic chip company like NXP and all those things, and from there it goes to tier three, tier two, tier one and finally, as a module, it goes into the car. So, in terms of the end product, which directly gets sold to the car manufacturers, these are from what we call electronics product companies, right? They can be incentivised for work.
Typically, if you have $100 to spend on an industry like semiconductor electronics, use 80% of that on manufacturing, you spend $15 out of that in product creation, and the rest on long term research, you can bring competitiveness. I think we need to do more on the product side. You need to build a robust product ecosystem that will automatically drive the fab. There is a lack of demand, so we need to put more emphasis. The government should put basically above $500 million towards incentivizing product creation, similar to what was done some years back in Electronics Development Fund (EDF). That model did not work. We need to make the model better and if we put $500 million in EDF then product companies can come to assist semiconductor problems.
The Indian landscape more than three decades ago when you were setting up HCL and now are very different. Today, there are so many startups and new-age companies. In the past year, there have been several unicorns that have come out of India. In this Budget will there be a fresh focus on startups? Will it address the issue of angel tax?
Dr Ajai Chowdhry: If you look back 10 years ago, everybody used to ask me, why can India not have a Google? I think that’s been put to rest in the last 10 years because of the sheer development of software products for the world. A lot of software-as-a-service (SAS) companies are the ones that have become unicorns. This whole development of the software product industry in startups has happened in a pretty big way. That is really very encouraging. Now, what is needed is the same thing that should happen in hardware. We need to encourage and provide funding for startups in hardware. Today, if you look at most VCs, there are really no VCs, who fund hardware startups. This is where the government needs to step in and create a model by which more startups start to work on the hardware product ecosystem.
As my colleague, Dr Satya Gupta said, focus on products, but through startups. We can create some very interesting opportunities for the country. I’ve been involved with an incubator in Delhi University, which was originally set up by MEITY, along with some of the associations, and it is fundamentally focusing on hardware. The interesting part is in the last five years, they’ve created 50 product companies, and close to 60-70 patents. So that needs to be made huge. Startup India needs to start looking at hardware in a big way. We believe, unless product companies happen, the semiconductors will have no market, then semiconductor plants will have no market. That is part one, as far as startups are concerned, and that is where I would like the government to pay a lot of attention.
The other thing that’s been pending for a long time is that all startups attract people into their organisations by ESOPs. ESOPs get taxed when they actually get the stock, when it gets vested. That is ridiculous. They should tax it when they sell it, so that employees actually feel the warmth of the wealth. That is what is missing in today’s taxation policy. And that needs correction.
Do you think there will be any change in the tax structure for corporates?
Dr Ajai Chowdhry: I think there has been a lot of work that the government has done on taxation for corporates. The interesting part is if you created a new manufacturing company the tax percent, so some of those interesting things have already happened. We don’t need to ask for anything more. I think what we need is these two initiatives for startups.
How do you see startups being incentivized in the Budget?
Dr Satya Gupta: Hardware startups are very different from software startups. Right now, whether it’s a Startup India or any programme, we are putting everything into the same set. The capital needs, the infrastructure needs, the support used for a hardware company is very different from a software company. I think that has to be understood and the government should put strong emphasis on building the right support ecosystem for the hardware companies – whether it’s VCs, government, and other channels.
You cannot apply the same formula that you applied for a software startup to the hardware startup. As I said earlier, $500 million EDF – they should put up, so that the companies can get adequate financial support.
What new initiatives under the Atmanirbhar movement that the government outlined earlier are likely to come out this year?
Dr Ajai Chowdhry: Atmanirbhar is a very large umbrella. I think the government needs to keep on creating more areas where we need to invest. I think one of the biggest areas that I believe that the government needs to continue to invest in is electronics, along with electric vehicles. Why am I talking about these two things together? 70% of an electric vehicle is electronics. I think that is where we should put a lot of effort and energy in terms of design to manufacture and provide funding for design to manufacture rather than just manufacture.
If you look at the whole Atmanirbhar and PLI seems of various verticals that have come around, they are oriented towards bigger companies, and they are oriented towards manufacturing and volumes. In addition to manufacturing and volumes, what is required is depth in manufacturing. Depth in manufacturing comes with designing and buying components locally, so that there is higher domestic value addition. That is something that they need to start to incentivize. That has not happened in any of PLI schemes.
Let’s look a little beyond Atmanirbhar – one very important component, which is that we are importing too many products from China. If you look at the last one year, the growth of Chinese imports has been monumental. This needs direction, because literally we are becoming a colony of the Chinese.
We are allowing all our brands in whatever area you look at to be eaten up by them. This is something that our work should correct and incentivize things that can be created in India, made in India. Look at medical electronics. The import of medical products last year was phenomenal from China. The current PLI for medical equipment and electronics covers only a small portion of the products. It needs to go completely broad. It needs to take up startups to work in this area. Today, startups are not incentivized in medical electronics as this comes under Pharma. The Ministry has to correct this and they need to bring MSMEs and startups into the medical electronics PLI.
While we do import a significant amount of electronics and other goods from China, should we look at taking a leaf out of the Chinese playbook in the way they have developed manufacturing facilities and their economy?
Dr Ajai Chowdhry: The government has now come up with a new vision document, which is looking at exports in a very big way for electronics. That is what will solve the problem. But that still does not take care of the depth in manufacturing. I think that is the area that I find missing, in our whole thinking as far as PLIs are concerned in every area of the country.
What is it we lack? Is it skill or accounting for costs involved in setting up manufacturing units in India?
Dr Ajai Chowdhry: You see, skills are no longer an issue. A lot of work has been done on skills by Skills India and we have an electronic sector Skills Council. The issue is to incentivize something which has not been incentivized. Today, we are incentivizing only volume manufacturing. Today, we are incentivizing large companies. We need to incentivize MSMEs. We need to incentivize startups in all these areas so that they will be the engine for creating new products and new things. A lot of innovation happens in small companies.
Dr Satya Gupta: To add one more point. See, typically the common focus is manufacturing and basic job creation. But if you look at the traditional industry, let’s say automotive or cement, then the product and manufacturing are basically done by the same company. Electronic industry does not work that way. While Apple is the product owner, Foxconn is the manufacturer. I think that difference has to be basically understood. In electronics only 8-10% is the value addition. The rest 40-45% value addition gets added by a manufacturing company. Electronic industry runs on the contract manufacturing model. That is a big difference between any other traditional industry and electronics and semiconductor industry because value remains with the product companies and manufacturing is only 8-10% of the whole. The product company and manufacturing company both need to be incentivized together.