Bolstering Electronics Sector Through Indo-US Partnership

By Sameer Guduru

Electronics has emerged as India’s 3rd largest export commodity, growing around 24 percent between April and October 2024, according to the Ministry of Electronics and Information Technology (MeitY), Government of India. The overall value of electronics manufacturing in India has crossed USD 100 billion in 2024. Just to provide a perspective, this number was USD 49 billion in 2017.

Additionally, the electronics exports rapidly grew at 23 percent annually and in 2023, India electronics export value breached USD 30 billion. While the overall market value of electronics manufacturing in India currently stands over USD 150 billion, there is room for accelerated growth. If current trends continue, India is on the right track to achieve the ambitious target of USD 500 billion set by Prime Minister Narendra Modi. However, to achieve these numbers, India needs to boost demand, which according to a report by NITI Aayog, currently stands at only 4 percent of overall global value.

If current trends continue, India is likely to reach around 280bn USD of manufactured electronic goods in 2030, however, Prime Minister Narendra Modi has set ambitious targets of achieving USD 500 billion. To achieve these numbers, India needs to boost demand, which according to a report by NITI Aayog, currently stands at only 4 percent of overall global value.

While India’s progress in the sector over the last decade or so has been steady, thanks to mobile phone manufacturing, initiatives like Make in India, production linked incentive (PLI) schemes, there is a much larger scope for further policies to integrate the country further into global value chains. To this extent, the Indo – US partnership has a major role to play in achieving India’s 2030 targets. A USD 100 billion market value of trade between US & India by 2030 is although ambitious, is not impossible to achieve.

Already several American majors have ventured into this space and are pursuing manufacturing in India in a big way. Some of the issues that have to be dealt with in optimising the opportunity and increasing the size of the pie are discussed briefly below.

Tariffs on components and sub-assemblies remain a significant issue in determining cost-competitiveness of manufacturing in India for companies compared to other emerging markets. As per ICEA recent report, in the case of mobile manufacturing, countries such as Vietnam and China have comparatively much lesser average tariffs compared to India, viz. India’s 6.2% & 7.4% compared to 0.7% & 4% respectively.

One of the reasons for this is the understanding that tariffs lead to higher domestic manufacturing and localisation. However, localisation is only possible, when there is adequate skilled workforce and a large domestic demand. India’s manufacturing sector has for decades been plagued with this perennial “chicken & egg” problem, where lack of technology has resulted in a skilled workforce — which in turn has resulted in India being able to attract high end technologies.

The other key determinant for localisation is exports, however, a larger volume of exports is only possible when there is a large manufacturing base in the first place, but tariffs create hurdles for larger investments.

Hence, keeping the long term in consideration, tariffs should be further rationalised in India, in the medium term, to bring in more investments, ancillary ecosystem and creating local demand, for localisation to be achieved. Especially considering India being a recent entrant, to emerge as a real competitor to other emerging markets tariff rationalisation is a must. This will help bring in larger investments and aid in growth and employment creation, which will have a cascading effect in skilling and training.

The other key element to attracting US investments in furthering manufacturing in India, is in the IT hardware space. While several US hardware majors are already to some extent manufacturing laptops and tablets in India, it is only a fraction of their overall manufacturing capacity. According to estimates, the market value for laptops and tablets is likely to reach USD 8.4 billion by 2028 at a CAGR of 7% per annum.

However, only 30% of this market share is manufactured locally. Considering India being a price sensitive market, currently Chinese manufacturers dominate laptop and tablet segments in India, and outperform others when it comes to scale. India despite PLI schemes still has significant disadvantages in laptop and tablet manufacturing considering a smaller domestic demand and the lack of component ecosystem.

Hence, rationalisation of tariffs, PLIs for components & sub-assemblies, will attract investment and therefore localisation. It is also important to contextualise IT hardware manufacturing as quotas and licensing may further impact the attractiveness of India as a manufacturing destination.

Further, considering China venturing into the high-end manufacturing of raw components, moving away from sub-assemblies, competing at scale with China, will be a difficult proposition for India in the near-term.

Ideally, India may explore the possibility of becoming a leading exporter and replicate the model in mobile phone manufacturing, rather than stifling the possibility of IT hardware manufacturing achieving true potential. It is worth noting here, the supply chain constraints that companies have to address due to quotas, which may lead to demand-supply issues thereby impacting consumers as well as prevent India from integrating into larger global supply chains.

If played well, US players can contribute significantly to IT hardware manufacturing in India, especially considering the increasing demand for data centres, computer hardware and in India’s overall digital transformation. Hence for India, given the current circumstances, it is pragmatic to emerge as a leading “friendshoring” destination and cater to what is necessary in landing significant segments o1 global value and supply chains of IT hardware.

The other key element going forward to be discussed at a bilateral level is mutual recognition, where components tested and certified in one geography are readily accepted in the other. This requires further discussions on alignment of standards in both geographies and identification of labs that can provide the required certification.

Considering the costs are lower in India, the country can emerge as a testing hub and even attract investments in test centres. This again requires training and ensuring barrier free entry of testing equipment.

Also, considering several Indian electronics emerging players and their ambitions of venturing into the US market, it becomes furthermore essential for standardisation and ease of testing and certification. Hence, it is prudent to establish mutual reciprocity and ease of market access rather than barriers to ease of doing business between both countries.

In conclusion, the US and India both have a lot to offer to each other in the electronics manufacturing space. It is important for India to showcase itself as a country that can provide the required skilled resources for decades to come in a sustained manner, while the US is in the midst of realigning global supply chains.

Considering India’s emphasis also on the base technologies, i.e. semiconductors, synergy also in IT hardware manufacturing will help achieve its targets in the long term, provided India creates avenues for US investments in the short-medium term.

About the Author:

Sameer Guduru is currently serving as Director, Digital Economy, Aerospace & Defence at United States – India Business Council, New Delhi. He is a physicist with a doctorate from at Istituto Italiano di Tecnologia and Politecnico di Milano, Italy and Postdoc from Centre National de la Recherche Scientifique (CNRS), Marseille, France. Prior to USIBC, he has worked with the New Emerging & Strategic Technologies (NEST) Division of the Ministry of External Affairs (MEA), Government of India, as a Fellow (2020-2023).