Union Budget 2023-24: A Glass Half Full

By Bipin Sapra

An in-depth analysis of the recent Union Budget 2023-24 announcement for the mobile and electronics industry and the way forward.

Bird’s Eye View of the Industry

India and its governing spirit have changed for the better during the last few years with policy and procedural amendments becoming a continuous process. Equipped with a series of stimulants announced by the Government of India, the electronics industry is on a high growth trajectory to achieve the manufacturing target of USD 300 billion by 2025-26, as envisioned in the Vision Document prepared by the Ministry of Electronics and IT (MeitY) and the India Cellular& Electronics Association (ICEA).

Some of the key policy measures for the electronics industry announced by the Government include the Production Linked Incentive (PLI) schemes that were launched in 2020- 2022  for 13 sectors with a budgetary outlay of approx. INR 1.97 lakh crore(US$ 26 billion) have greatly benefitted and incentivised the manufacturing of electronics products including Mobile Phones and specific components, Telecom Equipment, IT Hardware, White Goods, and LEDs. The Scheme for Promotion of Manufacturing of Electronic Components and Semiconductors (SPECS), and the Electronics Manufacturing Clusters(EMC) 2.0 have also been instrumental in encouraging investments in the Electronics System Design and Manufacturing(ESDM) sector and as out comes of these schemes, the domestic manufacturing of such incentivised electronics have increased manifold and many of the scheme applicants have already benefitted. It is commendable that the government is responsive to industry concerns and is actively working towards addressing the needs of the industry. The policies formulated in recent years show that several major schemes for the electronics sector, such as SPECS, PLIs, EMC, and Semi Con India Programme, have been announced by the government without waiting for the Budget Day. Additionally, India has witnessed need-based policy announcements, procedural amendments, and tweaks in direct and in direct taxes to encourage manufacturing as a continuous process performed round the year.

None the less , the industry and people at large always have some positive expectations from the Union Budget in which Government announces several schemes and does budgetary allocations for various sectors such as agriculture, MSMEs, education, defence, railways, and social welfare among others.

Key Proposals in Union Budget 2023-24

India’s budget announced for the next fiscal aims to build on the foundation laid in the last one to propel the country into Amrit Kaal. Adding to the policy impetus for the electronics industry are the Union Budget announcements for this year. The industry saw a 40% increase in the budgetary allocation this year, compared to last year, with a jump from INR 11,719.95 crores to INR 16,549.04 crores in the overall outlay for the MeitY. The big winners in the budget proposals include:

MOBILE PHONE

The mobile phone production in the country has increased from 6 crore units in 2014-15 (valued at ~ INR 18,900 crore) to 31 crore units in 2021- 22 (valued at ~ INR 2,75,000 crore). This has been further strengthened by the customs duty relief on the camera lens and its inputs/ parts for use in the manufacture of the camera module of cellular mobile phones. The duty on these products had been reduced in the last year’s budget from 10-15% to 2.5%. This year the duty of 2.5% has been removed in totality. The continuance of concessional import duty o f5%(from20%)on lithium- ion cells used for mobile  phone batteries until 31 March 2024 is an other key take away for mobile phone  manufacturers.

TELEVISION

Televisions are an integral part of households and thus a very important item in the list of consumer electronics and are heralded as a product for which the country can establish itself as a global hub for manufacturing. The budget has reduced the Basic Customs Duty on imports of specific parts for the manufacture of open cells of TV panels from 5% to 2.5%. Considering that open cells are a major high-cost component in the process of manufacturing TVs, this duty reduction will boost the production of televisions in the country. As published in MeitY’s Annual Report 2021-22, the TV production in the country in 2020- 21 accounted for USD 4.24 billion, this figure is expected to rise to USD 10.22 billion by 2025-26 growing a ta CAGR of 20%

OTHER ANNOUNCEMENTS IN THE SECTOR

1-  Customs duties on specific chemical items used in the manufacture of specified chemicals/items for the manufacture of pre-calcined Ferrite Powder (which is eventually used in the manufacture of cores in transformers for electronic devices) have been reduced from 7.5% to 0% till March 2024.

2- Customs duties for Palladium Tetra Amine Sulphate that are used for the manufacture of parts of connectors have been reduced from 5% to 2.5%. This will act as a tailwind for companies to “Make in India” since the duty on procuring the said raw material has been reduced. These connectors are versatile items and are used in the manufacture of consumer electronics, automobiles and also the aerospace industry.

WITH THE AIM TO ENHANCE EASE OF DOING BUSINESS, THE BUDGET ANNOUNCED THE FOLLOWING

• More than 39,000compliances have been reduced.
• Over 3,400 legal provisions have been decriminalised.
• The Jan Vishwas Bill2022 introduced in the Parliament seekstoamend42Centralactsinorder to further trust-based governance in India by reducing the compliance burden on individuals and businesses.
• Permanent Account Number (PAN) to be the common identifier for businesses for all digital systems of specified government agencies.
• A system of “Unified Filing Process” is to be set up to obviate the need for separate submissions of the same information.
• Execution of contracts during COVID was a challenge for all. MSMEs that were not able to execute contracts in that period will receive back 95% of the forfeited amount of bid/performance
• Entity DigiLocker to be set up for use by MSMEs, large businesses and charitable trusts for storing and sharing documents with various authorities/regulators/ banks/other business entities, in a secure digital manner whenever.

Impact of PLI on the Industry

India’s share in global electronics manufacturing has grown from 1.3% in 2012 to 3.6% in 2020. Growing a ta Compound Annual Growth Rate (CAGR) of 17.9%, the domestic production of electronic items has seen a sharp rise from USD 37 billion in 2015-16 to USD 74.7 billion in 2020-21. The Economic Survey of India for 2022-23 highlighted that the country’s electronics industry had reached a valuation of USD 118 billion as of FY 20. The sector has been spruced up primarily due to growth in the production of mobile phones, consumer electronics as well as industrial electronics.

PLI Scheme for Large-Scale Electronics Manufacturing attracted an investment of INR 4,784 crore in the industry leading to a total production of INR 2.04 lakh crore as of September 2022 out of which the exports alone accounted for INR 80,769 crore.

Adding to the above, in the last couple of years, about 250 manufacturing units have been established in the country catering to the mobile phone manufacturing ecosystem. This development has generated employment for about 7 lakh persons (both direct and indirect). Both foreign and Indian brands have shown a tendency towards setting up manufacturing plants or have entered into sub-contracts for the manufacture of mobile handsets with Electronic Manufacturing Services (EMS) companiesinIndia. The PLI scheme for LSEM (Large Scale Electronics Manufacturing) generated about 40,916 jobs as of September 2022. In fact, global mobile phone giants have created about 100,000 jobs in a span of 19 months up till 2023.

Owing to the schemes/incentives announced by the Government, the growth of the electronics sector – specifically the mobile production followed by the manufacturing of televisions and the setting up of semiconductor foundries–will prove to be a big source of employment, both direct and indirect, for the youth of the nation in the near future.

Semiconductors: The Flag Bearers of the Industry

There has been a major thrust on the sub-industry of semiconductors in the budget which will provide a fillip to the domestic manufacturing activities for semiconductors and create roots for a strong ecosystem in this sector. Outlay on the “Modified Programme for Development of Semiconductors and Display Manufacturing Ecosystem”  in India has increased massively from an outlay of INR 200 crore in the previous budget to INR 3000 crore in this year’s announcements. This amount has been further proposed to be prioritised amongst – silicon- based semiconductor fabs(INR1,000 crore); semiconductor fabs and chip packaging (INR 1,800 crore) and design-linked incentives (INR 200 crore).

The government’s vision of Atmanirbhar Bharat in the electronics and semiconductors market gained momentum when the Semicon India programme was approved with a total outlay of INR 76,000 crore for the development of the semiconductor and display manufacturing ecosystem in India.

Tax Announcements– A Move in the Right Policy Direction

The government’s move towards the reduction of customs duty, specifically the cut in the import duty on TV panels by 2.5%, will greatly benefit Indian consumers considering that televisions are one of the most purchased consumer durables in the country–across urban and rural areas. Per data available on IBEF, shipments of smart TVs from India rose by 65% YoY in the second quarter of 2021 on account of rapid expansion endear  ours being pursued by original equipment manufacturers (OEMs). It is forecasted that by 2025, smart televisions in India will reach a figure of approximately 40-50 million.

The said duty reduction coupled with the changes proposed in the new income tax regime providing an exemption from income tax till INR 7 lakh will hugely aid the mid- level income sections of the country–who comprise the largest consumer market in the nation – by increasing their purchasing power and creating a larger pool of disposable income. The said boost in the purchasing power of the country will not only create more demand for electronic consumer durables but will also significantly enhance demand for entry-level products i.e., first-time purchasers of electronic consumer durables items such as semi-automatic washing machines and smaller LED TVs. Thus, there will be an uptick in the consumer demand for such items caused by an increase in disposable income due to the lowering of tax slabs.

Competitiveness of the Domestic Industry–Still a Road Block

Manufacturers, suppliers, and distributors too have a lot to gain from the government announcements in the electronics sector. By moving towards rationalizing the country’s tariff structure, simplifying trade and business-related procedures, advancing infrastructure, and providing incentives the Government is targeting to give a substantial boost to the domestic industry for manufacturing of electronics products.

The slew of incentives and measures announced by the government over the recent years seek to achieve a level-playing field for the country’s manufacturers and to enable them to compete with global markets and curb imports of electronics products into the country. There has been a decrease in the rate of imports for finished goods and an increase in the import of electronic components. This is an indicator of the growth of manufacturing facilities of electronic products in the country. Supporting this growth is the fact that India is now the second-largest mobile handset manufacturing country in the world. However, there is tough competition for India on the global platform.

The Vietnamese electronics industry has emerged as the most intense hub due to the “China plus 1” strategy being adopted by leading manufacturing firms globally. This in turn has primed Vietnam for its participation in global value chains (GVCs) in the electronics sector.

While there are many factors responsible for a country’s participation in GVCs, the national policy landscape plays a crucial factor. It is necessary for a nation like India to adopt GVC-conducive measures such as low trade barriers and a reduction in costs a rising out of international trade. Other important aspects where there is scope in the national policy space include:

Advanced Infrastructure and Well- organized Logistics Ecosystem.

In the case of India, several stages of production of the electronics industry can shift base to the country with the rights e to trajectories set by the policy makers to ensure ease of doing business for the companies.

There exists a cost disability for electronics manufacturers seeking to set up their plants in India vis-a-vis in Vietnam and China. The latter countries have implemented a host of business-friendly regulations in the form of tax breaks, provision of supportive infrastructure, better ease of ease doing business and advancement of the manufacturing ecosystem. The collective impact of such policy support in China and Vietnam suggests that when compared to India the competitiveness gains for investors are approximately between 19 to 21% in Chinaand9to 12% in Vietnam.

Scope for Policy Change

The country has transitioned from almost absolute imports of mobile phones during 2013-2015 to a stage of import substitution during 2016- 2020 and now is an exporter of mobile phones. India crossed INR 90,000 crores of mobile exports by the end of FY 2022-23 – eclipsing the entire FY 2021-22’s mobile exports of INR 45,000 crores.

This development is the result of a clear intention on the part of government and industry however the domestic mobile and electronics industry needs more support, especially in the form of duty concessions on inputs / components.

The high import duties on inputs/ components used for the manufacture of electronic items increases the cost of manufactured product and makes them uncompetitive in the international markets. Basis the high- level analys is  of the reasons for lower exports from India in comparison to the competing nations such as China,

Vietnam, Malaysia, Thailand, etc., it is a fact that India has the highest import tariff rates than the competing nations, i.e., 9.7% as against 3.2% in China, 3.5% in Mexico, 5% in Thailand, and 5.6% in Vietnam. For instance, some inputs used for the manufacture of mobile phones still attract import duty ranging from 2.75% to 16.5% and this makes the Made-in-India mobile phones costlier in the international market.

The Indian ESDM manufacturing industry is facing the heat of this cost disparity and encountering difficulties in competing in the international markets vis-à-vis the electronics manufacturers from the above-mentioned countries. The sector has appealing business opportunities on the horizon that are yet to be leveraged. Two such potential areas are: the role of MSMEs and emerging technologies. MSMEs, also known as India’s Champions, can play a pivotal role in sustaining the local manufacturing ecosystem for the electronics industry. Global lead firms are certainly crucial in bringing investment, innovation and establishing a manufacturing vein, however, it is the MSMEs that will be instrumental in continuing domestic manufacturing for the country while also augmenting GDP, creating more jobs and reducing reliance on imports.

Similarly, emerging technology can great laid electronics manufacturing in India through integration with smart software such as Artificial Intelligence, and G5 services. Internet 4.0 brings with it an amplified demand for data networks that will further enhance the demand for 5G-compatible devices such as 5G modems , 5 Grouters, MIMO antenna, 5G new radio and countless other electronic items. These opportunities, however, can be fully relished only with the right policy support for the electronics sector, as has often been the demand of the industry.

Key Recommendations

Over the past 4-5 years, the domestic production of electronic items has markedly increase data CAGR of 17%.²² However, the domestic industry continues to face certain challenges.

India has stressed on the policy of ‘Make in India’ and ‘Aatmanirbhar Bharat’ and accordingly, all policies have been aligned to remove disabilities vis-à-vis competing countries. The vision of the government is that manufacturing in India should be adding substantially to the GVCs of the electronic sector. While the policies have borne substantial fruit in mobile phone manufacturing, the other electronic goods are now being given suitable focus too.

The PLI and other schemes which have been introduced to remove disability vis-à- vis other countries are bringing in much-needed investment in all sectors. Some of the schemes need to be tweaked for the industry to derive the desired benefit. Similarly, critical components and goods need to be identified for which government should create the necessary ecosystem.

Some of these electronic goods like laptops and computers are part of the ITA–1of which India is the signatory and accordingly it is not possible to increase customs duty on the same. Hence PLI and other related incentives are the only mechanisms to promote Make-in-India for these goods.

Further, in addition to budget announcements, there are other equally pressing issues that the government must address. Plug-and-play infrastructure can be a game changer for the domestic industry. By providing infrastructure support, in the form of buildings and concerned permits, the government authorities can significantly assist the manufacturers by themselves undertaking regulatory compliances and handing over readymade facilities to the private sector. This will go a long way in boosting India’s attractiveness for the electronics sector which tends to be rather labour- intensive.

Another area for considerations better to market access through Free Trade Agreements (FTAs). India is active in bilateral agreements which can be critical for establishing global supply chains. Ongoing negotiations with trading partners such as US and EU should be conducted with electronics manufacturing in mind so as to enable exports from India.

India’s Techade–The Way Forward

Electronics hardware manufacturing has come to be one of the chief pillars for the government of India, especially in its initiatives such as Digital India and Make in India. As an outcome of these measures, India aims to become a global hub for design and manufacturing while reducing its dependence on imports.

Drawing on the experiences of South Korea and Taiwan – two of the most significant illustrations of ‘catch-up industrialization’ – that crafted industrial policies in the period between 1960 and 1990 focused on setting up global value chains, it would be prudent for India also to continue supporting its domestic industries to ensure high growth.

While India is adopting astute policies and topping the same with a supportive budgetary envelope, there is still scope for a lot more that can be done for the electronics sector to reach its high target of becoming a USD 300 billion market by 2025-26.

The next step for the Government would be to continue creating an amicable environment, supplement the existing schemes with further schemes focused on incentivizing value addition, and R&D to send the right signals to foreign investors who have started placing their bets on India as a preferred destination. The policy moves by the government should be announced with the vision of strengthening the country’s domestic manufacturing capabilities in the electronics sector as well as sharply increasing exports to other markets. This will usher India to a new dawn of being self-reliant and find its rightful place in the global supply chains looking at diversification.

About Author

Bipin Sapra is a Tax Partner at EY who leads the Policy initiative for EY India, predominantly advising on Policy issues relating to Indirect taxes, Global trade, Incentives, Sustainability and other sectoral issues.