Union Budget 2024: Niti Ayog pushes for import tariffs, tax breaks to boost India's electronics powerhouse

Government think tank Niti Aayog has emphasized the urgency for India to implement substantial changes in import tariffs, introduce fiscal incentives, and develop strategic programs to establish a prominent presence in the global electronics value chain. The target is to boost the scale of electronics manufacturing from just over $100 billion presently to $500 billion by the year 2030.

In addition to financial backing, the report addresses concerns regarding skill development in the industry, the facilitation of visas for foreign workers, and the acceleration of foreign direct investment projects from nations that share a border with India.

Furthermore, there is a proposal to attract international expertise in high-precision manufacturing and design through enticing perks and swift approval processes for visas, especially for professionals who are visiting for training or business engagements. “There is a need to develop a mechanism to fast track approvals under Press Note 3 (2020) for specific proposals where foreign companies are critical for ecosystem development,” the report ‘Electronics: 
Powering India’s Participation in Global Value Chains’ said.

Global Value Chains

The report highlighted that Global Value Chains (GVCs) play a crucial role in contemporary manufacturing, involving international cooperation in design, production, marketing, and distribution.
Accounting for 70 per cent of global trade, GVCs underscore India's urgent need to boost its participation, particularly in sectors like electronics, semiconductors, automobiles, chemicals, and pharmaceuticals. Electronics are especially significant, with 75 per cent of exports linked to GVCs, the report said.

India's electronics sector has grown rapidly, reaching USD 155 billion in FY23. Production almost doubled from USD 48 billion in FY17 to USD 101 billion in FY23, primarily driven by mobile phones, which now make up 43 per cent of total electronics production.

The country has vastly reduced its dependence on smartphone imports, now manufacturing 99 per cent domestically.

Initiatives like Make in India and Digital India

Initiatives like Make in India and Digital India, along with improved infrastructure and business ease, backed by various incentives, have spurred domestic manufacturing and attracted foreign investment.

Despite these advances, India's electronics market is relatively small, representing just 4 per cent of the global market. The focus has mainly been on assembly, with limited capabilities in design and component manufacturing.

The global electronics market, worth USD 4.3 trillion, is led by countries such as China, Taiwan, the USA, South Korea, Vietnam, and Malaysia, the report said.  

According to the report, the electronics component manufacturing industry faces a cost disability ranging from 14% to 18%, posing challenges for manufacturers to maintain competitiveness and profitability within the existing incentive framework. Additionally, component manufacturers encounter a significantly lower capital-to-output ratio compared to other industries.

“This disparity underscores the need for a dedicated incentive scheme tailored specifically for the component manufacturing that provides targeted support to bridge the economic gap,” the report said.

High tariffs on components

The Niti Aayog report highlights that high tariffs on components in the electronics manufacturing sector present a significant challenge to India's ability to expand its electronics exports and stay competitive on a global scale. The current tariff rates, which vary from 0% to 20%, result in increased input costs. On average, India's tariffs stand at around 7.5%, surpassing those of China (4%), Malaysia (3.5%), and Mexico (2.7%). This places Indian electronics exports at a cost disadvantage of 5-6%.

In order to mitigate this cost disparity and enhance production efficiencies, it is imperative for India to streamline its tax framework within the electronics industry. This entails addressing both income tax and goods and services tax structures to foster a more conducive environment for manufacturing and export activities.

Furthermore, the report suggests the implementation of fiscal incentives to bolster the growth of industrial infrastructure and facilitate the scaling of electronics manufacturing capabilities in the country.

Target set

The target set for electronics manufacturing in India by 2030 is $500 billion, comprising $350 billion in finished goods and $150 billion in components. Approximately $200-225 billion of this total amount is expected to come from exports. This ambitious goal is also projected to generate 5-6 million additional jobs. Despite the current size of the Indian electronics manufacturing industry being around $100 billion, the global electronics market stands at an impressive $4.3 trillion. It is essential to note that without specific targeted support and strategic focus, the industry would only reach $253 billion by 2030 following a 'Business as Usual' trajectory.

"In the upcoming budget, we anticipate a strategic emphasis on bolstering manufacturing through enhanced incentives, tax rebates, and Production Linked Incentive (PLI) schemes. These measures are aligned with the Make in India initiative, aimed at attracting investments and enhancing domestic production capabilities. There is a strong expectation for increased allocation towards infrastructure development, intended to contribute to economic growth and address critical needs across sectors. With a focus on stimulating real estate growth, measures such as easing regulations, providing financial incentives, and promoting affordable housing initiatives could be introduced to stimulate demand and accelerate construction activities. This sectoral focus is poised to bolster economic recovery, create jobs, and drive nationwide advancement," said Aaditya Sharda, Co-founder, Infra.Market.