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Electronics & IT Hardware Industry- An Overview

It has been estimated that demand of electronics products and systems in India would grow to about USD 400 Billion by 2020. At the conventional rate of growth of domestic production, it would only be possible to meet demand of about USD 100 Billion by 2020. The Government attaches high priority to electronics & IT hardware manufacturing. It has the potential to generate domestic wealth and employment, apart from enabling cyber-secure ecosystem. There have been some efforts for rapid growth of the electronics (including telecom) hardware manufacturing sector in the past like 100% FDI permitted under automatic route, no Industrial license requirement, payment of technical know-how fee and royalty for technology transfer under automatic route. However, these efforts have not led to a substantial impact; partly because of India is a signatory to the Information Technology Agreement (ITA-1) that has resulted in a zero duty regime on import of the goods covered under the Agreement. India has also executed Free Trade Agreements (FTAs) and Preferential Trade Agreements (PTA) with several countries/ trading blocks, which has enabled zero duty import of items not covered under ITA. Other factors hampering the growth of electronics includes lack of reliable power, high cost of finance, poor logistics & infrastructure, weak components manufacturing base, lack of targeted & proactive R&D in collaboration with industry etc. DeitY has taken us some key steps to boost manufacturing of specific products which are listed below:

Boost for indigenous manufacturing of TVs
  • BCD on LCD, LED or OLED TV panels reduced from 10 % to zero.
  • BCD on Colour picture tubes for manufacture of cathode ray TV reduced from 10 % to zero.
  • BCD on Specified parts of LCD and LED TV (including open cell, plate diffuser, film diffuser, Back light unit module) has been reduced from 10%/7.5% to zero.
  • Reduction of BCD of Back Light Unit Module for use in the manufacture of LCD/LED TV panels from 10% to Nil and that of Organic LED (OLED) TV panels from 10% to Nil.
Boost for indigenous manufacturing of ITA Products

To address the problem of CENVAT credit accumulation, for all goods except populated PCBs, falling under any Chapter of the Customs Tariff, for use in manufacture of Information Technology Agreement (ITA) bound goods (where BCD is Nil), SAD has been reduced from 4% to Nil.

Boost for indigenous manufacturing of LED Lights
  • Excise Duty on LED (Light Emitting Diode) driver and MCPCB (Metal Core Printed Circuit Board) for use in manufacture of LED lights and fixtures or LED lamp reduced from 12/10 % to 6 %.
  • Excise duty on inputs for use in the manufacture of LED drivers and MCPCB for LED lights, fixtures and LED lamps has been reduced from 12% to 6%.
  • SAD on inputs for use in the manufacture of LED drivers and MCPCB (Metal Clad Printed Circuit Board) for LED lights, fixtures and LED lamps has been reduced from 4% to Nil.
Boost for indigenous manufacturing of Medical Electronic Products
  • BCD, Excise Duty / CVD and SAD have been fully exempted on specified raw materials [battery, titanium, palladium wire, eutectic wire, silicone resins and rubbers, solder paste, reed switch, diodes, transistors, capacitors, controllers, coils (steel), tubing (silicone)] for use in the manufacture of pacemakers. BCD on certain specified inputs for use in the manufacture of flexible medical video endoscopes has been reduced from 5% to 2.5%.
Boost for indigenous manufacturing of Solar Photovoltaic Cells
  • Excise duty has been exempted on EVA sheets and solar back sheets and specified inputs used in their manufacture. Solar tempered glass used in the manufacture of solar photovoltaic cells and modules.
  • Flat copper wire, round copper wire and tin alloys for the manufacture of PV ribbons for use in solar cells and modules.
  • BCD exempted on Specified goods used in manufacture of solar back sheet and EVA sheet or solar PV cells/modules.
  • Flat copper wire for the manufacture of PV ribbons.
  • Machines/parts related to manufacture of solar voltaic cells and setting up of solar energy production projects.
Boost for indigenous manufacturing of smart cards
  • Excise duty on Recorded smart cards has been increased from 2% without CENVAT and 6% with CENVAT to 12%.
  • Excise duty on Wafers for use in the manufacture of integrated circuit (IC) modules for smart cards has been reduced from 12% to 6%.
  • SAD has been exempted on import of PVC sheet and ribbon used in the manufacture of smart cards.
Boost for indigenous manufacturing of Microwave Ovens
  • BCD on Magnetron up to 1KW for use in the manufacture of microwave ovens has been reduced to Nil.
  • Rationalization of tariff structure for manufacture of optical fiber cables
  • High Density Poly Ethylene (HDPE) for use in the manufacture of telecommunication grade optical fiber cables has been reduced from 7.5% to Nil.
Semiconductor wafer fab manufacturing units
  • Investment linked deduction under Section 35AD has been extended to semiconductor wafer fab manufacturing unit.
Telecommunication Equipment Manufacturing
  • BCD on Telecommunication equipment not covered under ITA has been increased from zero to 10%.
Policy for Promotion of Fabless Design Industry

Semiconductors, also known as chips or ICs, are at the heart of any electronics product and constitute around 30% of the total value of the Bill of Material (BOM) and in case of high-end equipment and mobile handsets; this content goes as high as 60%. Semiconductor chip manufacturing is characterized by two type of companies: Integrated Device Manufacturers (IDMs) and Fabless Manufacturers. The IDMs (such as Intel, Texas Instruments) designs, manufactures and sells its own chips while fabless companies (like Qualcomm, Broadcom) designs and sells its chips but gets the chip manufactured by a third-party. Presently, most of the major chip innovations have come from fabless design companies. India has a huge opportunity to develop the fabless design industry in the country.

A Draft Cabinet Note formulating the Policy for Promotion of Fabless Design Industry was circulated to the concerned Ministries/Departments on 16th February 2015. The proposed policy provides a framework to promote the fabless chip design, embedded software and board design industry in India by providing
  • Benefits under M-SIPS;
  • Deemed export status;
  • 25% of the non-recurring expenditure for mask development;
  • Benefits under Section 35(2AB) of the IT Act;
  • 5% interest subvention on working capital for OEMs;
  • Setting up Incubation centers;
  • 50% of the cost of filing international patents
  • And export incentives of 2% under Focus Product Scheme etc.
Promotion of indigenous manufacturing of Set Top Boxes (STBs)

The Department is taking steps to promote indigenous manufacturing of Set Top Boxes (STBs) for Cable / DTH TV, keeping in view the huge indigenous requirement on account of roadmap for digitalization of the broadcast sector. Following specific measures have been taken for promoting domestic manufacturing of Set Top Boxes:
  • A Basic Customs Duty (BCD) of 10% has been imposed on imported STBs w.e.f. 01.03.2013.
  • The domestic STB manufacturers had to pay CST equivalent to VAT rate (typically 12.5%) since the Multi-System Operators (MSOs) were unable to issue C-Form because these are not sold to the users but installed at the customer's premises on "Right to Use" basis. In this model, an imported STB by the service provider does not require State VAT to be paid. To resolve the issue, the Department of Revenue has issued an O.M dated 13th August, 2014, wherein the facility of form 'C' has been extended to Set Top Boxes which have been defined as goods f or use in the "Telecommunication Network" under Section 8(3)(b) of Central Sales Tax Act, 1956. This has addressed the issue of inverted duty faced by domestic manufacturers of STBs over their imported counterparts.
  • To curb inflow of sub-standard STBs, especially from China mandatory compliance to notified safety standards has been provided for w.e.f. 3rd July 2013.
  • Development and implementation of Indian Conditional Access System (CAS).
Development of Indian Conditional Access System (CAS)

A Conditional Access System (CAS) is a system used to limit the access of TV signals to only authorized viewers and forms an integral part of Set Top Boxes (STBs). Conditional Access systems are highly proprietary and dominated by few global companies which is a major impediment in design and development of domestic STBs.

Based on the recommendations of a Committee of Experts, the specifications of the proposed Indian CAS were finalized. M/s. ByDesign India Pvt. Ltd., Bangalore has been awarded the work for development and implementation of the Indian CAS in association with the Centre for Development of Advanced Computing (C-DAC). C- DAC will be primarily responsible for design review, code review, monitoring, testing and validation of the entire project.

The main terms of development of Indian CAS are as follows:
    The developed Indian CAS would be integrated for at least 5 operators for at least 250,000 end users, in any combination.
  • The domestically produced CAS would be made available to domestic vendors @ USD 0.5 for a period of 3 years as against current market value of nearly USD 2 or more per STB;
  • Even after expiry of three years, the developer will always make license available to operators and domestic manufacturers of Head-end and STBs at commercial rate.
  • IPR generated out of this project will reside in India so that Government of India has access and complete control to these rights in times of emergency to protect national interest.
Production Profile

The total production of Electronics & IT-ITeS Industry is estimated to be around Rs. 933,550 Crore with a growth of 13.5% during 2014-15 compared to Rs. 822,530 crore achieved in 2013-14. The production and growth of the Indian Electronics and IT-ITeS industry, since 2009-10 is given below:

Production of Electronics and IT-ITeS Industry (Value in Rs Crore)

Year Production Growth (%)
2009-10 415520 11.6
2010-11 476180 14.6
2011-12 567835 19.2
2012-13 681063 19.9
2013-14 822530 20.8
2014-15* 933550 13.5
*Estimates based on inputs from Industry Associations, Ministries & other Organizations

Of the total value of production in the Electronics and IT & ITeS sector, production of Electronics hardware is estimated to have grown by 5.5% in 2014-15 to INR 190,366 crore in compared to INR 180,454 crore in 2013-14. The production of IT and ITeS has been estimated to be of the order of INR 743,184 crore in 2014-15 as compared to 642,076 crore in 2013-14 thereby marking a growth of 15.8% during the year. Therefore, the overall growth of this industry, which is at 13.5%, has largely been sustained by the relatively higher growth in the Software and services which are largely export driven and also dominate the electronics and IT sector.

Consumer Electronics

The Consumer Electronic industry has been witnessing a sustained increase in demand especially in countries like India. As per estimates of Consumer Electronics and Appliances Manufacturers Association (CEAMA), the overall production of this segment of electronic industry was INR 55,806 crore in 2014-15 and grew at about 17.24% over INR 47,599 crore achieved in 2013-14.

The growth in the Consumer Electronics over the years has been accompanied by an increase in imports in respect of certain items like LCD/ LED TVs. The government accordingly stopped their duty free import as baggage and imposed a 36.5% duty on the same in 2013-14. The growth in production of LCD / LED TVs increased to about 40% in 2013-14 compared to 11% in 2012-13. As per estimates from the industry association, this segment registered a growth of about 16% in 2014-15.

In contrast to the LCD/ LED segment, the conventional TV (with Picture Tube) continued to register negative growth with production declining from 4.5 million in 2013-14 to 3.5 million in 2014-15. Similarly, production of DVD players also continued to decline due to rapid growth of DTH sector, digitalization of cable TV network and use of set Top Boxes (STB). Growth in the Public Address systems came down to 5% in 2014-15 from 10% in the previous year.

Industrial Electronics

Industrial electronics sector is closely linked to the investment taking place in infrastructure and industry including power sector. Process Control Equipment, industrial control systems, Test & measurement devices, Power Electronics, Automated/automation equipment and Analytical Instruments are some of the key segments of this industry. Critical hardware technologies and Information Technology are playing a major role in value added Industrial Electronics.

Most of the domestic demand is catered to by the local manufacturing, whereas, about 10% of the sophisticated products are imported. The total production of Industrial Electronics during 2014-15, according ELCINA is estimated to be about INR 39,374 crore as against INR 33,600 crore during 2013-14 showing a growth of about 17.18%.

Automotive Electronics

With the growth in the Automobile industry and the increasing digitization of automobile controls, Automotive Electronics has come to occupy an important segment of the industry. While data on Automotive Electronics for the current year is not available, the production of Automotive Electronics Sector (as per available data from Gartner) is estimated to be about INR 7278 crore in 2013-14 compared to INR 5629 crore in 2012-13 exhibiting a growth of about 29%.

Computer Hardware

The value of production arrived by aggregating the different segments falling under category of Computers and peripherals amounted to INR 18,691 crore in 2014-15 (as per estimates by Manufactures' Association for Information Technology (MAIT)), as against INR 17,484 crore in 2013-14 thereby registering a growth of about 6.9%.

The Indian computer Hardware Industry has been undergoing a change in its product composition. The production of notebooks registered growth of about 17% from a level of INR 9,010 Crore in 2013-14 to INR 10,542 Crore in 2014-15. Production of Tablet PCs also registered robust growth of 27% to grow from INR 1126 Crore in 2013-14 to INR 1430 Crore in 2014-15. In contrast to the foregoing, the production of Desktop PCs registered negative growth of 16%, from INR 4,309 Crore in 2013-14 to

Electronics & IT Production Profile

With the drop in production activity during 2014-15 there was a substantial reduction in exports of mobile handsets compared to the preceding years. In 2014-15 the export nos. of mobile handsets declined to 14 mn units compared to 72.5 mn units during 2013-14 thereby showing negative growth rate of about 81%. With the rise in domestic demand and a significant drop in domestic production the market has shifted to the import route to meet the domestic demand. The total imports in 2014-15 stood at Rs. 58,550 crore compared to INR 42,200 crore in 2013-14 registering a growth of 38%. The estimated value of production for Mobile Phones (as per ICA) for 2014-15 is INR 18,900 crore as against INR 26,650 crore in 2013-14, i.e., a negative growth of about 29%.

Electronic Components

Demand for Electronic Components was in excess of US$ 14 billion in the financial year 2013-14 and estimated to have growth by about 15% to have crossed US$ 16 billion in 2014-15. The estimated production figure for this segment during 2014-15 is INR 39,723 crore (excluding LED) as against INR 32,102 crore in 2013-14, showing a growth of about 23.74 per cent.

Rapid growth in domestic manufacturing of electronic components is vital for supporting the growth in electronics manufacturing. The emerging high growth areas for domestic manufacturing are LED Lighting, Automotive electronics, energy meters, solar energy and IT products such as Tablets. These products are now driving the growth of electronic component manufacturing. These products are an addition to existing segments such as telecommunications, consumer electronics and industrial electronics.

The Indian electronic component market is dominated by components like electromechanical components (like relays, switches etc.), with 29% share, passive components (like capacitors, resistors, etc.) with 24% share. Further active components (like ICs, Diodes, Transistors, etc.) and the associate components (like optical disc, magnets, RF Tuners etc.) constitute 18% and 29% share of the components respectively. While the industry composition is not predicted to change substantially, there is a rapid decline in products such as Cathode Ray Picture Tubes and CD/DVD's which had till recently constituted a significant share of the manufacturing base and market. This is an outcome of advancing technology and consumer preferences. Consumer durables and Telecommunications account for about 60% of the demand for electronic components in India. This is followed by IT & Office Automation and Automotive industries which contribute 22%. Other application industries like Industrial electronics, Medical electronics, Strategic electronics and Lighting industry contribute the balance of the market. Industries like lighting and strategic electronics are expected to witness substantial growth in the near future.

Exports of Electronic components in 2014-15 are estimated at US$ 4.9 Bn of which almost 40% is contributed by electromechanical components and 27% by Passive components.

It is believed that export market is expected to increase in the next few years. Leading manufacturers are in the process of obtaining international certifications for their products manufactured and aggressively pursuing global markets with support from DeitY. With the costs in China rising and the industry growing in India, exports are estimated to grow by 15-20% per annum over next 4-5 years. Programs such as ''Make in India'' and ''Digital India'' are aimed at providing a boost for the demand for Electronic Components in coming years. Import of such a large volume will not be viable and thus domestic manufacturing will be the only solution. Other policy measures like Policy for providing preference to domestically manufactured Electronics Products (PMA) and differential excise duty dispensation for tablets & mobile phones, removal of SAD on inputs of goods levied under Information Technology Agreement of WTO etc. will encourage local manufacturing.

The Electronics Manufacturing Services industry in India is growing rapidly and key global players as well as a number of domestic companies are operational in the country. This segment needs very high efficiency of operations to remain profitable. Availability of components and an effective supply chain is vital for EMS companies to grow. Domestic companies have generally followed the business model of staying in low volume high mix business segments where margins are a bit better. But EMS players need high volume low margin segment to compete with the global players.

Light Emitting Diode (LED)

One of the driving forces for growth in electronics manufacturing and for growing component demand is the Indian Lighting market. The demand for energy efficiency has brought forward an immediate need for more energy efficient products and also has pushed market towards more efficient products such as Light Emitting Diode (LEDs). Over the years, opportunities for Light Emitting Diodes (LEDs) in Indian lighting markets have materialized in automotive, communications, signage, signalling, and architecture and entertainment sectors. The opportunity for LEDs in the general space illumination segment of residential and commercial buildings has most recently emerged and is expanding very rapidly.

As per our estimates, LED is likely to register a higher growth of about 11.9% with an estimated production of INR 2172 Crore during the year 2014-15, as against the production of INR 1941 Crore in 2013-14. Due to its likely faster growth, this has been considered as a separate vertical.

Electronics & IT Exports

During the year 2014-15, electronics and IT exports are estimated to be about INR 648,836 crore as compared to INR 573,996 crore in 2013-14, i.e., a growth of about 13% as against 25.8% during the previous year. The total value of software and services exports are estimated to be INR 612,144 crore in 2014-15 as compared to INR 527,292 crore in 2013-14, i.e., a growth of about 16 percent, whereas, the estimated value of electronics hardware export is INR 36,692 crore in 2014-15 as compared to INR 46,704 crore in 2013-14 registering a negative growth of 21.43%.
 
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