New Delhi, Jan. 13: A policy shift is on the cards to encourage local production of sensitive items such as capital goods, electronic equipment and telecom components.
Some of the changes relate to taxes. A revamp in the tax set-up will be initiated from April, under which the import of finished goods will attract higher taxes, while the levy on components will be lower. This is expected to force foreign firms to start manufacturing in India.
Top finance ministry officials said electronic goods were the third most imported item, valued at $21 billion in April-November 2012, while machinery imports stood at $18.5 billion during the same period. In 2011-12, electronic imports were $32.7 billion and machinery imports, $30.7 billion.
If the current trend persists, trade analysts see the import of electronic gears surpassing oil imports by 2020.
“We cannot afford this. India is one of the biggest markets for these goods and manufacturers need to understand that we cannot allow all our forex resources to be drained away to prop up manufacturing in Taiwan and Norway,” officials said.
Multinationals such as IBM and Cisco are miffed at the proposed moves and are lobbying the government to either scrap the policy or delay it as it violates WTO norms.
However, Chinese firms against whom these policies were initially designed have indicated that they are willing to set up plants in India or increase local sourcing to make telecom and power equipment for their clients such as Reliance and Adani.
Inter-ministry panels have been warning against Chinese imports flooding local markets on account of factors such as the artificially depreciated Chinese currency, tax advantages, subsidies, cheap government loans and absence of labour laws in China.
The customs duty structure for capital goods is likely to see major changes. A uniform 5 per cent minimum duty on all capital goods is likely against the present zero to 5 per cent duties on the goods.
According to the recommendations of an inter-ministry panel for the 12th Five-Year Plan, “The capital goods industry can be considered the ‘mother’ of all manufacturing industry and is of strategic importance to national security and economic independence. While it may be preferable from the user industry point of view to allow the import of capital goods at lower costs, this will result in over-reliance on other countries for key strategic inputs.”
Sourcing in telecom
One of the targets of the 12th Five-Year Plan is to increase the use of domestic products in telecom network up to 60 per cent with value addition of 45 per cent by 2017. The plan involves an investment of about $110 billion in telecom infrastructure.
The government has notified a policy to give preferential market access to telecom products manufactured in India. All government departments and agencies will have to buy 50-100 per cent of their total requirement from local manufacturers depending on the type of equipment.
Besides, the government is likely impose a “made-in-India” procurement tag on private players, including government licensees and “managed services providers” such as IBM.
A senior DoT official said India had a thriving component manufacturing base till the late 1990s, and the new telecom equipment policy “could have measures that would revive the domestic mobile component industry”.
The government has identified 18 telecom hardware items that will be put under a preferential market access category to be manufactured locally. These include SIM cards, base stations, switching centres, network management systems, modems used for WiFi or 3G broadband services and EPABX boxes.
Industry experts said with telecom set to account for 15 per cent of the gross domestic product, there would be a huge opportunity for equipment manufacturers. So, the government needs to be bold with policies.
“The DoT should have schemes, such as special economic zones where the production and sale will not be subject to direct and indirect taxes, but it will be for the domestic market,” said Hemant Joshi, partner, Deloitte Haskins & Sells.
The demand for telecom equipment in India is expected to grow to Rs 1,70,091 crore in 2020 from Rs 54,765 crore in 2009-10, according to a projection by the Telecom Regulatory Authority of India (Trai).
At present, local hardware accounts for only 12-13 per cent of the mobile operators’ needs. Of this, Indian companies account for just 3 per cent, according to Trai.
While the telecom department says that the policy changes have been introduced to tackle security concerns in imported products, domestic gear makers contend that the security issues may remain unresolved unless all components are sourced locally.
Security agencies have repeatedly raised concerns about possible spyware and malware embedded in imported products, especially those coming from China.
The new policy is likely to make it mandatory for firms to source a large percentage of such parts such as semiconductors and chips locally. The policy also seeks to penalise companies for paying royalties on foreign products rather than developing and patenting intellectual property in India.