With COVID-19 affecting both supply and demand of electronics products last year, the industry is expecting government support from the upcoming Budget to return to normal. On the supply side, the government must take steps to enable an uninterrupted supply chain by easing the imports, rationalising duties, making imports of raw materials for components competitive. This will help strengthen the component ecosystem. Additionally, support on the demand side should be ensured by lowering GST rates, thus making products affordable.
The Budget’s direction should be to enable domestic companies to have operations to support both local demands as well as exports. The current growth scenario coupled with the new strain of COVID-19 further highlights the need for the government to support domestic companies to help them battle the tough times.
During the lockdown, companies faced supply chain issues, especially those that sourced heavily from China.
Realising the importance of controlling supply chain to block uncertainties in manufacturing, Original Equipment Manufacturers (OEMs) are keen to explore options to partner and work with domestic component suppliers. The domestic component ecosystem stands to benefit, and all it needs is a positive push from the government.
Support domestic manufacturing
Support for domestic manufacturing and creating demand for eco-friendly and energy-efficient products can be done:
• By lowering tax rates
• Providing more incentives for domestic manufacturing
• Waiving customs duty on raw materials for components
Lowering the GST tax slabs for eco-friendly and energy-efficient products like 4 star, 5 star, and inverter air conditioners and refrigerators will drive demand and increase the adoption of sustainable appliances by Indian consumers. The upcoming Budget is likely to offer incentives for manufacturers to produce these energy-efficient products which will be in line with the government and focus on sustainability.
The government might consider initiating some measures to reduce the input costs to make the components by waiving duty on the imported parts. Basic customs duty on parts used in the manufacturing of key components such as motors and printed circuit board (PCB), which currently ranges from 7.5-10 percent, might be reduced.
Promote R&D
The government might also announce programs to promote R&D and incentivise local manufacturing. Earlier there was various percentage of deduction depending on the purpose of research – 150 percent, 175 percent or 200 percent. But after the recent amendments in FY 2020-2021, all research expenditure, irrespective of purpose were brought on par, i.e. 100 percent deduction for any research expenses incurred. The government might reinstate the reimbursement of R&D expenses to earlier levels. Expenditure incurred for taking professional help in aesthetic designing, prototyping, electronic controls designing, etc., might also be allowed as R&D expenditures.
Revive demand
Union Budget 2021 is expected to focus on regaining consumer confidence by reducing personal tax which in turn will help boost consumer demand and help the industry that is witnessing muted growth. The government might also look for a reduction in GST rates for products like refrigerators, which is currently at 18 percent, and air conditioners which are currently at 28 percent, as these products are now evolving from being luxury items to necessities.
PLI scheme for the manufacturing sector
The productivity-linked incentive (PLI) scheme for mobile phone/electronic manufacturers and pharmaceutical companies has already yielded significant investments in the respective sectors.
The PLI scheme introduced by the Union government at an outlay of $26 billion (Rs 2 lakh crore) for the manufacturing sector can attract investments worth $520 billion (Rs 38.36 lakh crore), according to the Ministry of Electronics and Information Technology. The expectation is to create the same manufacturing foothold in other key electronics products as well by making them part of the PLI scheme.
The writer is Industry Principal, Industrial Practice, Frost & Sullivan.
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