Hardware segment cries for policy shift

Hardware manufacturers feel that some of the problems confronting them need immediate attention. There should not be any loss of time because India is scheduled to move to a zero duty regime in IT by 2003. Clarity on vital issues would go a long way in preparing them for the challenges of the future, says Sandeep Dikshit.

JUNE 7 was supposed to be a momentous day for the beleaguered computer hardware industry. For the first time, the national advisory committee on information technology was scheduled to discuss the problems bedevilling this sector. The realisation about the importance of a thriving domestic hardware industry had dawned a few months ago after it became apparent that the software sector would not take a continuously upward growth path as was anticipated earlier.

Unfortunately, while fixing the date, the policy makers had no idea that this was the season when top entrepreneurs, ministers and top level policymakers are usually abroad. As a result, the meeting was quietly abandoned. Last heard, the meeting to discuss the travails of the hardware sector may be held in August. Incidentally that time Parliament would be in session. The Minister for Information Technology, Mr. Pramod Mahajan, who also doubles as the Minister for Parliamentary Affairs, as well as the top brass of the Ministry would be preoccupied with parliamentary work. It was also a reflection of the importance given to the hardware sector, that virtually none in the media considered it worthwhile to take the Government to task for this lackadaisical attitude.

Disappointed hardware manufacturers feel that some of the problems confronting them needed immediate attention. There should not be any loss of time because India is scheduled to move to a zero duty regime in IT by the year 2003. Clarity on vital issues would go a long way in preparing them for the challenges of the future.

MNCs thrive

Today the situation has become grim for the Indian hardware industry. American hardware companies were the first to move in and are well entrenched in India now. Over the years they infiltrated and took over the distribution networks of erstwhile Indian hardware manufacturers. They made full use of their money power to set up country-wide networks. Most of these companies closely guard their growth rate figures for India on grounds that country-level figures are not disclosed by them as a matter of strategy.

Companies from Korea too have started making inroads. Though their strategy is slightly different, it is equally aggressive. The Koreans made their foray in the Indian market through white goods and having set up country-wide distribution networks, they are now pushing IT products through the same channels. The Chinese too are following a similar strategy but their brand building process has just started and it will be some time before their products gain widespread consumer acceptance.

Absurd target

In this scenario, policymakers candidly concede that while the software industry has performed well, the hardware industry is struggling for survival. The production target of computers and peripherals for the current fiscal is Rs. 17,850 crores. The absurdity of this figure is clear from the figures for previous years. Actual production was only Rs. 2,800 crores three years ago. It declined to Rs. 2,000 crores in the last fiscal. In other words if the trend continues, the actual production would be less than one-seventh of the targeted figure.

That begs the question, why was such a figure projected ? The answer lies in the fact that the policymaking apparatus over the years has been lethargic and disinterested when it comes to the hardware sector. The target was set five years ago and since then the Government had banked on marginal re-tuning of policies. Barring a few exceptions like HCL, the closure or shifting of focus by erstwhile Indian hardware manufacturers demonstrates that the sector has been left to fend for itself while Mr. Mahajan and others preferred to bask in the trail blazed by Indian software companies and engineers.

The impediments, 13 in all, were identified during the middle years of liberalisation. Since then they have remained largely unaddressed. Some problems were created because of the uni- dimensional outlook. For instance, unviable economies of scale were a result of the accent on exports - a separate policy for export oriented units led to fragmentations of capacities because separate units had to be set up for domestic tariff area and exports.

Besides, there is no specialised mechanism for lending to hardware units. Banks are extremely reluctant to finance forays in this direction because of fast technological changes in product, design, finish and performance.

An inverted tariff structure is another cause for concern. The duty on imported components is more than the duty on finished goods.

The situation may worsen as India is a signatory to the IT Agreement (ITA-1) and the Government has announced the advancement of the zero duty regime on all IT products by two years to 2003. The Indian hardware sector will suffer a fatal blow if electronic products are at zero duty and inputs are taxed at 5 to 35 per cent.

Policymakers are now ruminating on the social and economic repercussions of such a situation. If the thrust on policies such as ``IT to the masses'' and computerisation of civil administration (e-governance) continues, the demand for hardware will increase exponentially. According to estimates, equipment worth a massive $160 billion will be required by the year 2008.

Apart from the implications on foreign exchange reserves if most of this is bought from overseas, imports of this magnitude will also mean loss in employment opportunities across all social strata.

Unlike the software industry which affords employment opportunities only to the educated and, preferably, English speaking middle class, the hardware industry will create job opportunities for every section of the population. If estimates are to be believed, a vibrant hardware sector could have employed half a crore people, 16 lakhs directly and the remaining indirectly.

The situation today calls for a major shift of the policy regime. The hardware industry is still pinning hopes on Mr. Mahajan, whose whims are rarely ignored at the top level. Old timers recall how he persuaded reluctant Finance Ministry officials to issue a clarificatory notification within the seven-day-period he had promised to the late Dewang Mehta at a public forum. Or how the Cabinet approved the Massachusetts Institute of Technology's Media Lab Asia project despite stiff opposition by bureaucrats.

It is time for Mr. Mahajan to turn his attention to the hardware sector if he wants to be known to posterity as the man who brought computers to villages. This means taking steps that are not to the liking of officials. Since uncertainty discourages disinvestment, it should be minimised by avoiding change of the duty regime with zero duty as the ultimate goal. In an import intensive industry like hardware where prices change rapidly and obsolescence is rapid, import procedures, export licensing and inspection should be simplified.

These solutions appear simplistic and could be exploited by traders pretending to be manufacturers. Local manufacturers of PCBs and other components have to be encouraged in a big way so that such a situation could be avoided.

This can only be done if Ministers take more active interest in the hardware sector by scouting for companies which may be interested in setting up manufacturing capabilities in India.

If Mr. Mahajan can claim credit for attracting Media Labs Asia and Mr. Chandra Babu Naidu for the Sankhya Vahini project, they can achieve success in the hardware sector as well provided they have the determination to endure the ruffling of a few feathers.

* * *

A. Total equipment requirement: 100+18+30+12 = $160 b

B. Estimated requirement of equipment to be met indigenously: 75 p.c. of A = $ 120 b

C. Estimated requirement of components: 50 p.c. of B = $60 b

D. Estimated requirement of components to be met indigenously: 65 p.c. of C = $39 b

E. Investment required for components: $31b (ratio 1:1.5)

(Assuming production of $20 b worth of components per annum by 2008

F. Investment requirement for equipment: $3 b (ratio 1:10)

(Assuming production of $30 b worth of equipment per annum by 2008 ($20 b domestic, $10 exports)

G. Total investment required = E+F, that is, 13=3 = $16b (up to 2008)

H. Total imports of equipment up to 2008 (2000 to 2008): $40 b (A-B, that is, 160-120)

I. Total imports of components up to 2008: $21 b (C-D, that is, 60-39)

J. Total imports over eight years, up to 2008: $61 b (H+I)

K. Import component of G (Total investment requirement) assumed as 75 p.c.: $12 b

L. Total import requirement (that is, foreign exchange required): $73 b (J+K)

M. Foreign exchange savings over eight years (2000-08): A-L, that is, 160-73: $87 b

Employment generation

* Current per capita productivity per annum: $20,000.

* Assuming per capita productivity per annum of $100,000 by 2008, employment potential by 2008. = $160 b (B=D/100,000: 1.6 million (employment generated directly by the hardware sector).

* Indirect employment 2 x 1.6 = 3.2 million.

* Total employment potential of the hardware sector by 2008: 4.8 million.

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