Electronics export opportunity

India must aim for greater global integration

One of the highlights of India’s merchandise exports in recent times has been electronic goods. The sector registered a 16.91 per cent year-on-year increase in June and a 21.64 per cent growth rate in the first quarter of 2024-25 over the previous year. The electronics manufacturing sector has significant growth potential and could greatly benefit from increased focus and policy support, enhancing integration into global value chains (GVCs). Further, it is crucial for domestic employment generation as the segment has achieved the highest growth in employment from 2018 to 2022, highlighted in the latest Economic Survey.

However, India’s share in the $4.3 trillion global electronics market is about 2 per cent. Globally, the area is dominated by China with a 30 per cent share in export. Emerging countries like Vietnam and Malaysia have also established a relatively sound base with a 4 per cent share in electronics GVC. In this context, the NITI Aayog’s new report “Electronics: Powering India’s Participation in GVCs” has highlighted that domestic production in the sector had doubled between 2017 and 2022, with a compound annual growth rate of 13 per cent. The report identifies favourable opportunities but also acknowledges ongoing challenges to further expansion and integration. Currently, India’s electronics production primarily involves the final assembly of electronic goods like mobile phones, televisions, refrigerators, and telecom equipment.

Heavy reliance on imports for component manufacturing and design limits the country’s ability to move up the value chain. India’s limited domestic component development capability is primarily because of a high tariff structure. With an average tariff rate of 7.5 per cent, significantly higher than in China, Vietnam, Thailand, and Malaysia, which have rates below 4 per cent, and additional taxes and surcharges, local production becomes more expensive. Consequently, manufacturers frequently source components from abroad, hindering the growth of a robust domestic electronics manufacturing base. Overall, the sector faces a cumulative cost disability of 14-18 per cent for component manufacturing due to high tariffs and material costs, logistics, and financing costs. Despite lower labour costs, India has struggled to capitalise on this advantage due to lower labour productivity. Given these challenges, it is important to address factors affecting India’s manufacturing, particularly in the electronics component sector. A key issue is India’s exclusion from major regional or economic trade blocs, which could reduce production costs through lower tariffs, streamlined regulations, and increased trade efficiencies.

Further, despite ongoing efforts, India continues to rank lower than competing nations in ease of doing business. Besides, to improve capabilities, India should diversify its electronics base, which is dominated by smartphones at 43 per cent, to include products like laptops and telecommunications equipment. The focus can be on localising the value chain, scaling up assembly operations, and rationalising tariffs compared to competing countries. Reduction in the Customs duties in the recent Union Budget is a positive step in this direction. A review of the Customs rate structure has been announced in the Budget to take the process forward. However, if all impending issues are not addressed quickly, India will lose the opportunity to attract firms that are moving out or diversifying away from China. Many are opting for Vietnam due to its favourable policies and fewer regulatory and political issues. The NITI Aayog report has highlighted what needs to be done. It’s now up to the government to make the most of the emerging opportunity.