India Plans Tax Structure Overhaul in Electronics Sector, Says NITI Aayog Report

India must streamline its direct and indirect tax structures for the electronics sector to reduce production costs and compete globally, according to a report by NITI Aayog on Thursday. The report, titled "Electronics: Powering India's Participation in Global Value Chains," proposed various interventions across fiscal, financial, regulatory, and infrastructure domains to boost electronics production, including mobile phones.

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The report highlighted that high tariffs on components are impeding India's ability to scale up electronics exports and compete internationally. On average, India's tariff on relevant electronics is about 7.5%, which is higher than China's 4%, Malaysia's 3.5%, and Mexico's 2.7%. This disparity makes it challenging for India to be competitive in the global market.

Fiscal Incentives and Cluster Development

The report suggested categorising fiscal incentives into three types: operational expenditure (opex) support for scaling manufacturing of less complex components, capital expenditure (capex) support for setting up manufacturing of specific complex components, and hybrid support combining both capex and opex. These measures aim to enhance India's manufacturing capabilities in the electronics sector.

Additionally, the report recommended developing large-scale clusters, preferably four greenfield clusters and six brownfield clusters. These clusters should have localised regulations, cluster governance, and provisions for essential common facilities. The goal is to create an environment conducive to large-scale electronics manufacturing.

Audit of Existing Clusters

The government needs to conduct a thorough audit of existing Electronics Manufacturing Clusters (EMCs) to assess utilisation, identify implementation issues, and evaluate the state of provided facilities. This audit will help in understanding the current challenges and opportunities within these clusters.

The report also recommended formulating policies to improve the overall attractiveness of these clusters through duty-free imports. This would make it easier for manufacturers to access necessary components without the burden of high tariffs.

India's Position in the Global Value Chain

A deeper analysis of India's presence in the electronic value chain reveals that while India has made progress in final assembly and sub-assembly, especially in mobile and consumer electronics segments, it still relies heavily on imports for components manufacturing and design capacities. This reliance on imports underscores the need for domestic capability enhancement.

India's smartphone assembly sector has experienced significant growth, with around 2 billion units assembled between 2014 and 2022. This growth indicates potential but also highlights the need for further development in component manufacturing to reduce dependency on imports.

To summarise, rationalising tax structures and implementing targeted fiscal incentives are crucial steps for India to enhance its electronics manufacturing capabilities. Developing large-scale clusters and conducting audits of existing ones will further support this goal. By addressing these areas, India can better position itself in the global electronics value chain.