Budget-Natyam 2018: Solid Moves for the Poor, Nothing for the Electronics Industry

This was not a budget for the industry. This was more for the social side, for the upliftment of the lower strata.

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The World Economic Forum held in Davos is a playground for the world’s most influential countries to come and share their vision of a better world. Prime Minister Narendra Modi was the first Indian PM to be a keynote speaker at the event. In his highly visionary and optimistic speech, Mr Modi talked in great detail about the seriousness of climate change and terrorism. He also spoke about the role that technology will play in the coming years to boost globalization and make the world a better place to live. In short, the Indian PM envisioned of a new world order for his country. And France’s Emmanuel Macron and Germany’s Angela Merkel nodded their heads in full vigour in the PM’s support.

But when all is said and done, the unfortunate part is that this ‘new order’ finds it hard to reflect itself in the vocabulary of politics and the various models of public policy. Sure, Global warming, and terrorism are subjects that go beyond the boundaries of nations, but we need to understand that the genesis of solutions to these problems happen within the realms of national politics. Unfortunately, India’s Union Budget for the fiscal year 2018-19 failed to address the new world order. And in turn tried to please people on the lines of caste, creed, ethnicity and all words imaginable along these lines. Not that it is the government’s fault. Pegged by fulfilling electoral aspirations, the government perhaps had no time to incorporate a bigger narrative of the world.

Here is an example that supports this. Customarily, after Arun Jaitley read out his proposals for the Modi government’s last full budget, our emails were flooded with post-budget reactions from the top people of several electronics companies. All of those quotes said how the government had done a wonderful thing by liberating the agriculture sector of the country. Now, you don’t have to be an expert to see this, but why is a company which deals in electronics, commending budgetary moves for the agro sector? Quite frankly, because there was nothing else to talk about. The country’s poor got twenty one mentions but the salaried-class – those who diligently pay taxes – were mentioned just seven times. And worse, the FM didn’t bother mentioning the electronics industry even once.

Amid immense speculation and a depreciating growth rate, a lot was expected of Arun Jaitley’s last full budget before the Lok Sabha elections in 2019. And after he concluded his two hour long budget speech, it left a lot to be desired. Experts openly called it as an election manifesto- a budget that resonated with the people who form the majority of the government’s vote bank. And at the same time, it turned a blind eye towards several industries that will form the backbone of the new world order when it dawns upon us. Apart from the electronics industry, the electric vehicle industry didn’t find a mention in the budget speech either- something that makes one wonder of the Modi government’s plans to fight climate change. Similarly, the telecom sector was also surprisingly given a huge miss.

In fact, if you look at it, this was a populist budget. It pleased the people that the government absolutely had to. “This was not a budget for the industry. This was more for the social side, for the upliftment of the lower strata,” said Rajoo Goel, Secretary General, ELCINA (Electronic Industries Association of India). Fortunately for the industry, there was a particular sector that the government had to absolutely please- the MSMEs. Following demonetisation and GST, a lot of Indian MSMEs were taken out of the grid. For many others, survival became a thing of luxury. So, it was only natural that the government do their bit for the small companies in the country. After all, MSMEs form the core of manufacturing in India. But more than that, they also form a large part of the government’s vote share. As a result, Mr Jaitley announced to reduce the corporate tax from 30 per cent to 25 per cent for companies with an annual turnover of upto Rs 250 crores. Credit where it’s due, and this decision seems to have come at a wonderful time. After the United States of America decided to lower its corporate tax, economists predicted that American companies that had opened bases in India would go home owing to lower tax rates. However, now that India has reduced the corporate tax, foreign companies will find it hard to shift station.

MSMEs covered, the budgetary speech did have a lot of positive takeaways for the renewable energy sector as well. While the renewable energy sector was hopeful of receiving a few subsidies and incentives from the government, the budget brought respite by bringing relief to solar module importers by killing off the duty on tempered glass. Yes, with growing concerns of climate change and India’s rise as a major nation in the fight against global warming, a little more value addition to the solar energy sector would have been a welcome decision. But, for now, the government’s calculated yet valuable steps towards the renewable energy sector shouldn’t be looked down upon.

To write this story, I visited the ELCINA House. Upon reaching there, I met Dr Ashish Saurikhia and we discussed the budget in great detail. And it was in that discussion where we agreed on one of the biggest problems of the budget for the electronics sector. You see, any finished electronic good involves a value chain of three different sectors. At the base level lies the component sector- the sector that takes care of all your capacitors, diodes, PCBs (Printed Circuit Boards) and other electronic components. That is followed by the PCBA sector. This is where all the different components are assembled on to the PCB. Then comes the final sector- the finished good sector. The lower two strata don’t have a big market in India in terms of manufacturing, and most of it is imported from elsewhere. Now, before the budget, there was no customs duty on these two, but following the budget the basic customs duty (BCD) on these sectors has been increased from nil to 10 per cent. Dr Ashish said that while that will discourage imports, the manufacturing chain of India’s electronics industry is simply not ready to produce those components. In short, while the government wants Indian manufacturers to locally source for components and PCBAs, it is forgetting that the industry is simply not yet ready to deliver. In effect, the customs duty should have been increased gradually, thus, giving the local industry some time to adjust to the changes.

Adding to that, the BCD on mobile phones and Televisions was increased by 5 per cent yet again. This had been done only a month ago, and there seemed no need to increase it further. It seems that the government is deliberately trying to change a lot of things just for the sake of it. But while it is doing so, it should remember the famous French epigram, “plus ca change, plus c’est la meme chose,”that is- the more things change, the more they remain the same. As Rajoo Goel puts it, “I feel increasing customs duty beyond a point is not a very sustainable thing to do. Because it can cause some anomalies in the market.” Increasing the BCD is not a good idea, we know it from the time when Mr Nehru was in office.  Yes, it is good for giving the local industry a protection and eventually provides a level playing field, but if overdone, comes with a lot of negative conclusions. “When you go beyond that (increasing BCD beyond a certain point), it is not clear if it will be just used by the industry as a tool to increase their profits. Because it is obviously an attraction for anybody just to increase their prices because they have protection,” said Goel.

Narendra Modi has religiously tried promoting Make in India around the world. It is the NDA government’s flagship initiative to establish India as a global manufacturing hub. Given the fact that this was the Modi-led government’s last full budget, many people expected that Make in India will get high priority in the budget speech. However, that wasn’t the case. On the upside though, Digital India got a total budgetary allocation of Rs 3,073 crores. This money would be used to develop the ‘disruptive’ new age technologies of Artificial Intelligence (AI), Internet of Things (IoT), and 3D Printing. The NITI Aayog will set up a National Program to set up R&D centres to develop these technologies of tomorrow. But, what is disheartening is the fact that after Mr Jaitley dedicated fifty five minutes of his budget speech towards agriculture, mentioning en passanttechnologies like AI, IoT, and blockchains raises an important question: In a world overflowing with new technologies and ideas, why is it that our government found itself so out of sync with the true meaning of a new age world? Yes, the agriculture sector is important to our economy, but would it be bad to promote disruptive technologies of tomorrow equally? Perhaps, that is not where the votes come from.

It is not as if the Indian ESDM is in no need of a policy overhaul. There are several reasons that currently mar the growth and productivity of the sector. To begin with, we need to first establish that the local electronics industry depends largely on imports. What further worsens the situation is the free trade agreements that India observes with several currently. The industry currently faces stiff competition from all ITA 1 countries. All ICT (Information and Communications Technology) products and their inputs are imported on zero duty for more than a decade now. To provide a level playing field to the electronics industry, the government could have provided a graded CAPEX support for investments in manufacturing, designing, and R&D in the electronics industry. Further, the government could have provided the industry some relief under Indirect Tax by not charging credit on CGST on the import of finished equipment. Also, most electronic components are covered under ITA 1. The government could have given a deemed export status to the productions of the local manufacturing industry; wherein goods sold by the industry domestically are also treated as exports. Had the government listened to even one of the above solutions, it would have been a well-rounded budget. Given the current situation of the Indian ESDM, the electronics industry should really be included in priority sector lending.

Both literally and figuratively, the Union Budget lacked energy. The area of energy is absolutely complex and it is very difficult to set it within the realms of an arithmetic document of the government’s spending and earnings. Still, the mention of making a move towards an alternate source of fuel for energy was a big miss from the budget. Why the energy sector is crucial is because it has had a changing narrative. The whole world is busy in developing technologies that can reduce our dependence on fossil fuels and for the first time in history, we are seeing the birth of a generation that is questioning the owner-operator model of transportation. India on its part has set a target of 2030. It is by then that it aims to see an all-electric fleet of vehicles on its roads. But despite that, electric vehicles found no place in Jaitley’s budget speech. “There was no mention of electric vehicles in the budget and we were looking forward to it. There was some good news for vehicles using the internal combustion engine, but the electric vehicle sphere got no mention at all. I think there should have been something for electric vehicles in the budget. I’m extremely disappointed that there wasn’t,” said Rajoo Goel.Sure, there are plans of electrifying thousands of villages and that will help in building a favourable infrastructure for EVs; but all those are extremely indirect outcomes of moves made in entirely different directions. The EV revolution should not be a by-product of village electrification. Rather, the opposite of it should be the case. To me personally, this was the biggest miss in the budget. Especially considering the fact that we are entering an energy intensive phase. But more than that, because our environment is under constant stress.

Whether or not there will be simultaneous elections for state assemblies and Lok Sabha is a narrative that will unfold itself when the time comes. That makes for an equally interesting story, but will be told some other day. Today, however, things don’t look very bright for India’s electronics sector. Rajoo Goel hopes that there will be a National Policy on Electronics 2.0 very soon. He believes that it will address some of the biggest issues that the domestic electronics industry faces today. The Union Budget 2018-19 was on a personal level very disappointing for me. I can only hope that with the NPE 2.0, India will usher itself into a new world order.

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