How India plans to become a major exporter of electronics

Amid the dark economic times in India, the growth of the electronics industry in the country is expected to offer some positive light — and particularly in terms of exports. The total generation of electronic goods increased from USD31.2 billion in FY15 to USD65.5 billion in FY19. This growth was led by mobile phones, according to data from a recent report from the Reserve Bank of India.

Additionally, the domestic value of manufacturing mobile phones jumped about eightfold from USD3.1 billion in FY15 to USD24.3 billion in FY19.

So, what’s pushing electronic exports at a time when the overall export outlook in India is moderate to poor? Did the country gain from the trade struggle between China and the U.S.?

“India’s electronic exports began to do well before trade tensions among the U.S. and China escalated,” shared Sonal Varma, Chief Economist for India and Asia ex-Japan at Nomura Holdings. “India started to become an alternative production destination because of pull constituents, such as possible domestic demand and government policies to encourage electronic exports.”

In the last several years, the government has launched several policies to boost local manufacturing of electronic assets. These include:

A Phased Manufacturing Program: established to support domestic manufacturing of mobile handsets and associated sub-assemblies & components development.
A National Policy on Electronics 2019: helping develop a global hub for electronic system design and manufacturing (ESDM) in India.
The Electronics Manufacturing Clusters project: providing resources and support so that India becomes a global player in electronics and related manufacturing.
A Modified Special Incentive Package Scheme: offering capital subsidies for organizations engaged in electronics manufacturing.

Some countervailing services were also announced to curb imports of electronic goods.

“Along with [these programs] came the impact factor — trade tensions among the U.S. and China,” added Varma. “We expect this definite trend in India’s electronic commodities to continue.”

Although the export numbers are impressive, analysts at Spark Capital point out that value appreciation is somewhat limited.

“India has converted into the second largest producer of mobile phones, replacing Vietnam. Notably, we consider that the net value adds only in the high single-digits now, since most of the elements of mobile phones are imported and only the assembling takes place in India,” according to a report from the analysts.

What’s more: companies have begun manufacturing printed circuit board assembly (PCBA) systems in India, taking the value to add to ~15 percent, the report added.

This rise in electronic manufacturing and exports bodes well for India and, especially, its trade deficit. It has one of the largest trade deficits in the world.

“A change like telecom imports — from built-up parts to intermediate supplies — likely feeds into exports of electronics, including consumer objects,” said Radhika Rao, an economist at DBS Bank. “This, over time, might assist narrow India’s current important net electronic import position.”

An increase in exports
India’s electronics imports reached a record USD 55.6 billion in FY19, compared to USD 51.5 billion a year before. The industry is one of the most significant drivers, contributing to the trade deficit (after oil). However, what has given policymakers some comfort is that electronics exports jumped to 39 percent or a record USD 8.9 billion last fiscal. This is a noteworthy increase compared to only 12.3 percent the previous year.

Analysts say two key elements stand out. First, the damaging impact of the October 2014 shutdown of Nokia’s manufacturing plant in Tamil Nadu is in the past — meaning those exports are mainly offset now. Second, the nature of imports in the mobile phone segment continues to grow. Purchases of components from overseas for domestic assembly and manufacturing are rising at a speed that’s outpaces completely-built units (CBUs).

Telecom instrument imports fell almost 15 percent as of February in FY19 after a nearly 17 percent rise in the FY18. Telecom instruments made up a third of the total electronics imports, followed by electronic components (28 percent), computer hardware and peripherals (16 percent), consumer electronics (9 percent), and electronic instruments (14 percent).

Between April 2018 and February 2019, exports of telecom machines (including mobile phones) reached 129 percent year-on-year to USD 2.4 billion. This is the largest jump since FY14, before the Nokia plant closing. After the Nokia plant closure, telecom instrument shipping crashed to just USD1.07 billion in FY15, according to DGCIS data.

According to the Chairman of the India Cellular & Electronics Association, Pankaj Mohindroo, the profile of imports — particularly in the mobile phone industry — is showing a strong change. The CBU import, which was above 75 percent, is now below 10 percent. Sub-assembly import has also dropped substantially after the PCBA sector launched aggressively last year. Now imports of essential components have begun in India and that will only rise.

As per a recent ICEA-McKinsey report, the advanced resurgence in mobile manufacturing was developed thanks to strong domestic demand, with the initiation of the Phased Manufacturing Program promoting import substitution. Between 2014 and 2017, the Indian smartphone market grew to more than 37 percent in value per annum, from USD 9 billion to USD 22 billion. In the volume term, selling of smartphones rose from 70 million units in 2014 to 150 million units in 2017.

Overall, those numbers are expected to increase and — with the ideal approach to manufacturing and exports — could greatly benefit India’s economy.