India’s $500 Billion Opportunity and How Not to Lose It

Oct. 17, 2024

Context

Last month, PM Modi announced a target of $500 billion (Rs 4.20 lakh crore) in electronics manufacturing by 2030 and this ambition to become a global hub for electronics manufacturing is bold and transformative.
To succeed, India must focus on export-led growth and regional clusters, supported by targeted regulatory reforms.
It is crucial to explore the potential benefits of this initiative, the challenges it faces, and a strategic path forward through regional clustering and regulatory improvements.

Potential Benefits of Electronics Manufacturing for India's Economy

Potential to Transform India’s Economy
- Growth in electronics manufacturing can directly contribute to job creation, a critical need given India’s large workforce.
- A case in point is the Apple ecosystem, which alone has generated exports of around $14 billion (Rs 1.17 lakh crore) and employs 160,000 people in India.
- Expanding this sector would multiply such benefits across a range of other companies and supply chains.
An Opportunity to Capture Electronics Market
- By becoming a competitive exporter of electronics, India can reduce its trade deficits and enhance its strategic position in global supply chains.
- India's total manufacturing output in 2023-24 was roughly $660 billion (Rs 55.4 lakh crore), which highlights the scale of the leap required to meet the $500 billion target in electronics alone.

The Role of Regional Clusters in Driving Growth

Engines of Industry Growth
- A key lesson from the history of manufacturing is that regional clusters have often been the engines of industry growth.
- Successful clusters have emerged in regions like Silicon Valley in the United States, Taiwan, Japan, South Korea, and more recently, Shenzhen in China and the Northern Key Economic Region (NKER) in Vietnam.
- These clusters have benefited from geographical proximity, shared infrastructure, and a concentration of suppliers and manufacturers that collectively boost competitiveness.
Potential to Become Competitive Manufacturing Zones
- In India, regions like Sriperumbudur in Tamil Nadu and Noida in UP have emerged as budding electronics hubs, contributing nearly 50% of India's electronics exports.
- Building on these existing clusters through region-led reforms could create globally competitive manufacturing zones.
- However, for these clusters to match global benchmarks like Shenzhen, significant investments in infrastructure and supportive policies are needed.

Strategic Steps for Building Competitive Manufacturing

Expanding Existing Clusters and Developing Large Special Zones
- Rather than creating new clusters from scratch, India can benefit from scaling up regions that are already contributing significantly to electronics exports, such as Sriperumbudur in Tamil Nadu and Noida in Uttar Pradesh.
- These clusters already have established ecosystems, including a network of suppliers, manufacturers, and supporting services.
- However, their current sizes limit their ability to compete on a global scale.
- To address this, the government could declare a large special zone of around 300 square kilometres that incorporates both existing factories and new industrial parks.
Attracting Anchor Investors and Building Supply Chain Networks
- Anchor investors are typically large companies, such as global electronics brands or leading component suppliers, whose presence can attract other firms along the supply chain.
- For example, Apple’s decision to partner with suppliers like Foxconn and Pegatron has significantly boosted India’s electronics manufacturing ecosystem.
- To attract such anchor investors, the government could offer targeted incentives like tax breaks, subsidies for setting up manufacturing units, and streamlined processes for land acquisition and construction permits.
- These incentives would make it more attractive for global brands to set up operations in India, even when other countries like Vietnam and China might offer competitive alternatives.
Enhancing Infrastructure and Worker Support Facilities
- Physical Infrastructure
  - This includes building robust transportation networks, such as highways, ports, and rail links, which connect the cluster to major cities and international markets.
  - Efficient transport reduces the time and cost of moving goods to ports for export, which is particularly important for electronics manufacturing, where speed and flexibility are critical.
  - Additionally, the availability of consistent power supply, water, and internet connectivity is essential for operating high-tech electronics factories.
- Social Infrastructure
  - Manufacturing clusters also need to address the needs of workers, who form the backbone of any production ecosystem.
  - Large zones can house worker accommodations, educational facilities, healthcare centres, and recreational areas.
  - This ensures that workers are close to the factories, reducing their commute time and improving their overall quality of life.
  - Providing such facilities also makes it easier for companies to attract and retain skilled workers, thereby enhancing productivity and reducing turnover rates.
Implementing a Pro-Export Regulatory Framework
- Customising Labor Laws
  - Electronics manufacturing often involves long production cycles, which may require flexibility in working hours and shifts.
  - India needs to implement labour laws that allow for extended shifts, overtime, and flexible working conditions, particularly for women, who constitute a significant proportion of the workforce in electronics factories.
  - By making labour regulations more business-friendly, the government can help attract manufacturers that require flexibility to meet global demand.
- Easing Taxation and Inventory Management
  - Electronics manufacturing is characterised by a fast-paced innovation cycle, requiring the frequent import and export of components.
  - To compete with other manufacturing hubs, India must simplify its tax structure to facilitate seamless cross-border movement of goods.
  - For instance, allowing foreign companies to manage component inventories without complex customs regulations could make India a more attractive destination for electronics brands.
  - By benchmarking corporate tax and GST rates against those in countries like Vietnam and China, India can ensure that it remains competitive in attracting investments.
- Streamlining Environmental Regulations
  - While it is important to maintain environmental standards, many of India’s regulatory norms related to pollution, green cover, and building permits are not aligned with global manufacturing practices.
  - In special electronics zones, the government could grant the EMC authorities the power to adapt these norms to suit industrial requirements, as long as the broader environmental objectives are maintained.
  - Such flexibility would enable quicker factory setup and expansion, making India more attractive for large-scale manufacturing projects.
Decentralising Administrative Power for Faster Decision-Making
- In many successful clusters, local authorities can grant approvals, licenses, and permits without needing to navigate complex layers of bureaucracy.
- This decentralised approach ensures that businesses can respond swiftly to changes in market demand or production requirements.
- In India, devolving such powers to the EMC authority would enable quicker and more efficient resolution of business concerns.
Encouraging Public-Private Partnerships (PPP) for Development
- PPP can play a crucial role in the development of manufacturing clusters by bringing in expertise, investment, and speed.
- Private developers can be involved in building plug-and-play industrial parks, where factories can start production quickly without the need to invest in basic infrastructure.
- This model has been successful in countries like China, where private developers have helped create high-quality industrial zones that attract foreign investment.

Conclusion

India’s $500 billion electronics manufacturing target represents a bold vision that could transform the country’s economy and generate millions of jobs; however, the scale of the ambition requires an equally bold approach to reform.
By leveraging the power of regional clusters, investing in infrastructure, and implementing tailored regulatory changes, India can create a competitive manufacturing ecosystem.