Current Economic Statistics and Review For the Week 
Ended July 16, 2005 (29^th Weekly Report of 2005)

  I

Highlights of  Current Economic Scene

AGRICULTURE

o The Food Corporation of India (FCI) is promoting decentralized procurement operations that will encourage local farmers to grow more, reduce the economic cost of procured foodgrains and make available locally preferred varieties. FCI has also formulated a scheme for private participation to modernize storage and handling of foodgrains more efficiently. In this scheme the private sector companies would develop bulk storage and handling facilities and operate them on ownership basis for total capacity of 5.5 lakh tonnes in two circuits. The scheme promises 100% guaranteed utilization of the infrastructure for the first 10 years and 75% for the next 10 years. Automatic approval of foreign direct investment, tax holidays for the first five years and custom duty exemption on the items not manufactured in India are the incentives offered under this scheme. 

o Ten states had already switched over the new procurement system in respect of rice. Andhra Pradesh, a major rice procuring state, had accepted in principle to switch over to the new system.

o The Centre has asked the states to increase their budgetary allocation for the farming sector to restrain the declining agricultural productivity. This decision has been taken against the background that the financial allocation for the agriculture sector is less than 2 per cent of the total budgetary support that ranged between Rs. 2,500 crore to Rs. 4,500 crore although it sustains 60 per cent of the countries population. The irrigation sector gets only less than 0.35 per cent allocation and agricultural research also gets less than 1 per cent.

o The Center has decided that all mandies (wholesale vegetables markets) in Maharashtra and Gujarat would be electronically connected with the multimodal commodity exchanges by month of August in this year. 

o The July showers have revived the expectations of a record food grain production this year despite initial hiccups due to late arrival rains by a week to 10 days. 

o The government has forecast wheat output at around 72million tonnes but the trade estimates production to be at least 2 million tonnes lower. However government is confident that there is no need to import wheat.

BANKING HIGHLIGHTS

o Western Union has tied up with Oriental Bank of Commerce (OBC) in its worldwide money transfer network. OBC has made a strategic agreement with Weizman Forex to provide payment of money transfers sent to India.

o The Reserve Bank of India (RBI) has cancelled the certificate of registration issued to Ratnanidhi Finsec Pvt. Ltd. having its registered office at Hyderabad. 

o Punjab National Bank (PNB) has declared a final dividend of 30 per cent i.e. Rs.3 per share for the financial year 2004-05. This is in addition to the interim dividend of 30 per cent declared earlier and paid.

o UCO Bank would select a consultant shortly for purposes of restructuring, required for meeting business targets in the current fiscal year. The 5 short listed consultants, Ernst & Young, McKinsey, Boston Consultancy Group, IBM Consultancy and National Institute of Bank Management (NIBM), would make presentations after which one would be selected. 

HOUSING

o Housing Development Finance Corporation (HDFC) has posted a 20.8 per cent rise in its net profit for the quarter ended June 30, 2005 to Rs.247.28 crore up from Rs.204.62 crore in the corresponding period of the previous year. Despite increased competition in the housing finance industry and hardening of interest rates in the economy, the spread on loans stood at 2.17 per cent.

INSURANCE

o India’s largest telecom operator Bharat Sanchar Nigam Ltd. (BSNL) has bought from Life Insurance Corporation of India (LIC), the biggest corporate group life insurance policy, which insures its 3.5 lakh employees for a sum of Rs.4,770 crore. BSNL will be paying monthly premium of Rs.4 crore to LIC for the policy. The premium will be deducted at source and employees are entitled to claim tax benefits. There are 3 premium slabs – Rs.525 a month for an insurance cover of Rs.5 lakh, Rs.315 a month for a cover of Rs.3 lakh and Rs.105 for Rs.1 lakh cover. Until now, the largest insurance cover was the policy purchased by Infosys, insuring 13,000 employees for a sum insured of Rs.10 lakh each.

INFORMATION TECHNOLOGY

o IT major Infosys Technologies plans to expand operations in China to serve the local market. Infosys Technologies (Shanghai) Company, a fully-owned subsidiary of Infosys, expects to increase its employee strength to 1000 from the present level of 100 in the current financial year 2004-05. Infosys has invested an initial capital of $5 million in its subsidiary in China.

o The Tata group has consolidated its information technology-enabled services business by merging Tata Infotech Ltd. (TIL) with Tata Consultancy Services (TCS). The merger is proposed to be effective from April 1, 2005. The shareholders of TIL will receive one equity share of TCS for every two shares held. Post amalgamation the paid-up share capital of TCS will increase from Rs.40.01 crore to Rs.48.92 crore. Post merger TCS will be the first IT company in India with sales of over Rs.10,000 crore.

o India’s largest software services exporter TCS has posted an over 33 per cent increase in its net profit at Rs.630 crore for the quarter ended June 30, 2005, as against Rs.474.07 crore in the corresponding quarter of the previous year. The company has added 68 new clients and 2690 employees in the first quarter of the current fiscal year. TCS has bagged several international contracts including a $100 million order from a US-based financial services firm. It has also formed a strategic partnership with the Chinese government. In addition, the company has won five new BPO deals in the banking, telecom and hospitality verticals

TELECOM

o Airtel will be investing Rs.100 crore in West Bengal over the next four months for strengthening its existing network. 

o Tata Teleservices has also earmarked Rs.150 crore for West Bengal and Kolkatta circles over the next 6 months for expansion of its services.

FINANCIAL MARKET DEVELOPMENTS

• Capital Markets

 Primary Market

o The IPO of Infrastructure Development Finance Corporation (IDFC) through 100 per cent book building process was oversubscribed by 14.01 times on the first day of its issue opening on July 15.

o Syndicate Bank in its follow-up issue of 50 million equity shares of Rs 10 each through 100 per cent book building process in a price band of Rs 46- 50 per share has fixed the price at Rs 50. 

o The shares of Yes Bank have been listed on BSE and NSE at premiums over the issue price of Rs 45 at Rs 65 and Rs 65.90, respectively, on July 12. 

 Secondary Market

o The BSE sensex gained 59.46 points or 0.82 per cent over the week to end at 7271.54 as compared to the previous close of 7212.08 and the NSE nifty gained 16.35 points or 0.74 per cent to close at 2212.55 points. the stock markets recovered from the terror tremors with the BSE sensex surging by 95 points. But, as Infosys announced its first quarter results, it dampened sentiments. The index fell further on Wednesday and Thursday due to the weakness in IT stocks. However, it recovered on Friday by about 84 points due to the easing of international crude oil prices and domestic inflation rate. 

o Among the sectoral indices of BSE, the BSE consumer durables index registered the highest growth of 5.82 per cent, while deceleration has been recorded by BSE IT index of 4.18 per cent. While the BSE sensex registered a gain of 0.82 per cent, BSE mid-cap and BSE small cap recorded gains of 3.25 per cent and 4.82 per cent, respectively.

o The average daily turnover on BSE and NSE during the week was higher around Rs 3,172 crore and Rs 6,354 crore, respectively as compared with Rs 2,874 crore and Rs 5,606 crore, respectively, in the previous week. 

o Between July 1 and July 15, FIIs have been net buyers of equities to the extent of Rs 4,008 crore with purchases of Rs 13,788 crore and sales of Rs 9,780 crore. During the same period, mutual funds have been net sellers to the extent of Rs 713 crore with sales of Rs 3,105 crore and purchases of Rs 2,392 crore 

o Due to the on-going Bull Run, the number of companies traded on BSE has cross the 2,500 mark for the first time in almost four years. 

o An expert group constituted by Sebi has recommended the consolidation of all securities laws on the lines of UK’s Financial Services and Market Act, 2000. 

• Derivatives 

o The daily turnover on the futures and options segment of NSE during the week ranged between Rs 12070 crore and Rs 19619 crore as compared to a range between Rs 10,562 crore and Rs 19,059 crore during the previous week. 

• Government Securities Market

 Primary Market

o The government is to re-issue 10.25 per cent 2021 for a notified amount of Rs 5,000 crore through a price based auction using multiple price method on July 18.

o In the 91-day treasury bill auctioned during the week, the yield has been set higher at 5.49 per cent as compared to 5.41 per cent set in previous week’s auction. 

 Secondary Market

o Given the buoyancy in the economy due to the strong industrial data, there have been expectations of a rate hike in the impending mid-term review of the RBI. The yields firmed up across maturity; the weighted average YTM of 8.07 per cent 2017 rose from 7.12 per cent on July 8 to 7.21 per cent on July 15. However, the call rates ruled in a lower range of 5.10 –5.32 per cent as compared to a range of 5.11 –5.55 per cent in the previous week. 

o The RBI has decided to introduce an electronic order matching trading platform for government securities on Negotiated Dealing System (NDS) from August 1. 

• Foreign Exchange Market

o The rupee-dollar exchange rate appreciated from Rs 43.63 on July 8 to Rs 43.52 on July 52 due to huge inflow of foreign currency assets. Even firming up of international crude prices above the $60 mark, did not dampen the appreciating trend; further as the crude prices eased, the trend continued. 

• Commodities Futures derivatives.

o The NCDEXAGRI index has firmed up from 1251.96 on July 9 to 1260.19 on July 16 and even the FUTEXAGRI index has risen from 1262.36 on July 9 to 1273.72 on July 16. 

o The commodity futures market across the country recorded a peak value of trade of Rs. 8137crores on July 7.

o The FMC said in the Co-ordination Committee meeting that it may encourage Exchanges working on the innovative contracts like T+2, weekly contracts etc. subject to the conditions that these would be in commodities of national importance and the contracts bring tangible gain to the commodity economy. 

o The endeavor of FMC and exchanges may be to move towards a situation of compulsory delivery against positions remaining outstanding on the days of expiry of contracts. This may be emphasized in the new contracts which are sent to FMC for approval.

o The government has proposed suitable amendments to the Forward regulation Act (1952) with a view to strengthen the commodity exchanges regulators. This will enable setting up of Forward Market Appellate Tribunal for ensuring smooth functioning of commodities exchanges. 

In the second half of June, the commodities exchanges recorded a turnover of Rs 62,210 crore, the highest with a fortnight since 2003. Of this two national level exchanges account for nearly 93 per cent of the total turnover with the highest turnover registered at National Commodities Derivatives Exchange (NCDEX), followed by Multi-Commodity Exchange. 

INFLATION

o Inflation rate, based on wholesale price index has declined marginally to 4.09 per cent during the week ended July 2, 2005 from 4.14 per cent registered during the previous week. The annual point-to-point inflation rate was at 7.08 per cent in the corresponding week last year.

o The WPI has declined a tad to 193.6 during the week in review from the last weeks’ level of 193.9 (Base: 1993-94=100). The index of primary articles’ group has declined considerably (by 1.3 per cent) to 188.9 from the previous week’s level of 191.4, mainly due to a considerable fall in the prices of food articles by 1.7 per cent. The index of fuel, power, light and lubricants group has risen (by 0.5 per cent) to 303.9 from the previous week’s level of 302.5. The index of heavy-weighted manufactured products’ group constituting 63.7 per cent of total weight, has remained unaltered to stand at previous week’s level of 170.6. 

o The latest final index of WPI for the week ended May 7, 2005 has been revised upwards; as a result both, the absolute index and the implied inflation rate moved up to 192.1 and 5.67 per cent instead of the provisional levels of 192 and 5.61 per cent, respectively. 

o The weekly indices in the last two months of May and June 2005 have been more or less rising. The similar rising trend is evident during the corresponding weeks last year. However, the indices have marginally declined during the week in review as well as the corresponding week last year. Consequently, the rate of inflation in the week in review has shown a marginal decline. 

LABOUR

o Employees’ Provident Fund Organisation (EPFO) has proposed a ban on premature withdrawals of provident fund accumulations by it’s subscribers. Alarmed at the rising trend of early withdrawals that threatens old-age income security of Employees’ Pension Scheme (EPS) members, the EPFO has decided to ban withdrawals prior to the superannuation age of 58 years. Instead, EPFO has proposed that the Scheme Certificate route as the only option available to those exiting before the superannuation age. The certificate is an instrument issued in lieu of the contributions made by a member and can be used to re-enter the EPFO scheme on re-employment. Introduction of such a restriction on premature withdrawals as well as an availability of a certificate option would require an amendment of the EPS scheme, 1995. Under the present set up, the EPFO is unable to curtail early withdrawals. The average settlement taken by the members on superannuation is not capable to even providing a minimum pension of Rs. 250 per month. 

PUBLIC FINANCE

o All states implementing VAT have agreed to the finance ministry’s proposal to work out the compensation for any VAT induced revenue de-growth after factoring in the floor rates ratified at April 27 meeting of the empowered committee. On April 27, the empowered committee had enlarged the exemption list and brought all industrial inputs, capital goods and medical equipment under the merit rate of 4 per cent. The committee also decided that prior Accountants General certification would not be mandatory for the release of the compensation amount as per the state finance minister’s claims. The Centre will release the compensation amounts every month.

o The empowered committee of state finance ministers on value-added tax has decided to allow states and union territories to exempt canteen service department (CSD) outlets from VAT. The committee also decided that states would be allowed to tax a commodity at 4 per cent if atleast 50 per cent of it was used as input for production. Earlier the states had been asked to include canteen service department in VAT. The empowered committee has asked states to adopt the uniform floor rates (of 20 per cent) for petrol, diesel and aviation turbine fuel by September 1. Regarding the threshold for small dealers, it has been decided that if any state or union territory fixes a threshold above the agreed amount of Rs 5 lakh, the loss of revenue on that account would be borne by the state or the territory concerned.

o An average of about 12 per cent growth in April-June revenue collections under VAT has been noted, which is less than the traditional growth rate of sales tax revenue. There has been substantial deceleration in growth in major states like Andhra Pradesh and Maharashtra. Higher growth rates have been observed in smaller states like Delhi.

o Service Tax on airfreight services will be withdrawn soon in response to the demands made by exporters of high value and perishable items. Transport of merchandise by air accounts for 35-40 per cent of India’s exports at present. The new impost had come through a clarification by the Central Board of Excise and Customs (CBEC), which said that service tax exemption for exporters would be available only if payment is received in foreign exchange. Airlines receive freight payments mostly in Indian rupee. Exporters have said that the service tax on freight goes against the government’s policy that taxes and levies would not be exported.

o The Finance minister has instructed the Income Tax officials to take a decision to file special leave petition (SPL) within seven days of the receipt of High Court order to check the revenue loss caused by the dismissal of delayed SLPs. The total amount of disputed demand pending before the High Court and the Supreme Court as on March 2005 is Rs 1,465 crore. In order to ensure that there are no delays forwarding SLP proposal to the Central Board of Direct Taxes (CBDT), the CBDT has also directed that within seven days from taking a decision to file an SLP, the proposal should be routed through the Chief Commissioner of Income Tax or through the Director General of Income Tax (investigation) within seven days.

o The Central Board for Direct Taxes (CBDT) has constituted a committee of senior officers to look into the issues of fraudulent cases of refunds and encashment of refunds in recent months. A background paper prepared by the finance ministry for the Parliamentary Consultative Committee noted that certain taxpayers had derived “undue tax benefits by claiming various deductions and exemptions to which they are not entitled. This is sometimes done with the collusion of their tax representatives.” The paper further pointed out that it was necessary to build adequate safeguard in the area of processing returns and issuing refunds, so that possibilities of misuse of tax provisions and misappropriation of government money collected through taxes was minimised.

EXTERNAL SECTOR

o Retail majors in India fell that the country is in no position to accept foreign direct investment at the moment. However, real estate developers are quite happy about it as according to them FDI in retail sector will change the face of it.

o The department of telecommunication has approached Prime Minister seeking relaxation in modalities for 74 per cent foreign direct investment in the telecom sector. The department has proposed that remote access be provided to network infrastructure vendors for equipment under repair.

o Upbeat about the economic prospects, the government has scaled up the FDI projection in India, for 2005-06. India is now likely to attract FDI worth $7 billion in 2005-06; a 25 per cent jump from an inflow of $5.6 billion during 2004-05.

o The rejection of Indian food consignments by the US and the European Union on sanitary and phytosanitary (SPS) and technical measures continues. In June, the US rejected as many as 216 Indian export consignments.

CREDIT RATINGS

o Icra has assigned an A1+ rating to the Rs. 600 crore short-term debt programme (enhanced from Rs. 550 crore) of Kotak Mahindra Investments Limited (KMIL). It has also assigned an A1+ rating for the Rs. 200 crore immediate term debt programme (Series I – 2005-06) of KMIL. The rating for the immediate term debt is valid till August 31, 2005. 

o In an another exercise, the agency has reaffirmed the LA - and MA outstanding ratings assigned to GHCL Limited’s Rs 15 crore long term NCD and FD programmes, respectively. It has withdrawn the outstanding A1 rating against Rs. 25 crore commercial paper programme as the same is not in use by the company. The reaffirmation of the ratings take into account GHCL's long and established track record in the soda ash industry, its operating efficiencies and efforts at improving its cost structure and the favourable outlook for the soda ash prices in the short to medium term on account of rising international prices

o Icra has retained the earlier assigned A1+ rating to the Rs. 25 crore commercial paper programme of Grindwell Norton Limited (GNL). The rating reflects GNL’s established market position in the domestic abrasives industry, good demand growth prospects of its user industries, strong operating cash flow generation and low financial risk profile. Similarly, the agency has also reaffirmed the A1+ rating, assigned to the Rs 20 crore commercial paper program of Automotive Axles Limited (AAL). The reaffirmation takes into account AAL’s strong market position in the medium and heavy commercial vehicle (M&HCV) axle segment, its strong financial position characterised by strong operating margin, moderate gearing, comfortable coverage and liquidity indicators.
 

Theme of the week:

Electronics Industry in India*

In the 21st century, Information and Communication Technologies (ICTs) have begun to influence every facet of economic and social life in every society; their potentials are perceived to be so immeasurably great, both in their extend and pace of application, that it is difficult to predict the shape of thins to come. Of late, there is hardly any country in the developing world, which has not initiated policy measures and institutional interventions to accomplish the advantages of new technology for development. Therefore, the ICT is generally considered as technology of the new millennium capable of bringing about fundamental changes in economy and society. 

Importance of Information and Communications Technology (ICT) Policies

The progress of ICT sector in turn is propelled by electronics industry in general and microelectronics in particular. India is one among the pioneering developing countries to make conscious attempt towards developing a broadbased and technologically dynamic electronics industry as early as in the mid 1960s. Towards the end of 1970s and in particular during the early 1980s, the industry witnessed a series of policy reforms directed towards making the industry more competitive with focus on the development of the indigenous industry and its production. This was followed by the liberalization policies of 1990s with greater focus on exports and international competitiveness. 

Thus, three phases could be observed in the evolution of the policies governing Indian electronics: the import substitution period during the 1970s, liberalization phase beginning with the early 1980s; and the globalization period, which began in the early 1990s. Against this background, this report makes an attempt to study the evolution of policies as well as the production and export performances of the electronics industry in India. 

Policy Initiatives 

As early as in the mid-1960s’, the government recognized the importance of electronic industry for national development in view of their ‘pervasive’ applications. A series of government committees and policy measures contributed to the evolution of the what has come to be known as National Innovation System (NIS) in the IT sector. The early initiatives included Bhabha Committee of 1963, Electronics Committee chaired by Dr V.A. Sarabhai in 1966, and the National Conference on Electronics in March 1970. As a follow-up of their recommendations, a separate Department of Electronics (DoE) was set up in 1970 to co-ordinate and implement policies for development of electronic industries including computer software. In 1971, the government constituted the Electronics Commission as a policy formulation body with strong emphasis on research and development (R&D) and technology development. In 1973, the Technology Development Council was set up to assist the Electronics Commission on the recommendations of the National Seminar on R&D Policy in Electronics. 

Until the end of the 1970s, electronics industry was the most protected of all Indian industries. The country's electronics policy strongly favoured self-reliance and technology upgradation, while capital imports were actively discouraged. Furthermore, the manufacture of certain electronic products was restricted to either the public sector or to small firms. Having access to only low quality and expensive raw materials, the electronics industry used inefficient production methods to produce obsolete products of low quality at high cost.

By the late 1970s, owing to slow growth and technical obsolescence, the electronics industry began to receive the attention of Indian policy makers. In terms of output growth, Indian electronics lagged behind newly industrializing countries like South Korea. For instance, during the decade 1971-81, while the electronics production in India increased four-fold, that in South Korea increased almost by twenty times. 

In 1979, Sondhi Committee and Menon Committee were set up by the government to examine the performance of the electronics industry. The Sondhi Committee strongly encouraged the dismantling of most of the controls in general and suggested changes particularly in Monopolies and Restrictive Trade Practices Act (MRTP) and Foreign Exchange Regulation Act (FERA). The Menon Committee likewise recommended liberalised imports of foreign technology and duty-free import of capital equipment. 

It was, however, only in the early 1980s that the process of liberalization began in earnest. The 1980s marked the second phase when the government took up a number of initiatives in the direction of a more liberal and open electronics policy. The first measures announced in 1983 aimed at reducing input costs through lowering of import duties and local taxes and encouraging economies of scale by removing some of the restrictions on the entry of large firms. These policy changes sought a liberal climate, through dilution of industrial licensing. The policy liberalisation proved conducive in removing institutional barriers to the entry of firms. As a result, number of ambitious plans for setting up high-tech production facilities for integrated circuits (ICs) and electronic switching components were announced. In case of computers, for example, a number of foreign firms entered the market and most of them preferred to set up joint ventures rather than setting up subsidiaries. 

Technological Imports

Prior to the 1980s, imports were severely restricted, with few exceptions. Only those required by the state for defence and telecommunications were permitted. Under the new electronics policy, permission to import technology was allowed. More importantly, restrictions on technology payments including royalties and technical fees were largely removed and higher royalty rates were normally permitted. As a result, there was a significant increase in the total number of foreign collaborations in the electronics industry. 

In short, the technology behaviour of the firms during the 1980s was oriented more towards technology import. In the late 1980s, the electronic industry in India recorded unprecedented growth and achieved overall technology development. However, some discouraging signs overshadowed the developments. The Department of Electronics (DoE), in a report, acknowledged that while liberalisation facilitated the industry's rapid expansion, it was also been responsible for weakening its technological base. The report's major findings were:

1) A sharp decline in the share of domestic production;
2) A significant drop in R&D activities with even simple products which could feasibly be designed locally being furnished through imports;
3) Foreign collaborative efforts being undertaken exclusively for the import of plants and kits to the neglect of technological know-how and know-why;
4) The stagnation of exports to hard currency areas.

Gradually, these concerns began to influence the government policies. In early 1990s, a number of measures to restrict imports and increase the pace of indigenisation were introduced, particularly aimed at ensuring that the users of imported kits move in the direction of production based on indigenous inputs. The building up of design competence was also given greater importance than in the past.

Indigenisation

It also appears that a large number of companies attracted to the electronics industry in early 1990s were not keen in setting up manufacturing facilities, contenting themselves with the assemblage of imported kits. As a result, the process of indigenisation has met little success. Indigenisation has also been feeble in the production of component parts attributable to their long gestation period and comparatively low returns.

Post-Liberalisation

The new industrial policy of July 1991 set the beginning of the third phase marked by further liberalisation in industrial licensing. Recognizing the potential of electronics and IT industry, National Task Force (NTF) on Information Technology and Software Development was set up in May 1998 by the Prime Minister’s Office (PMO). The NTF was set up to explore the issues related to the development, manufacture and export of IT hardware. The NTF was of the view that hardware industry and software industry are two sides of the same coin, the success of one depended on the concurrent success of the other. The NTF suggested measures to make the IT hardware industry competitive and achieve high growth by encouraging FDI, bringing tariffs on inputs and capital goods to zero per cent and simplification in EXIM policy and customs procedures. 

Electronics Production

India’s electronic industry is relatively small but rapidly expanding sector as evinced in its annual growth rate of production. Over the years, with policy reforms, the share of organized private sector and the small-scale sector increased at the cost of public sector units. An immediate impact of the liberal policy was an unprecedented shift in the product structure. The most important and outstanding development was the production of a wide range of modern electronic products including a variety of consumer products, such as colour televisions (TVs), push-button telephones, personal computers (PCs) video recorders; even more complex products such as advanced mainframe computers were also in progress. As a result, the total electronics output increased to Rs.19,533 crore in 1996 from Rs.9,164 crore in 1990. 

Post-1990s can be divided into two sub-periods with 1997 as the cut-off period because there has been a number of institutional interventions and new policy initiatives since 1997 like the formation of a separate ministry for IT and electronics, reorganisation and merger of Department of Electronics (DOE) to Department of Information Technology (DIT) and attempts of hardware promotion and fiscal incentives.

During the period 1997-2005, the Indian electronics industry witnessed unprecedented growth. In the year 2004-05, the total electronics production in value terms increased to Rs.1,47,610 crore from Rs.26,640 crore in 1996-97 registering a compound annual growth rate (CAGR) of 24 per cent (Table 2). However, this high growth rate has been attained due to a sharp rise in computer software production, which registered a CAGR of 40.3 per cent, while electronics hardware production has recorded a sluggish CAGR of 11.6 per cent for the same period. Thus, despite the above-mentioned reforms, the electronics hardware production has grown at an abysmally lower rate, while the computer software production is galloping ahead. In value terms, the total hardware production has increased gradually to Rs.49,750 crore in 2004-05 from Rs.20,340 crore in 1996-97.

Increasing Imports

It is quite likely that the pent-up demand of the community, particularly that of the rapidly growing middle and richer classes, has been satisfied by increased imports of electronics goods, as shown in Table 3. This has happened after 1996-97. CAGR of such imports has worked out to 29.8 per cent per annum for the period 1996-97 to 2004-05. On the other hand, the computer software in physical form, which constitutes the original branded/licensed products from reputed firms like Microsoft, Oracle, SAP and IBM, has shown a growth in imports of 28.1 per cent per annum for the same period. Though the annual growth of physical software also appears high, it still constitutes less than 10 per cent of the total electronics imports. These licensed products serve as a base for multiplying varied forms of software services products.

Sectoral Trend

Table 4 presents data on the trends in electronics hardware production across six broad categories – consumer electronics, industrial electronics, computers, communication and broadcasting equipment, strategic electronics and components. It might also be of some interest to explore the changing product composition during the period under consideration.

1) Consumer Electronics: Is the largest sector and accounts for almost 35 per cent of the total electronics hardware production. The share of electronics consumer goods increased from 32 per cent in 1996-97 to around 40 per cent in 1999-2000. However, in 2004-05 the market share declined to 33.8 per cent, owing to the dominance of Korean companies, namely, LG Electronics and Samsung Electronics. During the period 1996-97 to 2004-05, the consumer electronic sector registered a CAGR of 12 per cent. 

2) Industrial Electronics: In the last decade the share of industrial electronics has almost remained the same in the range of 13 to 15 per cent. 

3) Computers: During the period 1997-2005, computer production has registered the highest CAGR of 16 per cent across the six broad categories. However, the production of computers has not been able to keep pace with on going IT revolution and that their share in total output has remained stagnant or declined. 

4) Communication and Broadcasting (C&B) Equipments: The thrust areas in this sector were telecom industry, wireless communication, user specific transmission, switching units and terminal equipment. The broadcast sector covers digital broadcasting of audio and video, IP telephony, broadband access, digital compression and optical technologies. During the period 1996-97 to 2004-05 the C&B Equipments manufacturing has registered CAGR of 6 per cent, the lowest across the broad six categories. 

5) Strategic Electronics: This sector covers the area of satellite-based communication, navigation and surveillance system, radars, navigational aids, underwater electronic system, infra-red based detection and ranging system, disaster management system and internal security system. It was, therefore, essential to develop self-sufficiency in this vital area, and build indigenous competence by strengthening the industrial base in the country. The Indian strategic electronic industry has been able to meet the bulk of the requirements of the country’s defence and paramilitary forces. While the public sector units were fulfilling substantial portion of these requirements, the emphasis was on attracting private sector into this area. Currently, the industry is modernising and receptive to absorbing latest technologies through joint ventures in order to sustain the path of high growth. The production in the strategic electronics sector during the year 2004-05 is estimated to be Rs.3,050 crore as against Rs.2,750 crore in 2003-04. 

6) Electronic components: This sector has continued to be largely driven by consumer electronics components production in India. The electronic component sector’s production in value terms has increased to Rs.8,800 crore in 2004-05 from Rs.3,700 crore in 1996-97.

Foreign Investment Policy

The new industrial policy of 1991 divided the foreign investment proposals into two categories: those cleared by the Reserve Bank of India (RBI) i.e. automatic approval and those cleared by the Foreign Investment Promotion Board (FIPB). 

The salient features of the investment policy applicable to Electronics and Information Technology were:

1) Automatic route for foreign equity up to 100 per cent in electronics and IT hardware manufacturing, except aerospace and small scale reserved items. 

2) 100 per cent investment permitted in units set up exclusively for export. Such items can be set up under any of the following schemes, namely, Electronics Hardware Technology Park (EHTP), Export-Oriented Units (EOUs), Special Economic Zones (SEZs) and Software Technology Parks (STP). 

3) FDI permitted up to 74 per cent in setting up Internet Service Providers (ISPs), with FDI beyond 49 per cent requiring government approval. 

Thus, the 1990s witnessed the removal of industrial licensing for most of the products except a few products of strategic significance and further liberalization with respect to FDI and technology import. 

The outcome was a phenomenal increase in the total number of collaborations in the electronic industry. From August 1991 to August 2004, Government approved 26,117 foreign collaborations (Technical and Financial) proposals with a corresponding foreign direct investment (FDI) of Rs. 2,47,664 crore. Out of these, the number of approvals for electrical equipment sector including electronics, has been of the order of 5904 (22.6 per cent of the total approvals) with an equity participation of Rs.18,726 crore, accounting for about 7.6 per cent of the total proposed investment. The electrical and electronic equipment sector ranks 3rd in the list of sectors in terms of cumulative FDI approved from August 1991 to August 2004. Of these nearly 50 per cent of the investment has been in the field of computer software industry (Table 5).

India’s Electronic Exports

Similar to the trend in production, there has been a relatively sluggish growth in electronics hardware exports. However, in the year 2004-05, the total electronics exports in value terms galloped to Rs.86,980 crore from Rs.6,287 crore in 1996-97, recording CAGR of 39.4 per cent; the high growth rate has been attained due to a sharp rise in computer software exports, which registered a CAGR of 45.3 per cent, while electronics hardware exports have recorded a sluggish CAGR of 20.9 per cent for the same period (Table 6).

India’s hardware exports have not increased substantially in spite of a number of incentives available to manufacturers. In value terms, the total hardware exports is increasing at a decreasing rate, which has gradually increased to Rs.8,750 crore in 2004-05 from Rs.2,587 crore in 1996-97. In fact, one of the major assumptions underlying the policy of liberalisation was that the lifting of import restrictions would lead to a dramatic growth in exports. A number of factors, such as low volumes, high costs of components and inefficient production techniques, and probably an attractive domestic market which have already been discussed, are largely responsible for the poor export performance. Also it is found that the manufacturing industry in this hardware electronics sector is dominated by foreign firms which have come to India focusing on its potentially vast domestic market; these foreign firms also have production facilities elsewhere which are being treated as export base. 

Issues

The upswing seen in the IT industry during the recent years has propelled India on the world map as a provider of a wide range of highly-skilled software services. IT software and services sector in India recorded unprecedented growth rate in a sustained manner for more than a decade and established credibility in the international market, whereas, the hardware sector, both computer hardware and other electronics equipment and components, has shown relatively slower growth. The sluggish growth, which began in the mid 1990s, continues even today with hardly any signs of turnaround.

In the last decade, the Indian electronics industry has witnessed a number of policy initiatives and institutional interventions to make the industry dynamic in output growth and internationally competitive. Despite these policy initiatives, it was observed that the rate of growth of output and exports has been relatively moderate in the 1990s. In the highly competitive market, currently it is not possible nor justified to cut off the industry's access to essential imports, but there is certainly a need to strengthen its technological base. At the same time, being a signatory to Information Technology Agreement of WTO, India is committed to reducing the tariff rates on a wide range of IT goods to zero level by 2005 leading to unprecedented import competition. Hence it is important that the industry equip itself to meet the foreign competition and enhance its export competitiveness. In this direction, policy initiatives should favour the proliferation of firms who have the necessary resources as well as the will to set up modern production facilities. Access to imported kits should also be considerably restrained and the permission to import technology linked to R&D investment.

Experience of countries that followed highly liberal trade and investment policies reveals that there is a link between trade and investment which is conditioned by the product characterisation and organisation of production. For example, in an assembly circuit oriented industry like PC manufacturing, the motherboard is made in Thailand or Malaysia, floppy drive in Korea or Singapore, power supply in Indonesia and so on and final assembly is done in China. The production of PC components requires hi-tech equipments; in addition it is capital and scale intensive such that no country can afford to have the capacity to produce all the required components. Hence, there in lies the need for rationalising their production across different locations. This is what, perhaps, led to the global production networks which subsequently led to domination of contract manufacturing. 

Given the domination of contract manufacturers in global electronics industry, it may be advisable to offer special incentives on one-time basis to attract a few such large manufacturers. Once the large firms are established within the country, it would induce others to follow. Given the declining capability in the field of microelectronics, any such initiative to attract investment into this field is expected to have rich and long lasting dividends.

* This note has been conceived and written by Bipin K. Deokar, Research Officer. 

*These statistics and the accompanying review are a product arising from the work undertaken under the joint ICICI research centre.org-EPWRF Data Base Project.

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