IT Taskforce

REPORT OF THE PANEL ON
DEVELOPMENT, MANUFACTURE AND EXPORT OF
INFORMATION TECHNOLOGY HARDWARE

 

NEW POLICY PARADIGM FOR THE IT HARDWARE INDUSTRY

The Hardware Industry and the Software Industry are two sides of the same gold coin representing India emerging as a Global IT superpower. The Government of India approved the 108 recommendations covering IT Software and associated services. The second integral part of this exercise is the matching policy framework for the IT Hardware and associated services. The success of one, whether it is the export of software of $ 50 billion by the year 2008 or IT penetration drive for realising IT for all by 2008, depends on the concomitant success of the other which calls for the creation of policy ambiance for the IT hardware industry.

The past and the existing policy framework brought about a high degree of uncertainty discouraging investments in a frequently changing duty regime, with duty on inputs often more than that on finished goods, with cumbersome and counter-productive import/export procedures which impeded the velocity of business. This predictably led to the decline in value addition of the hardware industry and eventually to the closing down of many of the units.

In contrast, the software industry flourished with a continuously increasing buoyancy attributable, in part, to the factor advantage of high quality software human resources and partly due to a series of incentives given and procedural simplifications made special to this industry. Being human resource intensive, the software industry was able to convert this comparative advantage into increasing exports.

Techno-economists pose the obvious question: Given the same degree of incentives and simplification of procedures bestowed on the software industry , is there a feasible policy regime which can give similar buoyancy to the Indian IT Hardware Industry inspite of the relatively higher capital intensiveness of the industry as a whole, without conflicting with the growth of the Software and IT Services industry?

The answer to this question requires careful reconciliation between numerous conflicting factors, which are outlined here.

In a controlled economy, different import duties were levied on various components and subsystems going into the manufacture of the end-equipment like Personal Computers depending upon whether the component is made in the country or not. For those made in the country, a suitable higher barrier on import is placed. Added to this, is the financial resource mobilisation for which Government is utilising the import duty as an instrument. Most countries which have succeeded in setting up the hardware industry on a large scale with high value addition, have done so without taking recourse to this route. In India, taking this route in the past was one reason for the progressive decimation of the hardware industry. Higher duty on Personal computers, for example, would mean that the cost of Personal Computers in India will be higher. This in turn, will severely impede the large scale penetration of PC-based applications in the social and economic spheres of the country.

The opportunity cost associated with not having these IT applications in place to the desired levels, is several times the revenue mobilised by the levying of such duties. The adverse price elasticity has resulted in far more adverse demand elasticity. Without having enough population of IT products in the country, the economy of scale got reduced. Producing IT hardware at unviable economy of scale, has resulted in increased cost of production. Thus, the entire industry languished as a small time industry. The flourishing software and IT services industry, which saw this trend as a counter-productive economics, increased the pressure for taking the import route. Thus, they perceived the hardware industry as a stumbling block to their growth and consequently became a direct or indirect agent for de-emphasising the value addition in the hardware industry. The hardware industry, under such pressure, took recourse to a continuously decreasing added value in their manufacture.

The IT hardware industry increasingly got transformed into direct or indirect dealers of foreign brands. When this happened, the software industry and those wanting to promote more and more IT services and applications, began asking a logical question: "why should imports be so channellised only through those who were labelled as hardware manufacturers and why not open out imports through non-manufacturing dealers and get the systems maintained either by themselves or through third party maintenance service units?"

Based on the recommendations of the National Task Force on Information Technology and Software Development, the Government of India approved the policy for advancing the zero import duty target on all IT finished goods from 1-1-2005 to 1-1-2003 and several key parts to January 1, 1999 in the WTO-ITA-I schedule. With less than 30 months to this target, applicable specially to only the IT sector, the Government's revenue earning through import duties need not be a major concern. The protection of the surviving units of the hardware industry can be given as a reason for not advancing the target date even further. With the drive for PC and other IT product penetration ever-increasing and with the past and existing policy paradigm, it is unlikely that many of these surviving hardware units which have achieved higher value addition can survive to see the year 2003. Marginal retuning of the policies would have no salient impact. If the present surviving units are required to survive and grow in future and if the entire hardware industry has to be put on a high growth path, without adversely affecting the growth of the software industry as well as IT services and applications, then a major paradigm shift of the policy regime is essential for the following reasons:

1. Uncertainty discourages investment - uncertainty has to be minimised by avoiding change of duty regime every year with zero duty as the ultimate goal.

2. Duty on inputs should not be more than that on finished goods, as the negative potential gradient will impede further investments.

3. All factors leading to the grey market, which creates unfair competition, have to be de-emphasised.

4. In an import intensive industry like the hardware industry, with fast changing prices and obsolescence, all procedures for imports, exports, licensing and inspection should be simplified to help increase the velocity of business.

5. The economical scales internationally achieved should also be nationally achieved in the shortest possible time. Until large enough volumes of production can be put in place, the market should combine a large enough export drive with the internal market.

6. Competitive climate for investment and production in comparison with that present in the competing countries should be put in place including those related to customs, foreign exchange regulations, labour laws, banking facilities and support infrastructure.

Making IT hardware manufacture viable in the Indian context, is a major challenge of reconciling highly conflicting parameters cutting across software, IT services and applications, hardware import, hardware manufacture, subsystem and parts import, subsystems and parts manufacture, component import and component manufacture. One exercise is to work out the reconciliation which calls for a minimum sacrifice - be it the loss of Government revenue, attenuated growth of one industry or the other, survival of the more disadvantaged units, slowing down of the IT application drive, etc.

For evolving such a well knit integrated package of policies, the Soft Bonded IT Unit (S-BIT) scheme is proposed with the following broad features:

 

(i) Any set of policies oriented towards making India an IT Super Power should consider IT Hardware and Software as two sides of the same coin.

(ii) A steady decline of the IT hardware industry over the past 7-8 years due to faulty and deficient policies , should be immediately reversed into a growth path through the introduction by a set of policies conducive to growth and international competitiveness.

(iii) An investment climate comparable to Taiwan, Philippines, Singapore, Korea and Malaysia has to be created in India in order to derive the maximum competitive advantage from the twin factors - a Low-cost high quality knowledge workforce and a fast growing internal market.

(iv) Local and export production should be seamlessly integrated for maximising the economy of scale.

(v) The unit should be subjected to only fiscal and procedural control and not physical control.

(vi) For maximising the velocity of business, a-posteriori controls should substitute the existing a-priori controls.

(vii) 'Export obligation' should be substituted by 'self-regulated export incentives'

(viii) Aggregation of S-BIT units to any extent, even to the complexity of a self-contained High-Tech Habitat, should be possible subject to the same set of policy instruments at all levels of complexity.

ix) The Indian IT Industry should be made strong enough to meet the demands of a zero duty regime under the WTO-ITA by the year 2003 by creating a maximally similar condition within the S-BIT Unit.

x) The S-BIT Scheme should be, by and large, revenue-neutral in the long run for the Government.

To work out details of such a scheme as well as to identify and work out the policy instruments for simplification of procedures and giving appropriate incentives to the industry, the National Task Force on Information Technology and Software Development decided the setting up of a Panel on the Development, Manufacture and Export of IT Hardware. The Notification constituting the Panel is at Annexure-I.The Panel held three meetings on 10th August, 13th August and 19th August 1998. The list of participants is enclosed as Annexure-II.

An integrated policy package, as finalised by the panel is given below in terms of following 84 policy bullets:

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