Union Budget 2024: Now’s The Time To Broaden PLI Focus, Urges India’s Electronics Manufacturing Industry

The startup ecosystem, the wider business world, and the taxpayers are brimming with hopes about what the Narendra Modi government will focus on in the upcoming Union Budget 2024-25. 

In the recent past, the electronics manufacturing industry received a significant boost from the central government policies and its ‘Make In India’ initiatives. From smartphone manufacturing to EVs, and semiconductors to large-scale electronics hardware manufacturing, several sectors have become the beneficiaries of these policy drives.

For instance, even during the interim Budget in February this year, the government said it would increase the allocation for semiconductor and display manufacturing development by more than 2X. 

It also announced a 30% higher allocation for 2024-25 for production-linked incentives (PLI) across all sectors and a double allocation for the production and development of green hydrogen and solar power. 

While the sunrise industries are largely pleased with the government’s policy boost so far, there are multiple gaps that need to be addressed. One such issue is with the PLI benefits for electronics component manufacturing companies, which many in the manufacturing sector feel need to be fine-tuned and extended to other categories. 

Extend PLI Across The Value Chain

As per India Cellular and Electronics Association (ICEA) data, India’s electronics manufacturing output has reached a record-breaking $115 Bn market in FY24, with $29.1 Bn in electronics exports, making electronics the fifth-largest export category from India.

Speaking to Inc42, Kaushik Mudda, cofounder and CEO of deeptech startup Ethereal Machines pointed out that the PLI schemes today are limited to the top few beneficiaries in the end product manufacturing, which needs to trickle down to the rest of the ecosystem.

“Companies like us are manufacturing products for some of the top electronics manufacturing services (EMS) companies but we do not qualify under PLI. Like us, there are multiple other manufacturing service providers in the second layer who help the top-facing EMS companies. If the government wants the whole EMS sector to grow, it needs to ensure that the whole ecosystem is covered and PLI benefits trickle down to the whole supply chain ecosystem,” Mudda said.

Ethereal Machines claims to be the only company in India developing 5-axis computer numerical control (CNC) machining technology. This is considered to be a bedrock for electronics component manufacturing from consumer electronics products to aerospace.

“While the budget announcements are awaited, I think the government’s preliminary steps are on the right track as it has covered the first layer to start with. But if it wants to achieve the scale it is looking at in a very short span of time, the government should start thinking a bit broader,” Mudda added.

It is pertinent to note that the ICEA has also submitted its recommendation to the government to bring components used in electronic goods under the PLI scheme.

In its recommendation to the centre earlier this month, ICEA said that it was imperative to develop a components and sub-assembly ecosystem in order to build a sustainable and robust electronics manufacturing industry in the country.

“The government should provide appropriate policy and financial support for building large-scale components and sub-assembly ecosystem, with a longer gestation and incentive period.” 

As per the electronics body, this would not only offer long-term policy predictability and certainty but create an environment for business continuity, enabling job creation, advanced skill development, integration into the electronics global value chains, increasing exports, and others.

Shifting the focus to the promising green hydrogen sector in India, Newtrace cofounder and CEO, Prasanta Sarkar, also pointed at a similar problem and said that the majority portion of the INR 19,744 Cr PLI budget for green hydrogen today goes for the production of green hydrogen molecule and manufacturing of electrolysers at scale, which in a way, favours importing existing technologies.

“A very small portion of it goes into capacity building within the country in terms of developing next-gen technologies with improved performance, visible supply chain and owning the IP to navigate any possible geo-political challenges or disruptions in the future,” he said. 

Sarkar believes policymaking should lean towards internal capacity building and developments as well owning the IP rights within the country to secure energy infrastructure.

Meanwhile, a reduction in tax and tariffs is another important aspect that startups in the manufacturing industry are also looking forward to. ICEA has also recommended a reduction in input tariffs for electronics manufacturing.

“Sustaining the tremendous growth in mobile phone production and exports requires matching the competitive tariff regimes of China and Vietnam. Current high tariffs increase manufacturing costs in India by 7-7.5% on the bill of materials (BoM), deterring local ecosystem development, hampering exports and adversely impacting job creation,” according to Pankaj Mohindroo, chairman of ICEA.

Manufacturing Industry Eyes Tax Benefits

Manufacturing as a industry has a cascading effect across sectors. For instance, the electric vehicle sector, which is a critical part of future economic growth, needs a thriving domestic manufacturing industry for components and parts. 

Amitabh Saran, cofounder and CEO of three-wheeler EV manufacturer Altigreen Propulsion Labs, believes that the central government should consider increasing funding and tax incentives like tax holidays, accelerated depreciation rates, credits for expenses, reducing GST for private sector electronics R&D investments.

In this regard, EV original equipment manufacturers have had a long-standing demand to slash GST rates on batteries from 18% to 5%, at par with the GST on the sale of vehicles. 

Ahead of the interim Budget, some industry players told Inc42 that along with GST, there was also a need to ease the taxation on imports of battery components and reduce customs duty for cells and other key components to help flourish this ecosystem further. However, no such announcements came at the time.  

In the upcoming budget, the broader electronics manufacturing industry is optimistic about certain reductions in taxes and tariffs.

Ashok Rajpal, managing director of Ambrane India, said, “Critical investments in infrastructure and technology will be pivotal for the growth of the electronics manufacturing sector. Tax incentives and streamlined regulatory processes are essential for sustaining sectoral health.” 

Meanwhile, Rashid K, director at Genrobotic Innovations, one of the leading Indian robotics startups, said that lowering the GST rate of manufacturing materials and other raw materials to below 18% would offer much-needed relief and promote an atmosphere that is more favourable for the development of new technologies. 

What Else Can The Government Do To Boost The Industry?

While the industry is largely positive on the steps taken by the central government so far, the scope for improvement is high.

For instance, Saran believes that the government’s PLI and Electronics Manufacturing Clusters (EMC) schemes are good schemes for the promotion of the electronics industry in India, but the centre must simplify foreign direct investment (FDI) policies for the electronics sector and help in export promotion schemes to assist in international market access

Besides, he emphasised the need to focus on promoting and creating a strong skilled pool of resources in the electronics manufacturing space, including the technicians, IT and electronics courses in educational institutions. 

He also said that the country needs to develop dedicated electronics manufacturing clusters in different parts of India.

With the Indian government eyeing to build self-reliance across its electronics and semiconductor manufacturing, which would ultimately boost all the allied sectors including EV and robotics, there is a common sentiment among market leaders that the first generation of these manufacturing companies requires more focussed incentivisation. 

“The first generation of electronics or semiconductors that we are going to develop and manufacture in the country are not going to be the most advanced ones globally but we will have to find use cases to create an ecosystem for them so that they get adopted and are incentivised to go back and further improve those products. Only then, over the next few years, India will have the advanced, globally competitive products,” added Newtrace’s Sarkar.