Will hardware emerge from the shadows this time?

The Indian hardware sector has been languishing over the years and a situation has come when every year we see the closure of 15 to 20 major IT hardware companies or their shifting to trading. As against this is the Chinese threat which is looming larger every year. Its exports of hi-tech products crossed $ 15.7 billion in the first six months of 2000 up by 48 percent over the previous year with computer and telecom hardware alone accounting for 72 percent.

The hardware sector in India has the potential to create a million jobs every year. Unlike the software sector, the hardware sector creates jobs for the semi-skilled people as well. It is the single largest creator of jobs in Taiwan and the US. An estimated 7.4 million jobs were created in IT electronics in 1998 in the US, of which close to six million were in hardware and associated services. 

IT and electronic goods exports account for 47 percent of Singapore's GDP and 65 percent of Malaysia's GDP. It accounts for 8.3 percent of the US economy while in India, it is less than one percent of the GDP.

So is the government listening? Early indications from ministry officials provide hope that things might be more positive during the budget for the sector. The apex hardware industry body MAIT is buoyant about the forthcoming budget. Said Vinnie Mehta, Director, MAIT, "Both the IT Ministry and the Commerce Ministry are receptive about the needs of the hardware industry. So we are hopeful."

Earlier during the fiscal, Pramod Mahajan, the IT Minister, had declared that this year would be the year of hardware. Vinay Kohli, IT Secretary, has also expressed his concern over the slow growth in this sector while the software sector has experienced phenomenal growth during these years. It was bad enough that the WTO deadline was looming on the horizon in 2003. Besides, the gap in growth between the hardware and software sector was also growing.

The Ministries of IT and Commerce have recommended a slew of initiatives ranging from the reduction of duties to rationalization of procedures that could take the sector a long way. Highly placed Ministry officials have said that the Commerce Ministry has recommended for the first time to do away with the Net Foreign Exchange Positive Criteria (NFEPC) pertaining to the Electronic Hardware Technology Parks (EHTP). 

Another announcement related to the EHTP, expected to be announced during the Exim Policy on March 31, is that the Commerce Ministry is contemplating to allow hardware firms operating in these export-oriented technology parks to sell their products in the domestic market at international prices. Currently EHTP scheme allows companies to sell in the domestic market only at a concessional rate of customs duty subject to the NFEPC. The withdrawal of the NFEPC will be complimented by the removal of the concessional duty facility on the domestic sale. The sale will be valid on payment of all the applicable duties so as not to put the domestic industry at a disadvantage.

This decision has been taken in view of the high rate of products' obsolescence in the foreign market which is, however, saleable in the domestic market. Most of the recommendations are on the basis of a study under the chairmanship of NL Lakhanpal, DGFT.

The Commerce Ministry has also recommended creating Special Economic Zones (SEZs) exclusively for the hardware sector, which will not have any NFEPC criteria. It has also suggested the removal of restriction on the minimum area for SEZs, which is currently slated at a minimum of 1,000 square feet area.

The Ministry has proposed modification of the labor laws by suggesting the introduction of contract employment, flexible timing and enabling the removal of employees who cannot be retrained in new technologies. On the taxation front, the Ministry has urged the removal of withholding tax and reducing the excise duty from 16 to eight percent.

The Ministry of IT on its part has seconded the Commerce Ministry in the reduction of the excise duties and the industry's demand for zero rate of import duty on electronic components and raw materials for components. The Ministry has also recommended that the peak rate duty be brought down to 10 percent from the 15 percent and the Special Additional Duty (SAD) on computer hardware be removed.

Among the major demands of the hardware industry, was the reduction in the various duty rates like customs, SAD, and CVD, which account for over 40 percent of the price of products. This is in addition to the sales tax ranging from zero to 16 percent from state to state and item to item.

According to the industry, if the recommendations pertaining to the EHTP are accepted, it will encourage the setting up of new hardware units as the EHTPs would have the flexibility to export as well as sell the products in the domestic trade area to economize on production. Added Mehta, "This is the only way out for the industry. If the government stands by these recommendations, we shall see the EHTP and SEZ models being highly successful."

Speaking further about the issue of taxation, Mehta said, "Since the sale of PC has experienced a slowdown, the hardware industry is banking on the forthcoming budget for duty cuts and other measures so that the PC prices would come down resulting in increased rates."