India cannot be competitive since it does not have a component manufacturing base.

Quite true, but component manufacturing cannot start unless there is a demand. Demand cannot start unless there is assembly. Assembly cannot start unless there is a market that can be addressed. Fortunately, the market, to a limited extent, is there in India and if projections are to be believed, India is the market of the future. Today growth of the assembly industry-the hardcore electronic assembly and not screw tightening or packaging-has to be encouraged for the component industry to become lucrative enough to set up their shops in India. When we are able to sufficiently motivate this backward integration into Indian companies we would have taken the first step in our quest for recognition as a global IT solutions provider. How to ensure that the market matures further to promote reverse incentives of assembly and components manufacturing?

At this moment of time, the answer would be to give reason to companies to come to India. Be it a preferred access to domestic market by duty incentives so that they take the bait and set up their shops in India or by providing infrastructure parks which insulates companies from bureaucratic hassles. It is only then that companies like Nokia, Ericsson, Intel, Cisco etc. would find a reason to invest in India. This policy was followed very successfully by the Government for the automobile revolution that was started in 1984 with the advent of the phased manufacturing programme. The modus operandi of this policy has to be changed. The companies are going to China because of huge domestic market potential, no duty barriers as well as availability of a cheap manufacturing source. We must give them similar reasons to come though our market is not as big as China's but we can still market the potential which is equally alluring.

Infrastructure parks: are they not similar to EPZs?
Export Processing Zones, by their very name are locations meant for manufacturing and export. Companies will invest into India to access the Indian market and also to generate economies of scale through exports all over the world. The carrot of domestic demand has to be hyped. The Government has given manufacturers of PC motherboards in India substantial duty incentives which should catapult demand and provide economies of scale.That is a myth that I would like to explode. Today motherboard manufacturing in India, which started off as an impetus industry, has become a farce.

Companies invested substantially into the infrastructure to promote world class manufacturing hoping to attract export orders. Fundamental to the strategy was to achieve economies of scale by manufacturing computer motherboards and supplying to the domestic industry and at the same time showcase our capabilities. Because of vested interests all the duty advantages that manufacturers enjoyed were negated when the Government turned a Nelson's Eye to large-scale imports of motherboards preinstalled in the computer chassis by all the large domestic and MNC PC assemblers. The modus operandi is to import the Motherboards along with the chassis and declare it as a assembly for which there is currently no classification in the custom tariff. Exploiting this loophole, the assembly is then imported at a duty tariff of 5 per cent which is significantly lower than raw material imports at 8 per cent duty and finished goods import at 15 per cent duty. Given such a scenario why would a consumer of motherboards opt forIndian manufactured boards when he can import at a a lower rate of duty/cost from overseas? This fact when brought to the notice of the authorities through letters and personal meetings elicited the standard response: nothing happened.

There is already talk of telecom being the next wave in the broadband revolution: how are duties structured to help Indian companies?
Today broadband hardware comprising of cable modems/ADSL modems/set-top boxes/DTH is the talk of town. The government has to ensure that these products are made available to the domestic market by local manufacturers either by joint-ventures or technology transfers. Duty has to be structured such that service providers are not able to find loopholes in customs tariff to import at lower rates that finished goods as has happened in computer motherboards. A modified version of PMP (Phased Manufacturing Program) has to be adopted. The manufacturing industry in India is already burdened with numerous infrastructure and bureaucratic bottlenecks but when these are combined with patently unfair duty practices it breaks the back of the industry. Duties for imports are to negate the manufacturing advantages of foreign manufacturers who operate in manufacturer-friendly zones and not to tilt the playing field in favor of domestic industry. Indian policy makers have to think as a country. They have to understand that theIndian manufacturer has to get economies of scale by accessing the Indian market and then utilise these economies of scale to leap-frog into the international market. Instead, we are allowing our competitors to hop step and jump into the Indian market with impunity-whereas we ridicule our industry.

This is the concluding part of an exclusive article by Sanjay Shakdher, VP operations, XO Infotech Ltd