2.1 Triggering the Development of the Industry
The seeds of the Indian electronics industry were sown by the Electronics Committee set up in 1963. The Committee, better known as the “Bhabha Committee”,Footnote 4 gave a 10-year (1966–1975) roadmap for building domestic capacities for the manufacture of computers and components. Its recommendations for the components sub-sector were that domestic manufacturing should focus on producing in large quantities in order to reap the economies of scale and that adequate research and development support was made available to the manufacturing units in order to keep them abreast with the advances in technology in this highly dynamic industry. Immediately after the Bhabha Committee submitted its report, the government constituted another Electronics Committee under the chairmanship of Vikram Sarabhai, the doyen of the Indian space programme. The Sarabhai Committee was tasked to take account of the most urgent needs of the electronics industry, to keep track of the research being done in design and development and to give guidance and direction, where necessary, identify sectors where indigenous production could be built up, and promote the speedy building up of such capacity.Footnote 5
Armed with the recommendations of the two Committees, the government initiated the process of building a self-reliant electronics industry in the country. The Department of Electronics (DoE) was established in 1970 and in the following year, the Electronics Commission was set up to lay down policies and to guide the future development of the electronics industry in India. The thrust of the policies adopted since the early 1970s was to promote a state-led electronics sector, with the involvement of both the Central government as well as the state governments.
Bhabha Committee’s emphasis on the development of an indigenous computer industry and the endorsement of this view by the Sarabhai Committee, led to the establishment of computer production facilities in the public sector. The Electronics Corporation of India Limited (ECIL) was already in existence since 1967 under the Department of Atomic Energy (DAE) and was entrusted to commercialise electronic systems developed at the Atomic Research Centre under the Department. By 1971, ECIL became a computer manufacturing enterprise that was fully supported by the DoE.Footnote 6
The 1970s was marked by government’s resolute pursuit of developing local expertise in the computer industry. This endeavour had two distinct phases. In the first phase which lasted until the middle of the decade, the clear emphasis was on giving the ECIL the status of the dominant firm in the emerging domestic industry. This strategy was strongly endorsed by the Minicomputer Panel, a study group set up by the Electronics Commission in 1974,Footnote 7 which concluded that ECIL would be able to meet domestic demand for minicomputers, both in terms of production and technology. Having satisfied itself that small computer systems could be designed and assembled in India on the basis of imported components and peripherals, the government initiated a variety of policies to support the fledgling industry.Footnote 8
However, the government’s schema of putting ECIL as the lead firm in the Indian industry had, at best, mixed results. Rajaraman points out the company had two sets of weaknessesFootnote 9: the company “worked more like a cottage industry” and its sales efforts being poor, and the company was unable to find ready markets for its products. ECIL mostly served a captive market that included government departments and agencies like the atomic energy establishments and universities funded by the government. According to Brunner, “by about 1976, it had become obvious that ECIL was not able to meet domestic computer demand with competitive prices and technology”. These two factors combined together, increased the gap between the demand and supply of computers in the country.Footnote 10
These were compelling reasons for the government to open the doors for increased private sector participation in the computer industry. The turnaround on the part of the government came in 1978 with the announcement of the Minicomputer Policy, which opened up the hitherto restricted area of computers to private sector companies. The government relaxed the norms for obtaining industrial licences, which facilitated the entry of three private sector enterprises in the industry.Footnote 11 Before the turn of the decade, a fourth company had also started operations (Table 1).Footnote 12
2.2 Facilitating the Growth of the Electronics Industry in the 1980s
In the 1980s, the emphasis shifted to encouraging the private sector to play a pivotal role through a number of key innovation-boosting initiatives.
The New Electronics Policy (NEP) unveiled in January 1984 had four main objectives: (i) facilitating technology transfer in the electronics industry, (ii) import of computers for government departments, (iii) establishing “science cities”/science parks to encourage expatriate Indian technicians to return to the country, and (iv) setting up free trade Export Processing Zones.
A New Computer Policy (NCP) was announced in 1984 for removing the institutional barriers to “transforming the industry into a ‘virtuous circle’ of competitive prices/costs-higher demand-higher scale of production-higher efficiency-competitive prices/costs”. It marked a departure from the erstwhile policy that restricted entry of companies that were part of “monopoly houses”Footnote 13 and those that were covered by the Foreign Exchange Regulation Act (FERA). Imports of technology and capital goods were liberalised, and although domestic manufactures were initially given import protection from competitors of similar products, they were progressively exposed to international competition.
The NEP and NCP introduced policies markedly different from the policies in the 1970s; the key departure was the freedom given to the private sector to drive the industry. Simultaneously, existing public sector organisations were strengthened, and new institutions like the Centre for Development of Advanced Computing (C-DAC) Technology Development Council and Centre for Development of Telematics (C-DoT) were established to expand the domestic capabilities in the electronics sector.
2.3 Technology Imports and Domestic R&D Behaviour
The leverage of foreign firms in the Indian electronics industry declined in the 1970s. The share of these firms in domestic production declined from 10% to 3% between 1972 and 1977. However, the participation of foreign firms increased in the later 1970s through strategic alliances and collaborations, which increased from 16 in 1977 to 210 in 1985. Technology was increasingly sourced from four major countries: the USA, Japan, West Germany and the UK.
The data for the Indian electronics industry during the liberalisation phase (the 1980s) shows low bargaining power of Indian firms (no definite trends, the cases involving both lump sum payment and royalty), royalty rates close to 5% and increase in the proportion of cases with higher lump sum payments (the share of cases with lump sum payments exceeding Rs. 5 million were 6% in 1982 and 29% in 1991). It resulted in the increase of cost of technology per collaboration and more foreign exchange outflows.
2.3.1 Domestic R&D Behaviour: C-DAC and Param Supercomputer
As regards domestic R&D, organisations like Technology Development Council, C-DoT, C-DoM and C-DAC were responsible for technology development on behalf of DoE. Agencies like Defence Research and Design Organisation (DRDO) and Council of Scientific and Industrial Research (CSIR) also undertook R&D activities in electronics. But R&D sponsored by the government was “not linked to the manufacturing system in the country, and hence the outcome of the R&D activities of these organisations remained mostly unutilised”.
Denial of supercomputers to India by the USA and Japan led to the development of indigenous supercomputers, which remains as the most successful R&D foray by an Indian enterprise. The countries of Western alliance had established a strict regime for the export of electronic items citing “dual uses”, i.e. those that could be employed both for civilian and defence-related purposes. Exports of these items were regulated by the Coordinating Committee for Multilateral Export Controls (CoCoM). Indeed, this Cold War mechanism affected India, a traditional ally of the Soviet Union.
The DoE established the C-DAC with an initial investment of Rs. 300 million to build high-performance computers. The project was successfully completed in 1991, and the Param supercomputer was unveiled. From its very first generation, Param supercomputer was ranked among the best machines in the world.Footnote 14
2.4 Electronics Industry in the Period of Economic Reforms
Since 1991, the key reforms benefiting the electronics sector were elimination of tariffs on IT products, abolition of industrial licencing systemFootnote 15 and dropping of entry barriers for FDI.
In 1991, the telecom sector was fully opened for FDI. Five leading multinational companies (MNCs) set up their manufacturing facilities in India – Alcatel, Lucent Technologies, Ericsson, Siemens and Fujitsu. When the de-licencing of telecom services was notified in 1999, the demand for telecom equipment moved in favour of cellular mobile and internet services. This shift away from fixed switches benefitted the global players.Footnote 16
Impact of opening up of this sector for FDI had only a limited impact. The study conducted by Rao and Dhar showed that the “realistic FDI” in the electronics sector were quite small, including office, accounting and computing machinery; radio, television and communication equipment; and medical, precision optical instruments and watches.Footnote 17 Francis concludes that the Information Technology Agreement of 1997 (ITA-1) did not help in attracting FDI into this sector. Ernst points out that during 2010 and 2013, FDI inflows into the electronics sector was “extremely low”: it ranked 24 out of 26 sectors in terms of cumulative FDI during this period.Footnote 18
However, Mrinalini et al. points out that software and IT is the second leading sector in terms of FDI inflows. Out of the total FDI inflow of US$350.47bn during 2003–2009, 13.8% was into the software and IT sector. In terms of FDI in R&D, this sector received more than half of the inflow. Out of the FDI in R&D, more than 50% was into this sector (Table 2).Footnote 19
Outcomes of FDI in R&D are significant. Mrinalini et al. (2013) find that out of 706 firms, companies investing in FDI in R&D in India, only 74 have obtained Indian patents, taking up 0.5% of their global patents. Of these firms, 54 were in software and IT sector (Table 3).
It is found from the above table that FDI in R&D firms in India have negligible share of patents in India as compared to their global patent profile. Mrinalini et al. (2013), however, have not gone into the factors contributing to this phenomenon.
Government of India
estimated that in India, demand for electronic products in 2008–2009 was about US$45 billion, while domestic production was only about US$20 billion. Projections for the year 2020 showed that the demand would be US$400 billion, while domestic supply would be only US$100 billion, indicating a substantial demand-supply gap. In electronics hardware production, India’s share was only 1.3% of the global production in 2011, with imports accounting for 64% of India’s consumption of electronic products and 51% of electronic components.Footnote 20
Ernst argues that India’s production base for components was declining. For example, printed circuit boards (PCBs) accounted for 90% of the cost of strategically important telecom equipment production, and two-thirds of its PCB requirements were met through imports. India’s share in world PCB production was only 0.7%. While the liberalisation of telecom services boosted demand for electronic products, it did not result in an increased opportunity for domestic manufactures but came as an opportunity for foreign companies.Footnote 21
Ernst identified three major challenges facing India: (i) lack of a vibrant domestic component industryFootnote 22; (ii) disconnect between manufacturing and design capabilities; and (iii) a broken innovation system.
Elaborating on the second challenge, Ernst pointed out that India had acquired capabilities in integrated circuit (IC) designs, but most of the IC design work done in India was for MNCs, which were transferred to their manufacturing location in other countries, especially in China. IC design capabilities in India were not linked to manufacturing in India. Moreover, investment in R&D in India was at a very low level, below 1% of GDP. Larger foreign companies were reluctant to invest in full-scale manufacturing R&D in India. The foreign original equipment manufacturers typically conducted only the final assembly here.
The table below summarises the key facets of major non-government companies operating in India’s IT and ITES sectors (Table 4).Footnote 23
The main area of concern, in our view, is that the R&D spending of the industry still remains at a relatively low level. R&D spending increased nearly sevenfold between 2004–2005 and 2012–2013 but fell away quite appreciably in the last 2 years of the period covered in the above table. These numbers were also reflected in the data on patenting activity in the sector, which we will discuss in a later section.
2.6 Strategic Role of Standards
The 2012 National Policy of India on Electronics deals with the development of Indian standards for technical quality and safety of electronic products. Ernst argued that technical standards are as important as patents for an economy. Technical standards contribute to productivity growth as it promotes diffusion of technological knowledge. A study conducted by the German Institute of Standardization found that 1% increase in stock of technical standards would contribute to 0.7–0.8% economic growth.Footnote 24
Standards are so vital a strategy in industrialisation for latecomers that Ernst called it their “lifeblood”. Defining standards is a knowledge-intensive activity which involves cooperation between industry, government, academia and non-governmental organisations representing larger interests of society. However, latecomers are often takers of standards rather than creators of standards, which adds to the vulnerability of their efforts to industrialise.
India’s standardisation system is beset with a number of problems, stemming, in particular, from the presence of several standards development organisations (SDO), whose objectives, mandates and spheres of authority were often overlapping. For instance, the Quality Council of India is mandated to establish and operate national accreditation structure for bodies which confirm compliance of standards, while the National Accreditation Board for Testing Calibration Laboratories (NABL) provides accreditation to testing laboratories in accordance with ISO/IEC 17025. Besides, the National Accreditation Board for Certification Bodies (NABCB) recognises those bodies applying for accreditation based on the criteria set by NABCB. There are also a number of SDOs in the electronics sector – the Electronics and Information Technology Division Council of the Bureau of Indian Standards and Telecommunications Engineering Centre, the Global ICT Standardisation Forum for India.