Amid dark economic times in India, the growth of the electronics industry in the country is expected to offer some positive light – and 
particularly in terms of exports. Total generation of electronic goods increased from $31.2 billion in FY15 to $65.5 billion in FY19. This growth was led by mobile phones, according to data from a recent report by the Reserve Bank of India.
Furthermore, the domestic value of mobile phone production increased nearly eightfold, from US$3.1 billion in FY15 to US$24.3 billion in FY19.
So, what is driving electronics exports at a time when the overall export outlook in India is moderate to weak? Did the country gain from the trade fight between China and the US?
“India's electronics exports started to perform well before the escalation of trade tensions between the US and China,” shared Sonal Varma, chief economist for India and Asia ex-Japan at Nomura Holdings. “India has started to become an alternative manufacturing destination due to pull factors such as possible domestic demand and government policies to encourage electronic exports.”
In recent years, the government has launched several policies to boost local production of electronic assets. These include:
- A phased manufacturing program: established to support domestic handset manufacturing and the development of associated subassemblies and components.
- A National Electronics Policy 2019: Helping to develop a global center for electronics systems design and manufacturing (ESDM) in India.
- The Electronics Manufacturing Clusters project: providing resources and support for India to become a global player in electronics and related manufacturing.
- A modified special incentive package scheme: offering capital grants to organizations involved in electronics manufacturing.
Some compensatory services were also announced to restrict imports of electronic products.
“Along with (these programs) came the impact factor – trade tensions between the US and China,” Varma added. “We expect this definitive trend in India’s electronic commodities to continue.”
Although the export numbers are impressive, Spark Capital analysts point out that the value appreciation is somewhat limited.
“India has become the second largest producer of mobile phones, replacing Vietnam. Notably, we consider the net value to add just single digits now as most elements of mobile phones are imported and only assembly takes place in India,” according to the analysts’ report.
What's more: Companies have started manufacturing printed circuit board assembly systems (PCBA) in India, increasing the value by around 15 percent, the report added.
This increase in production and exports of electronic products bodes well for India and especially its trade deficit. It has one of the largest trade deficits in the world.
“A shift like that in telecom imports – from built parts to intermediate supplies – is likely to fuel exports of electronics, including consumer goods,” said Radhika Rao, economist at DBS Bank. “This, over time, could help reduce India’s current significant net electronics import position.”
An increase in exports
India's electronics imports hit a record $55.6 billion in FY19, compared to $51.5 billion a year earlier. Industry is one of the most significant drivers contributing to the trade deficit (after oil). However, what gave policymakers some comfort was the fact that electronics exports jumped to 39 percent or a record $8.9 billion in the last fiscal year. This is a notable increase compared to just 12.3% the previous year.
Analysts say two main elements stand out. Firstly, the detrimental impact of the Nokia factory closure in Tamil Nadu in October 2014 is in the past – meaning these exports are mostly offset now. Secondly, the nature of imports in the mobile phone segment continues to grow. Purchases of components from abroad for domestic assembly and manufacturing are increasing at a rate that outpaces completely built units (CBUs).
Imports of telecom instruments fell by almost 15% in February in FY19, after an increase of almost 17% in FY18. Telecommunications instruments accounted for one-third of total electronics imports, followed by electronic components (28 percent), computer hardware and peripherals (16 percent), consumer electronics (9 percent) and electronic instruments (14 percent). ).
Between April 2018 and February 2019, exports of telecommunications machines (including mobile phones) reached 129 percent year-on-year to $2.4 billion. This is the biggest jump since fiscal 2014, before the Nokia factory closed. After the closure of the Nokia factory, shipments of telecommunications instruments fell to just US$1.07 billion in the 2015 financial year, according to DGCIS data.
According to the president of the India Cellular & Electronics Association, Pankaj Mohindroo, the import profile – particularly in the mobile phone industry – is showing a sharp change. CBU import, which was above 75 percent, is now below 10 percent. Subassembly imports have also dropped substantially following the aggressive launch of the PCBA sector last year. Imports of essential components have now started in India and this number will only increase.
According to a recent ICEA-McKinsey report, the advanced resurgence of mobile manufacturing has been driven by strong domestic demand, with the start of the Phased Manufacturing Program promoting import substitution. Between 2014 and 2017, the Indian smartphone market grew by more than 37% in annual value, from US$9 billion to US$22 billion. In terms of volume, smartphone sales went from 70 million units in 2014 to 150 million units in 2017.
Overall, these numbers are expected to increase and – with the ideal approach to production and exports – could greatly benefit India's economy.