MICRO – ECONOMICS (I-MBA SEM-IV) MODULE – IV

PRICING SCENARIO IN ELECTRONICS INDUSTRY IN INDIA

Q.1 Discuss Pricing scenario in India since 1991 with special reference to Electronics industry. (GTU:
9/12/2015)

Ans.

1. Introduction

The Electronics Industry in India took off around 1965 with an orientation towards space and defence
technologies. This was rigidly controlled and initiated by the government. This was followed by
developments in consumer electronics mainly with transistor radios, Black & White TV, Calculators
and other audio products. Colour Televisions soon followed. In 1982-a significant year in the history
of television in India - the government allowed thousands of colour TV sets to be imported into the
country to coincide with the broadcast of Asian Games in New Delhi. 1985 saw the advent of
Computers and Telephone exchanges, which were succeeded by Digital Exchanges in 1988. The
period between 1984 and 1990 was the golden period for electronics during which the industry
witnessed continuous and rapid growth.

From 1991 onwards, there was first an economic crises triggered by the Gulf War which was followed
by political and economic uncertainties within the country. Pressure on the electronics industry
remained though growth and developments have continued with digitalisation in all sectors, and
more recently the trend towards convergence of technologies. After the software boom in mid 1990s
India's focus shifted to software. While the hardware sector was treated with indifference by
successive governments. Moreover the steep fall in custom tariffs made the hardware sector
suddenly vulnerable to international competition. In 1997 the ITA agreement was signed at the WTO
where India committed itself to total elimination of all customs duties on IT hardware by 2005. In the
subsequent years, a number of companies turned sick and had to be closed down. At the same time
companies like Moser Baer, Samtel Colour, Celetronix etc. have made a mark globally.

2. Pricing Scenario of Electronics Industry in India

The electronics sector produces electronic equipment for industries and consumer electronics
products, such as computers, televisions and circuit boards. Electronics sector industries include
telecommunications, equipment, electronic components, industrial electronics and consumer
electronics. Electronics companies produce electrical equipment, manufacture electrical components
and retail these products to make them available for consumers 1.

The market is dominated by electromechanical components such as PCB and connectors, which form
30 per cent of the total demand, followed by passive components such as resistors and capacitors at
27 per cent, the study pointed out.

India's attractiveness for manufacturers is growing due to the availability of low-cost labour. Rising
manufacturing costs in China and Taiwan are compelling manufacturers to shift their manufacturing
base to alternate markets.

Prepared by Dr. Amit Rajdev, Assistant Professor, Finance, AITS. Page 1

However, it said the Indian manufacturing ecosystem for electronics and hardware industry is still at
a nascent stage and faces various demand side as well as supply side challenges are limited scale of
operations and local component demand due to the nascent product manufacturing in India.

Component demand in India is muted due to very limited value addition as primarily last-mile
assembly takes place. Norms such as safety regulations for automotive, medical and industrial
sectors have driven the uptake of electronic content globally.

India has been successfully promoting reforms in all the constituents of the Internet, Communication
and Entertainment sector. Being a signatory to the Information Technology Agreement (ITA-I) of the
World Trade Organization and with effect from March 1, 2005 the customs duty on all the specified
217 items has been eliminated.

Industrial Licensing has been virtually abolished in the Electronics and Information Technology sector
except for manufacturing electronic aerospace and defence equipment. There is no reservation for
public sector enterprises in the Electronics and Information Technology industry and private sector
investment is welcome in every area. Electronics and Information Technology industry can be set up
anywhere in the country, subject to clearance from the authorities responsible for control of
environmental pollution and local zoning and land use regulations 3.

However, manufacturers in India do not add high electronic content in the products due to limited
industry-specific standards. The current market is dominated by secondary sales and primary sales
are limited due to reduced disposable income in semi-urban and rural markets.

Even as global markets are witnessing rapid consumer uptake as electronic content increases across
verticals (e.g., automotive with applications around safety, connectivity, infotainment, consumer
electronics, smart homes, etc.); India has a slower adoption as consumers remain highly sensitive to
even a marginal increase in product prices 2.

References:
1
www.investopedia.com/ask/answers/042915/what-electronics-sector.asp

2
http://economictimes.indiatimes.com/industry/cons-products/electronics/electronics-products-
market-to-touch-75-bn-by-2017-study/articleshow/54408462.cms
3
https://smallb.sidbi.in/sites/default/files/knowledge_base/reports/electronics_industry_in_india.pd
f

Q.2 Explain how the liberalization and globalization policies affected the pricing scenario of
computers and electronics in India (GTU: 12/5/2016)

Prepared by Dr. Amit Rajdev, Assistant Professor, Finance, AITS. Page 2

1. Introduction

The Electronics Industry in India took off around 1965 with an orientation towards space and defence
technologies. This was rigidly controlled and initiated by the government. This was followed by
developments in consumer electronics mainly with transistor radios, Black & White TV, Calculators
and other audio products. Colour Televisions soon followed. In 1982-a significant year in the history
of television in India - the government allowed thousands of colour TV sets to be imported into the
country to coincide with the broadcast of Asian Games in New Delhi. 1985 saw the advent of
Computers and Telephone exchanges, which were succeeded by Digital Exchanges in 1988. The
period between 1984 and 1990 was the golden period for electronics during which the industry
witnessed continuous and rapid growth.

From 1991 onwards, there was first an economic crises triggered by the Gulf War which was followed
by political and economic uncertainties within the country. Pressure on the electronics industry
remained though growth and developments have continued with digitalisation in all sectors, and
more recently the trend towards convergence of technologies. After the software boom in mid 1990s
India's focus shifted to software. While the hardware sector was treated with indifference by
successive governments. Moreover the steep fall in custom tariffs made the hardware sector
suddenly vulnerable to international competition. In 1997 the ITA agreement was signed at the WTO
where India committed itself to total elimination of all customs duties on IT hardware by 2005. In the
subsequent years, a number of companies turned sick and had to be closed down. At the same time
companies like Moser Baer, Samtel Colour, Celetronix etc. have made a mark globally.

2. Impact of Liberalization and Privatisation on Pricing Scenario of Computer and Electronics

The impact of liberalization and privatisation on pricing scenario can be discussed as below:

1. Initial reform, during 1980’s encouraged domestic electronics firms. Further liberalisation of the
industry led to an increase number of foreign firms.

2. With the result, our indigenous industry got exposed to the aggressive competition of
multinational companies. Many of the small firms are closed, as they do not have economies of
scale. Thus, main suppliers would remain as multinationals and large Indian companies.

3. Most of the foreign firms preferred not to compete but to collaborate with the Indian firms. It is
essential for Indian companies to have a good foreign partner at least in the beginning.

4. The main objectives of Indian companies in this regard to support their investment in
research and development, access the latest technologies and also fulfil the feelings that
foreign technology is invariably superior to their domestic equipments.

5. As regards the foreign partners, their motivations are to take advantage of the growing
Indian market as well as the low production costs in the country. In this process, many of the
Indian companies were subsequently taken over by foreign companies.

Prepared by Dr. Amit Rajdev, Assistant Professor, Finance, AITS. Page 3

7. Further it is found that as the ratio of foreign to domestic capital stock increases; the ratio of
labour to value added tends to be lower. The ratio of foreign to domestic capital stock have
experienced upward trend since the early 1990's. The rapid growth of the Indian manufacturing
sector since 1990’s, resulted weak absorption of labour because of higher import of foreign capital.

8. Moreover, the high cost of working capital and capex-related financing (receivables and payables)
due to high interest rates is major challenge faced by domestic manufacturers, since it increases to
the overall cost of finance. The cost of capital at 12 to 14 percent is much higher than the global
average of 5 to 7 percent1.

9. Due to implementation of FTAs, consumer electronics and home appliances sector is facing
inverted duty structure, where the final product is being imported at 0 or concessional import duty,
whereas inputs attracted around 7.5%–10% duty 1.

10. The relatively poor perception of India as an electronics-manufacturing destination worldwide

Source:
1
A Study on Indian Electronics and Consumer Durables Segment – April – 2015, FICCI,

Prepared by Dr. Amit Rajdev, Assistant Professor, Finance, AITS. Page 4