Design Linked Incentives: A Pathway to Domestic Innovation

The Indian appliance and consumer electronics (ACE) market in India is poised to grow at an exponential rate. Fueled by a burgeoning middle class ready to spend on a variety of products like ACs, TVs and dishwashers, the ACE market is projected to double in size by 2025. It is imperative that this rise in demand for consumer electronics is met by Indian manufacturers as it is an opportunity to generate more jobs and economic activity. However, this would require the evolution of the domestic manufacturing ecosystem to enhance domestic base raw material supply as well as robust manufacturing capacity for components. A key factor in achieving this that is often neglected is the creation of large scale R&D capability domestically.

The need for innovation

The cost to make an electronic product is the sum of its material costs (bill of materials), IP costs (generally in the form of licence fees) and manufacturing costs. So far most of the government’s attention has been towards addressing India’s disability in material costs when compared with China through the deployment of multiple Production Linked Incentive (PLI) schemes. The PLI schemes help lower overall product costs by incentivising product sales that are a result of fresh investments in manufacturing capacity. The PLI schemes target strategic high growth segments like automotive, smartphones, consumer appliances and renewable energy solutions. PLIs help ensure that a greater portion of product value addition that results from domestic demand is captured within our borders.

However, The PLI methodology mostly ignores IP development costs. While PLIs can recognise a small percentage of investments (upto 10%) for R&D costs like testing equipment, jigs and fixtures, it is clear that they are aimed squarely at the promotion of manufacturing rather than incentivising green field R&D. 

This is a lost opportunity as IP makes up a large portion of the value of electronic products – an average of 25%, in fact. Simply put, irrespective of whether they are manufactured locally, a quarter of all value addition on electronics used in industries like electric vehicles and energy-efficient electronics is being captured outside of India.  As such, any long term vision to boost the electronics manufacturing ecosystem must contain a plan to comprehensively build out domestic R&D capacity through necessary regulations and incentives.

Steps ahead

The good news is that there is a template to work with in the form of the recent DLI (Design Linked Incentive) Scheme for semiconductor design. Semiconductors are one of the most crucial components for most modern technologies. India has been a victim of the global semiconductor supply crunch and remains a bit player in the overall semiconductor supply chain. The Indian government is looking to rectify this through the Indian Semiconductor Mission (ISM), which has been allocated USD 10 billion to build a domestic semiconductor ecosystem. The ISM proposed a Design Linked Incentive (DLI) scheme which will promote innovation in the nascent domestic semiconductor design industry by offering financial incentives and infrastructure support.

The challenge is that the DLI scheme is currently limited to semiconductor design activities only. It is imperative that it is expanded to include the development of designs for embedded systems that use semiconductors. This will help create a pull-based market for semiconductors through the generation of greater local demand. 

Investment in manufacturing capacity follows aggregate demand – a truism that will hold good for India’s semiconductor ambitions. It is a concern that the current schemes are focusing on creating capacity before fully exploring demand creation.

The DLI scheme for semiconductors does however set a precedent and I believe that expanding the scope of the DLI scheme to include semiconductor-based embedded system design will help in improving the health of the semiconductor ecosystem. Failing to do so runs the risk of putting the cart before the horse by trying to create capacity without first guaranteeing local demand.

A new way of thinking

Electronics R&D has been the victim of chronic underinvestment in India. This has led to an IP vacuum with Indian manufacturers lagging behind their global counterparts. However, Indian manufacturers are experiencing a change in mindset and are beginning to prioritise longer term strategic goals like IP creation. It is imperative that the government keeps pace with this evolution. Implementing policies that incentivize R&D, beginning with the expansion of the DLI scheme to include designs for embedded systems, would be a good first step. Increased R&D capacity will help keep more of the value generated by the domestic electronics industry within India and will guarantee the health of the Indian electronics industry over time. 

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