BANGALORE, India -" Two recent developments have given India's hardware industry hope for a vastly improved PC market here, where penetration rates are below 10 systems per 1,000 people.
The India-U.S. High Technology Cooperation Group (HTCG), a bilateral organization with representatives of the government and private industry, said it will focus on the PC business climate. In addition, India's national government, which has long turned a blind eye to the country's hardware industry while coddling its software industry, promised its help during a meeting here last month.
While the government's future policies are impossible to predict, the HTCG started work at its second meeting here on a proposal on the prevailing tariffs for PCs and the course of action needed in the future. The group's proposals will be passed on to policy makers for consideration.
Meanwhile, India's hardware association, the Manufacturers' Association for Information Technology (Mait), is working with Crisil, a national research and financial agency in India. The two will put together recommendations for the government on steps needed to spur growth in India's computer hardware business.
Traditionally, sales of PCs in India have been low because of high domestic and import tariffs, which depress the already-low average purchasing power of citizens. Successive governments have barely seemed to notice the domestic computer hardware industry, while eagerly helping the software export services business.
For instance, a government-commissioned task force constituted several years ago brought out a set of recommendations to encourage the domestic software and hardware industries. While all recommendations for software were implemented, not one for the hardware sector was acted on.
Domestic taxes on PCs vary from one Indian state to another, ranging from 20 to 45 percent. That is the prime reason the assembled PC market, called the grey market, has long held more than a 50 percent market share, as those assemblers can avoid paying taxes that domestic suppliers of finished products, such as Wipro and Zenith, or global suppliers like IBM and Acer, cannot escape. PC suppliers believe that the implementation of a more sensible tax regime will shrink the grey market's share and increase total PC sales.
Fewer than 2.3 million computers were sold in India in 2002-03: 2.29 million desktops, 51,000 notebook PCs and 57,000 PC servers, said Mait. Grey-market assemblers took 46 percent of that business, Mait said.
"The grey market survives solely by evading local taxes," said Vinnie Mehta, executive director of Mait, during the India-U.S. forum meeting last month. "India does not make PC components, it does not set industry standards, and the market size isn't there either," he said. For years, Mait has been demanding a scaling down of domestic tariffs on PCs.
"There is tremendous lag in the way India has treated the hardware part of the IT industry; it has moved much slower in hardware from a policy viewpoint," said a top executive at Hewlett-Packard Co. An evaluation by HP of hardware pricing in 125 nations concluded that price was the industry's main problem in India. The study indicated that at current income levels, India should have a PC penetration rate of 17 units per 1,000 people, but that the rate is now just 9 per 1,000. "There is a need to cut cascading taxes on hardware," the HP executive said. "As a company, HP can leverage its entire investment in India only if there is a strong domestic base for us."
PC penetration rates are higher in Romania, Peru and Vietnam, according to an Intel Corp. executive. "There is an affordability barrier here. The telecom market has seen explosive growth because of policy rationalization, and the same can happen in PCs," the executive said.
One glaring indication of how the country's software industry is pampered while the hardware industry is ignored is a rule that lets software-export firms import PCs for writing software at zero duties. All others must pay the duties, which sometimes total nearly half the cost of the computer itself.
Even the software industry recognizes the disparity. "It is absurd that the poorer pay more [for PCs]," said Jaithirth Rao, vice chairman of the National Association of Software and Service Companies, India's software association and the head of a software export firm, Mphasis BFL Ltd. Studies by Mait have indicated that the PC market in India will double if current duties are halved.
Few doubt the lobbying power of the HTCG to get more favorable business regulations. Its members include some of the world's largest PC makers, including Dell, HP and IBM.
At the group's first meeting in July in Washington, representatives of the United States and Indian governments and industry briefly touched on "acceleration in reduction of excise taxes and special additional duties."
Mait has asked an agency for recommendations that will be presented to India's finance ministry. Coupled with the HTCG's views on the same topic, PC vendors could see a benefit when the country announces its annual fiscal policy in late February. Another factor that makes this more possible is the need for India to present itself as more than a provider of software services in the face of looming protectionist fears in the United States.