India's hardware vendors bleed from currency devaluation

Weaker rupee and rising component prices mean manufacturers struggling to break even on costs, particularly on government contracts, and measures needed to mitigate problems, local players urge.

Currency depreciation and rising prices of components have hit India's hardware industry hard, with existing government contracts that have locked down on pricing and time to deliver a particular pain point for local manufacturers, say market players.

Local trade body Manufacturers' Association for Information Technology (MAIT) noted recently that the country's IT hardware market is valued at US$12.7 billion, with 85 percent of the products imported from abroad. Additionally, government contracts contribute about 50 percent of the total volume of hardware sales, with existing orders worth about INR 100 billion (US$1.79 billion), it stated.

However, the industry was hit by supply line disruptions in 2011 and 2012 because of the tsunami in Japan as well as floods in Thailand, which have led to an increase in prices of key components, MAIT said.

The biggest blow, though, came from the devaluation of the rupee. India's currency has depreciated steadily against the U.S. dollar over the past year, dropping from INR 45 to US$1 in May 2011 down to INR 56 to US$1 in May this year, it noted, adding that the 24 percent devaluation has been one of the steepest declines across all Asian currencies.

"It's a double whammy with the falling rupee leading to higher import costs. Component costs have risen by about 15 percent due to floods in Thailand and tsunami in Japan," said Alok Bharadwaj, president of MAIT, during a recent press briefing in New Delhi.

He added that during the last three months, the rupee had slid over 10 percent and this has caused IT hardware vendors in the country to bleed, with the overall industry making an estimated loss of INR 3 billion (US$54.0 million).

Ajai Chowdhry, founder and chairman of HCL and chairman of the India government's IT taskforce, went on to point out that the rupee used to depreciate and bounce back but this time, its value has slid continuously for a year. The taskforce was created to suggest measures to stimulate the growth of IT, ITES (IT-enabled service) and electronics manufacturing industries.

Moreover, electronics costs would also come down to alleviate price pressures. "This would help us make up for any devaluation. But this time, even this is not happening," the executive said during the same briefing as Bharadwaj.

"This is an unprecedented situation. If not corrected immediately, suppliers will shy away causing delays in the procurement process which might impact all major economic activities including industrial production," Chowdhry added.

Revise government contracts
To address these challenges, the MAIT has urged the Ministry of Finance, Ministry of Commerce and Ministry of IT and Communications to come together to help. Bharadwaj said the biggest pain point for manufacturers is government contracts, as it is "impossible" to honor the terms with the 10 percent devaluation in currency in just 90 days.

In fact, companies have been forced to pass on the burden to their consumer and enterprise customers, he noted, adding that prices of products such as desktops and laptops have increased by almost 10 percent in the last six months.

Chowdhry explained that government contracts are typically time-bound and prices are locked upon signing of the agreement, which means that the terms were negotiated under more favorable economic conditions. Right now, these contracts are severely impacting IT hardware companies which are "already operating on wafer-thin margins", the chairman stated.

As such, there is a need for the pricing terms of government contracts to be revised to take into account the new costs, the MAIT president urged. The trade association proposed measures to remedy the situation:

  • The government should implement the Exchange Rate Variation (ERV) clause included in the manual on policies and procedures for purchase of goods released by the Ministry of Finance's department of expenditure. In fact, any public sector agency should quote an appropriate exchange rate on the date of tender so that vendors can apply accordingly, and this should be applicable for both long- and short-term contracts.
  • For tenders that have already been signed off and are in the implementation stage, there should be an option for vendors to ask for the inclusion of the ERV clause.
  • The import of raw materials should be exempted from Counter Veiling Duty (CVD) and Special Additional Tax for the next four months to mitigate some of the impact of rising component costs and exchange rate volatility. The exemption can be reviewed periodically should market conditions continue to fluctuate.
  • Extend a 35 percent abatement concession to all hardware devices, particularly for laptops, printers, and scanners--all of which are given just 20 percent and is insufficient for vendors to cover their higher costs. Abatements are tax deductions from the usual retail price.

Promote domestic manufacturing
Going forward, Bharadwaj pointed out that the IT hardware industry remains a critical enabler in enhancing inclusion, reach, productivity and speed in all kinds of economic activities.

The local demand for IT hardware and electronics is expected to hit US$400 billion by 2020, according to the estimates provided by the Ministry of IT and Communications. Given the current rate of domestic production though, some US$320 million worth of IT hardware is expected to be imported to meet the projected demand.

To this, Chowdhry said electronics imports may exceed oil imports and add to the deteriorating fiscal deficit. Hence, the promotion of domestic manufacturing is key for India's future growth, he stated.

The MAIT president agreed, but said that while the industry "strongly supports" the cause of enhancing local production volume, he believes this will "take time" to become a reality.

Swati Prasad is a freelance IT writer based in India.