Has India missed the computer hardware bus?'' has been an oft-repeated question. I believe no country misses any economic bus for all the time. China is the most recent example of a country boarding the hardware bus with a vengeance. To give you an idea, China exported hardware worth $36 billion (Rs 165,600 crore) in 2001, and is the world's third-largest electronics hardware manufacturer.

China has successfully created an economic environment and regulatory mechanism that encourages domestic manufacturing. The critical features of this environment can be summed up as:

• Large domestic consumption led by the government
• Unique packages of investments and tax incentives-special economic zones, free ports, bonded zones etc.
• State-of-the-art infrastructure
• High competition among the local governments for attracting hardware industry-related investments
• Flexible labour laws
• Linking of access to domestic market with condition of local manufacturing

The success of the Chinese experiment can be gauged from the fact that market size (2002) for most of the products is 4-10 times that of Indian market (See Where They Stand).

Several considerations favour a vibrant domestic hardware manufacturing industry. Let me mention the three I find most compelling. One, the achievement of $87 billion (Rs 400,200 crore) target for software by 2008 would require cumulative imports of $120 billion (Rs 552,000 crore) worth of hardware between 2001-08. Can we afford such an import-bill. Two, employment generation in hardware sector for the same investment is much higher than other sectors. For every Rs 1crore worth of sales, employment generation is greater than 10 for hardware, against five-six for engineering sector. And, three, the nation cannot be self-sufficient in strategic sectors like defence, nuclear energy, and space without domestic capabilities in hardware development and manufacturing.

The challenge therefore, is to create an environment that encourages large domestic consumption and manufacturing of hardware for domestic and export markets. For encouraging domestic consumption, I believe we need to work on two fronts.

First, government must take the lead in computerising and e-enabling its operations, thus leading to large purchases. Government buying is known to be the most significant catalyst to trigger domestic consumption.

Second, the incidence of indirect taxes at all levels-raw materials, components and finished products-must be brought down drastically. Duties and taxes account for almost 40 per cent of a pc's cost in India compared to only 17 per cent in China. This will unleash new demand as well as eliminate the grey market. The grey market currently accounts for 50 per cent of the total.

For encouraging domestic manufacturing, I would suggest that income tax exemption on 50 per cent of the profits earned from electronics/it hardware manufacturing should be given. In addition, export of electronics/it hardware should be fully exempt from income tax for a period 10 years. These measures would also attract foreign investment in hardware manufacturing as has happened for software development.

Facilitating exports would require development of world-class infrastructure in terms of power, ports, telecommunications, transport, and hardware parks on the one hand, and improving velocity of doing business by simplifying procedures related to exports and imports, and removing inflexible labour laws, on the other.

In the 1960s, Japan held the centre stage in global manufacturing. The 70s witnessed the rise of Taiwan and South Korea. In the 1980s it was Singapore, Malaysia, and Philippines and since the 1990s it has been China. With the creation of right environment, India can definitely be the next hardware destination.