Context: Around five years ago, the Government of India decided it wanted more companies to make things in India. It has therefore introduced a key set of incentives through the production-linked incentives (PLI) scheme. Here, the government gives money to foreign or domestic companies that manufacture goods here.
The industry that has shown the most enthusiasm for the PLI scheme is smartphone manufacturing. And with the scheme, mobile phone exports jumped from $300 million in FY2018 to an astounding $11 billion in FY23.
However, the former RBI governor contends that while imports of fully put-together mobile phones have come down, the imports of mobile phone components have shot up between FY21 and FY23.
The Need for PLI Scheme
- Manufacturing is a key ingredient to economic growth and also has a multiplier effect. It means that every job created and every rupee invested in manufacturing has a positive cascading effect on other sectors in the economy.
- However, India has a recurring problem of insufficient infrastructure, archaic labour laws and the lack of skilled labour force.
- To solve this, the government used, and uses, a carrot-and-stick approach.
- The ‘stick’ is raising import duties, thus making it more expensive for companies to import stuff from somewhere else and sell it in India.
- The ‘carrot’ is to provide subsidies and incentives.
- One key set of incentives is the production-linked incentives (PLI) scheme. Here, the government gives money to foreign or domestic companies that manufacture goods here. The annual payout is based on a percentage of revenue generated for up to five years.
- The industry that has shown the most enthusiasm for the scheme is smartphone manufacturing. Companies like Micromax, Samsung, and Foxconn (which makes phones for Apple) can get up to 6% of their incremental sales income through the PLI programme.
Arguments in Support of the Scheme
The PLI scheme was conceived to scale up domestic manufacturing capability, accompanied by higher import substitution and employment generation.
- Enhance Digital Economy: With PLI, India aims to reach US$300 billion worth of electronics manufacturing and US$ 120 billion in exports by FY26, supported by the vision of a US$ 1 trillion digital economy by 2025. Improvement in manufacturing and export over the past five years ensures that India is on the right trajectory to achieve this target.
- Growth in Electronic Goods Exports: The major drivers of growth in this industry are mobile phones, consumer electronics, and industrial electronics. Mobile phone exports jumped from $300 million in FY2018 to an astounding $11 billion in FY23.
- Reduction in Imports: And while India imported mobile phones worth $3.6 billion in FY2018, it dropped to $1.6 billion in FY23.
- Import Substitution: The success of the PLI Scheme for manufacturing of mobile phones led to 97% of mobile phones sold in India now being made in India.
- Meeting Global Demand: In the mobile phone segment, India has become the second-largest mobile phone manufacturer globally, with the production of handsets going up from six crore units in FY15 to 31 crore units in FY22. These numbers are expected to improve as more domestic and global players set up and expand their bases in India.
- Increased Foreign Investments: As of September 2022, the PLI scheme for LSEM attracted investments of ₹4,784 crore, with a total production of ₹2,03,952 crore, while also generating 41,000 additional jobs.
- Job Creation: In the medium-term, the scheme is expected to bring in additional production to the tune of ₹10.69 lakh crore and generate 700,000 jobs.
- Improve Export Competitiveness: Participation in the PLI scheme will help many more domestic players to attain economies of scale in production through localising. Hence, this will further enhance export competitiveness and increase India’s participation in the global value chain.
- Mr. Rajan, along with two other economists, released a brief discussion paper arguing that the programme is not really pushing India towards becoming a self-sufficient manufacturing powerhouse. Instead, the government is using taxpayer money to create an ecosystem of low-level assembly jobs that will still depend heavily on imports.
- They have raised concerns on the performance of PLI in adding value to the manufacturing ecosystem in India. According to a World Bank Report, value addition as a percentage of GDP of the manufacturing sector was the lowest in 10 years at the end of 2022.
- Imports of parts such as printed circuit boards, semiconductors, displays, cameras, batteries etc used in the mobile phones have increased substantially between FY21 and FY23. This suggests that companies are mostly assembling the product.
- Hence, India has become more dependent on the products used for assembling the mobile phones after the PLI Scheme.
- Further, it also highlights the absence of localisation in key products in smartphone manufacturing.
- This is important as low-level assembly work does not produce well-paying jobs and does not nearly have anywhere the same multiplier effect that actual manufacturing might provide.