The Production Linked Incentive Scheme, though ambitious in its goal suffers from several fundamental issues. The article discuses such issues.

Background of the Phased Manufacturing Policy

• The Phased Manufacturing Programme (PMP) incentivised the manufacture of low value accessories initially, and then moved on to the manufacture of higher value components.
• This was done by increasing the basic customs duty on the imports of these accessories or components.
• The PMP was implemented with an aim to improve value addition in the country.
• Recently, 16 firms in the mobile manufacturing sector were approved for the Production Linked Incentive (PLI) scheme to transform India into a major mobile manufacturing hub.
• The PLI comes on the back of a phased manufacturing programme (PMP) that began in 2016-17.

Issues to consider

1) More imports and less value addition in India

• Firms such as Apple, Xiaomi, Oppo, and OnePlus have invested in India, but mostly through their contract manufacturers.
• As a result, production increased from $13.4 billion in 2016-17 to $31.7 billion in 2019-20.
• But factory-level production data from the Annual Survey of Industries (ASI) shows that more than 85% of the inputs were imported.
• UN data for India, China, Vietnam, Korea and Singapore (2017-2019), show that except for India, all countries exported more mobile phone parts than imports.
• More export than import by these countries indicate the presence of facilities that add value to these parts before exporting them.
• India, on the other hand, imported more than it exported.
• Therefore, while the PMP policy increased the value of domestic production, improvement in local value addition remains low.
• The new PLI policy offers an incentive subject to thresholds of incremental investment and sales of manufactured goods.
• Thus, focus remains on increasing value of domestic production, and not local value addition.

2) Shift from China unlikely

• India produced around 29 crore units of mobile phones for the year 2018-19; 94% of these were sold in the domestic market.
• This implies that much of the incremental production and sales under the PLI policy will have to be for the export market.
• Recently, a study by Ernst & Young showed that if the cost of production of a mobile phone is say 100 (without subsidies), then the effective cost (with subsidies and other benefits) of manufacturing mobile phone in China is 79.55, Vietnam, 89.05, and India (including PLI), 92.51.
• So, it may be premature to expect a major chunk of mobile manufacturing to shift from China to India.

3) PLI doesn’t strengthen the current export competitiveness

• India’s mobile phone exports grew from $1.6 billion in 2018-19 to $3.8 billion in 2019-20, but per unit value declined from $91.1 to $87, respectively.
• This shows that our export competitiveness seems to be in mobiles with lower selling price.
• However, for foreign firms chosen under the PLI policy, the incentive will be at and above ₹15,000 ($204.65).
• So, it is clear that the PLI policy does not strengthen our current export competitiveness in mobile phones.

4) Absence of domestic firms

• Domestic firms have been nearly wiped out from the Indian market.
• So, their ability to take advantage of the PLI policy and grab a sizeable domestic market share seems difficult.
• Domestic firms may have the route of exporting cheaper mobile phones to other low-income countries.
• However, their performance in the last couple of years has not been promising.

5) Importance of supply chain colocation

• The six component firms that have been given approval under the ‘specified electronic components segment’do not complete the mobile manufacturing ecosystem.
• For example, when Samsung set up shop in Vietnam, it relied heavily on its Korean suppliers which co-located with it to produce intermediate inputs, so much so that 63 among Samsung’s 67 suppliers then were foreign.
•  Though Samsung is invested hugely in India, it has not colocated its supply chain in the country.
• So, the foreign firms chosen under the PLI policy should be encouraged to colocate their supply ecosystems in the country.

6) Complaint at WTO against PMP

• In September 2019, Chinese Taipei contested the raise in tariffs under the PMP.
• If the PMP is found to be World Trade Organization (WTO) non-compliant, then we may be flooded with imports of mobile phones.
• This might make the local assembly of mobile phones unattractive.
• This will affect the operations of the mobile investments done under the PMP.

Conclusion

The PMP policy, since 2016-17 has barely been helpful in raising domestic value addition in the industry even though value of production expanded considerably.

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