16th October – PLI Scheme

Production Linked Incentive Scheme

Recently, the Ministry of Electronics and Information Technology (MeitY) had approved 16 firms in the mobile manufacturing sector for the Production Linked Incentive (PLI) scheme (for large-scale electronics manufacturing, notified on April 1, 2020) to transform India into a major mobile manufacturing hub. These are five domestic and five foreign mobile phone producers and six component manufacturers.

Background –

  • The PLI comes on the back of a phased manufacturing programme (PMP) that began in 2016-17 and was supposed to culminate in 2019-20.
  • The 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.

More imports in India –

  • Many foreign firms 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.
  • However, analysis of factory-level production data from the Annual Survey of Industries (ASI) shows that in 2017-18, value addition for surveyed firms (barring two outliers) ranged from 1.6% to 17.4%, with most of the firms being below 10%.
  • For the majority of the surveyed firms, more than 85% of the inputs were imported. Comparable UN data for India, China, Vietnam, Korea and Singapore (2017-2019), show that except for India, all countries exported more mobile phone parts than importswhich indicates the presence of facilities that add value to these parts before exporting them.
  • India, on the other hand, imported more than it exported, the least being in 2019 when its imports of mobile phone parts were 25 times the exports. Therefore, while the PMP policy increased the value of domestic production, improvement in local value addition remains a work-in-progress.
  • Further, 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 which might make the local assembly of mobile phones unattractive. This will affect the operations of the mobile investments done under the PMP.

Focus on value of production –

The new PLI policy offers an incentive subject to thresholds of incremental investment and sales of manufactured goods; these thresholds vary for foreign and domestic mobile firms. Thus, focus remains on increasing value of domestic production, and not local value addition. If implemented in totality, an additional capacity of 60 crore mobile phones per year may be onstream at the end of the PLI, i.e. FY25.

Shift from China is unlikely –

  • Recently, a study by Ernst & Young for the India Cellular & Electronics Association 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.
  • This shows that incentives under the PLI policy may not turn out to be a game-changing move, and it may be premature to expect a major chunk of mobile manufacturing to shift from China to India.

Conclusion –

In summary, 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. As backward integration via tariff protection is likely to come up against WTO rules, the new PLI focus is on increasing domestic production, and not value addition. The policy has separately licensed six component manufacturers to start domestic manufacturing. This may not succeed as the assemblers and component manufacturers move together. A first step in this direction could be to encourage foreign firms chosen under the PLI policy to colocate their supply ecosystems in the country.

SourceThe Hindu

QUESTION – The Production Linked Incentive Scheme is celebrated as a game changer in increasing manufacturing of mobile phones and electronic products in India but there are several bottlenecks related to value addition which needs to be addressed. Discuss.

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