Recently, Ministry of Electronics and Information Technology (MeitY) 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.
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.
About Phased Manufacturing Programme (PMP):
The PLI follows the phased manufacturing programme (PMP) which was launched in 2016-17.
The PMP aimed to increase the share of locally-procured components in the manufacturing of mobile phones leading to the setting up of a “robust indigenous mobile manufacturing ecosystem in India.”
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.
Situation of Mobile exports and imports in India:
- 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.
- It may also be useful to recall that mobile phone investments that occurred around 2005, targeted relatively local and low value export markets, which is being followed by the incumbent mobile manufacturers in the county.
- Numbers show that though India’s mobile phone exports grew from $1.6 billion in 2018-19 to $3.8 billion in 2019-20, the per unit value declined from $91.1 to $87, respectively.
- Thus, our export competitiveness seems to be in mobiles with lower selling price.
- It is clear that the PLI policy does not strengthen our current export competitiveness in mobile phones; and markets with higher average selling price have lower volumes.
More imports in India: Limitation in PMP policy:
- 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.
- 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 imports which 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.
PMP policy in India may arise a issue of Tariff in WTO:
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.
Limitations that need to be corrected:
- Low Level of Participation in Global Value Chains (GVCs): India’s participation in GVCs has been low compared to the major exporting nations in East and Southeast Asia.
- On the contrary, export growth of capital intensive products from China has been mainly driven by its participation in the GVCs.
- China’s export promotion policies since the 1990s have relied heavily on a strategy of integrating its domestic industries within the GVCs.
- With low participation in GVCs have resulted in a disproportionate shift in India’s geographical direction of exports from traditional rich country markets to other destinations like African countries.
- Shift from China is unlikely: Chinese firms that dominate the Indian market are not a part of the PLI policy.
- Thus, their capacity expansion, if any, will be in addition to this. India produced around 29 crore units of mobile phones for the year 2018-19; 94% of these were sold in the domestic market, with the remaining being exported.
- This implies that much of the incremental production and sales under the PLI policy will have to be for the export market.
Now, Production Incentive Scheme (PLI) for Large Scale Electronics Manufacturing:
Production linked incentive to boost domestic manufacturing and attract large investments in mobile phone.
Manufacturing and specified electronic components including Assembly, Testing, Marking and Packaging (ATMP) units.
Extend an incentive of 4% to 6% on incremental sales (over base year) of goods manufactured in India for a period of 5 years subsequent to the base year as defined.
The total cost of the proposed scheme is around Rs 41,000 Crores.
It will attract global MNCs such as Apple, Samsung, Oppo etc. to manufacture in India. Boost to domestic Industries. Assemble in India to be integrated with Make in India.
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 collocate their supply ecosystems in the country.
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.