Context: The government aims to expand the ambit of the production-linked incentive (PLI) scheme to include as many as ten more sectors such as food processing and textiles other than the already included mobile phones, allied equipment, pharmaceutical ingredients and medical devices.
More on news:
- The central government introduced the PLI scheme for mobile manufacturing as well as pharmaceutical ingredients and medical devices.
- The Ministry of Electronics and IT had earlier approved 16 proposals by electronics manufacturers, including Samsung, Foxconn, Lava and Micromax, entailing an investment of ₹11,000 crore under its Production Linked Incentive (PLI) Scheme.
- Among the international firms approved, Foxconn Hon Hai, Wistron and Pegatron are contract manufacturers for Apple iPhones.
- Apple (37%) and Samsung (22%) together account for almost 60% of global sales revenue of mobile phones.
Production Linked Incentive (PLI) Scheme
- Under the new PLI scheme, companies that set up new mobile and specified equipment manufacturing units or expanded their present units would get incentives of 4-6 per cent on incremental sales from goods made in India.
- Apart from cutting down on imports, the PLI scheme also looks to capture the growing demand in the domestic market.
- The objective is really to make India more compliant with its WTO (World Trade Organisation) commitments and also make it non-discriminatory and neutral with respect to domestic sales and exports.
- The PLI scheme for pharmaceutical ingredients and medical devices seeks that applicants will commit a certain amount prescribed by the government as investment to build capacities in these areas.
- The government will pay the companies it selects for the scheme a specific proportion of their turnover from making and selling the bulk drugs or medical devices as an incentive over the next few years.
- The PLI scheme for bulk drugs focuses on building economies of scale in over 50 critical active pharmaceutical ingredients, including penicillin G, vitamin B1, dexamethasone, meropenem, atorvastatin and aspirin.
- The total incentive to be given to each company will be decided by an empowered committee.
- It will have secretaries from the Department of Economic Affairs, Department of Expenditure, Department of Revenue, Department for Promotion of Industry and Internal Trade, Directorate General of Foreign Trade, apart from the MeitY secretary and the CEO of the Niti Aayog.
- Duration: It will cover target segments that are manufactured in India for a period of five years.
Need of the scheme
- The idea of PLI is important as the government cannot continue making investments in these capital intensive sectors as they need longer times to start giving the returns. Instead, what it can do is to invite global companies with adequate capital to set up capacities in India.
- The companies would bring additional investment in electronics manufacturing to the tune of ₹11,000 crore.
- They will generate more than two lakh direct employment opportunities in the next five years, along with the creation of additional indirect employment of almost three times the direct employment.
- The approved companies under the PLI Scheme are expected to lead to total production of more than ₹10.50 lakh crore, of which around 60% will be exports.
- The government expects domestic value addition to grow from the current 15-20% to 35-40% in case of mobile phones and 45-50% for electronic components.
- It will help in building a strong ecosystem across the value chain and integrating with the global value chains.
- It will strengthen the electronics manufacturing ecosystem in the country.
- Apart from Electronics and pharmaceuticals which are large sectors, so, at this point, if the government can focus on labour intensive sectors like garments and leather, it would be really helpful.
Phased Manufacturing Programme
- 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.
An assessment of PMP
- Increased production: 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.
- At present, India imports basic chipset for mobile handsets but there has been a spurt in the production of other mobile components.
- 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.
- Lesser value addition: 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%.
- More imports: 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.
- India, on the other hand, imported more than it exported.
Therefore, while the PMP policy increased the value of domestic production, local value addition remains a problem.
Concerns with PLI policy
Focus on production, not value addition: 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 the value of domestic production, and not local value addition.
Shift from China is unlikely
- Chinese firms that dominate the Indian market are not a part of the PLI policy.
- Recently, a study 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 phones in China is 79.55, Vietnam, 89.05, and India (including PLI), 92.51.
- This shows that incentives under the PLI policy may not shift a major chunk of mobile manufacturing from China to India.
- Export competitiveness: Though India’s mobile phone exports grew from $1.6 billion in 2018-19 to $3.8 billion in 2019-20, our export competitiveness is in mobiles with lower selling price.
- However, for foreign firms chosen under the PLI policy, the incentive will be computed on the basis of the invoice value of phones available at and above ₹15,000 ($204.65).
- It is clear that the PLI policy does not strengthen our current export competitiveness in mobile phones.
- Difficult for domestic firms
- The five foreign firms that have been chosen already have facilities in India, and can be expected to continue with their strategy of dependence on imported inputs.
- Domestic firms have been nearly wiped out from the Indian market.
- Supply chain colocation
- PLI scheme does not complete the mobile manufacturing ecosystem. For example, though Samsung is invested hugely in India, it has not colocated its supply chain in the country.
- 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.