Initiative to boost domestic manufacturing in India | 26th Nov. 2020

Domestic manufacturing

News: Government has recently approved the Production Linked Incentive (PLI) scheme worth up to Rs 1.46 lakh crores for 10 sectors with an aim to make Indian manufacturers globally competitive, attract investment in India and enhance export.

The sectors under the scheme include automobiles and auto components, pharmaceuticals, telecom, and networking products, and advanced chemistry cell battery among others.

PLI scheme worth Rs 50,000 crore for large-scale electronics manufacturing (in particular, mobile phones), medical devices, and pharmaceutical ingredients was launched earlier.

Production Linked Incentive (PLI) scheme:

It proposes a financial incentive to boost domestic manufacturing and attract large investments in the electronics value chain.

Key features of the scheme:

  • The scheme shall extend an incentive of 4% to 6% on incremental sales (over a base year) of goods manufactured in India and covered under target segments, to eligible companies, for a period of five (5) years with financial year (FY) 2019-20 considered as the base year for calculation of incentives.
  • The Scheme will be implemented through a Nodal Agency which shall act as a Project Management Agency (PMA) and be responsible for providing secretarial, managerial, and implementation support and carrying out other responsibilities as assigned by MeitY from time to time.
  • Companies that make mobile phones which sell for Rs 15,000 or more will get an incentive of up to 6 percent on incremental sales of all such mobile phones made in India.
  • In the same category, for companies that are owned by Indian nationals and make such mobile phones, the incentive has been kept at Rs 200 crore for the next four years.

Intended benefits of the scheme

The scheme is aimed at:

  • Incentivizing foreign companies to set up shop in India.
  • Encouraging local manufacturing units to set up or expand manufacturing units.
  • Reducing the dependence on Chinese imports.
  • Attract Investment in cutting edge tech and manufacturing In India.
  • Making India a part of the global supply chain.

What is the status of imports in India?

  • Analysis of factory-level production data from the Annual Survey of Industries (ASI) shows that value addition for surveyed firms ranged from 1.6% to 17.4%, with most of the firms being below 10%. More than 85% of the inputs were imported for the majority of the surveyed firms in 2017-18.
  • 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’s imports of mobile phone parts were 25 times the exports in 2019.
  • The PMP policy increased the value of domestic production while improvement in local value addition remains a work-in-progress.

Why the shift from China is unlikely?

  • India produced around 29 crore units of mobile phones for the year 2018-19; 94% of these were sold in the domestic market and the rest was exported. This means that much of the production and sales under the PLI policy will have to be for the export market.
  • A study by Ernst & Young for the India Cellular & Electronics Association showed that if the cost of production of a mobile phone says 100 then the effective cost of manufacturing a mobile phone in China is 79.55, Vietnam is 89.05, and India is(including PLI), 92.51.
  • It may be early to expect a major chunk of mobile manufacturing to shift from China to India as incentives under the PLI policy may not turn out to be a game-changing move.
  • The PLI policy does not strengthen our current export competitiveness in mobile phones; and markets with a higher average selling price have lower volumes.
  • In September 2019, Chinese Taipei contested the raise in tariffs under the PMP. If the PMP is found to be the 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.

Challenges faced by domestic manufacturers:

  • Less presence of domestic firm: Domestic firms have been nearly wiped out from the Indian market and thus their ability to take advantage of the PLI policy and grab a large domestic market share seems difficult.
  • Cheap imported material: Domestic firms may have the route of exporting cheaper mobile phones to other low-income countries but their performance has not been promising.
  • For example, among the chosen domestic firms, Lava International reported exports of ₹324 crores in 2018, while Optimus Electronics exported ₹83 crores in 2018 and ₹4 lakh in 2019.
  • 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. Export growth of capital-intensive products from China has been mainly driven by its participation in the GVCs.
  • Lack of integration: China’s export promotion policies since the 1990s have relied heavily on a strategy of integrating its domestic industries within the GVCs.
  • Lack of 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.
  • Missing Profits: Despite the impressive growth of electronic products in India, the net value added by production units is very low.
  • Challenges in Set-up of Foundries: Many industry experts also cite the lack of a foundry as contributing to low R&D in this sector in India, which results in poor talent retention and eventually ‘brain drain’.
  • Low R & D: Domestic players have also shown low interest due to their inability to compete with tech giants in research and development (R&D) and investment.

Steps that were taken to boost manufacturing

  • Scheme for Promotion of Manufacturing of Electronic Components and Semiconductors:
    • Under the scheme, a financial incentive of 25% of capital expenditure has been approved by the Union Cabinet for the manufacturing of goods that constitute the supply chain of an electronic product.
    • The SPECS notified for manufacturing of electronics components and semiconductors has a budget outlay of Rs 3,285 crore spread over a period of eight years.
    • The government estimates that the push for the manufacturing of electronics components and electronic chips will create around 6 lakh direct and indirect jobs.
  • Modified Electronics Manufacturing Clusters Scheme
    • The EMC 2.0 has a total incentive outlay of Rs 3,762.25 crore spread over a period of 8 years with an objective to create 10 lakh direct and indirect jobs under the scheme.
    • The EMC 2.0 scheme will provide financial assistance up to 50% of the project cost subject to a ceiling of Rs 70 crore per 100 acres of land for setting up of Electronics Manufacturing Cluster projects.
    • Electronic manufacturing clusters to be set up under the scheme will be spread in an area of 200 acres across India and 100 acres in the North-East part of the country.

 Way forward:

  • Focus on supply chain co-location: Foreign firms chosen under the PLI policy should be encouraged to co-locate their supply ecosystems in the country as the assemblers and component manufacturers move together.
    • The six-component firms that have been given approval under the ‘specified electronic components segment’ do not complete the mobile manufacturing ecosystem.
    • For example, literature shows that when Samsung set up shop in Vietnam, it relied heavily on its Korean suppliers which co-located with it to produce in-between inputs, so much so that 63 among Samsung’s 67 suppliers then were foreign.
    • Even though Samsung is invested hugely in India, it has not co-located its supply chain in the country.
  • Focus on the value of production:
    • The new PLI policy offers an incentive subject to brinks of incremental investment and sales of manufactured goods; these thresholds vary for foreign and domestic mobile firms.
    • However, the focus remains on increasing the value of domestic production, and not local value addition. If implemented, an additional capacity of 60 crore mobile phones per year may be on stream at the end of the PLI.
  • Profiting from Anti-Chinese Sentiments: USA’s allegations on China for worsening Covid-19 and India-China conflict are golden opportunities for India to act fastly on it and attract outgoing investment.
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