Explained |  The debate over India’s smartphone manufacturing dreams

Why have the former Reserve Bank of India governor and the Minister of State for Electronics been at loggerheads with each other? What are the key features of the production-linked incentives (PLI) scheme? Why are low-level assembly jobs not good in the long-run?

August 21, 2023 10:48 pm | Updated 10:49 pm IST

A view of Foxconn’s Sriperumbudur plant in Kancheepuram district.

A view of Foxconn’s Sriperumbudur plant in Kancheepuram district. | Photo Credit: File Photo

The story so far: Over the last few months, former RBI governor Raghuram Rajan and the Minister of State for Electronics Rajeev Chandrasekhar have sparred over how well a Central government scheme to boost electronics manufacturing has been faring.

What happened?

It started when Mr. Rajan, along with two other economists, released a brief discussion paper arguing that the programme isn’t really pushing India towards becoming a self-sufficient manufacturing powerhouse. Instead, the government is using taxpayer money to create an ecosystem of low-level assembly jobs that will still depend heavily on imports. The junior IT Minister responded sharply, calling the paper a concoction of “half-truths” built on “shoddy comparisons”.

What is the PLI scheme?

Around five years ago, the Government of India decided it wanted more companies to make things in India. Manufacturing is a key ingredient to economic growth and also comes with what economists call a multiplier effect — every job created and every rupee invested in manufacturing has a positive cascading effect on other sectors in the economy.

However, the problem was that many industries didn’t want to set up shop in the country. India’s infrastructure isn’t great, the country’s labour laws are archaic, and the workforce isn’t very skilled. To solve this, the government used, and uses, a carrot-and-stick approach. The ‘stick’ is raising import duties, thus making it more expensive for companies to import stuff from somewhere else and sell it in India. The ‘carrot’ is to provide subsidies and incentives. One key set of incentives is the production-linked incentives (PLI) scheme. Here, the government gives money to foreign or domestic companies that manufacture goods here. The annual payout is based on a percentage of revenue generated for up to five years.

The industry that has shown the most enthusiasm for the scheme is smartphone manufacturing. Companies like Micromax, Samsung, and Foxconn (which makes phones for Apple) can get up to 6% of their incremental sales income through the PLI programme. And with the scheme, mobile phone exports jumped from $300 million in FY2018 to an astounding $11 billion in FY23. And while India imported mobile phones worth $3.6 billion in FY2018, it dropped to $1.6 billion in FY23. Central government Ministers, including Mr. Chandrasekhar, have regularly cited this data as proof of the PLI’s scheme’s success.

What is Mr. Rajan arguing?

In his paper, the former Central bank governor argued that the export boom hides more than it reveals. Specifically, Mr. Rajan contended that while imports of fully put-together mobile phones have come down, the imports of mobile phone components — including display screens, cameras, batteries, printed circuit boards — shot up between FY21 and FY23. Incidentally, these are the same two years when mobile phone exports jumped the most. This matters because manufacturers aren’t really making mobile phones in India in the traditional sense. That would involve their supply chain also moving to India and making most of the components here as well. All that the companies are doing, Mr. Rajan said, is importing all of the necessary parts and assembling them in India to create a ‘Made in India’ product.

This is important as low-level assembly work doesn’t produce well-paying jobs and doesn’t nearly have anywhere the same multiplier effect that actual manufacturing might provide.

What is the Minister saying?

Mr. Chandrasekhar’s argument is two-fold. First, he said, Mr. Rajan wrongly assumed that all imports of screens, batteries, etc. are used to make mobile phones. It is possible these items are used also for computer monitors, DSLR cameras, electric vehicles etc. He also argued that not all mobile phone production in India is supported by the PLI scheme, only around 22% so far.

The Minister’s overarching point is that the import dependency isn’t as bad as Mr. Rajan says it is. That said, the Minister has admitted that the ‘value-addition’ — how much work an Indian mobile production plant is actually doing in creating the finished product — for mobile manufacturing is probably low. But he added, it will go up as the broader supply and assembly chain settles in India.

Who is right?

To his credit, Mr. Rajan accounted for this critique in his initial paper. In a reply to the Minister last week, he argued that even if only 60% of imports are used for production, India’s net exports will still be negative. That is, even if only 60% of screens, batteries, etc. are used to make mobile phones, the final import tally would still beat the final export tally.

The main divide is over whether the PLI programme will be able to create long-lasting jobs and firmly establish India as a manufacturing and supply hub that adds value to the production process.

The Minister believes that it will take time for the project’s results to show. On the other hand, Mr. Rajan believes that without proof of PLI’s success, there is an opportunity cost. After all, every rupee spent in PLI payments is money that could have gone into improving, say, the education system, an investment that would also help the Indian economy.

(Anuj Srivas is a freelance writer)

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