The Debate Over India’s Smartphone Manufacturing Dreams

Relevance: GS3 - Effects of liberalization on the economy, changes in industrial policy and their effects on industrial growth, Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment. Inclusive growth and issues arising from it. GS2 - Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

(Source: The Hindu, 08/21/2023)

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Why in the news?

• Recently, a paper released by former RBI Governor Raghuram Rajan and two other economists argued that the PLI scheme to boost electronics manufacturing is not driving India to become a self-sufficient manufacturing powerhouse.
• The government has rejected the argument and claimed that the results of the programme will be evident with time.
• The PLI scheme was launched in 2020 to scale up domestic manufacturing capacities, achieve higher import substitution and employment generation.

What happened?

• A discussion paper authored by three economists including the former Governor of the RBI, Raghuram Rajan, has questioned the effectiveness of India’s PLI scheme for smartphone manufacturing.
• According to the paper, the government of India is developing an ecosystem of low-level assembly jobs that will still be dependent on imports.

What is the PLI scheme?

• Around five years ago, the government of India introduced a shift in the country’s manufacturing policy with an emphasis on domestic manufacturing.
• Reason: Manufacturing is key to economic growth due to the multiplier effect.
  • Every job created and every rupee invested in manufacturing has a positive cascading effect on other sectors in the economy.
• However, many companies were hesitant to establish manufacturing centers in India due to the lack of adequate infrastructure, archaic labor laws, and poorly-skilled workforce.

Carrot-and-Stick approach

• In order to resolve this, the government adopted a carrot-and-stick approach.
  • Stick: Import duties were raised making it more expensive for companies to import their products for sale in India.
  • Carrot: Subsidies and incentives were provided to companies to encourage domestic production.

PLI

• One of the major incentives provided to companies was the Production Linked Incentives (PLI) which was introduced in 2020.
• Under the scheme, domestic and foreign companies that manufacture their goods in India are incentivized financially.
• The incentive amount is calculated based on a percentage of revenue generated for up to five years.
• Aims:
  • Reduce India’s dependence on China and other foreign countries.
  • Support the labour-intensive sectors and increase meaningful employment.
  • Reduce the country’s import bills and boost domestic production.
• Performance:
  • Companies have shown the most interest in the PLI scheme in the smartphone category.
  • Micromax, Samsung, and Foxconn (which makes phones for Apple) can get up to 6% of their incremental sales income through the PLI programme.
  • Exports: Mobile phone exports rose from $300 million in FY2018 to $11 billion in FY23.
  • Imports: Mobile phone imports dropped from $3.6 billion in FY2018 to $1.6 billion in FY23.

What are the arguments for and against the scheme?

What is Mr. Rajan arguing?

• Although imports of fully assembled mobile phones have dropped, the imports of mobile phone components have increased between FY21 and FY23.
  • This includes display screens, cameras, batteries, printed circuit boards, etc.
• The export boom which occurred in the same period is hiding the fact that manufacturers are not manufacturing phones in India in the traditional sense.
• Instead of moving their supply chains and component manufacturing to India, manufacturers are simply assembling the components imported from abroad in India to create “Made in India” devices.
• This is a major concern because
  • Assembly work does not have multiplier effects similar to those associated with manufacturing, which means the economic contribution of the scheme is lower than expected.
  • Employment in the assembly ecosystem is less remunerative than in traditional smartphone manufacturing. As a result, the scheme generates employment, but it is of low quality.

What is the Minister saying?

• The Minister of State for Electronics and Information Technology stated that the research paper is based on an inaccurate assumption.
• Not all the screens, circuit boards, batteries, etc which are imported into India are used in the smartphone sector.
  • They could also be used in the manufacture of computer monitors, DSLR cameras, electric vehicles, etc.
• Moreover, only 22% of mobile production in India is supported by the PLI scheme.
• The Minister has claimed that the level of value-addition in mobile manufacturing i.e. the portion of work done by Indian mobile production plants in creating the finished product, is probably low.
• However, India’s import dependency is not as bad as projected by the research paper and that manufacturing in the country will increase as the global assembly and supply chain settles in India.

Who is right?

• Mr. Rajan has argued that even if only 60% of the imports of screens, batteries, etc. are used for production in India, India’s net exports will still be negative i.e. imports would exceed exports.
• However, there are doubts over the ability of the PLI programme to generate long-lasting employment and establish India as a hub of manufacturing and supply where there is value addition to the production process.
• While the Minister has stated that the scheme will produce results with time, Mr. Rajan has highlighted the opportunity costs associated with the scheme due to the lack of proof.
• Each rupee invested in the PLI scheme could have been used to improve the Indian economy such as the education system.

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FAQs

MCQs

Question: The money multiplier in an economy increases with which one of the following? (UPSC CSE 2021)

(a) Increase in the Cash Reserve Ratio in the banks.

(b) Increase in the Statutory Liquidity Ratio in the banks.

(c) Increase in the banking habit of the people.

(d) Increase in the population of the country.

Question: Consider the following statements;

1. The PLI scheme was first launched in the pharmaceutical sector.
2. Only Indian companies are eligible to apply for the scheme.

Which of the above statements is/are correct?

(a) Only 1

(b) Only 2

(c) Both 1 and 2

(d) None of the above