Understanding the debate on the PLI system for mobile phones

In today’s Finshots, we analyze the debate over the effectiveness of Production Linked Incentives (PLIs) for mobile phones.

The history

In fiscal year 2018, India exported mobile phones worth just US$300 million. But five years later we managed to do a decent somersault. In FY23, we shipped a whopping $11 billion worth of that. We no longer rely solely on importing mobile phones, but ship them to all corners of the world. We are now a net exporter!

How could we change that so quickly, you ask?

If you ask anyone, you’ll get the answer: Production Linked Incentives (PLI).

A few years ago the government started the mission to make India a manufacturing hub. They realized that we lacked everything – infrastructure, expensive credit, lack of electricity and limited R&D (research and development) capacity. So we had to do something about it.

Therefore, in 2018, they massively increased taxes on the import of entire mobile phones for the first time. They wanted to stop phone imports. But we would have to boost domestic production at the same time to meet demand. So the government rolled out financial incentives and told the companies, “Look, if you can make phones in India and sell more of them every year, we’ll give you some money for your troubles.”

Businesses flocked to get this “free” money. And soon 10 companies received the green signal. Five Indian companies such as Lava and Bhawati (Micromax) and international companies such as Samsung and Foxconn (a contract manufacturer for Apple) were given the green light. If they achieved their promised goals, they would receive the incentive. And in December 2022, the government cited booming exports and boasted of the PLI program as one of the most successful programs boosting cell phone production in the country.

But a few days ago, former RBI Governor Raghuram Rajan shared some of his insights on LinkedIn that appear to be hampering PLI’s success.

He points out that the export turnaround actually began long before PLI was even introduced. In fact, our exports skyrocketed just five months after the government imposed high tariffs in 2018.

So you have to ask yourself: We can’t have become a manufacturing giant that quickly. So what has changed?

Well, his theory is that the phone makers have been smart about it. When the tariffs were put in place, they just started importing into India all the parts and parts needed for the cellphone. Actually the “raw material” for the final phone. And when they got that, they started assembling it here. This way they could avoid the high taxes. And the theory makes sense given the rise in imports of these “commodities” – semiconductors, circuit boards, displays and cameras. This has also increased significantly in these 5 months.

And the problem is that this trend seems to have continued even after the introduction of the PLI system. Our mobile phone exports have increased significantly in the last year and a half, and imports of these components have also increased accordingly.

If you include these components in the mobile phone export figures, the figure even changes drastically. We’re becoming net importers — value up a whopping 70% between FY17 and FY23.

Now there are a few arguments you can make here.

First, let’s assume that domestic demand for phones has skyrocketed. The Indians bought it for their own use. That would effectively mean that we could end up exporting fewer phones. But we still need to import the displays and circuit boards to make these phones. And that could mean a higher import value.

But the fact of the matter is that overall domestic demand for smartphones has actually stalled. Therefore, ‘domestic’ demand alone may not be able to explain this.

The other argument is that semiconductors are not only imported for mobile phones. They could be used in cars. Or in other electronic goods like televisions. Therefore it is necessary to filter out the end use. and dr Rajan has done the same and says we would have remained net importers if 60% of those imported goods hadn’t gone into non-mobile activities.

His argument is that we’re still dependent on imports, which means we only assemble foreign parts and don’t add much value in manufacturing. And it’s not just Raghuram Rajan who pointed this out, but a Credit Suisse report a few months ago says pretty much the same thing: We are assemblers, not value creators.

But what about the downside? Surely Mr. Rajan has been wrong about India’s prospects in the past? Why couldn’t he be wrong again?

Well, he could. And one could argue that the PLI system is a stepping stone of sorts.

Because no matter how you look at it, it has successfully lured international names like Apple and Samsung to India. These people have been trying to reduce their dependence on China, and the timing of the PLI program could not have come at a better time. We are the perfect cost-effective alternative. This means that even if it is only about assembling parts for the time being, it can provide a boost in employment in the country. Just look at Apple’s production efforts. 100,000 new jobs have already been created in the last 18 months. That’s something.

And we are also in the process of getting some of the ‘raw material’ manufacturers to set up branches in the country. We also have our own PLI for semiconductors. So maybe we’re putting all the ingredients together to build the entire value chain. You can’t build these things overnight. you need time

And as in a Yuqing research paper, maybe we’re following the same scheme.

Conclusion: While it is safe to say that the number of net exporters (of mobile phones) may not reflect the whole picture, the PLI program (along with other programs) could mean a massive boost for mobile phone production in the coming days.

Until then…

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