Phased manufacturing policy that is hardly smart

Phased manufacturing policy that is hardly smart

Context:

• Initiatives taken by the Ministry of Electronics and Information Technology (MeitY) to provide impetus to domestic manufacturing in India.

Mobile industry in India:

• 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.
• The mobile production has increased from $13.4 billion in 2016-17 to $31.7 billion in 2019-20.
• Over the years, firms such as Apple, Xiaomi, Oppo, and OnePlus have invested in India, but mostly through their contract manufacturers.

Production Linked Incentive (PLI) scheme:

• The Ministry of Electronics and Information Technology (MeitY) had approved 16 firms in the mobile manufacturing sector for the Production Linked Incentive (PLI) scheme (for large-scale electronics manufacturing).
• The scheme is aimed at transforming India into a major mobile manufacturing hub.

Phased Manufacturing Programme (PMP):

• The PMP began in 2016-17 and was supposed to culminate in 2019-20.
• 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.
• The PMP was implemented with an aim to improve value addition in the country.

Issues:

Though the schemes like the PMP and PLI are well intended there are doubts over the benefits that can accrue from these.

• The value addition in India remains very low, with most of the firms recording below 10%.
• A large percentage of the inputs going into electronic manufacturing in India are being imported. This is as high as 85%.
• Compared to economies such as Vietnam, Korea and Singapore which export more mobile phone parts than imports, India, on the other hand, imported more than it exported.
• In 2019 Indian imports of mobile phone parts were 25 times the exports.
• This indicates the lack of facilities that add value to the imported parts before exporting them. Therefore, while the PMP policy increased the value of domestic production, improvement in local value addition remains a work-in-progress.

Challenge to PMP at the WTO:

• In September 2019, Chinese Taipei contested the raise in tariffs implemented by India under the PMP.
• If the PMP is found to be non-compliant with World Trade Organization (WTO) rules and agreements leading to the striking down of India’s PMP, this could lead to a situation where the Indian markets would be flooded with imports of mobile phones which might make the local assembly of mobile phones unattractive. This will affect the operations of the mobile investments already done under the PMP.
• The new PLI policy by offering an incentive for incremental investment and sales of manufactured goods seems to be focussing on only increasing value of domestic production, without paying attention to increasing local value addition.
• Despite the current incentives provided by the government in the form of the schemes like PLI, the effective cost (with subsidies and other benefits) of manufacturing mobile phone in China continues to be much lower than in India.
• This indicates that the PLI policy may not turn out to be a game-changing move, and it may be wrong to expect a major chunk of mobile manufacturing to shift from China to India.
• Available figures indicate that India’s export competitiveness seems to be in mobiles with a lower selling price.
• This aspect seems to be overlooked in the current PLI policy as the incentive for foreign firms chosen under the PLI policy will be computed on the basis of the invoice value of phones priced above a certain threshold.
• The PLI policy in its current form does not strengthen India’s current export competitiveness of low-value mobile phones.

Challenges for domestic firms:

• Domestic firms currently have very little share in the Indian market. Their ability to take advantage of the PLI policy and grab a sizeable domestic market share seems difficult.
• Thus, how well they respond to the opportunity that the PLI policy provides is an open question.
• The six component firms that have been given approval under the ‘specified electronic components segment’ may not be able to complete the mobile manufacturing ecosystem in India.
• Prior international experience has shown that investments from major mobile manufacturers in a country should be followed by the co-location of related industries.
• However, this seems to be not happening in India. Though Samsung has invested hugely in India, it has not colocated its supply chain in the country.

Way forward:

• The PMP policy and the new PLI may be helpful in only increasing domestic production, and not value addition which would bring in much more benefits to India.
• The government must encourage foreign firms chosen under the PLI policy to colocate their supply ecosystems in the country.