On smartphone manufacturing in India

General Studies Paper 3

Context

• 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.

The issue

• 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 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.

The glitches

• The export boom hides more than it reveals. 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.
• 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.

Conclusion

• 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.