Understanding the debate about the PLI scheme for mobile phones

In today's Finshots, we dissect the debate about the efficacy of Production Linked Incentives (PLIs) for mobile phones.

In FY18, India exported a mere $300 million worth of mobile phones. But five years later, we’ve done a neat somersault. In FY23, we shipped a whopping $11 billion worth of them. We’ve gone from relying heavily on importing mobile phones to sending them to all corners of the world. We’re a net exporter now!

How did we turn this around so quickly, you ask?

Well, ask anyone and the answer you get will be — Production Linked Incentives (PLI).

You see, a few years ago, the government embarked on a mission to turn India into a manufacturing powerhouse. They realized that we suffered from a lack of everything –infrastructure, expensive borrowings, power shortages and limited R&D (research and development) capabilities. So we needed to do something about it.

So, in 2018 they first massively increased taxes on importing whole mobile phone units. They wanted to discourage phone imports. But we’d need to simultaneously boost domestic manufacturing to cater to demand. So the government introduced financial incentives and told companies, "Look, if you’re able to produce phones in India and sell more and more of them each year, we’ll give you some money for your troubles."

Companies flocked to get this ‘free’ money. And pretty soon, 10 firms got the green signal. 5 Indian firms such as Lava and Bhawati (Micromax) and international entities like Samsung and Foxconn (a contract manufacturer for Apple) got the go ahead. If they met their promised targets, they’d get the incentive. And by December 2022, the government pointed to the booming exports and was flaunting the PLI scheme to be one of the most successful schemes that boosted mobile phone manufacturing in the country.

But a few days ago, former RBI governor Raghuram Rajan shared some of his findings on LinkedIn that seem to cast aspersions on the success of PLI.

He notes that the turnaround in export fortunes actually started much before PLI was even introduced. In fact, just 5 months after the government slapped high tariffs in 2018, our exports zoomed.

So you have to ask — we can't have turned into a manufacturing giant so quickly, so what changed?

Well, his theory is that phone manufacturers have played it smartly. Once the tariffs were introduced, they simply began to import all the bits and pieces needed for the mobile phone into India. The ‘raw material’ for the final phone really. And once they got this, they started assembling it here. This way, they could avoid the high taxes. And the theory makes sense if you look at the rise in imports of these ‘raw materials’ — the semiconductors, circuit boards, displays, and cameras. This shot up in those 5 months too.

And the problem is, the trend seems to have continued even after the introduction of the PLI scheme. Our mobile phone exports have really shot up in the past year and a half, and the imports of these components have shot up in a commensurate manner too.

In fact, if you include these components with the mobile phone export figures, the number changes drastically. We become net importers — it has soared by a massive 70% between FY17 and FY23.

Now, there are a couple of arguments you can raise here.

For starters, let's say the domestic demand for phones shot up massively. Indians were buying 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 anyway. And that could mean a higher import value.

But the thing is, the overall domestic demand for smartphones has actually been faltering. So ‘domestic’ demand alone may not be able to explain it.

The other argument is that semiconductors aren't just imported for mobiles. They could be used in cars. Or in other electronic goods like TVs. So stripping out the end use is necessary. And Dr. Rajan did that too and he says that unless 60% of these imported stuff went towards non-mobile activities, we would have remained net importers.

His argument is that we’re still dependent on imports i.e. we just assemble foreign parts, and we don't add a lot of value in manufacturing. And it's not just Raghuram Rajan that pointed this out, but a report by Credit Suisse a few months ago says pretty much the same thing — we’re assemblers and not value adders.

But what about the flip side? Surely, Mr Rajan has been wrong about India's prospects in the past? Why couldn't he be wrong again?

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

Because no matter how you look at it, it has successfully attracted marquee international names like Apple and Samsung to India. These folks have been trying to reduce their reliance on China and the timing of the PLI scheme couldn't have come at a more opportune time. We’re the perfect low-cost alternative. That means, even if it's just the assembly of parts for now, it can provide a boost to jobs in the country. Just look at Apple's manufacturing efforts. It has already created 100,000 new jobs in the past 18 months. That's quite something.

And we are also tying to woo some of the ‘raw material’ manufacturers to set up base in the country. We have a separate PLI for semiconductors too. So maybe we are putting together all the ingredients to set up the whole value chain. You can't build these things overnight. You need time.

And as a research paper by Yuqing Xing, Professor of Economics at the National Graduate Institute For Policy Studies, Tokyo explained — developing countries like China actually started with low-value-added tasks such as assembling before upgrading themselves to tech and design work. So maybe we are taking a leaf from the same playbook.

Bottom line–While it's safe to say that the net exporter figure (of mobile phones) may not paint the entire picture, the PLI scheme (coupled with other programs) could offer a massive boost to mobile phone manufacturing in the days to come.

Until then…

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