Is much touted PLI a bone of contention between thought leaders?

Asoke K Laha, President & MD, Interra Information Technologies

It is my well-considered policy to steer clear of the controversies, particularly revolving around political ones. My conviction is that I followed that dictum in letter and spirit so far.  

Enthused by the runaway success of the manufacture of smartphones in the country, from a net importer, India has scripted a huge success story by pushing exports to the extent of over US $10 billion annually. By any standards, if the exports have vaulted to that extent, not only covering up the lost foreign exchange by importing costly devices to cater to India’s highly elastic demand but bringing in foreign exchange multiple times more than what we had foregone, is a coveted success story that can engage any business school to dissect the success. Indeed, that feat has all the elements of a huge success. However, I have argued in my article that exports alone should not be the criteria for measuring the success of a scheme. Importantly, we have to see whether the ecosystem being developed is sustainable and self-propelling. I also alluded to taking cognizance of the employment generation, the cost-benefit of manufacturing the product locally, and importantly the net export after deducting the cost involved in importing parts and components that go into the import-led export.   

If my opinion did not raise any issue, it is not the case now. There is a controversy building up between two powerful blocs. The first group’s views are expressed and substantiated by two union ministers in charge of the Ministry of Electronics and Information Technology viz Mr. Ashwini Vaishnaw, the Union Minister, and Mr. Rajeev Chandrasekhar, Minister of State for the same ministry, brilliant people in their own rights. While the former is an ex-civil servant, the latter is a successful businessman  turned politician.  Pitted against them is another stalwart, Dr. Raghuram Rajan, an economist of repute served in many important positions in India and abroad including the Governor of the Reserve Bank of India.  

Now let me come to the point of controversy among these stalwarts, who have their own credible arguments and sound arguments. The trigger for the controversy may appear to be the Production Linked Incentive (PLI) scheme 2.0 for the electronics hardware industry to increase its production and export from India, which was announced some time ago. PLI was extended to the electronics hardware industry with all good intentions and admittedly, it has created momentum in the industry on several counts. Before dissecting the controversy objectively without taking any partisan view, let me explain what it is.  

On May 29, 2023, with a budgetary outlay of Rs 17,000 crore for increasing the production of PCs, laptops, servers etc.,  the government came out with a new notification to emulate the success achieved in the smartphone sector.  It is reported that 32 applications have been received so far under the scheme.  Companies that will be manufacturing laptop,  include HP India, Dell, Acer, Lenovo, Thomson and others. Servers will be made by HP Enterprises. According to government sources, the incremental production of Rs 3.35 lakh crore would take place. This will push India as a major supply chain partner that can lead to considerable value addition. There are reports that Apple Inc. is in talks with the government to manufacture iPads in India. The PLI scheme 2.0 for IT hardware scheme will allow applicants to choose 2023, 2024, or 2025 as the base year for starting production and envisages an incentive of up to 5% on incremental sales, more than double the roughly 2% being offered under the first phase. 

Now let us have a look at the different versions  of opinions that are being expressed. The government of India maintains that the new scheme will create a new ecosystem in the electronic hardware sector, making the sector tick like the software sector, which has grown phenomenally over the years., bringing in quantum jumps in production to meet the domestic demand and to create surplus for exporting to countries, where there could be great demand. It is expected that electronics hardware demand globally will outstrip the volumes and values of petroleum products.  

Now let us see who is opposing this concept and their points of view. Dr.  Raghuram Rajan is no stranger to India. He is not only a well-known economist besides having experience in working with multilateral funding organizations at various senior levels. Recently, he along with a team of economists bought out a paper that criticized the PLI in the electronic hardware sector dubbed the smartphone model is a wrong pathway, and asserted that the model of growth is not suitable to India. 

Dr Rajan and his team recognize that in the last five years, India has become a major manufacturer of mobile phones. They also do not question the official figures that between 2017-18 and 2022-23, net exports have grown from US $3.3 Billion to 9.8 Billion, putting the export growth into the range of US $13.1 Billion.  

The economists' group claims that smartphone trail to follow since mobile companies have imported completely knocked-down kits and then assembled phones in India. They assert that such screw drive technologies will not help creation of jobs in the manufacturing sector, the  sector which can absorb a large number of semi-skilled persons in the country. Software is not the choice for such people since it requires high skills. The sops which the government has extended to the hardware industry in the form of PLIs, they claim, is ephemeral since once sun sets on such incentives, those who have availed the incentives and set up their shops would leave the shore to pursue their luck elsewhere, where they can get more sops. They point out that there are areas where we have very strong manufacturing – two-wheelers for example, auto ancillaries, pharmaceuticals. But electronic hardware, they argue, do not have such attributes to extend incentives from the tax payers kitty.   

There is no difference of opinion between the government and the group of economists regarding the disabilities for manufacturing in India emanating from infrastructural bottlenecks, erratic power supply, shortage of water in certain pockets, mismatch between job requirements and skill sets etc. The government makes good these things by offering certain incentives or fiscal concessions. Earlier there  were tax holidays, or tax waivers etc. But PLI scheme introduces a new set of incentives which are linked both with production and exports. I am not getting into such complex vectors, which are not relevant to this context.  

According to Dr. Rajan the dynamics of the electronic hardware is  different. Between 60% to 80% of the cost of electronic hardware is on account of the R&D, branding, and marketing which translates into payment towards intellectual property. The rest is on account of manufacturing. Here again, in a completely knocked down situation when the product reaches India, most of the manufacturing would have taken place outside India including high end products like semiconductors to sensors to ordinary components like the case, glass that covers the frame etc are sourced from outside. What that happening is assembling or sub-assembling, which does not require high end skill sets.  

The group of economists point out that, that model is flawed because of various grounds. Foremost is the presence of various layers in the supply chain. First, you have the group of innovators and brand managers like Apple and Samsung, who focus only on creating new models, R&D, innovation and branding leaving the production to contract manufacturers like Foxconn.

Then there are the specialized companies that manufacture sourcing components and intermediary items globally from companies. There are various grades of companies in this group. Semiconductors are sourced from highly accomplished companies, which have a strong research and design team. Even these companies outsource their design works to small companies based in India or Indonesia. The other peripherals are sourced from various component manufacturers. Here again, the contract manufacturers cannot take a call on their own. They have to go by the standards set by the brand whether Apple or Dell or Intel, whose name goes into the brand. They have to approve the brand based on some stringent standards. For instance, a component manufactured in India by an Indian company cannot be sourced by Foxconn by its own unless Apple clears it. 

What is really happening in India is assembling, which will not create either employment accounting for a fraction of the value created. They maintain that one has to take a holistic view of things that are happening. There is an outflow of resources when we import the components and subassemblies. “Here in India, we shape aluminium sheets into iPhone SE cases, drill the holes, and then export the semi-finished shells to China for final assembly. That’s the kind of stuff – where we are calling manufacturing, that’s what we’re doing. We’re not doing sophisticated stuff here. With these processes being handled in India, they argue that India cannot be called a major manufacturer but a major assembler. That should not be the thing that we should look at,” they argue quote unquote. They argue that India should look at segments where value addition is more rather than creating a fab (where semiconductors are manufactured), which requires heavy investment and may not be suitable to our ecosystems where there are infrastructural bottlenecks like erratic power supply, dusty environs, water shortages, etc. They want India to focus on segments where India has the strength and need not require heavy investments like chip designing, component manufacturing, R&D, etc. to go up incrementally in the value chain.  They also point out the fault lines in the model. For instance,  “Apple which is worth US $3trillion, but doesn’t manufacture anything. Foxconn manufactures for Apple. Foxconn’s market value is $50 billion. The difference between $3trillion and $50billion is 60 times in value terms. What we are trying for is what Foxconn is doing – the lowest part of the value-added chain. Of course, we say this is going to produce low-skilled jobs and that’s true,” I am again quoting them to make sure that this is not my view, though there can be areas that I may agree with such vectors.  

Now, let me be the arbiter without taking any sides. Which way the economists' argument is different from that of the government. The government’s view is that in the initial stages to attract investments from global companies, to bring them on board, there should be some incentives. Such global companies invest in a country looking at only the incentives. There are many other factors that they look into, such as general investment policy, market, access to other markets, availability of skilled labour, even for high-end works like R&D, etc.   
Why do global electronic hardware companies start focusing on China plus policy? That was the after-effect of the trade war and cajoling from their governments. Even then, they are not putting a full stop to China because it is a huge market and a potential market to source products. There is also a process of acclimatization and then deepening and expanding operations. At the commencement of operations, the value addition may not be significant. That was also the case with the automobile and auto component sectors. Mostly the products came in the knocked-down condition either completely or semi-knocked-down conditions. In the case of electronic hardware, the same thing would happen. It is not a pipe dream but something that can happen over a period of time.    

However, the most sound argument for attracting investments in the electronic hardware sector seems to be the weaponization of the supply chain. We have seen such things happening during the peak of the trade war and is still continuing. We heard about shortages of chips during the trade war. How that has happened? How China and the US started manufacturing chips home rather than sourcing from other countries. That I believe is borne out of the weaponization of the supply chain. Countries are looking at self-sufficiency in hardware and their decision is guided not alone by the comparative advantage of production but by how important the product is for the security and self-sufficiency of the country. Let me conclude by saying that there are merits and demerits in both arguments and a policy should be taken to the logical end and imaginary or possible hiccups should not change the course of a decision that is half done. I trust I am neutral in my approach.