The government’s flagship Production Linked Incentive (PLI) scheme is being closely monitored. This is justified, as a program linked to taxpayer commitments should be scrutinized for efficacy against its stated objectives. In this regard, a recent post by Raghuram Rajan on the impact of planning in mobile phones is illustrative. Not only because of his position as a distinguished professor and former governor of the Reserve Bank of India, but also because he has been skeptical of the concept of PLI as a way of expanding India’s manufacturing base.
Rajan’s analysis focused on two variables: the apparent impact of the PLI on net exports of mobile phones and the amount of value added in India. There are many other variables to judge a program’s effectiveness, but the variables Rajan used are a really good starting point.
Using monthly data from the commerce ministry, Rajan essentially makes three points. One, net imports of mobile phones (and their sub-components) have seen a huge increase at headline levels since the PLI came into effect (about $8 billion from 2017 to 2023). Two, even adjusting for the fact that many line items in the electronics category would be related to other products (such as electric vehicles, laptops), net imports remained positive (i.e. imports exceeded exports). And three, that value addition in India is very low.
Rajan’s first conclusion is wrong. Components such as lithium ion batteries, semiconductors and recording devices are used in many electronic devices, not just mobile phones. Linking the import of all such sub-components to mobile phones is a fallacy. To be fair, he recognizes this and does a second-order analysis with different scenarios attributing a certain proportion of such components to the mobile phone. But there’s the rub. Even in the most aggressive scenario drawn – 80% of all such components are attributed to mobile phones – India’s net mobile imports show a flat trend. Given that India’s own smartphone consumption grew 70-80% from 2017 to 2023 (20-25% in volume, 50-55% in value), a flat net import trajectory over this period represents a great validation of PLI. Will do, especially since it’s still early days.
On value addition, it is indeed true that the final assembly is a small part of the retail price of the mobile phone. It is also true that unless Indian mobile phone manufacturers are integrated backwards, local price increases will not happen. But this is hardly unique to India or the mobile phone ecosystem. It is widely reported that the total value-added value of an iPhone made in China is about $8, or less than 10% of the retail price of the iPhone14. This, after Apple developed its China ecosystem over several decades. China has also developed co-terminus capabilities in many components and is now a world leader in some of them (such as lithium-ion batteries). India’s own experience in automobiles has been similar. When Suzuki started business here, it got permission to import 40,000 cars from Japan. Back then, the initial goals for local sourcing were modest. For a long time, Suzuki assembled cars from imported kits. In parallel, it started developing a local chain of Tier 1 and 2 suppliers. The process was accelerated by the entry of other international auto manufacturers after 1991. It took decades, but today automobiles contribute 12% to India’s manufacturing Gross Value Added (GVA) and are responsible for millions of direct and indirect jobs.
Early indicators of mobile phone PLI are positive on job creation. Recently, it was reported that Apple alone has created over 100,000 direct jobs in the past two years, as it builds Indian capacity as an alternative sourcing destination to China.
The biggest benefit of attracting large international firms into mobile manufacturing is not related to exports and jobs. This lies in their impact on building an ecosystem that can spawn dozens of Indian enterprises across a wide industry segment. The role of Suzuki Motors in the development of India’s automobile industry is well known. Few know about Texas Instruments in developing India’s prestigious IT services ecosystem in Bangalore. The role of international banks in developing India’s global financial services talent pool is poorly understood. This type of intellectual property takes time to develop, but once developed it is difficult to replicate.
Moving away from ideological hesitation, the first signs from mobile phone PLI are largely positive. We should focus on the positive and use quick feedback loops instead of letting the best (policy) become the enemy of the good.
Somnath Mukherjee is the Chief Investment Officer of ASK Wealth Advisors.
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Updated: June 15, 2023, 11:16 PM IST