PM Modi’s $24 billion manufacturing push is stuck on the assembly line

Its collapse would highlight a major blunder in Prime Minister Narendra Modi’s campaign for greater economic self-reliance.

Already, influential critics are asking whether the much-hyped breakthrough in becoming the hub of smartphone manufacturing is a hollow claim. Low-end assembly-line jobs, created with the help of expensive state subsidies and protectionist import tariffs, would only make sense if they were a quick route to more sophisticated production, such as microprocessors.

To that end, a possible rejection by the government of incentives for a proposed 28-nanometer chip unit by Indian billionaire Anil Agarwal’s Vedanta Resources Ltd. and Taiwan’s Hon Hai Precision Industry Co., also known as Foxconn, is not a good look. Is.

Neither of the partners has significant chipmaking experience, and the project has yet to find a technology partner or license manufacturing-grade technology, Bloomberg News reported this week, citing people familiar with the matter. New Delhi has pledged to pay half the cost of setting up the semiconductor units, but only if at least one of those two conditions is met.

It is not just the Vedanta-Foxconn project that has hit a rough patch. A $3 billion proposal that had Israeli foundry Tower Semiconductor Ltd as a tech partner has also stalled, while a third plan is stuck as Singapore-based IGSS Ventures Pte seeks to resubmit its application for incentives. Yes, Reuters reported this week. With this, state-aided chipmaking can go back to the drawing board.

Vedanta may reapply when the junk-rated miner figures out what to do about its record $2 billion in bonds coming due next year. Tower may be waiting for Intel Corp to acquire it before re-entering the race. Or maybe new contenders will emerge. Mumbai-based conglomerate Tata Group, which could soon become the fourth contract manufacturer for iPhones, also harbors chipmaking ambitions, Chairman Natarajan Chandrasekaran told Nikkei Asia in December.

While the COVID-19 disruptions convinced widget makers of the virtues of a “China 1” strategy, bureaucrats in New Delhi were already viewing the deepening gulf between Beijing and Washington as a once-in-a-generation opportunity were watching But instead of focusing on making the 400 million-plus workforce more productive, the Modi government decided to emulate the Trump administration’s chauvinistic approach to business. Protectionism and import duty on mobile phones increased from 15% to 20%. The Electronics Policy of 2019 adopted net positive balance of payments as one of its goals.

Then, just as the country was about to emerge from its pandemic lockdown, Modi came up with the slogan of self-reliance. A five-year $24 billion subsidy, known as Production Linked Incentives or PLI, was envisioned. The idea was to select a handful of investors and persuade them to manufacture locally in industries such as electronics, electric-vehicle batteries, solar panels and textiles. The economy’s inherent lack of competitiveness was to be compensated for with handouts to risk takers as well as import protection. As of 2020, a quarter of India’s tariff lines exceed 15%. This is double what it was a decade ago.

The “Make in India” campaign seems to have worked for mobile phones. From a net importer of $3.3 billion five years ago, the most populous country is now a net exporter. Now the difference between what it gets from selling the phones to the rest of the world and what it costs to buy them from China is $9.8 billion.

Yet, those numbers hide more than they reveal. As former Reserve Bank of India governor Raghuram Rajan recently showed in a paper with two co-authors, instead of finished mobile phones, India now imports components. When you add key components such as semiconductors, printed circuit boards, displays, cameras and batteries, the country is a larger net importer than previously thought. It is now spending a total of $21 billion. (Or a part thereof, assuming that some of the imported components may be used to make things other than mobile phones.) “In other words, it is entirely possible that we will be able to impose tax on imports during the PLI scheme. have become more dependent,” the researchers say.

On every locally assembled phone, the government Apple Inc. Another Taiwanese contract manufacturer Foxconn and Wistron Corp. pay up to 6% of the invoice value for In the absence of data, Rajan and his colleagues wonder whether the handouts, combined with other subsidies, actually exceed the value added.

This is an important question. The emerging consensus in policy-advisory circles is that in a decade the nation will capture about 20% of the final cost of a device. That’s optimistic, given that China raked in $6.5 on the first iPhone in 2009. Economist Yuqing Jing estimated that it took nearly a decade for the People’s Republic to raise its take to $104, or 10% of the iPhone X’s final price.

But if five years of high tariff walls and nearly three years of subsidies haven’t encouraged indigenous production of simple parts, how will the handouts help with more complex manufacturing?

Perhaps it’s just that Agarwal, who claimed to be building “a self-sufficient Silicon Valley” in Modi’s home state of Gujarat, hasn’t found a technology partner in nine months, or that Hyundai Global Motors, which has been chosen for battery subsidies Gone, turns out to be a case of mistaken identity — it had nothing to do with the South Korean carmaker. It is time to stop and weigh whether the PLI program is as successful as it is broken. Startups spending $1 on customer discounts to buy $1 in revenue and $2 in losses, there’s no point in ranting about wasting taxpayers’ billions.

Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services in Asia. Prior to this, he worked for Reuters, The Straits Times and Bloomberg News.

The text of this story is published from a wire agency feed without any modification. Only the headline has been changed.

Updated: June 02, 2023, 07:15 AM IST