IASbhai Daily Editorial Hunt | 15th Oct 2020
A real decision is measured by the fact that you’ve taken a new action. If there’s no action, you haven’t truly decided.– Tony Robbins
EDITORIAL HUNT #189 :“Manufacturing Policy into Action and Analysis | UPSC”
Chidambaran G. Iyer
Manufacturing Policy into Action and Analysis | UPSC
Chidambaran G. Iyer is Associate Professor, Centre for Development Studies, Thiruvananthapuram.
Phased manufacturing policy that is hardly smart
Largely applicable to the mobile phone manufacturing sector, the plan has fared poorly in domestic value addition
SYLLABUS COVERED: GS 3 : Economy : Manufacturing Sector : Scheme
PLI Scheme aims at transforming India into a major manufacturing hub . Critically analyse the drawbacks and scope of optimisation. -(GS 3)
- PLI SCHEME
- Focus on Value Production
- Shift from China
PRODUCTION LINKED INCENTIVE SCHEME
- AIM : PLI Scheme is to transform India into a major mobile manufacturing hub.
- KEY PLAYERS : These are five domestic and five foreign mobile phone producers and six component manufacturers.
- BACKGROUND : The PLI comes on the back of a phased manufacturing programme (PMP) that began in 2016-17 and was supposed to culminate in 2019-20.
- PROTECTIONISM : This was done by increasing the basic customs duty on the imports of these accessories or components.
- AUGMENTATION AND SURPLUS : The PMP was implemented with an aim to improve value addition in the country.
MORE IMPORTS IN INDIA
- FOREIGN INVESTMENT : Firms such as Apple, Xiaomi, Oppo, and OnePlus have invested in India, but mostly through their contract manufacturers.
- ANNUAL SURVEY OF INDUSTRIES DATA : Analysis of production data shows that in 2017-18, value addition for surveyed firms ranged from 1.6% to 17.4%, with most of the firms being below 10%.
- IMPORTED INPUTS : For the majority of the surveyed firms, more than 85% of the inputs were imported.
- GLOBAL COMPARISON : Comparable UN data for India, China, Vietnam, Korea and Singapore (2017-2019), show that except for India, all countries exported more mobile phone parts than imports .
- EASE OF DOING BUSINESS : Which indicates the presence of facilities that add value to these parts before exporting them.
- IMPORTS VS EXPORTS : India, on the other hand, imported more than it exported, the least being in 2019 when its imports of mobile phone parts were 25 times the exports.
- WORK IN PROGRESS : Therefore, while the PMP policy increased the value of domestic production, improvement in local value addition remains a work-in-progress.
- TARIFF BATTLE : Further, in September 2019, Chinese Taipei contested the raise in tariffs under the PMP.
- WTO COMPLIANCE : If the PMP is found to be World Trade Organization (WTO) non-compliant, then we may be flooded with imports of mobile phones .
- STRUCTURE : This will affect the operations of the mobile investments done under the PMP.
FOCUS ON VALUE OF PRODUCTION
- INCENTIVES : The new PLI policy offers an incentive subject to thresholds of incremental investment and sales of manufactured goods.
- DIFFERENT LAYERS : These thresholds vary for foreign and domestic mobile firms.
- FOCUS : Thus, focus remains on increasing value of domestic production, and not local value addition.
- ESTIMATIONS : If implemented in full swing, an additional capacity of 60 crore mobile phones per year may be onstream at the end of the PLI, i.e. FY25.
SHIFT FROM CHINA IS UNLIKELY
- CHINESE DOMINANCE : Chinese firms that dominate the Indian market are not a part of the PLI policy.
- EXPANSION : Thus their capacity expansion, if any, will be in addition to this.
- NET PRODUCTION : India produced around 29 crore units of mobile phones for the year 2018-19; 94% of these were sold in the domestic market, with the remaining being exported.
- SURPLUS PRODUCTION IS NEEDED : This implies that much of the incremental production and sales under the PLI policy will have to be for the export market.
- EFFECTIVE COST : If the cost of production of a mobile phone is say 100, then the effective cost (with subsidies and other benefits) of manufacturing mobile phone in China is 79.55, Vietnam, 89.05, and India (including PLI), 92.51.-Ernst & Young Study on India Cellular.
- MANUFACTURING BASE : It may be premature to expect a major chunk of mobile manufacturing to shift from China to India.
- REGRESSIVE PRICING : Numbers show that though India’s mobile phone exports grew from $1.6 billion in 2018-19 to $3.8 billion in 2019-20, the per unit value declined from $91.1 to $87, respectively.
- EXPORT COMPETITIVENESS : Thus, our export competitiveness seems to be in mobiles with lower selling price.
- INCENTIVE COMPUTATIONS : However, for foreign firms chosen under the PLI policy, the incentive will be computed on the basis of the invoice value of phones available at and above ₹15,000 ($204.65).
- SELLING AT LOWER PRICE : PLI policy does not strengthen our current export competitiveness in mobile phones and markets with higher average selling price have lower volumes.
DIFFICULT FOR DOMESTIC FIRMS
- FOREIGN FIRMS : The five foreign firms that have been chosen are Samsung and four of Apple’s contract manufacturers.
- DEPENDANCY : Samsung and two of Apple’s contract manufacturers already have facilities in India, and can be expected to continue with their strategy of dependence on imported inputs.
- LOCAL PLAYERS : Domestic firms have been nearly wiped out from the Indian market.
- GRABBING DOMESTIC MARKET : So, their ability to take advantage of the PLI policy and grab a sizeable domestic market share seems difficult.
- ALTERNATIVES : Domestic firms may have the route of exporting cheaper mobile phones to other low-income countries.
SUPPLY CHAIN COLOCATION
- WELCOME STEP : The six component firms, given approval under the ‘specified electronic components segment’, do not complete the mobile manufacturing ecosystem.
- VALUE ADDITION : In summary, the PMP policy, since 2016-17 has barely been helpful in raising domestic value addition in the industry even though value of production expanded considerably.
- ON WTO TABLES : As backward integration via tariff protection is likely to come up against WTO rules, the new PLI focus is on increasing domestic production, and not value addition.
- SEPARATE LICENSE : The policy has separately licensed six component manufacturers to start domestic manufacturing.
- NURTURING SUPPLY ECOSYSTEM : A first step in this direction could be to encourage foreign firms chosen under the PLI policy to colocate their supply ecosystems in the country.
This PLI Scheme may not achieve its final targets as the assemblers and component manufacturers do not move together in this scheme.
SOURCES: THE HINDU EDITORIAL HUNT | Manufacturing Policy into Action and Analysis | UPSC