Govt takes PLIs back to the drawing board amid critical challenges

With this signature manufacturing scheme facing critical challenges, the government is reworking parts of the programme in consultation with companies

It’s a massive gamble that could bring in Rs 30-35 trillion in incremental manufacturing revenues from 15 sectors in the next five years. Yet the absence of chest thumping was notable a few weeks ago when Niti Aayog announced its first-ever disbursement of Rs 53 crore to electronic manufacturing services (EMS) player Dixon Technologies under the production-linked incentive (PLI) scheme.

That is because the government is facing several critical challenges for this signature programme. Global players have raised concerns on the slow and complex disbursement process, causing some of them to question whether they want to go ahead with their investment commitments under the scheme. Others are questioning the qualifying criteria. And still others are struggling with the “China factor”.

To be sure, the PLI path was not expected to be easy. Niti Aayog officials explained that the slow pace of audit and disbursement was on account of this being the first year of the scheme. The process will be streamlined and speeded up, they added. But they are keen to underline that with incentives totalling Rs 1.93 trillion, the government means business. Though many elements have not conformed to plans, the government is prepared to tweak the schemes to make them work.

For instance, two key schemes — IT hardware (laptop, PCs, pads) and telecom and network products — have not taken off. In the PLI for IT products, except three or four players, most of the 14 eligible players — global and Indian — have not been able to meet their investment and production targets to access the incentive. That has forced the government to rework the entire scheme.

The earlier PLI for telecom and network products, for example, has been tweaked to include incentives for design primarily to encourage domestic players. But as a senior executive of a domestic telecom company pointed out, “All they have done is offer one per cent more as incentive for design. Global telecom gear players can’t avail of this incentive because they design abroad. But it is too little for domestic players. They should have given, say, 3-4 per cent on design alone.”

A similar reworking may be underway in electric vehicles (EVs), where manufacturers of electric scooters with products already in the market before the scheme was announced are peeved by stiff revenue and fixed asset qualifying criteria — Rs 10,000 crore at group level and Rs 3,000 crore respectively. That has made leading EV players such as Ather Energy and Hero Electric ineligible. The government is, however, engaging with these companies to find solutions.

Supply chain issues could also adversely impact many PLIs, especially because geopolitical compulsions have prevented Chinese component companies — which are major global suppliers — from setting up shop in India. Most home-grown companies that were expected to fly the Indian flag by becoming “domestic champions” and export globally have failed even to meet their modest investment targets.

The challenges can be best gauged in some of the PLIs that are in advanced stages of implementation and have completed one year. In the flagship mobile devices PLI, for instance, global majors such as Apple Inc’s vendors have done well in FY22 and have, accordingly, applied for their incentives.

But the story will be far more challenging from this year because they have committed to a manifold increase in production. So in FY23 the FOB or free on board value of phones by Apple’s three contract manufacturers will have to rise threefold to $5 billion over FY22 and nearly three times that by FY26. That is because it has promised exports of $42 billion (FOB value) of phones from India across the five years of the PLI.

This is clearly the test case. Analysts say to make such a massive jump and also increase value addition commitments (from 18-20 per cent currently to 35 per cent at the end of five years) will require a large base of domestic vendors. They cannot simply continue importing and hope to remain competitive globally.

But with Chinese vendors pretty much out of the picture, Apple vendors’ options are limited to the time-consuming process of developing domestic suppliers. Apple Inc has been working with the Tata Group for mechanical part supplies, but the project will be a work in progress for the next two to three years.

The other challenge comes from the dismal performance of domestic companies. At least three to four of them, including Lava and Optiemus Infracom, are not eligible for incentives for FY22. Government sources said Chinese companies with their hazy economic models have disrupted local brands, which now account for only 2 per cent of the smartphone market. With hardly any volumes in the domestic market, these companies are finding it difficult to get orders from global players to make phones and achieve their production targets.

The government is clearly aware of both problems. So it is talking to Chinese companies to encourage them to export in a bigger way — numbers currently are negligible. The expectation is that this could help domestic players, and some of them have begun negotiations for becoming contract manufacturers of Chinese brands, especially for exports as they make a lot of phones that are cheaper. (The government had earlier even considered a scheme for the sub-Rs 10,000 phone market for domestic players but did not go ahead with it.)

But the results have not been encouraging. An executive with a mobile device maker, which is eligible for PLI, said, “We have been talking to them, they have done due diligence of our factories but no orders have come. They seem to prefer the global EMS players.”

Minister of State for Electronics and IT Rajeev Chandrasekhar has been candid about the challenge. In an interview to Business Standard he pointed out that unlike the end product or the OEMs, supply chain investments are more difficult — compounded by the fact that a lot of them are of Chinese origin — to bring to India.

But he also says the government is aware of the challenge to move supply chains to India and the incentives and support that it has to offer. One option the industry has been pushing for is to go for a special PLI for component manufacturing, both for mobile devices and IT products. Others such as the Indian Cellular and Electronics Association have asked the government to look afresh at the foreign direct investment policy and ease restrictions on the movement of suppliers to India.

Officials from the Ministry of Electronics and Information Technology (Meity) pointed out that IT hardware is not a high-growth market, and there are only four or five brands globally and much of it is manufactured in China. Also, as signatories to international agreements, IT products are exempted from paying duties, so, overall, there is no incentive to manufacture in India.

Meity officials said they are hoping to address this issue. “We are looking at what disability in manufacturing these companies have in India and what other access such as market aggregation they require to come here,” a senior official said.

All these issues need to be urgently addressed given that many other PLI schemes — advanced chemistry cell batteries, electric vehicles and auto components — have started out this financial year. The encouraging sign so far is the government’s willingness to address policy weaknesses to make PLI work.

Manufacturing mix

(PLI segments and incentives earmarked by govt)

• Mobile devices: Rs 40,995 cr; given one-year extension, 3-4 players failed to make the cut to get incentives in FY22
• IT hardware products: Rs 7,325 cr (being reworked)
• Telecom and network products and design: Rs 12,195 cr; scheme tweaked to add design
• Auto and components: Rs 25,938 cr; some electric two-wheelers ineligible for the scheme due to stiff requirements