Govt to launch PLI schemes for 10 sectors in 45 days. Is it overambitious?

By setting a deadline of 45 days for extending the scheme to 10 industries, the government may be ignoring the critical demands of the targeted industries

In April, the government made its big tryst with production-linked incentive (PLI) scheme to transform India into a global export hub for mobile devices.

Global brands such as Apple Inc, through its vendors, and Samsung lined up to participate in the scheme, which offered incentives of 4 to 6 per cent for five years on phones priced over $200, provided companies commit to incremental investment and production every year. So the seven firms (three of which will make for Apple) have committed to make incremental investment of Rs 10.5 trillion over five years, of which 65 per cent will be for exports.

If the scheme takes off, India could move ahead of Vietnam as the largest exporter of mobile devices after China by 2025, as the cost disability will be partly neutralised by the incentive. By then, Apple Inc is expected to shift 10-20 per cent of its manufacturing capacity from China to India, and global component players would be making a beeline to cater to this huge need.

Buoyed by the enthusiastic response in mobile devices and electronic components (also medical devices and active pharmaceutical ingredients), the cabinet announced PLI schemes for 10 industries — automobiles and components, telecom equipment, laptops and PCs, air conditioners, electric batteries, among others — and earmarked Rs 1.46 trillion for the incentives. It promised to put the schemes together in a record 45 days.

But that might be overambitious, not least because it took 16 months for the government to conceive the PLI scheme for mobile devices. Unlike telecom, in broad swathes of the industries, stakeholders and representative associations say they have had no discussions with the government on the contours of the scheme.

Such discussions are important to take manufacturers’ concerns on board. In the PLI scheme for mobile devices, for instance, the government proposed allowing only 50 per cent credit on second-hand machinery imports while calculating incremental investment. Global companies countered that what should matter is the total investment they make. It took another five months for the 47-page guidelines to be published.

For the new scheme, manufacturers say the outgo looks large collectively, but since it is spread over five years, the annual outgo for 10 segments, with multiple sub-segments, is Rs 29,000 crore on average or less than Rs 3,000 crore for each segment each year. Laptop and PC makers say earmarking Rs 5,000 crore for six products bundled under electronics and technology products is extremely inadequate. The country imports about $4 billion worth of PCs and laptops annually. “Even if we want to manufacture this value in India, without considering an increase in domestic and export demand, we will require an incentive of Rs 1,400 crore. What we seem to have been offered is not enough at all,” said a top executive of a PC and laptop maker.

In telecom equipment, for instance, a draft plan that replicates the mobile device scheme expects equipment makers to make incremental investment of Rs 8,000 crore over five years, and additional production of Rs 181,500 crore, of which 80 per cent will be for exports. That is a tall order given that only a third of the $10 billion spent on equipment annually by major manufacturers is in India.  

And then there’s the question of qualifying investment. “We already export from India and can surely scale up. We have been investing in manufacturing in India since 1994. But we want this investment to be considered for PLI eligibility and not only the incremental investment made from the day the scheme is implemented,” Nitin Bansal, managing director of Ericsson India, pointed out.

Another gear maker said capacity utilisation of their factories is 40-50 per cent, though they are exporting half their products. “Of course we can export more, but we will do so only when capacity is fully utilised,” he said.

In the auto sector, a PLI is unquestionably useful. India is a net importer of auto components — as much as 40 per cent comes from China and South Korea. And there are key product categories where the import dependence is very high — drive transmission and steering (30 per cent of imports), engine components (17 per cent) and electrical and electronics (15 per cent).

Meanwhile, as Maruti Suzuki chairman R C Bhargava pointed out, a PLI scheme cannot substitute for other disabilities. “There is a substantial disability in car making costs in India and that is why production isn’t shifting from China to India. But we also need to remove the reasons for the high cost, many of which are soft issues like waiting for government permissions and slow clearances in states.”

Electric vehicle (EV) makers say the incentive for lithium and advanced batteries, imported mainly from China, would make a big difference. The government has earmarked Rs 18,100 crore for this. Lithium Urban Technologies founder Sanjay Krishnan, who runs India’s largest EV fleet, pointed out that big players with money to invest have to come in and that would take longer than five years.

For ACs, the challenge is to reduce the dependence on import of components, which account for around 70 per cent of the value of what is manufactured in the country. As part of the discussion with the government, companies were looking at a fivefold increase in AC production, hitting Rs 1 trillion in five years.

Giving them a helping hand, the government has recently plugged duty-free imports of most ACs from countries such as Thailand and Malaysia by putting them in the “prohibited list”. A combination of incentives under PLI and raising duties on components would do the trick, AC manufacturers said. But the question is whether an artificial protection would make India genuinely competitive.