Manufacturing boost: PLI looks to succeed where older schemes failed

Pushing exports key to ensure scheme's viability, say experts

With Union Finance Minister Nirmala Sitharaman declaring Rs 1.97 trillion worth of sops as part of the production-linked incentive (PLI) scheme and the government expanding it to include televisions, air conditioners, and food processing, the Atmanirbhar Bharat programme has got a big push.

However, this is not the first time that such measures to boost local manufacturing have been introduced. Since 2012, at least two comprehensive programmes have been launched, backed by high-voltage promotion campaigns, which fell well short of their targets. 

To mark a departure from this trend, the PLI scheme will need to overcome many hurdles that its predecessors could not.

According to industry experts, while PLI is a well-designed scheme that aims to increase manufacturing capabilities rapidly, learning from past mistakes is not a bad idea, especially from older pet projects like the Phased Manufacturing Programme (PMP) and Make in India.

PMP, which the new scheme replaces, was launched in 2015 under the Make in India banner. Aimed at increasing local value addition, the scheme depended heavily on import substitution. And, industry enjoyed the fruits, at least for the first two years. The number of mobile handset manufacturing plants shot up from two in 2014 to 68 in 2017. But, as the initial buzz wore off, manufacturers began to fall short of yearly targets.

“PMP was a noble approach, but its timing was not right. It got impetus initially as the market was growing fast then and new players were entering from China, who set up assembly lines here,” said Navkendar Singh, research director at IDC.

However, from the third year, when targets became steeper, manufacturers shied away from the huge investments they were required to make. According to Singh, setting up plants to manufacture semiconductor fabrication (FAB) or printed circuit board assembly (PCBA) requires comm­itted investments for 20-30 years. The lack of scale in the lo­cal market made those targets unviable.

“In the last five years, India has tried substituting imports of mobile phones and parts by imposing duties on finished mobile phones and parts like batteries, chargers, wired headsets, under the PMP. While that partially arrested import of finished mobile phones due to shift of assembling operations to India, imports of parts and components continued due to lack of volumes within India,” Indian Cellular and Electronics Association (ICEA) noted.

Though PMP failed to achieve even half of its initial targets, Singh said, it should be credited with the growth in local assembly. Unlike in 2015, today all leading players — from Xiaomi and Samsung, to Vivo and Oppo — assemble over 90 per cent of their handsets locally. Apple, which imported iPhones since its entry in the late-2000s, now rolls out 65 per cent of its phones from India-based units. According to ICEA, the number of facilities currently involved in handsets production is about 268.

According to the industry body, which represents all leading players and works closely with the government, after the failure of PMP the way to increase volumes is by pushing exports. Apart from closing the import-export gap, this will help offer manufacturers enough scale and incentive to set up high-tech component manufacturing plants here.

The PLI scheme was set in motion with 16 project approvals last July. To scale production and exports, it offers 4-6 per cent incentive on incremental handset production with 2020 as base year. According to internal estimates, if successful, the scheme has the potential to raise local value addition for feature phones to 70-80 per cent and for smartphones to over 35 per cent.

However, like the PMP, some crucial challenges remain for the PLI. According to Singh, for such a large-scale scheme to succeed, bringing states and the Centre on the same page will be crucial. “Today, some states are very aggressive, but a large number are lagging,” he said. According to ICEA, states like Andhra Pradesh, Telangana, Karnataka, Tamil Nadu, Uttar Pradesh, and Maharashtra, are well ahead of others in terms of capital subsidy, power subsidy, tax reimbursement and skill upgradation, among others.

“Labour cost is much cheaper here, compared to our competitors — China and Vietnam — but our infrastructure is inadequate. We fare poorly in some of the basic parameters like overall ease of doing business. Further, the ecosystem for high value manufacturing is not in place,” said Singh.

Moreover, the recent duty hikes on a number of key components like PCBA and camera modules that need to be imported has made handset manufacturers jittery.