Will govt incentives for mobile manufacturing speed up job creation?

The Indian govt hopes to generate 300,000 direct jobs and thrice as many indirect employment opportunities in the sector over the next five years

Would the ring of support for the mobile manufacturing ecosystem manage to build on India’s labour abundance? For starters, just take a peek at the tables below. They compare the extent of support Chinese and Vietnam governments offer to their mobile manufacturers against what India lines up. The data is for 2020. The two Asian countries offer 12 and 13 types of support, respectively, to their companies. India, by comparison, even with Production-Linked Incentives (PLI), offers only five. Looking at these in another way, for every Rs 100 crore of investment made by an Apple, Samsung or a Micromax in India, the state reimburses only Rs 8.49 crore. In China, the reimbursement is the equivalent of Rs 20.49 crore and in Vietnam it is Rs 10.95 crore, even after factoring in currency variations. 

The numbers show that Indian state support still keeps the Samsung or a Lava unit less competitive than their counterparts based in China or Vietnam. To make up for this deficiency the Indian state can possibly offer only one more sizeable advantage, the size and the competing cost of labour. If more and better-trained workers line up, would they neutralise some of India’s short financial support? A survey of cross-country experiences with electronic manufacturing shows this is indeed true. Despite lower upfront support by the states, if the same incentives are structured to encourage innovations by firms, including genuine local sourcing, they encourage more employment. The table is drawn from an analysis done by Garima Kapoor, senior vice president, for Elara Securities.  

The answers are important because they offer an indication if the PLI support by the Centre will be spent chasing a will-o-the-wisp or would provide a sustainable platform for the manufacturing sector. Would the incentive marry a natural competitiveness with India’s vast market? The mobile sector is important to track since it unquestionably can create deep linkages—something that promotion policies for steel production or setting up of SEZ, despite their initial promise, couldn't do in an earlier era.

Labour connect: 

The starting point is provided by a paper written this year by Saon Ray and Smita Miglani of think tank Icrier. Prof Ray and Miglani make the point that India has often adopted piecemeal approach to bring in key multinationals who sit astride the global value chains (GVC), to set up base in India. “GVCs do not respond to piecemeal approaches to policy changes. Rather, a holistic approach is needed, in cooperation with the international community and businesses”, they write. So would labour reforms along with fiscal offers for production linked incentives work?

Going by the Ray and Miglani paper, if PLI is connected with some other advantages like labour arbitrage in India, it should qualify as an integrated approach. But how far would the differential be made up? The chart shows labour subsidy makes up about 10 per cent of the support China offers mobile manufacturers. For Vietnam it is about 5 per cent. The difference is obvious, since the Chinese worker brings in a far higher level of skill than her Vietnamese counterpart. India so far has not been able to offer any labour subsidy to the manufacturers. So the extent to which it is able to do so could be a make or break option for the decision by the manufactures to expand or even invest in India. 

Stitching in labour differential is intuitively obvious for India but successive governments have found it a difficult nut to crack. In two of the previous UPA government’s efforts to ramp up manufacturing, the theme of using more labour was conspicuously absent. Just after coming to power, the then UPA government discovered steel as a thrust area. It wrote the National Steel Policy in 2005. The other was the plan to develop Special Economic Zones as spearhead of manufacturing expansion in the economy. 

Interestingly, the steel policy had also asked for duty protection against high imports, though the period was the high noon of reduction in import duties. “Integration with the global economy requires that the industry should be protected from unfair trade practices, which become common especially during the periods of downturn. The Government would, therefore, institute mechanisms for import surveillance, and monitor export subsidies in other countries,” the Policy noted. On labour, however, the policy only noted that the economy has cheap labour which should be harnessed. Instead it dwelt in detail on how costs could be slashed by reduction in the high costs of coal and rates of bank finance. 

The sector has not pulled in employment fifteen years later. Domestic steel production has risen close to 110 million tonnes as the Policy expected but with persisting weaknesses in facing global competition. A PriceWaterhouseCoopers report  on the sector written as late as 2018 notes the industry has to be robot-based, “reducing overall labour costs”. The report notes, “India…missed the opportunity to build a mature secondary sector in its hurry to strengthen the tertiary/services sector.” The domestic industry has been accused of forming cartels to manipulate prices. The objective of large scale recruitment of labour has got left out from the expansion plans for not only steel industry but also the projected expansion of SEZs. The latter incidentally could never take off. 

Innovation & value add:

Could it be different this time with the PLI for mobiles? It could, provided the route is used to create a higher value add. That this means integration into the global value chain is well understood. It also means more job creation--something the steel sector could not do since it was not innovating. In fact without the labour connection, it is a moot point why India even bothered to raise its walls against imports to promote domestic manufacturing, when an easier alternative was to simply connect with the global value chains. 

In the manufacture of electronics from iPad to the lowly feature phone the distinctive phenomena is the shift in the share of the value add across countries. It is initially captured by the country where the model is invented. But as production expands the share of the value add is captured more by the countries where the assembly line happens.  An International Labour Organization study shows for low end phones like the ones pioneered by Nokia of Finland, the share of value added in the country of origin has dipped from a high of 39 per cent in 2000 to as low as 8 per cent within less than a decade. In the same period Asia’s share rose from 14 per cent to 36 per cent. 

How countries capture this rising trend of value add depends on how well they train their labour and local firms to innovate. Vietnam, for instance, has expanded the supply of labour, but has not invested adequately in their subsequent training and has therefore stuck to the low end of the value-add chain. China, by contrast, has moved up the chain.

Other Asian countries such as Thailand created three large scale copycat clusters of the electrical & electronics industry. In Malaysia it is again a combination of three micro regional clusters and so it is in Vietnam. Kapoor writes, “Vietnam’s electronics industry has existed in an almost spontaneous manner without any unified development plan and attention from competent authorities for 20 years…Its Ministry of Information and Communication has been unable to coordinate common efforts and necessary interactions between ministries and departments in solving problems that involve overlapping functions, thereby delaying responses and slowing problem-solving, and thus the development of the sector”. The local sourcing was more in the nature of compliance with that of rules than in reality. So quality issues have become a big bug bear for international brands who aim to provide upscale products from these markets. The Indian government hopes to travel along the Chinese route to capture through domestic value addition from the current 15-20 per cent to 35-40 per cent in the case of mobile phones and 45-50 per cent for electronic components. It also hopes to generate 300,000 direct jobs in the next 5 years along with creation of additional indirect employment of nearly thrice the direct employment. These are big numbers. 

To make the math work the production calculus has to pair the sectors offered financial support or PLI with the labour intensity they can generate. It seems electronic components ie mobile parts as well as consumer electronics offer an advantage of being able to suck in large pools of labour for every unit of capital consumed. (see table) Along with since PLI will expectedly track export performance, it is plausible to expect that the firms will innovate. Most models of trade theory show firms that trade more with the rest of the world creating GVC networks, tend to spend more capital per unit on innovating. A World Bank study has assessed that firms that import and export are 0.6 per cent more productive than non-trading firms. 

One of the reasons the Indian automobile sector generated jobs by thousands whereas the steel sector did not is the destination of their products. India’s net exports of steel after a brief surge in FY17 and FY18 fell back to negative zone from FY19. Of all the sectors covered in PLI, it is the mobile manufacturing which could replicate the automobile sector’s employment story. 

The PLI scheme for 13 sectors like mobile manufacturing offers an incentive of 4 to 6 per cent on incremental sales (over base year) of goods under target segments that are manufactured in India to eligible companies, for a period of five years. The base year for measurement is FY20. The payments will be paid to eligible companies from ministry that sponsors those schemes and not as tax offsets.

Table 1-A: Effective cost of manufacturing mobiles in India (for each Rs 100 crore of investment)

State Subsidies for capital investments	0.90
CIT exemption/reduction	0.84
R&D subsidy	0.15
Indl land development support	0.40
PLI	5.20
Company investment to manufacture mobiles	92.51

Source: Elara Securities

Table 1-B: Effective cost of manufacturing mobiles in Vietnam and China (for each Rs 100 crore of investment)

Vietnam		China
CIT exemption/reduction	1.75	CIT exemption/reduction	2.00
Subsidy for machinery & eqpt	0.20	Subsidy for machinery & eqpt	3.00
Cost of power	1,00	Cost of power	1.00
Interest subvention on working capital	1.75	Interest subvention on working capital	3,25
R&D Subsidy	.070	R&D subsidy	2.00
Incentive for Supporting industry	0.75	Exemption/reduction of land rental	0.60
Exemption/reduction of land rental	0.50	Industrial land development support	0.60
Industrial land 0.50% development support	0.50	Building (for plug and play)	1.00
Building (plug and play)

0.30 Labour subsidy 2.00 Labour subsidy 0.50 Logistics 1.00 Logistics  0.50 Ease of doing business  2.50 Ease of doing business  2.00 MEIS type subsidy 1.50

Duty free imports for creating fixed assets, and of inputs not available domestically

0,50 . . Company investment to manufacture mobiles 89.05 Company investment to manufacture mobiles 79.55

Source: Elara Securities

Table 2: Labour intensity linkages​

Industry *	Fixed capital/total persons employed	Value of output/Fixed capital
Consumer electronics	12.59	7.57
Computers & peripherals	11.30	12.90
Other electrical eqpt	10.68	3.91
Electronic components	6.84	4.90
Domestic appliances	8.32	6.78

* Lower ratio indicates higher labour intensity; Source: Elara Securities