THE GIST of Editorial for UPSC Exams : 15 October 2020 Phased manufacturing policy that is hardly smart (The Hindu)

Phased manufacturing policy that is hardly smart(The Hindu)

Mains Paper 3: Economy
Prelims level: Production Linked Incentive Scheme
Mains level: Government policies and interventions for development in various sectors

Context:

• Last week, the Ministry of Electronics and Information Technology (MeitY) said it had approved 16 firms in the mobile manufacturing sector for the Production Linked Incentive (PLI) scheme.
• PLI scheme was for large-scale electronics manufacturing, notified on April 1, 2020 to transform India into a major mobile manufacturing hub.
• These are five domestic and five foreign mobile phone producers and six component manufacturers.
• 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.
• The PMP incentivized the manufacture of low value accessories initially, and then moved on to the manufacture of higher value components.
• This was done by increasing the basic customs duty on the imports of these accessories or components.
• The PMP was implemented with an aim to improve value addition in the country.

 More imports in India:

• Firms such as Apple, Xiaomi, Oppo, and OnePlus have invested in India, but mostly through their contract manufacturers.
• As a result, production increased from $13.4 billion in 2016-17 to $31.7 billion in 2019-20.
• However, analysis of factory-level production data from the Annual Survey of Industries (ASI) shows that in 2017-18, value addition for surveyed firms (barring two outliers) ranged from 1.6% to 17.4%, with most of the firms being below 10%.
• For the majority of the surveyed firms, more than 85% of the inputs were imported.
• 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 — which indicates the presence of facilities that add value to these parts before exporting them.
• 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.
• Therefore, while the PMP policy increased the value of domestic production, improvement in local value addition remains a work-in-progress.
• Further, in September 2019, Chinese Taipei contested the raise in tariffs under the PMP.
• If the PMP is found to be World Trade Organization (WTO) non-compliant, then we may be flooded with imports of mobile phones which might make the local assembly of mobile phones unattractive.
• This will affect the operations of the mobile investments done under the PMP.

 Focus on value of production:

• The new PLI policy offers an incentive subject to thresholds of incremental investment and sales of manufactured goods; these thresholds vary for foreign and domestic mobile firms.
• Thus, focus remains on increasing value of domestic production, and not local value addition.
• According to our calculations, if implemented in toto, 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 firms that dominate the Indian market are not a part of the PLI policy.
• Thus, their capacity expansion, if any, will be in addition to this.
• 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.
• This implies that much of the incremental production and sales under the PLI policy will have to be for the export market.
• Recently, a study showed that if the cost of production of a mobile phone is say 100 (without subsidies), 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.
• This shows that incentives under the PLI policy may not turn out to be a game-changing move, and it may be premature to expect a major chunk of mobile manufacturing to shift from China to India.
• It may also be useful to recall that mobile phone investments that occurred around 2005, targeted relatively local and low value export markets, which is being followed by the incumbent mobile manufacturers in the county.
• 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.
• Thus, our export competitiveness seems to be in mobiles with lower selling price.
• 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).
• This is surprising as it is clear that the 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:

• The five foreign firms that have been chosen are Samsung and four of Apple’s contract manufacturers.
• 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.
• Domestic firms have been nearly wiped out from the Indian market.
• So, their ability to take advantage of the PLI policy and grab a sizeable domestic market share seems difficult.
• Domestic firms may have the route of exporting cheaper mobile phones to other low-income countries.
• However, their performance in the last couple of years has not been promising.
• For example, among the chosen domestic firms, Lava International reported exports of ?324 crore in FY18, while Optiemus Electronics exported ?83 crore in FY18 and ?4 lakh in FY19.
• Thus, how well they respond to the opportunity that the PLI policy provides is an open question.

 Supply chain colocation:

• Finally, the six component firms that have been given approval under the ‘specified electronic components segment’, though a welcome step, do not complete the mobile manufacturing ecosystem.
• For example, literature shows that when Samsung set up shop in Vietnam, it relied heavily on its Korean suppliers which co-located with it to produce intermediate inputs, so much so that 63 among Samsung’s 67 suppliers then were foreign.
• It was a surprise when it was found through our primary survey that though Samsung is invested hugely in India, it has not collocated its supply chain in the country.

Conclusion:

• 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.
• 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.
• The policy has separately licensed six component manufacturers to start domestic manufacturing.
• This may not succeed as the assemblers and component manufacturers move together.
• A first step in this direction could be to encourage foreign firms chosen under the PLI policy to collocate their supply ecosystems in the country

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Prelims Questions:

Q.1) With reference to the CZA-Prani Mitra awards, consider the following statements:
1. The awards were given in ten categories.
2. Central Zoo Authority (CZA) was established to oversee the functioning of Indian zoos and complement the wildlife conservation strategies through ex-situ measures.
Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer: B

Mains Questions:

Q.1)What are the roles of the Production Linked Incentive Scheme (PLI) for Large Scale Electronics Manufacturing? Describe its components, and significance.