Home / Economy / Raghuram Rajan finds loopholes in Centre's PLI scheme by using iPhone's example

Former RBI Governor Raghuram Rajan has questioned the implications of the Centre's Production Linked Incentive (PLI) scheme. The economist said that the PLI scheme is based on the premise that India manufactures "too little" and it is implemented to create a sustainable manufacturing base in India.

However, citing an example of phone manufacturing in India, Rajan pointed out the loopholes in the scheme. 

Citing an example of cell phone industry, he said, "First, custom duties on mobile imports were increased to 20% in April 2018. This immediately increases domestic prices of mobiles, allowing producers to charge Indian customers more. For example, an iPhone 13 pro max is available for under 92,500 in Chicago, US, inclusive of taxes while the same model with identical specs costs 1,29,000 in India, a markup of nearly 40%".

However,  the Production Linked Incentives scheme offers manufacturers a government payment of 6% in the first year for every cell phone they produce in India, down to 4% in the fifth year, provided they meet investment and sales targets, he underlined.

Rajan highlighted that the government will give a 6% subsidy to the manufacturers even if they import all parts from abroad and assemble them in India. "They (manufacturers) get the 6% subsidy on the invoice price," he added, "Even if they go up to the typical 17-25% value added of cell phone manufacturers in India, they get a handsome subsidy of 24% -35%. In addition, states further add to this bounty through state waivers (about 9% of the price), power, land, and capital expenditure subsidies".

Rajan said the combination of "protection" and "subsidies" are making exports profitable and that's why manufacturers are flocking to be selected for the PLI scheme.

But Rajan said that Indian customers are facing the brunt of it. That's because the "Indian customer pays a higher price because of tariffs, and the Indian taxpayer pays for the subsidies, not just to Indian firms that are selected in the PLI scheme but also to international manufacturers like Foxconn and Wistron".

According to Rajan, the PLI scheme has also not helped in boosting exports much. Citing data, the economist wrote, "In the last third of 2019 (before PLI was introduced and before Covid), exports were $1.6 billion and imports $4.4 billion for a net deficit of $2.8 billion. In the last third of 2021 (after PLI was introduced), exports were $2.7 billion and imports $5.2 billion for a net deficit of $2.4 billion". Exports have gone up substantially, but they were already trending up before PLI, Rajan pointed out.

Rajan said billions of dollars allocated to PLI could instead have been devoted to remedial schooling for the children who have lost out during Covid, or to upskilling the workforce.

Rajan argued that if PLI-induced domestic production does not become globally cost-competitive, it will reduce exports in other sectors – high-cost domestically produced PLI-favored semiconductors will reduce the competitiveness of two-wheeler exports that rely on chips.

Rajan advised the government should investigate more before extending the costly scheme to yet more industries.

"The real problem is that we are still trying policy shortcuts. They are no substitute for longer-term tasks like enhancing human capital investment, creating a simple but fair land acquisition process, ceasing the constant rejigging of tariffs and taxes that make it hard for producers to invest, and strengthening infrastructure," he added.

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