The government recently extended production-linked incentives (PLIs) for the domestic manufacture of cellphones that expired a few months ago for another five years.
The scheme has a standout record. It has vaulted India to the world’s second spot in making handsets, created thousands of jobs, especially for women, and bumped up exports.
Its renewal, however, suggests that the contract-job factories for the world’s top brands like Apple, Samsung and Xiaomi still depend on a subsidy to remain competitive even after five years of support. The scheme also loses some sheen if its impact is held against the light of details. India’s export boom, for example, needs to be viewed in the context of an import surge to feed it.
Of relevance to macro stability are net imports, which have been modest. The slice we capture of this global value chain is also blurred by insufficient clarity on how much intellectual property in these devices actually originates in India.
As for new jobs, the electronics sector accounts for under a fifth of the total that can be attributed to various PLI schemes; the food processing industry tops this chart with nearly twice that share. Of course, given the country’s job scarcity, all jobs are welcome.
Moreover, this industrial policy may need a longer window and wider back-up before a competitive edge takes shape.
On its part, not only has the government worked to ease logistics, infrastructure and other local friction points, it has rolled out incentives to develop an ecosystem to make smartphone components. The aim is to reduce imports for exports, capture more value and impede the flight of factories to rival hubs.
India’s drive for chip-making, with fiscal support of its own, is expected to create a local base for silicon wafer inputs. Information technology minister Ashwini Vaishnaw is confident that within eight years, India would have advanced from 40nm chips used for cars and TV sets to locally developed 3-7nm-class chips used in mobiles.
This takes us to a larger concern. Apart from the long arc of fiscal props needed to acquire a global edge, the resilience of these investments may shortly be tested by the risk of factory work being taken over by artificial intelligence and robotics. As the global race for tech-led efficiency speeds up, India would need to shorten this industry’s curve to competitiveness.
That need not be a scramble. Indian companies could deploy capital to leapfrog technology barriers by buying businesses overseas. China’s firms have taken this approach. Xiaomi, the world’s third largest phone marketer, has used its mobile business as a stepping stone to enter the automobile market.
As for supply networks, Chinese companies have snapped up as many as 130 component makers in Europe over the past two decades. For Indian brands to succeed, they would need to straddle the globe too. India’s public incentives to churn out smartphones are expected to work with a fiscal spur for components developed using domestic design and R&D.
This quest for global success is a far cry from the dreary days of hard production limits. As Prime Minister Narendra Modi rightly remarked recently, we have moved from “production linked punishment,” a reference to the pre-1991 Licence Raj, to PLIs.
The challenge now lies in raising this bar to usher in a regime that effectively offers value-linked incentives to make and market the 21st century’s most successful product so far.