Explained: How the PLI scheme works for laptops, tablets and mobile devices

The second part of a report on the productivity-linked incentive scheme examines anomalies for makers of laptops, tablets and mobile devices

As with telecom equipment makers, the disconnect between the productivity-linked incentive (PLI) scheme and economic policy appears to be repeated for laptops, tablets and mobile devices (see part one published yesterday).

The government expects 75 per cent of the incremental production of Rs 3.26 trillion of laptops and tablets to be earmarked for exports. The scheme is for manufacturers of laptops with an invoice value of Rs 30,000 and tablets of over Rs 15,000. Yet the collective additional investment requirement by companies that just want to qualify for the PLI programme is mere Rs 2,600 crore. And the value addition “suggested” by government is to be around 30-35 per cent. If these targets are achieved, the government will save $1 billion on its import bill and the sector will become foreign exchange-neutral.

Indian manufacturing in this sector is negligible. A study by the India Cellular and Electronics Association (ICEA) shows that in 2019-20, India’s laptop market was pegged at $4.85 billion, of which $4.21 billion was imported. China accounted for 87 per cent of imports by value. The story is the same for tablets; in a market of $0.5 billion, 82 per cent is imported with China dominating.

So any increase in domestic production will mean a reduction in the import bill, and many see the PLI scheme in that perspective. “It’s merely an import substitution incentive policy (for mid- and high-end laptop over Rs 30,000) and not one that encourages exports,” said a global PC maker that has been looking at setting up operations for export but will not participate in the PLI scheme.

He points out that the incentive scheme of one to four per cent of incremental manufacturing value won’t meet even half the cost disadvantage with China, which is between 17 and 19 per cent.

Some potential manufacturers are also peeved that, unlike other schemes (such as mobile devices or telecom equipment), they have to meet an annual localisation requirement (the scheme specifies which components to make in India each year). This could again face a challenge in the WTO. ICEA has already written to the government raising concerns on this point.

The most ambitious of PLI schemes is in mobile devices, and is likely to have some success given that over 95 per cent of the phones sold in India are assembled here. The scheme, which is for mobiles that cost more than $200, is already off the ground and has attracted big global players like Samsung and Apple Inc.

But here, too, anomalies are emerging. The government has targeted incremental sales of Rs 10.5 trillion of mobile phones in five years, of which over 60 per cent will be exported. This means, mobile phone makers have to increase exports 25 times by the fifth year of the scheme. “Expec­tations” of domestic value addition will go up from 15-20 per cent currently to 35-40 per cent in the fifth year.

That is pretty key as electronics is already the second-largest item in the country’s import bill. According to ICEA, even at a 25 per cent value addition (assuming domestic manufacturing of $80 billion of mobile devices by 2025-26), the import bill for components would more than double from $15 billion in 2019-20 to $37 billion in 2025-26.

If companies do succeed in meeting this level of value addition, it will lead to an incremental saving of over Rs 2.1 trillion in the import bill for components, which works out to six times the incentive provided for this sector (Rs 36,000 crore) in the period. Not only that, the foreign exchange outflow due to import of components would be almost neutral, matched with exports of mobile devices.

But there is a big if. For higher value addition and for more global players to shift capacity to India from China or Vietnam, a robust component manufacturing ecosystem needs to be in place. “As much as 85 per cent of the components imported in India for mobile devices come from China. But India has closed the foreign direct investment doors of FDI to them, so they cannot set up shop here. Even if you source components from Vietnam, they, too, are Chinese. So the government needs to take a strategic call,” said a top executive of a global mobile device manufacturer.

But the government’s hasty response to a geo-strategic crisis with China in Ladakh has been poorly thought through at multiple levels. The restrictions on Chinese FDI, now in the process of being partially relaxed, were followed up by a hefty 10 per cent increase in October last year of import duties on mobile device displays to protect and encourage production in India. But as a mobile device manufacturer pointed out, “Most of the manufacturers in India of this product were Chinese companies such as Holtech; so you actually ended up protecting them!”

To add to that in the latest Budget duties on other components that go into making the printed circuit board assembly and connectors have also been raised by 2.5 per cent. ICEA President Pankaj Mohindroo said most of these products are not even manufactured in India, so this duty increases the cost of mobile phones and impacts the Atmanirbhar Bharat programme.

“It’s a double whammy. Chinese components players have increased prices because global demand of mobile devices jumped 20 per cent during and after the Covid-19 lockdowns; on top of that, India has inadvertently given them a helping hand,” said an executive of a mobile device manufacturer. As a result, he added, last year imports of mobile devices spiked.

Mobile device players also point out that unlike India, China focused on exports rather than import substitution or value addition, Beijing’s economic planners assuming that these things would automatically follow. So even now while China imported $496 billion worth of electronic components in 2019-20, it exported $671 billion worth of electronic exports. Value addition after 20 years in mobile devices is 40-50 per cent.

To be sure, a vibrant component ecosystem is not that easy to create — it took the Indian auto industry a decade to create one. China has over 30 suppliers of mobile device components with revenues of over $1 billion. And the top 15 have already invested $96 billion to set up large global-sized plants in that country. “It will take at least five to 10 years to create a component infrastructure in India. So expecting 40 per cent value addition is not in sync with reality. Maybe it could hit, say 30 per cent, at the most,” said a PLI player.

Another concern is that the first-year commitments might be difficult to meet, because in classic Indian bureaucratic style, companies were given approval only in October, leaving six months to achieve what they were supposed to in 12 months. Mobile players say they can put in the investment, and install the machines, but they cannot compensate for six months lost in the first year of PLI. Taken together with demands for readjustments in export and value-addition “expectations”, it is clear that the PLI scheme will be the source of hard bargaining between industry and the government in the months ahead.