Outgrowing Apple

India must approach its industrial policy with a lighter and practical, reform-oriented touch instead of trying to deal with individual companies like Apple or Tesla

Apple Inc has become the poster boy for the production-linked incentive (PLI) scheme and foreign direct investment (FDI) in India. Its achievements have been impressive. The company saw exports surge more than five times to $5 billion in FY23, accounting for 80 per cent of smartphone shipments from India, with Samsung accounting for most of the rest.
 

Apple also says it has created through its ecosystem of mainly Taiwanese vendors 100,000 new direct jobs in the 19 months since it entered the PLI scheme, about half of the total direct jobs that the government reckons will be created under the PLI scheme for mobile phones in five years. Though it is Samsung that has set up the world’s largest phone factory in the country, it is Apple that is said to be boosting the “China-Plus-One India Story” around the world.
 

The reality check to these numbers is that they are small when set against the magnitude of the employment challenges in India where the bulk of the labour force is in the informal sector, working in sub-optimal conditions. The message, then, is that we need many more Apple-like giants setting base in India for a variety of manufacturing. So why aren’t they following the Cupertino, California-based poster boy into the country?
 

This is not a critique of the PLI scheme, the success or failure of which will best be judged after the sunset clauses of five years or so kick in. The real issue is the particularism and exceptionalism with which the Union government chooses to approach industrial policy and foreign direct investment (FDI). Surajeet Dasgupta had chronicled how Apple had discussed the PLI scheme for mobile devices over “10 months of detailed negotiations and 40 to 50 meetings with different government departments” (Business Standard, January 25, 2022).  The negotiations involved such nitty-gritty things as the minimum value of the phone, local sourcing norms, the level of minimum investment and so on.
 

The tortuous route Apple took to establishing a significant manufacturing presence (it had been assembling smartphones through contract manufacturers since 2017) and setting up single-brand retail stores could just as well be a cautionary tale for prospective investors. Elon Musk, who yearns to sell Tesla’s iconic electric cars to super-rich Indians, is discovering this truth the hard way. Here, too, the interminable negotiations are stalled over high import duties on electric vehicles (EVs), arguments over company-owned showrooms and so on.
 

Mr Musk’s enterprise is so elite as to make little difference to the grander scheme of employment — and investment — generation aims of any FDI-oriented policy. Post-liberalisation history suggests that governments may do better to stop engaging with individual companies and opt for a lighter and practical reform-oriented touch that can create their own magnetic force for domestic and international investment.  
 

In the early nineties, for instance, now defunct power company Enron was meant to be the beacon for infrastructure investments with regimes across the ideological spectrum extending all manner of questionable incentives, such as allowing it to charge power tariffs predicated on hopelessly expensive imported naphtha feedstock. Enron in India did not fail only because its Houston, Texas parent imploded under the weight of fraud but because power pricing and transmission reforms did not progress rapidly enough. With its only buyer, the state electricity board, declining to buy expensive power, the bankrupt US corporation exited and the plant is now run by a government-promoted company. The slate of generating projects that the government had put up for foreign investment in the first flush of reforms was quickly erased.           
 

By contrast, corporations that became global models for India did so by taking advantage of better conditions for doing business, including the revolution in telecom and road connectivity and changes in law governing corporate activity and capital flows. Genpact, which started out as a back-office operation for GE Capital was one of the early movers that sparked the Business Process Outsourcing (BPO) to life, turning Indian startups such as Infosys, TCS, HCL and Satyam (before it foundered) into today’s multinational giants. The high-value extension of the BPO revolution, once derided as “body shopping”, can be seen in the establishment of Global Centres of Excellence where multinationals use Indian engineers and scientists to conduct serious cutting-edge research.
 

In the automobile industry, it was the government stipulation of local sourcing conditions that transformed a limited market into a major industry. At the start of the nineties, Indian auto-component manufacturers had one of the worst rejections rates in the world. By the 2000s, the industry had become a significant global player on the back of technology transfers from multinationals serving the car giants following indigenisation rules. That, for instance, has not happened in the mobile phone PLI, where critical components are still imported.  
 

Equally, the movers and shakers of this generation of new businesses — Flipkart (now owned by Walmart), and startups such as Zomato, Ola, Oyo, Paytm and a host of Indian-owned startups — flourished almost under the radar, building on India’s expanding software capabilities but without the benefit of specific government intervention. In retail, in fact, regime after regime did their best to slow things down in response to domestic lobbying, with sometimes damaging results.  
 

As for Apple’s enthusiasm for India, it is telling that it has decided to sit out the PLI 2.0 scheme for IT hardware. It has reportedly preferred instead to locate its plants in Vietnam, from where it hopes to take advantage of a free trade agreement with India to sell laptops in this country.