Why in the News?

In recent months, there has been an ongoing exchange of viewpoints between former RBI governor Raghuram Rajan and Minister of State for Electronics Rajeev Chandrasekhar regarding the performance of a Central government initiative aimed at enhancing the electronics manufacturing sector.

Context:

• In the backdrop of this discussion, it's important to highlight that former RBI governor Raghuram Rajan, along with two fellow economists, released a concise research paper in which they posited that the Production-Linked Incentive (PLI) program might not be effectively driving India toward self-reliance in manufacturing.
• They contended that taxpayer funds were potentially being used to establish an ecosystem centered around low-level assembly jobs, which could still heavily rely on imports.

What Is the Production-Linked Incentive (PLI) Scheme?

• The PLI scheme was designed with the overarching goals of bolstering domestic manufacturing capacity, augmenting import substitution, and fostering employment generation.
• Launched in March 2020, this initiative initially focused on three key industries:
• Mobile and related Component Manufacturing
• Electrical Component Manufacturing
• Medical Devices
• Incentives Offered by the Scheme:
• The incentives provided under this program are contingent on incremental sales and vary across sectors.
• They range from as low as 1% for electronics and technology products to as high as 20% for the production of critical key starting drugs and certain drug intermediaries.
• In certain sectors like advanced chemistry cell batteries, textile products, and the drone industry, incentives are calculated based on sales performance and local value addition over five years.
• Sectors Covered by the PLI Scheme:
• To date, the government has unveiled PLI schemes encompassing 14 sectors, including but not limited to the automobile and auto components industry, electronics and IT hardware, telecom, pharmaceuticals, solar modules, metals and mining, textiles and apparel, white goods, drones, and advanced chemistry cell batteries.
• The introduction of this scheme aligns with several key objectives:
• Reducing India's reliance on imports from countries like China and other foreign nations.
• Bolstering labor-intensive sectors to enhance the employment ratio within India.
• Mitigating import bills while promoting domestic production.
• It's important to note that the PLI Yojana also extends an invitation to foreign companies to establish their operations in India and encourages domestic enterprises to expand their manufacturing capabilities.

What is the PLI Program in the Smartphone Manufacturing Sector?

• Among the sectors, the smartphone manufacturing industry has exhibited remarkable enthusiasm for the PLI program.
• Companies such as Micromax, Samsung, and Foxconn (known for manufacturing Apple phones) stand to benefit by receiving incentives of up to 6% of their incremental sales revenue through the PLI initiative.
• This program has yielded remarkable results, as evidenced by the staggering growth in mobile phone exports.
• The exports of mobile phones surged from a modest $300 million in FY2018 to an astonishing $11 billion in FY23.
• Additionally, the import figures tell a compelling story; while India imported mobile phones valued at $3.6 billion in FY2018, this figure significantly dwindled to just $1.6 billion in FY23.
• Central government Ministers, including Mr. Chandrasekhar, frequently cite these statistics as compelling evidence of the resounding success of the PLI scheme.

Former RBI Governor Raghuram Rajan's Perspective:

• In his research paper, the former head of the Central Bank presented the argument that while the imports of fully assembled mobile phones have indeed decreased, the imports of mobile phone components, encompassing items such as display screens, cameras, batteries, and printed circuit boards, experienced a significant upsurge between FY21 and FY23.
• Interestingly, these two years also marked the period during which mobile phone exports experienced their most substantial growth.
• His contention revolves around the observation that manufacturers in India are not fundamentally engaged in the traditional sense of mobile phone production, which would involve the localization of the entire supply chain and the domestic production of most components.
• Instead, what these companies are primarily doing is importing all the requisite parts and subsequently assembling them in India to produce a product labeled as 'Made in India.'
• Furthermore, Rajan's critique extends to the assertion that low-level assembly work, as opposed to comprehensive manufacturing, does not generate well-paying jobs and lacks the robust multiplier effect that genuine manufacturing might provide to the economy.

What is the Union Government Response:

• Minister of State for Electronics, Rajeev Chandrasekhar, presents a two-part counter-argument.
• Firstly, he contends that Mr. Rajan's assumption that all imports of items like screens and batteries are exclusively intended for mobile phone manufacturing is inaccurate.
• These imported components could also be utilized in the production of other devices such as computer monitors, DSLR cameras, and electric vehicles, among others.
• Secondly, he points out that not all mobile phone production in India benefits from the PLI scheme; only approximately 22% of the industry has been covered by the scheme thus far.
• The Minister's primary assertion is that import dependency isn't as severe as Mr. Rajan portrays it to be, given the potential diversity of applications for these imported components and the limited coverage of mobile phone production under the PLI scheme.

In Conclusion:

• The former RBI Governor contends that even if we assume that only 60% of imports are utilized for production, India's net exports would remain in the negative territory.
• This means that even if just 60% of components like screens and batteries are dedicated to mobile phone manufacturing, the total imports would still surpass the overall exports.
• The fundamental divide in this debate revolves around the question of whether the PLI program can effectively generate sustainable employment opportunities and firmly position India as a manufacturing and supply hub that contributes substantial value to the production process.
• The Union Government's perspective is that the results of the PLI Scheme may require time to become fully apparent and impactful.