New Delhi: India surpassed a remarkable $10 billion (Rs 82,000 crore) worth smartphone exports in the financial year 2023. The real game changer for the rise in exports was attributed to the production-linked incentive (PLI) scheme.
But has India really become a manufacturing giant? The devil is in the details, as former governor of Reserve Bank of India Raghuram Rajan explains in his new column on the PLI scheme.
Rajan says that the boom in mobile phone exports might be a sign of concern as the growth is happening on the back of assembly rather than genuine manufacturing within the country.
“One key deficiency of the scheme is that the subsidy is paid only for finishing the phone in India, not on how much value is added by manufacturing in India,” he says.
“This matters! It turns out that very little apart from assembly is done in India, though manufacturers claim they intend to do more in future. So India still imports much of what goes into the mobile phone, and when we correct for that, it is very hard to maintain that net exports have gone up,” he says.
Rajan explains the mobile phone manufacturing scenario in India with the help of graphs. The first graph shows that imports were down soon after the imposition of tariffs in 2018, but exports started taking off. So, net exports turned positive five months after the imposition of tariffs in 2018.
In Union Budget 2018, the Union government hiked customs duty on both mobile phones and mobile phone parts from 15% to 20%. According to the Indian Cellular and Electronics Association, mobile handset exports grew over eightfold to Rs 11,200 crore in 2018-19 and exceeded imports for the first time.
But is this the real picture? According to industry experts, mobile phone companies imported completely knocked-down kits, rather than importing finished phones, and then assembled phones in India, says Rajan.
Interestingly, after the imposition of tariffs in 2018, there’s a sudden increase in the import of semiconductors, printed circuit board assemblies (PCBAs), displays, cameras and batteries.
“When mobile phones exports really take off from the last quarter of 2021 (figure 1), there’s a commensurate rise in net imports of inputs (figure 2),” he writes.
Rajan questions how much is the change in value added once we combine net exports of finished phones and net exports of components.
So in figure 3, which combines figures 1 and 2, shows the combined net exports fell from under -$12.7 billion in FY17 to -$21.3 billion in FY2023. “In other words, it is entirely possible that we have become more dependent on imports during the PLI scheme,” Rajan adds.
In Figure 3, it is assumed that 100% of imports of semiconductors, PCBAs, displays, li-ion batteries, battery chargers, and cameras go into mobile manufacturing. And since these components are used in other products as well, such as DSLR cameras, electric vehicles, etc., it may be possible that the increase in imports may be due to an increase in demand for these products.
So Figure 4 removes these sub-parts and finds no substantial difference in the net exports pattern. Figure 4 redraws Figure 3.
Rajan, therefore, says, “We certainly cannot claim the rise in exports of finished cell phones is evidence of India’s prowess in manufacturing. Manufacturers are likely engaging in only assembly, which they seem to have been doing even before tariffs were introduced.”
He also highlights that World Trade Organisation rules do not allow India to tie the PLI subsidy to the value added in India. “If so, is the scheme failing in the making?”
He further says that the government should undertake a detailed assessment on how many PLI jobs have been created, the cost to the country per job, and why the PLI scheme does not appear to have worked so far before extending it to new sectors.