Electronics manufacturing seems to be attracting the highest share amongst production linked incentive (PLI) schemes announced so far. On offer are incentives of more than 900 billion rupees (approx. $12 billion), but are these schemes truly equipped to make India aatmanirbhar (self-reliant), or are there gaps that need to be filled? Is there room for accommodating and encouraging India based companies?
Narendra Modi, the Prime Minister of India, in his address to the nation on the occasion of Independence Day, pointed towards the electronics industry of India and noted the success it has witnessed in the last few years. Mentioning the mobile phone segment, he explained how India has evolved from being a mobile phone importing nation to one that is exporting mobiles phones worth $3 billion a year.
“Seven years ago, we used to import mobile phones worth about eight billion dollars. However, now the import has reduced considerably, and today we are also exporting mobile phones worth three billion dollars,” noted the Prime Minister.
Notably, in the past few months, the government of India has launched not one or two but a series of production linked incentive schemes to encourage domestic manufacture of electronics and associated components in the country. Ranging from manufacturing smartphones to making large scale electronics in India, these PLI schems promise incentives of more than 900 billion rupees (approx. $12 billion).
As PM Modi said, “That is why I tell all our manufacturers that each of your products is a brand ambassador of India. When someone will buy and use your product, the customer should say with pride now, “This is Made in India.” That’s the mindset we need. You all should now aspire to win over the global market. The government is fully with you in realising this dream.”
The local factor
Local for Vocal and Aatmanirbhar Bharat have been two sets of keywords that the entire cabinet of ministers and rest of the Indian bureaucracy and administration has been promoting since the last two years. Now, while the pride of holding and using a ‘Made in India’ phone or any other electronic device is enough in itself, what also matters is how much local value addition are the manufacturers doing.
As Sanjeev Keskar of Arvind Consultancy puts it, “It’s great that India is taking huge strides in terms of electronics manufacturing. We have taken the first steps, but it is critical to understand and act upon what kind of local value addition these manufactures are doing in India. Are they just importing completely-knocked-down (CKD) units, assembling them here, and calling it Made in India?”
“Such practice will only ensure that only a small part of localisation is taking place in the country. For example, the CKD route cannot currently ensure more than 10% local value addition. This means for every $100-phone we export or sell in the country, India gets to keep only $10, the rest of the amount goes back to the country of origin of the product, IP, and components,” he adds.
While there is no doubt that the PLI schemes will help attract a lot of investments, both from local as well as international organisations, the objective of making these schemes successful, which in turn will make India atmanirbhar, will only be achieved when there is an adequate local component manufacturing ecosystem in the country.
“PLI scheme is of great interest to component manufacturers, and we understand that a few of the large companies have submitted their applications for benefits under the same. However, the potential of this scheme to enable growth of the components eco-system and attract a large number of domestic entrepreneurs is subject to it being tailored to suit domestic industry,” notes Rajoo Goel, Secretary General, Electronics Industries Association of India (ELCINA).
One way of gauging how well this local ecosystem of manufacturing components is working in India is by keeping a check on the number of CKDs being imported in India. If the number of CKDs being imported and assembled in the country is more than the number of units being locally manufactured in the country, then the ecosystem may need an overhaul. Of course, the end-to-end manufacturing will take time but with the right modifications in the policy, this has a window of being achieved faster.
Notably, while the first PLI scheme was a groundbreaking one, what limited its reach was inclusion of components that were more inclined towards the mobile value chain. Moreover, there has been no mention of raw materials that go into manufacturing of components.
“The components covered under the current PLI scheme are extremely limited and do not cover a number of electro-mechanical, mechanics (plastic & metal parts), and some others such as filters, isolators, RF components, magnets, which have high import dependence.
These must be added to the list of eligible components for PLI benefits. The list of components covered under the scheme needs to be more comprehensive and at least include all components which are eligible in the SPECS scheme,” explains Goel.
He adds, “It is also very important that key inputs which are required for manufacturing components should be included such as MPP film for capacitors, ferrite core and enamelled copper wire for transformers and inductors, lead frames, moulding compound, and gold wire for semiconductors.”
Interestingly, creation of direct and indirect jobs in the electronics manufacturing ecosystem has been one of the top agendas for most of the PLI schemes. It is worth mentioning here that the component manufacturing ecosystem has the potential to add one job for every two million rupees invested, and five jobs for every ten million rupees invested.
The greatest example of the same comes from the recently announced PLI for LED lights and ACs. India is one of the largest consumers of LED lights in the world, and it is on the brink of having a higher penetration of ACs, and that is why the industry was amazed at the announcement of this scheme. However, a lot of key components that are a part of these were not included in the list.
Some of the examples of these components include capacitors (film and electrolytic), diodes, bond wire, connectors, MOSFETs/transistors/rectifiers, transformers (only inductors have been included), optics, and laminates for metal-clad PCBs. The scheme, like most others, also does not mention raw materials used in manufacturing the components.
“Raw materials have not been included. It is requested that these may be considered as they are essential for enabling cost-competitive manufacturing of components. There are several different nomenclatures used in the industry, and this should not result in exclusion of key components,” says Goel.
Investment vs output dilemma
The opportunities arising from the PLI schemes are mammoth, and this is true both for the manufacturers as well the consumers. However, the manufacturers based in India might find the investment threshold to be on the rough side when it gets compared to the output required to be eligible for incentives.
“ELCINA has analysed the impact of the first PLI scheme on components which were addressed partially. The scheme had some major challenges for component manufacturers such as investment threshold of one billion rupees, which was very high and investment turnover ratio which was unrealistically pegged at 1:5 or 1:6, again being out of reach for component manufacturers,” says Goel.
An investment of a billion rupees largely puts a lot of the India based component manufacturers off the track from applying for the scheme. Now while the government had changed the threshold to 250 million rupees in the second round of PLI for components, incremental sales were once again pegged at a billion rupees. This means a capital output ratio of about 1:4, which many believe is not achievable. Ideally, since India is learning to become aatmanirbhar in terms of manufacturing electronics and components, the output could have been revised to a lower figure for now and increased once the goals were established keeping five year plans in focus.
“The corresponding minimum investment to turnover ratio may be pegged at 1:2. In some component categories, which are less capital intensive, this ratio may be kept at 1:3,” opines Goel. ELCINA, as Goel further highlights, will be happy to provide a list of such components as well.
Not just limited to the investment threshold, Goel is of the view that the PLI schemes should target inclusion of about 200 companies, and the threshold for each company should be kept at a minimum of 150 million rupees. When the minimum threshold is 150 million rupees, it is imperative that there will be organisations investing much more than that.
As a matter of fact, ELCINA estimates that the actual average investment would be to the tune of 500 million rupees, which simply translates into a capital investment of up to 100 billion rupees over four year time.
For the output part, the same could be fixed at 1:2 in the first two years and then to 1:3 in the fourth and fifth year. The same would not only help local manufacturers establish ground but it might also lay the foundation for bigger and better PLI schemes for the future.
“As per this realistic assumption, these 200 companies investing 10,000 crores (100 billion rupees) over four years would achieve an additional output of 87,500 crores (875 billion rupees) in five years and incentive payment from year two to year five at six per cent will add up to only ₹ 5,100 crores (51 billion rupees) over five years,” says Goel.
Similarly, the PLI for white goods (LEDs and ACs) has also pegged the capital output ratio to the tune of 1:4 and 1:5. Moreover, there is no flexibility on offer to investors on whether they can invest in the large category or the normal category. For example, as explained by ELCINA, under normal investment for LED components, in the fourth year the minimum investment is 100 million rupees and incremental sale is 480 million rupees. In order to achieve ₹ 480 million sale, the applicant may require higher investment, and there should be no restriction on the same.
“The mandated capital output ratio of 1:4 or 1:5 is not achievable in the case of most components; ideally this should be between 1:2 and 1:3. Eligibility for PLI benefit should be subject to achievement of net incremental sales only and investors should have flexibility to apply under Large Category or Normal category,” says Goel.
Then comes the part where there is no clarity on whether the applicant to the white goods PLI scheme (like most other schemes) can supply to other segments or not. Considering the fact that a lot of components used in LED lights and ACs are used by other verticals as well, the government could have allowed and covered manufacturing and supplying of these to other category companies as well.
For instance, if a company has applied for PCB assembly for controllers (LED Light Management Systems), they would not be able to apply for LED drivers or LED engines, even though there is a lot of commonality in the investment, and capacities may therefore be sub-optimally used.
The costs in India and international players
The importance of a local component manufacturing ecosystem could be linked to a study done by Ernst and Young. The study notes that the cost of manufacturing a mobile phone in India is ₹100. However, in competing nations like China and Vietnam, the costs are ₹ 79.55 and ₹ 89.05, respectively. After adding the PLI benefits for manufacturing mobile phones in India, the cost comes down to ₹92.51. While that is still not competitive with China and Vietnam, what makes it grimmer is the fact that not all mobile phone manufacturers will be eligible under the scheme.
The government of India has at times mentioned that the PLI schemes are tailored to attract global champions to set shop in the country and to create global champions from India. However, there is very little presence of such domestic organisations in the country. This absence paves ways for global manufacturers to set up shop and gain more of the Indian market. If we look at the smartphone segment, the one mentioned by Indian authorities again and again, it is evident that no Indian brand exists among the top five, and may be not even among the top ten.
Further, there has been a cold response from the authorities about companies raising the issue of revising the timelines of PLI schemes based on the extreme market conditions originating as an after-effect of the still going on coronavirus pandemic. Though the Ministry of Electronics and IT (MeitY) had agreed to change the timeline for the PLI around smartphones, there was a long exchange of emails and meetings between industry organisations and authorities.
If the dates for PLI for smartphone timeline had not been changed, the likes of Foxconn, Wistron, Optiemus, Dixon, Lava, Bhagwati, UTL, Sahasra, AT&S, and Neolync would not have become eligible for any incentive from the ₹ 53.34 billion budget earmarked for this financial year. This could have sent a wrong message to the applicants of other PLI schemes as well.
“A serious setback the industry suffered during the peak of Covid was penalties by way of demurrage and detention charges, which were levied by shipping companies and C&F agents during the lockdown period. The Ministry of Aviation and Ministry of Shipping issued clear instructions and notifications in this regard recommending waiver of such charges but to no avail. Importers suffered significant losses on this account for no fault of theirs and have been struggling to get these charges refunded, without success. The industry’s pleas seem to have fallen on deaf ears and not yielded any result,” notes Rajoo Goel highlighting some of the difficulties companies in India had to face during the lockdowns.
Goel concludes, “Support to the components sector is being provided under SPECS and to some extent under PLI, but this is too little for the gigantic task on hand. Electronic components and semiconductors require an investment of at least $30 to 40 billion (₹ 2.25 to 3 lakh crore) by 2025, if we have to expand our components industry from the present $11 billion to $75+ billion. With a target of $400
billion electronics production, even this multiplier will meet only 50 percent of our demand for components by 2025. The current schemes provide about ₹ 7,500 crores (₹ 75 billion) to support electronic component manufacturing. The government needs to ramp up outlays by at least 3-4 times to achieve its ambitious targets.”
Mukul Yudhveer Singh is a business editor at EFY