New Delhi: The Performance-Linked Incentive (PLI) scheme for electronics has fared better than previous government initiatives to push India’s manufacturing capabilities in the sector, and in the next phase, the government should look at ways to increase domestic value addition by developing the component ecosystem, according to experts.
However, they also warn that withdrawing incentives, before the ecosystem is fully established, may hamper the evolution of electronics manufacturing in India.
Kunal Chaudhary, indirect tax partner at EY India, told ThePrint, that before the introduction of the PLI scheme, previous methods aimed at drawing industry interest, such as the gradual implementation of custom duties or issuing export incentives like the Merchandise Exports from India Scheme (MEIS), yielded limited success. He added that with the introduction of PLI schemes and ease of business norms in the country, the sectors gained significant momentum and have led to a tangible increase in India’s manufacturing output.
The PLI schemes, which aim to cut imports and generate employment by boosting manufacturing in India, targets 14 sectors, including mobile phones and IT hardware within the electronics industry. Of the schemes introduced so far, the one for large-scale electronics manufacturing (including mobile phones), launched in April 2020, has been touted as one of the most successful ones.
One of the important benefits of PLI, apart from the boost in domestic manufacturing, Chaudhary said, is the substantial increase in exports. Currently, India satisfies 97 percent of its mobile phone requirements through domestic production, with 30 percent of the output in FY 2023-2024 designated for export.
In FY24, India’s mobile phone exports jumped 40 percent to USD 15.6 billion from USD 11.1 billion in FY23, marking a growth of USD 4.5 billion, partly due to the contributions from leading companies like Apple and Samsung, he noted.
Getting the timing right
The PLI schemes positioned India as an attractive manufacturing location at a time when manufacturing in China began to lose some of its sheen due to severe supply chain disruptions as a result of the Covid pandemic.
India started introducing PLI schemes in March 2020 amid reorientation of global supply chains, following the COVID-19 outbreak, Neha Anna Thomas, associate director-economic analytics at Frost & Sullivan, pointed out.
She added that at that time, China had started to lose its manufacturing share because of rising labour costs, the 2019 outbreak of US-China trade wars, and later, because of stringent Covid lockdowns.
“While India was not very successful in capturing redirected investments away from China following the trade wars (Vietnam and other Southeast Asian nations were more successful then), the PLI schemes were launched at an opportune time to capture newer investments following pandemic-induced supply chain reorientation,” she said.
Citing the data from the International Trade Centre, Thomas said that India’s exports of telephone sets (including smartphones) grew at a CAGR (compound annual growth rate) of 58.4 percent between 2020 and 2023, while China’s shrank at a CAGR of 0.5 percent during this period.
EY India’s Chaudhary said that while mobile exports from China and Vietnam experienced a decline of 2.78 percent and 17.6 percent, respectively, in FY24 compared to the previous year, India’s mobile exports witnessed a substantial increase of 40.5 percent.
“India has managed to capture nearly 50 percent of the reduction in mobile phone exports from China and Vietnam,” he added.
“PLI schemes have positioned India as an attractive and competitive location, along with other measures, such as low corporate tax rates, cheap and young labour force, conducive tax & regulatory framework, automatic FDI (foreign direct investment) route etc., for manufacturing companies looking to relocate as part of China+1 strategy,” Chaudhary further noted.
He also pointed out that while PLI beneficiaries account for only 20 percent of the market share, they contributed to 82 percent of mobile phones exports during FY 2022-23.
Thomas, too, said that the rise of the China+1 supply chain and production strategies — whereby companies maintain production in China, while simultaneously diversifying to other destinations — has improved India’s go-to-market attractiveness for overall manufacturing, including electronics.
She further added that given the possibility that the US presidential and policy outcomes could lead to another round of US-China trade wars, companies that proactively de-risk and diversify would be better prepared for potential disruptions.
Kathir Thandavarayan, partner-consulting at Deloitte India, said that the global companies, which look at enabling supply chain resilience for any eventuality, and therefore, delinking dependency on specific countries, are looking at creating new capacities in locations that have the potential to provide a strong manufacturing ecosystem. These companies would require fiscal support from the government to create these capacities.
“On all required aspects of supply chain resilience, potential for ecosystem development and government support, India scores well vis-à-vis competing countries. In addition, India has the inherent advantages of a large domestic market,” he said.
PLI schemes, Thandavarayan added, compensate for structural challenges in the target sectors, such as absence of economies of scale, lower productivity, high financial costs, logistics inefficiency, etc., which impact the global competitiveness of India’s manufacturing.
“For example, when PLI was launched for large-scale electronics manufacturing, the scale of mobile phones manufacturing in India was substantially lower than competing countries, specifically from Southeast and East Asia regions. The economies of scale were favourable to the competing countries. Bringing economies of scale and capacities requires positive interventions/support from the government through PLI,” he said.
Thandavarayan explained that the absence of economies of scale has an impact on cost structure and the ability to compete globally, which promotes imports rather than manufacturing in the country. PLI scheme helps to drive investments in manufacturing, bringing in capacity in huge scale and addressing structural disadvantages that India has in terms of productivity, financial costs and logistics, over a period of time.
“PLI providing benefits of about 5-7 percent on revenues terms addresses the cost imbalance. With economies of scale, cost structure becomes favourable for India and productivity also increases, making India’s manufacturing globally competitive,” he said.
Krishan Arora, partner at Grant Thornton Bharat, said that the success of mobile PLI is evident from the substantial investments of approximately Rs 4,784 crore, production worth about Rs 2,03,952 crore, and the creation of 45,485 new jobs.
“The mobile scheme has been very successful because of the growing global demand for smartphones. Major smartphone manufacturers, like Foxconn, Wistron and Pegatron, have started making high-end smartphones in India,” Arora added.
He attributed the success to increased domestic consumption of phones, a hike in import duty on the phones and its components, and the design of the incentive scheme, which offers incentives not only to mobile phone manufacturers, but also to component manufacturers, reducing the overall production cost.
Arora noted that India has grown faster in electronics manufacturing, compared to China and Vietnam. This, he said, is evident from major companies, like Foxconn, moving some of their production assembly lines to India. Additionally, the Ministry of Commerce and Industry reported a 20 percent increase in value addition in mobile manufacturing in just three years. In contrast, Vietnam took 15 years to achieve an 18 percent increase, and China took 25 years to reach a 49 percent increase, he said.
Experts are confident that the PLI 2.0 for IT hardware — launched in 2023 following lukewarm reception to the initial scheme for IT hardware in 2021 — will show results in the coming years.
Thandavarayan noted that the PLI scheme for large-scale electronics (which included mobile phones) took 2-3 years to show results, and the IT hardware 2.0 will take a similar time period to yield benefits. “Similar to electronics PLI, many global and Indian companies are investing in IT hardware manufacturing. In total, there are 41 proposals with a production value of more than Rs five lakh crore,” he said.
According to Chaudhary, IT hardware products fall under the Information Technology Agreement (ITA-1) of the World Trade Organisation (WTO), of which India is a signatory. This agreement permits duty-free imports of these items, resulting in minimal incentives to attract any production domestically.
“However, due to national security concerns, the Indian government has recently introduced a requirement of prior authorisation for importing IT hardware products. There is a renewed push to stimulate local manufacturing in the IT hardware space. This is expected to yield significant results in the coming years, with giants, like Dell, HP, Lenovo and others, establishing production bases in India,” he said.
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What next?
According to Thandavarayan, the expectation from PLI is that within five years, the development of the manufacturing ecosystem will achieve maturity, efficiency of operations will become comparable, and structural issues, like productivity and logistics, will be addressed. “Beyond the scheme period of five years, it is expected that the industry will be on its own, and the companies won’t need any incentive support to be competitive in India and for exports,” he said.
However, a shift in focus is likely from the end product of manufacturing to building the ecosystem across the value chain, particularly on all critical components that are currently being imported from other countries, significantly from East Asia.
“Going forward, the government would potentially look at incentivising some of the critical value chain elements of electronic manufacturing, and therefore increasing the domestic value addition, which is currently at 15-20 percent… We shall target 40-50 percent of domestic value addition through the next level of PLI scheme, covering the critical elements of the value chain, where we want to develop the domestic manufacturing ecosystem,” Thandavarayan said.
Chaudhary noted that green shoots in the component ecosystem have emerged with large companies, such as the TATA group, entering the component manufacturing space. He added that the incentives under the PLI scheme were designed to mitigate the competitive disadvantages faced by India in comparison to other manufacturing hubs, and help establish last mile production for companies looking to relocate supply chains to India.
Given that last mile production has successfully been established, he said, the government can consider introducing a new iteration of PLI scheme with incentives focussed to augment domestic value creation within India. The incentives, according to him, should target attracting industries specialising in electronic components and sub-assemblies that will eventually amplify the entire value chain localisation in India.
“It is essential for the electronics manufacturing ecosystem to be fully established and reach its potential before declaring the sunset to the incentive schemes. In cases where the incentives are halted before the ecosystem is mature, it may interfere with the complex progression and evolution of electronics manufacturing in India,” Chaudhary added.
Arora added that these schemes are having a positive impact both at micro and macro level as they attract more investments, increase production and sales, create jobs, and reduce reliance on imports in certain industries.
“This is strengthening India’s economy. From a business perspective (micro level), these schemes provide financial support to companies, helping them operate at full capacity and even expand. This creates a win-win situation for both business owners and the country,” he said.
(Edited by Mannat Chugh)
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