Manufacturing is one of the principal growth engines that helps a country chug along the economic development track. To boost domestic manufacturing and cut down on import bills, the Centre, in March 2020, had introduced a production-linked incentive (PLI) scheme that aims to give companies - domestic and foreign - incentives on incremental sale of products manufactured locally. In almost two years now, 13 sectors have been covered under the scheme. Uncannily, the PLI scheme implementation coincided with the outbreak of the Covid-19. Moneycontrol Pro thought it would be worthwhile to check the progress of the scheme in this pandemic-whacked period.
Starting today, India Ratings and Research (Ind-Ra) — a 100 percent Fitch group company — will review the progress of each of the sectors every week on Wednesdays. To begin with, Ind-Ra dissects the PLI scheme for large-scale electronics manufacturing, the first sector that was notified under the programme in April 2020.
As part of the Digital India drive, the electronics sector has been on the central government’s radar for quite some time now. Several schemes were introduced in the past that aimed to provide a leg-up to the industry by way of grants and subsidies. In spite of all the incentives provided by the government, a sharply rising domestic demand (the digital “boom”) for electronic items far surpassed local production, leading to higher imports. The share of electronics in India’s total import bill rose to 4.2 percent in FY20 from1.8 percent in FY15.
To boost domestic production of mobile phones and specified electronic components and attract investments, the central government had notified the Production-Linked Incentive (PLI) scheme for electronics components in April 2020. Under the scheme, eligible companies are allowed to claim an incentive of 4-6 percent on incremental sales (over the base year of FY21) of manufactured goods for a period of five years. The government has already approved 16 players with a total envisaged investment of Rs 11,000 crore and expects a production value of Rs10.4 lakh crore in the next five years, of which about 60 percent is likely to be exported. The scheme is also likely to enhance the competitiveness of local electronics products.
It is expected that the assembling of mobile parts may become the most attractive activity, as the incentive of 4-6 percent is about 50-100 percent of the total assembly cost of mobile phones. The manufacturing of some of the basic components with low value addition, such as casing, batteries, and audio, may also pick up momentum, while high-end components, such as camera, display, and memory, will take time.
Shortcomings
The PLI scheme still needs to address a few issues. First, to ramp-up local production, the scheme offers incentives only for a fixed period of five years, starting from the base year of FY21. With the raging global supply-chain issues and the pandemic-led demand disruption, mobile phone manufacturers may not be able to achieve the near-term production targets and claim incentives.
Second, the incentives of 4-6 percent is pretty meaningful given that operating profit margins for large mobile phone manufacturers range between 3-7 percent. This may improve the competitiveness of Indian manufacturers substantially over the scheme period. However, the competitiveness of the manufacturing facilities in the absence of the incentives remains to be seen.
Third, the current scheme aims at providing big incentives to large corporate houses in select sectors, who can quickly build the scale. This is a deviation from the earlier schemes (MEIS, RoDTEP), which aimed at providing small incentives to a much wider corporate landscape. In order to provide a complete manufacturing ecosystem, active participation of small-scale players will also be required. It remains to be seen how much of the PLI incentives percolate down to SME/MSME participants.
Finally, issues relating to the availability of skilled manpower and high-latency infrastructure facilities need to be addressed.
Opportunities
In Ind-Ra’s view, the advantage of the PLI scheme should be seen beyond its present stated scope. For instance, committed investments, at present, are predominantly focused on low value-added services such as assembling or manufacturing low-cost components (casings), which form less than 10 percent of a mobile phone’s total Bill-of-Material. In order to achieve the stated target of increasing the gross domestic value addition from the current 15-20percent to 35-40 percent for mobile phones and 45-50 percent for electronic components, a shift to higher value-added products/processes is required. Nevertheless, companies would expect a robust manufacturing ecosystem before committing investments and starting with low value-added activities will provide the adequate boost.
Moreover, India now attracts manufacturing activities for low-cost smartphones or feature phones, which have lower Average Selling Price ASP), and hence, lower likely incentives. A progressive shift towards higher ASP brands or products would improve the stickiness of cash flows in the long term.
Structurally, many global telecom OEMs are focusing more on R&D and marketing activities, while outsourcing low value-added manufacturing activities to their suppliers. These OEMs have preference for a focused set of suppliers with whom they intend to have long-term contracts. A timely execution of orders by Indian corporate houses may open up future business potential.
In summary, the PLI scheme for mobile handsets provides a leg-up to manufacturing by providing meaningfully big incentives to a few large players. It still needs to address a few issues, including structural competitiveness in the absence of PLI incentives, availability of skilled manpower and high-latency infrastructure, benefits to the SME/MSME segment, and near-term supply-chain issues. Nevertheless, the benefit of the PLI scheme should be seen beyond its present stated scope. The progression from low-cost components to high-cost components, or from low-ASP products to high-ASP products can throw up much larger opportunities.
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