Why PLI for cellphone making should be

mostly for export, not domestic market

Incentives should not be extended beyond five years: the biggest risk is that they will continue forever in
flop sectors to save face and jobs. Demands from additional sectors to get PLI must be resisted. 14
sectors are already too many. PLI is still likely to fail where it backs national champions for domestic
sales in a protected market.

In 2017-18, India imported $21 billion of cellphones and components, and exported just $1.1 billion, for a
net sectoral trade deficit of $20 billion. But exports have since soared, while imports have been muted. In
March 2023, exports actually exceeded imports by $239 million, according to calculations from
commerce ministry data by economist Rahul Chauhan (see graphic). This is a phenomenal reversal.

For the full year 2022-23, the trade deficit in cellphones was $3.6 billion. This looked a huge
improvement over $20 billion five years earlier. But none could have expected this to turn into a net
surplus by March 2023.

Source: Ministry of Commerce and Industry

In 2022-23, Apple exported $5 billion of its production of $7 billion. Samsung also exported $4
billion. Apple targets $20 billion by 2024, and aims to shift 25% of its global output in India.
Component suppliers – Foxconn, Pegatron and Wistron – are ramping up production in India, for
cellphones and other consumer electronics.

This is a success of industrial policy, giving huge subsidies and tariff protection to select companies to
create world-beating factories with global scale economies. I have always been sceptical of industrial
policy. History shows that governments often fail in picking industrial winners and end up with white
elephants and crony capitalists. This is what happened with the Nehru-Indira aim of creating national
public sector champions.
However, the Asian Tigers – South Korea, Taiwan and Singapore – successfully used industrial policy
from the 1960s onwards to create world-beating companies. They were all autocracies that, unlike India,
could crush all opposition to land acquisition, environmental norms or hire’n’fire labour laws. They had
small populations and domestic markets, and, hence, focused on export-oriented factories. China later
followed the same approach.

But in Indian conditions, industrial policy historically failed. Why, then, has it succeeded in cellphones?
In 2017-18, cellphone imports at $21 billion were second only to oil imports. Domestic production was
tiny. Many local factories that once showed promise later closed. India fared poorly in electronics because
it had signed the Information Technology Agreement in 1996 pledging zero duty on specified electronic
items to facilitate the digital revolution.

Indian electronic manufacturers faced import duties on their raw materials and components, and so could
not compete with duty-free imports. To end this reverse protection, the government announced a phased
manufacturing programme (PMP) for cellphones and components in 2017, later supplemented by
Aatmanirbhar and production-linked incentive (PLI).

Critics feared that cellphone manufacture would depend heavily on component imports, adding little
value. Apple’s value added in India is barely 15%, though the company hopes to raise it to 20-25%. The
20% import tariff on phones means protection of ₹20 plus a PLI grant of ₹4-6 for value addition of just
₹15. Does this not mean showering billions on a few corporations for minor gains? Is it not a waste of
public money? Will beneficiaries become uneconomic and close when incentives are withdrawn after five
years, as scheduled?

These would be major dangers if cellphone production was for self-sufficiency. But since production is
overwhelmingly for export, this resembles the Asian Tiger model. High import tariffs are not an
economic cost for exported output. PLI is a cost, but is a worthwhile incentive if limited to five years.
Success depends on creating massive capacities with scale economies, which will remain competitive
when incentives end.

Raghuram Rajan and some other critics fear that rising component imports would mostly offset
rising exports. They seemed right for a few years. But then PLI and the China factor changed the
picture. Rahul Chauhan calculates that the cellphone trade deficit narrowed by $16.7 billion
between 2017-18 and 2022-23. Then the monthly deficit became a surplus of $239 million in
March 2023, a fantastic turnaround.

Why were pessimists proved wrong?

● Geopolitics were a new factor pushing MNCs out of China into India.
● MNCs catered mainly to the global market. So, the cellphone incentives did not mean self-
sufficiency. Instead, they ensured global competitiveness.
● MNCs have persuaded state governments to relax labour laws, improving the ecosystem.

Rajan thinks MNCs may have used transfer pricing to keep profits in India during their current tax
holiday, inflating their exports. I think this can only be a minor factor. Unlike Rajan, I confess I was
wrong.
The outlay for PLI has been fixed at ₹1.97 lakh crore over seven years. That is barely 0.6% of GDP, very
affordable even if some sectors fail. Disbursement has been slow because companies have not fulfilled
PLI conditions. For success, these conditions must not be relaxed. Please stay tough.

Incentives should not be extended beyond five years: the biggest risk is that they will continue forever in
flop sectors to save face and jobs. Demands from additional sectors to get PLI must be resisted. 14 sectors
are already too many. PLI is still likely to fail where it backs national champions for domestic sales in a
protected market.

Bottom line: PLI should create massive capacities mostly for export, not for the domestic market, as the
Asian Tigers did. The aim should be globalisation, not self-sufficiency.