Former Reserve Bank of India (RBI) governor, Raghuram Rajan, along with fellow authors Rahul Chauhan and Rohit Lamba, has raised concerns about the effectiveness of the Indian government’s Production-Linked Incentive (PLI) scheme, particularly in the mobile manufacturing sector. In a research note shared on social media, Rajan questioned whether the PLI scheme has been a failure and urged the government to undertake a detailed assessment of its impact.
The PLI scheme, introduced by the Narendra Modi government, aimed to incentivize manufacturing in India by offering financial incentives to key sectors and fostering the creation of national manufacturing champions. The government allocated a substantial budget of Rs 1.97 lakh crore for the scheme. However, Rajan’s analysis suggests that India has not truly become a mobile manufacturing giant as claimed.
The research note highlights the need for the government to examine the data and assess key factors such as job creation, cost per job, and the overall effectiveness of the PLI scheme. Rajan particularly questions why the PLI scheme for mobile manufacturing has not yielded the desired results thus far, before considering its extension to new sectors.
One of the main deficiencies pointed out by Rajan and the authors is that the subsidy provided under the PLI scheme for mobile manufacturing is based solely on the finishing of the phones in India, rather than on the value added by domestic manufacturing. This has resulted in India still heavily relying on imports for various components of mobile phones.
The research note presents data indicating that India’s net exports of final mobile phones and related components have worsened since the implementation of the PLI scheme. The authors argue that the rise in exports of finished cell phones does not necessarily indicate India’s manufacturing prowess, as manufacturers may primarily be engaged in assembly rather than significant value addition.
To support their argument, the authors cite the example of the Apple iPhone 12 Max, where the value added from final assembly and testing by Foxconn accounted for only around 4 percent of the manufacturing costs and a fraction of the mobile phone’s total value.
Rajan also raised concerns about the World Trade Organization (WTO) rules, which prevent India from tying the PLI subsidy to the value added within the country. This limitation raises further doubts about the efficacy of the scheme and its ability to promote true manufacturing growth.
In light of these findings, Rajan and his co-authors call for a comprehensive evaluation of the PLI scheme’s impact on the mobile manufacturing sector. They suggest a closer examination of the cost-effectiveness of the 6 percent subsidy paid on finished mobile phones and state subsidies to determine if they truly outweigh the value added in India.
The research note by Raghuram Rajan and his colleagues raises important questions about the effectiveness of the Modi government’s PLI scheme for mobile manufacturing. The findings underline the need for a careful assessment of the scheme’s outcomes and potential modifications to promote domestic value addition, job creation, and sustainable growth in the manufacturing sector.
