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Editorial Analysis: Mobile policy gets it right

Mobile manufacturing policy in India

Approx Read Time: 5 minutes

India is not able to manufacture at scale:

  • India’s biggest battle in terms of becoming competitive has always been that of scale.
  • While this was partly fixed when most industries were delicensed in 1991, many restrictions, such as those imposed due to restrictive labour laws, remained.

India lagged in exports:

  • Countries like China, Vietnam, and Bangladesh walked away with the exports market for readymade garments and shoes.
  • Meanwhile, India’s restrictive labour laws ensured our firms remained small and just nibbled at the exports market.
Mobile manufacturing in India

Mobile manufacturing:

  • Mobile phones is a big market for exports globally at around $300 bn right now.
  • Even in this case, India’s plan to target exports has been a failure.
  • There has been a sharp jump in the number of firms assembling phones and components—from two in 2014 to over 260 right now—but, handset exports were just around $2 bn in 2019.
  • In contrast, the National Policy on Electronics 2019 projects handset exports to rise to $110 bn by 2025.

India’s earlier incentives for mobile exports were not designed well:

  • While India raised the incentives on mobile phone exports to 4% of the value of the phone, the problem was that everyone got this, even small firms.
  • What India needed, instead, was a policy that focused on getting just the top 4 or 5 manufacturers in the world, like Apple, Samsung and Huawei.
  • The top 5 mobile manufacturers control nearly three-fourths of global exports, and the bulk of exports take place out of China and Vietnam.

Schemes for electronics announced recently:

  • The Union Cabinet has approved three new schemes to boost large-scale electronics manufacturing in India.
  • The three schemes together will enable large-scale electronics manufacturing, a domestic supply chain ecosystem of components and a state-of-the-art infrastructure and common facilities for large anchor units and their supply chain partners.

The production-linked incentive scheme for mobile phone manufacturing:

  • The production-linked incentive scheme proposes production linked incentive to boost domestic manufacturing and attract large investments in mobile phone manufacturing and specified electronic components including Assembly, Testing, Marking and Packaging (ATMP) units.
  • It will offer an incentive of 4-6% on incremental sales of goods manufactured in India.
  • Domestic value addition for mobile phones is expected to rise to 35-40% by 2025 from the current 20—25% due to the impetus provided by the scheme.
  • It has been provided a budgetary outlay of Rs 40,995 crore for five years.

Benefits:

  1. The scheme has a direct employment generation potential of over 2,00,000 jobs over 5 years.
  2. It would lead to large scale electronics manufacturing in the country and open tremendous employment opportunities. Indirect employment will be about 3 times of direct employment as per industry estimates.
  3. Thus, the total employment potential of the scheme is approximately 8,00,000.

The scheme addresses many critical issues:

WTO compatible:

  • Unlike India’s existing MEIS scheme of incentives for exports that is WTO-incompatible (as WTO rules out export subsidies), the new incentives that start at 6% and taper off to 4% in the fifth year are WTO-compliant as they are linked to domestic production.

Improves viability:

  • The incentive, coupled with the sharp corporate tax cut, helps reduce the cost disadvantage India had versus Vietnam.
  • It also helps that India has a reasonable domestic market. And, given that India’s per capita income is around a fifth of China’s, labour costs here will be much lower.
Only the really serious players will benefit:
  • The scheme has an outlay of Rs 40,995 crore over five years, looking at the firms producing around Rs 8 lakh crore of phones cumulatively.
  • The policy stipulates that any firm availing the incentives has to have an output of at least Rs 25,000 crore over that in the base year.
  • That means only the really serious players will benefit, and so they are more likely to relocate some of their China/Vietnam operations to India or, more likely, expand here rather than in those countries.
  • The policy thinks local value addition can rise to around 40% with these incentives.

Focuses on high end phones for exports:

  • Since the policy is applicable only to phones that cost at least $200 to produce—that is a retail value of around $350-450—the bulk of them will have to be exported.

Conclusion:

  • Notwithstanding the delay, this time around, India has focused on creating scale, which is a big change from the past.
  • Also, this time, only the firms that can deliver will get incentives.
  • It is hope that the working and execution will match the spirit of the policy.

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