New localisation plans can derail Modi’s entire PLI scheme

There can be little doubt that the Rs 40,000-crore production-linked-incentive (PLI) that the government came up with for mobile phone assembly/manufacture – primarily for exports – is imaginatively designed and can go a long way in spurring output. In order not to violate WTO norms that prohibit subsidies for exports, the PLI is linked to domestic production, but since the scheme is meant for phones with an ex-factory value of at least $200, that effectively means most of the phones will be exported as the Indian market for expensive phones is limited. Unlike schemes in the past where incentives were available for everyone, this one tried to focus on larger firms since they have a better chance of being able to export; Apple and Samsung, for instance, control the lion’s share of the $300-bn global export market. The way the scheme was designed, to avail of the incentive, a firm has to increase its output in the 5th year by a fairly steep Rs 25,000 crore over that in the first year.

Coupled with the sharp reduction in corporate tax rates, labour reforms that included fixed-term employment and a sharp reduction in the compliance burden – at least for central labour compliances – this was an attractive package to woo firms wanting to leave China. While the rush to leave China has reduced considerably now that President Joe Biden has replaced Donald Trump, a problem in the way the new PLI schemes are being planned – in November, the Cabinet cleared Rs 160,000 crore more worth of PLI for 10 other sectors – could see the entire PLI plan unravelling. It is also important to keep in mind that, for all the talk of investors leaving China, it continued to be the world’s largest FDI destination and attracted $163-bn in FDI in 2020, beating even the US that pulled in $134 bn; so, the view that investors are dying to leave China is simply not true, India will have to do a lot of work to attract investment.

The Rs 7,500-cr PLI scheme that is being worked on for laptops and tablets also targets large production volumes – the 4th year production has to be $4bn vs the first year’s $400-mn – but the scheme is planning to link incentives to localisation targets for PCBs, battery packs, etc. India has lost WTO cases where similar localisation targets have been fixed, so the new PLI scheme will almost certainly be challenged at the WTO; and under Biden, the WTO’s dispute settlement board will get a fresh lease of life. It is true that, even in the case of mobile phones, the government wants firms to give data on their localisation plans, but asking for data can still be defended at the WTO as just being an academic exercise aimed at better policy-making in future. Indeed, as investors realize India’s PLI policies can be struck down by WTO, even existing investment in phones can dry up with investors getting wary.

The reason for the policy presumably has to do with the revenue department not wanting to give money to firms without more local production or export. That is short-sighted since, if local assembly/production rises, even without more localisation, tax revenues from GST and corporate taxation will rise; so will jobs. Two, once there are higher volumes being assembled, higher localisation will also follow as firms will prefer to have more local component suppliers as this reduces transport costs and shortens time-to-market. But this requires other changes such as lower tax rates, better labour laws, industry-friendly policies etc; merely linking localisation levels to a 1-4% incentive will not lead to either higher levels of assembly or even localisation. If that is the thinking, it makes sense to simply junk the new PLI plans.