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Context: The ongoing debate between former RBI Governor Raghuram Rajan and the Minister of State for Electronics regarding the effectiveness and impact of the Production-Linked Incentive (PLI) scheme in India's electronics manufacturing sector.

Details

• The debate started when Raghuram Rajan, along with two other economists, released a discussion paper critiquing the PLI scheme's effectiveness. They argued that the scheme was not effectively pushing India toward self-sufficiency in manufacturing. Instead, it was creating an ecosystem of low-level assembly jobs that relied heavily on imports.

The PLI Scheme

• The PLI scheme is a government initiative aimed at promoting domestic manufacturing by providing subsidies and incentives to companies that manufacture goods in India. These incentives are based on a percentage of the revenue generated by the companies for a certain period.

Rajan's Arguments:

• Raghuram Rajan's main argument was that while the PLI scheme led to an increase in mobile phone exports, it concealed the fact that many components used in these phones were being imported.
• He claimed that the manufacturing process in India was more of an assembly of imported components rather than true domestic manufacturing.
• He expressed concerns that this approach did not create high-paying jobs and lacked the desired multiplier effect on the economy.

Minister's Response:

• The Minister of State for Electronics countered Rajan's arguments by stating that not all imported components were used exclusively for mobile phones and that they could be used in other industries like computers, cameras, and electric vehicles.
• He also clarified that only around 22% of mobile phone production in India was currently supported by the PLI scheme.
• The Minister acknowledged that the "value-addition" in India's mobile manufacturing might be low but believed it would improve as the supply chain evolved.

Long-Term Impact and Opportunity Cost

• The Minister argued that the results of the PLI scheme might take time to fully manifest and that the supply and assembly chain settling in India could lead to increased value addition.
• Rajan's concern was that without concrete evidence of the PLI scheme's success, resources being invested in it could potentially have been used to improve other sectors, like education, that would also contribute to the Indian economy.

In summary, the debate centres around the effectiveness of the PLI scheme in achieving its goals of promoting domestic manufacturing, creating high-value jobs, and establishing India as a manufacturing powerhouse.

Smartphone manufacturing in India

• India is one of the largest and fastest-growing smartphone markets in the world, with over 1.3 billion potential customers. However, until recently, most of the smartphones sold in India were imported from other countries, mainly China. This meant that India was losing out on the benefits of local manufacturing, such as job creation, value addition, and export potential.
• To change this situation, the Indian government launched several initiatives to promote domestic smartphone manufacturing under the "Make in India" campaign. These include providing incentives, subsidies, tax breaks, and infrastructure support to smartphone companies that set up their factories in India. The aim is to make India a global hub for smartphone production and innovation.
• The results have been impressive so far. According to a report by Counterpoint Research, India shipped 2 billion domestically assembled smartphones and feature phones between 2014 and 2022, making it the second-largest mobile phone producer in the world after China. In 2022 alone, 98% of all mobile phone shipments within the Indian market were domestically produced and 16% of the production was exported 

Major Smartphone brands that have invested in local manufacturing in India

• Samsung: The Korean giant has two manufacturing facilities in India, one in Chennai and one in Noida. The Noida facility is the largest Samsung mobile factory in the world, spanning an area of over 1,29,000 sq. metres.
• Apple: Apple makes smartphone models such as the iPhone XR, iPhone 6s and the first-gen iPhone SE in India.
• Xiaomi: The Chinese leader in the Indian smartphone market has seven smartphone manufacturing plants in India to date. Xiaomi also has a power bank manufacturing plant in Noida and a PCB assembly plant in Chennai. Xiaomi makes most of its smartphones and accessories in India for the domestic as well as export markets.
• Vivo: Vivo has two smartphone manufacturing plants in Greater Noida, with a combined capacity of 50 

Significance of smartphone manufacturing in India

• Employment Generation: Smartphone manufacturing can create a ripple effect of employment opportunities. Beyond the manufacturing plants themselves, jobs are generated across the supply chain, including in areas like component manufacturing, packaging, transportation, retail, and customer service. This is particularly important for a country like India, where job creation is a critical economic and social concern.
• Economic Growth: Domestic manufacturing contributes directly to economic growth by increasing the output of the manufacturing sector. The growth of this sector can lead to higher GDP figures, which are indicators of a country's economic health. Additionally, the revenue generated from manufacturing activities contributes to tax revenue, which can be invested in infrastructure, public services, and welfare programs.
• Reduced Imports: By manufacturing smartphones locally, India can reduce its dependency on imported devices. This, in turn, can improve the trade balance by reducing the outflow of foreign exchange for imported goods. This is particularly important in the context of electronics, where a significant amount of money was previously spent on importing smartphones.
• Technology Transfer: When international manufacturers set up facilities in India, they often bring with them advanced technology, manufacturing processes, and know-how. This knowledge transfer can have a positive impact on the entire ecosystem, leading to the development of local expertise in manufacturing and research and development. Over time, this can foster innovation and the creation of homegrown technology solutions.
• Attracting Investment: India's large population and consumer base make it an attractive market for global smartphone manufacturers. This, combined with the government's efforts to create a favourable business environment through initiatives like "Make in India," can encourage foreign companies to invest in setting up manufacturing facilities within the country. This foreign direct investment not only supports the manufacturing sector but also contributes to overall economic development.

Steps taken to promote smartphone manufacturing

• Make in India Initiative: Launched in 2014 by the Indian government, the "Make in India" initiative aimed to transform India into a global manufacturing hub. It sought to attract both domestic and foreign companies to set up manufacturing units in India across various sectors, including electronics. The initiative aimed to create an environment conducive to manufacturing by simplifying regulations, improving ease of doing business, and offering incentives such as subsidies, tax benefits, and a more investor-friendly ecosystem.
• Production-Linked Incentive (PLI) Scheme: The PLI scheme is a major initiative introduced by the Indian government to boost domestic manufacturing across various sectors, including electronics and smartphones. Under this scheme, manufacturers receive financial incentives based on their incremental production. In the case of smartphones, manufacturers are eligible to receive a percentage of their incremental sales revenue as incentives. This encourages companies to increase their production capacities and invest in local manufacturing facilities, ultimately leading to job creation and technological advancements.
• Reduced Import Duties: To further incentivize local manufacturing and make domestically produced goods more competitive, the Indian government increased import duties on smartphone components and devices. By making imports costlier, the government aimed to level the playing field for domestically manufactured products and encourage companies to invest in local production facilities.

These steps collectively create a framework that encourages companies to invest in domestic manufacturing, thereby contributing to job creation, economic growth, technology transfer, and reduced import dependency in the smartphone industry.

Challenges that India faces in its efforts to promote smartphone manufacturing

• Supply Chain Challenges: Creating a robust supply chain for smartphone manufacturing involves coordinating multiple suppliers and partners to ensure the timely availability of components and materials. This requires investment not only in setting up the supply chain but also in ensuring its efficiency, reliability, and quality. The challenge lies in establishing a well-integrated supply chain that can meet the demands of high-volume manufacturing while maintaining cost-effectiveness.
• Infrastructure: A robust manufacturing ecosystem relies on strong infrastructure, including reliable power supply, transportation networks, and communication facilities. Power shortages and disruptions can affect manufacturing processes, leading to production delays and increased costs. Adequate transportation infrastructure is essential for the smooth movement of raw materials and finished products. Investment in improving infrastructure is crucial to support the growth of manufacturing activities.
• Labour Skill Gap: Advanced manufacturing processes require skilled labour with expertise in various fields, including engineering, electronics, and automation. Bridging the skill gap requires focused efforts in education and training to develop a workforce that can effectively operate and maintain sophisticated manufacturing equipment. Developing vocational training programs tailored to the needs of the industry can help address this challenge.
• Regulatory Hurdles: Regulatory challenges can include complex bureaucratic processes, unclear regulations, and difficulties in obtaining permits and licenses. These hurdles can delay the establishment of manufacturing facilities and increase costs. Streamlining regulatory procedures, providing clear guidelines, and creating a business-friendly environment can help mitigate these challenges.
• Land Acquisition: Setting up manufacturing facilities requires land, and acquiring suitable land can sometimes be a challenge due to land-use regulations, local considerations, and community concerns. Land acquisition processes can be time-consuming and may lead to delays in project implementation. Addressing land acquisition challenges through transparent and efficient processes is crucial for timely manufacturing setup.

Addressing these challenges requires a comprehensive and coordinated approach from the government, industry stakeholders, and educational institutions. Overcoming these obstacles will play a significant role in shaping the success of India's smartphone manufacturing ecosystem and ensuring its sustained growth.

Way Forward

• Invest in Skill Development: Prioritizing skill development is crucial to address the labour skill gap. Investing in vocational training programs, partnerships with educational institutions, and industry-led training initiatives can equip the workforce with the necessary skills for advanced manufacturing processes. This will ensure a steady supply of skilled personnel to support the growth of the industry.
• Infrastructure Improvement: Continued investment in infrastructure development is essential to provide a strong foundation for manufacturing growth. Ensuring reliable power supply, efficient transportation networks, and communication facilities will enhance the overall business environment and enable seamless production processes.
• Research and Innovation: Encouraging research and development (R&D) activities within the manufacturing sector can lead to technological advancements and higher value addition. Collaboration between academia, research institutions, and industry players can foster innovation in areas such as product design, manufacturing processes, and materials, making the industry more competitive on a global scale.
• Ease of Doing Business: Simplifying regulatory processes and creating a business-friendly environment is crucial for attracting both domestic and foreign manufacturers. Reducing bureaucratic hurdles, streamlining approval procedures, and providing clear guidelines can enhance the ease of doing business, making India a more attractive destination for manufacturing investments.
• Global Supply Chain Integration: Attracting international suppliers to establish operations in India can create a comprehensive ecosystem for manufacturing. This involves fostering partnerships with global component manufacturers and encouraging them to set up facilities in India. A well-integrated supply chain will not only strengthen domestic manufacturing capabilities but also enhance India's position in the global electronics industry.

As these strategies are implemented collectively, they can contribute to the sustainable growth of India's smartphone manufacturing sector. By addressing challenges, nurturing innovation, and creating an environment conducive to manufacturing, India can continue to establish itself as a competitive player in the global electronics market while reaping the economic and employment benefits of a thriving domestic manufacturing ecosystem.

Conclusion

• India's progress in smartphone manufacturing mirrors its ambition to emerge as a global manufacturing epicentre. Despite persistent challenges, a sustained commitment to refining skills, enhancing infrastructure, fostering innovation, and improving the business environment can fuel the enduring prosperity of this sector. By persistently addressing these facets, India's momentum in the global electronics landscape is poised for augmentation, solidifying its reputation as a formidable player in the manufacturing arena.

Must-Read Articles:

PRODUCTION-LINKED INCENTIVE (PLI) SCHEMES: https://www.iasgyan.in/daily-current-affairs/production-linked-incentive-pli-schemes#:~:text=The%20Production%20Linked%20Incentive%20(PLI,sales%20over%20a%20base%20year.

PRODUCTION LINKED INCENTIVE SCHEME 2.0 FOR IT HARDWARE: https://www.iasgyan.in/daily-current-affairs/production-linked-incentive-scheme-20-for-it-hardware

PRACTICE QUESTION Q. What is the significance of mobile manufacturing in India's economic landscape, and how does it contribute to the country's pursuit of self-sufficiency and technological advancement? What challenges does India face in bolstering its mobile manufacturing sector, and what strategies can be employed to overcome these challenges and pave the way for sustained growth in the industry?

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