Explained |  The debate over India’s smartphone manufacturing dreams

Former RBI governor Rajan and IT Minister Chandrasekhar spar over Central govt's PLI scheme to boost electronics manufacturing. Rajan argues it creates low-level assembly jobs, not value-addition, while Chandrasekhar believes it will take time for results to show. Debate centres on whether scheme will create long-lasting jobs and establish India as a manufacturing hub.

The story so far: Over the last few months, former RBI governor Raghuram Rajan and the Minister of State for Electronics Rajeev Chandrasekhar have sparred over how well a Central government scheme to boost electronics manufacturing has been faring.

It started when Mr. Rajan, along with two other economists, released a brief discussion paper arguing that the programme isn’t really pushing India towards becoming a self-sufficient manufacturing powerhouse. Instead, the government is using taxpayer money to create an ecosystem of low-level assembly jobs that will still depend heavily on imports. The junior IT Minister responded sharply, calling the paper a concoction of “half-truths” built on “shoddy comparisons”.

Around five years ago, the Government of India decided it wanted more companies to make things in India. Manufacturing is a key ingredient to economic growth and also comes with what economists call a multiplier effect — every job created and every rupee invested in manufacturing has a positive cascading effect on other sectors in the economy.

However, the problem was that many industries didn’t want to set up shop in the country. India’s infrastructure isn’t great, the country’s labour laws are archaic, and the workforce isn’t very skilled. To solve this, the government used, and uses, a carrot-and-stick approach. The ‘stick’ is raising import duties, thus making it more expensive for companies to import stuff from somewhere else and sell it in India. The ‘carrot’ is to provide subsidies and incentives. One key set of incentives is the production-linked incentives (PLI) scheme. Here, the government gives money to foreign or domestic companies that manufacture goods here. The annual payout is based on a percentage of revenue generated for up to five years.

The industry that has shown the most enthusiasm for the scheme is smartphone manufacturing. Companies like Micromax, Samsung, and Foxconn (which makes phones for Apple) can get up to 6% of their incremental sales income through the PLI programme. And with the scheme, mobile phone exports jumped from $300 million in FY2018 to an astounding $11 billion in FY23. And while India imported mobile phones worth $3.6 billion in FY2018, it dropped to $1.6 billion in FY23. Central government Ministers, including Mr. Chandrasekhar, have regularly cited this data as proof of the PLI’s scheme’s success.

In his paper, the former Central bank governor argued that the export boom hides more than it reveals. Specifically, Mr. Rajan contended that while imports of fully put-together mobile phones have come down, the imports of mobile phone components — including display screens, cameras, batteries, printed circuit boards — shot up between FY21 and FY23. Incidentally, these are the same two years when mobile phone exports jumped the most. This matters because manufacturers aren’t really making mobile phones in India in the traditional sense. That would involve their supply chain also moving to India and making most of the components here as well. All that the companies are doing, Mr. Rajan said, is importing all of the necessary parts and assembling them in India to create a ‘Made in India’ product.

This is important as low-level assembly work doesn’t produce well-paying jobs and doesn’t nearly have anywhere the same multiplier effect that actual manufacturing might provide.