PLI review 5 years on | On Govt table: PLI 2.0, what next to push manufacturing

Given that the first phase of the PLI scheme is seen to have enabled a directional pivot in favour of manufacturing, the trigger for the renewed debate stems from the challenge of using the gains of the first phase as an inflection point for PLI 2.0. In the inter-ministerial discussions, it was noted that percentage value addition across key sectors is still in single digits. This is the case even in sectors where the PLI scheme is seen as a relative success.

A renewed case is being made for localisation of electronics manufacturing since it is critical to creating a dynamic domestic manufacturing ecosystem. A progressive deepening and broadening of the manufacturing base will allow for greater value capture by the domestic producer, sources said.

This will potentially improve competitiveness of local manufacturers compared with their Chinese competitors; and in a world of globalised supply chains and heightened geopolitical risks, increase their bargaining power.

But there is compelling evidence to suggest that any meaningful realignments to the globalised supply chains by way of relocation of components and sub-component manufacturers can only be incentivised by large-volume manufacturing, which drives down costs through economies of scale.

Further, this is also seen as necessary to be able to negotiate competitive rates with semiconductor chip manufacturers and technology licensing from proprietary vendors.

But India’s relatively small market in sectors such as telecom and electronics products does not provide sufficient incentives for manufacturers to relocate their supply chains. Larger volumes, therefore, require access to export markets, given that exports also serve the purpose of introducing competition and market efficiency. This is now seen as an additional ingredient for scaling up the manufacturing effort.

This is the reason why exports as an additional metric is being proposed by some in the government as a prerequisite for upscaling India’s PLI-led manufacturing ambitions.

The other limitation that is being felt is the relatively smaller size of domestic firms, which typically are low on value addition and suffer from limited foreign market access. Given the lack of economies of scale, the Indian players are typically not price-competitive compared with the Chinese or the Vietnamese, and cannot therefore generate the volumes necessary to attract the component manufacturing ecosystem.

One suggestion being proposed is that foreign OEMs could have a critical role in mobilising large volumes. Large foreign OEMs, with their well-established value chains, can be strategically used to dovetail India’s fledgling component manufacturing ecosystems and catalyse manufacturing at scale within a tangible time period. These foreign OEMs are also seen as being better placed than Indian firms to negotiate competitive rates from strategic vendors.

Over time, the component manufacturing ecosystem will expand by supplying to domestic manufacturers and others, and also attracting more component and subcomponent manufacturers. This could result in knowledge and productivity spillovers, which could gradually expand the manufacturing base in general, covering more products.

This strategy has worked well for countries such as Japan and South Korea in their early growth years, and now China, the sources pointed out. Their domestic firms slowly emulated foreign OEMs, and moved up the value chain to emerge as branded OEMs themselves. China executed this in sectors such as EV manufacturing over the last decade by getting Tesla Motor to set up shop, which, in turn, helped the Chinese vendor base to upgrade their quality. That eventually ended up helping Chinese homegrown EV makers such as BYD, Xpeng, Li Auto and Nio to move up the quality scale in double-quick time, and now threaten Tesla in the Chinese, and even western markets.

In terms of job creation though, the PLI scheme has been a mixed bag so far, with data obtained under the Right to Information Act by The Indian Express revealing that sectors such as mobile phones, food processing and pharma have done relatively well; sectors such as auto, IT hardware and specialty steel are somewhat better placed; while some others such as textiles and advanced chemical cells well below target.