Former Reserve Bank of India (RBI) Governor Raghuram Rajan has questioned the sustainabilty of the Centre’s production-linked incentive scheme (PLI). The PLI scheme aims to give companies incentives for incremental sales from products manufactured in domestic units. Rajan in a LinkedIn post said that Apple using India for cell phone assembly is no proof that PLI is working.
Rajan said, “The 20 per cent tariff on mobile phone imports before PLI started (paid for by the consumer) may be reason enough for Apple to assemble in India. Also, Apple is looking for alternatives to China, as are many global supply chains.” He said that the growing Indian market is a big attraction. It may be that the PLI scheme tipped Apple over the edge. More likely, they would have come for other reasons.
Adding to the argument he said, “We need to look not just at exports but also imports (as well as royalties and profits foreign manufacturers take out) to evaluate the scheme’s contribution to our external account. In fact, the government statistics suggest 38 per cent of the expected investment in mobile phones has come in but only 4 per cent of the expected jobs. This suggests a lot less labour or value added in Indian than anticipated.”
The former governor said that even if production comes to India, manufacturers must find it worthwhile to continue manufacturing in India after all the government-provided incentives end. This implies that they should bring substantial parts of the supply chain to India so they do not leave easily.
Rajan said that the government has a tight Budget constraint, so as interest rates rise and debt servicing becomes difficult. Contracted PLI is a form of debt in that the government will owe manufacturers.
He wrote, “The $10 billion seemingly set aside for subsidizing a $20-billion chip factory, with dubious prospects of success, could finance hundreds of top universities (including upgrading existing ones) and thousands of top schools.”
Rajan asked the government, “Is it better to create human capital or subsidise physical capital? Is it better to create Apple or TSMC (the Taiwanese chip maker)?” If PLI is not going to create crores of jobs India needs (thus far, the scheme has created 3 per cent of the anticipated additional employment of 0.6 crores, while 15 per cent of anticipated investment has already come in), the sooner we shift to schemes that will work, the better, he added.