A Rs 40,000-crore PLI scheme for electronics sub-assemblies and components likely to be announced

Budget 2024-25 could see India pushing its success story in production linked incentives (PLIs) for electronics further with the announcement of a new PLI for sub-assemblies and components. Pegged to be in the range of Rs 35,000-40,000 crore, the scheme has been in the works since February at the Ministry of Electronics and Information Technology with a clear purpose to build an ecosystem for higher local sourcing of components, multiple sources told Moneycontrol.

The scheme, designed with extensive stakeholder participation, hopes to address local sourcing concerns that have dominated the PLI scheme.

It aims to develop an ecosystem of components and sub-assemblies, but an industry insider pointed out that finding companies to participate in the scheme will be a real challenge. Companies that are meeting nearly all criteria of the PLI scheme are falling behind on the local sourcing norms “because India doesn’t manufacture the high-quality components needed, it’s a real challenge”, said another source.

China’s dominance

Nearly 90 percent of the electronic component ecosystem is dominated by China. “You are trying to move an entire ecosystem from a country that has taken over three decades to build,” said a source. China’s dominance in the electronics components space has remained unfazed— the neighbouring country exports nearly $900 billion worth of electronic products annually while India manages to do around $15 billion.

In fact, until 2010, India and Vietnam exported a similar value of electronic items but since then Vietnam’s exports have leapt nearly nine times that of India’s, according to data compiled by ICRIER. “Other countries like Vietnam have surged because of no local sourcing requirements that have encumbered Indian players – so while a company might not be exporting from China, the same Chinese supplier is now coming in from countries like Vietnam, said a source. It is a problem that the ministries – including commerce, MEITY and finance – are mindful of, and have been pushing for a resumption of easier access to the Chinese ecosystem. However, the final decision on Chinese visas will be taken by the Cabinet Committee on Security, the Ministry of External Affairs and the Home Ministry.

The impediments

The push in the Budget 2024-25 is to increase domestic value addition. China and Vietnam have followed the same approach but they did it sequentially instead of a simultaneous approach. Industry players say that Indian companies are battling with the high cost of capital — nearly three times that of China; access to technology and a near absent skill-set. “The question is – even if you give PLI who will these companies work with?” the source asked. The scheme will have to look at joint ventures to begin with. Success stories of East Asian economies such as Hong Kong ($320 billion); Taiwan ($183 billion), and South Korea ($148 billion) as of 2020-21 show that “first globalise then localise” in the case of electronics sector has worked better, according to an analysis by ICRIER.

Sino-India reset

India’s relationship with China over the last few years has been difficult, hitting a new low four years ago with the escalation of tensions on the India-China border. What has followed since has been an overt attempt to keep Chinese money and people out of India. There has been a lot of talk about pressing the reset button to resolve differences. Significantly, in the first meeting between External Affairs Minister S Jaishankar and Chinese Foreign Minister Wang Yi, both sides agreed that the” prolongation of the current situation in the border areas is not in the interest of either side”.

The economic impact of the souring of the relations has been a slide for India. When the smartphone PLI scheme was announced on April 1, 2020, the intent was to ride the China plus one wave and the hope was that along with assembly, the entire ecosystem would shift from China to India. On April 17, 2020, Press Note 3 was released putting sweeping curbs on Chinese investments into the country, including bans on Apps. The trigger cited was national security concerns. Since then India’s trade deficit with China has expanded at a breathless pace — while India’s exports to China have remained around $16 billion annually since 2019, imports have increased from $70.3 billion in 2018-19 to over $101 billion in 2023-24. This has meant a cumulative trade deficit of more than $387 billion over the past five years.

Policy dilemma

The policy dilemma before the Indian government is how to deal with China. While India needs China to build its sourcing capabilities, it also has to keep its security concerns paramount. Electronics manufacturing is a success story that India needs to build upon to create highly skilled jobs in India. At the last count, 14 million Chinese were directly employed in the electronics sector compared to 140-210,000 in India. Even the Philippines has 21 times more workers in the electronics sector than India. As the government readies to announce a new PLI scheme, the big question is whether the government will allow joint ventures in this space because the tech know-how for components and sub-assemblies largely sits outside India. “We have to build scale. Assembly has done well. Electronics has been a successful PLI, we have to build on it. It is a well established principle that when you grow scale, value addition goes down initially,” said an industry source.

As India looks at becoming the third largest economy in the world, it faces the pertinent question of either allowing Indian manufacturing access to the cheapest inputs from anywhere in the world to build and scale, or to start from scratch even as it aspires to build for the world. India has announced a slew of programs, including Make in India and the PLI schemes, to build its manufacturing capabilities. It has been negotiating free trade agreements but even as such pacts have been signed, custom duties across a wide range of products have ratcheted up. While the government pursues two simultaneous goals of exporting to the world and boosting local value addition, it might want to step back to assess if India wants to shift gears and accelerate one over the other for the time being.