PLI Schemes: Chinese firms to be let in; MeitY assures industry that supply chains won’t be disrupted, other ministries to follow suit

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September 06, 2021 4:15 AM

Though the assurance has been given by the ministry of electronics and IT to the hardware industry executives, who had made a representation to the government in this regard, sources said that other administrative ministries will also take a similar approach.

But finally when the names of the selected companies were announced in May, the production target was slashed to Rs 1.60 lakh crore of which exports would be of the order of Rs 60,000 crore.But finally when the names of the selected companies were announced in May, the production target was slashed to Rs 1.60 lakh crore of which exports would be of the order of Rs 60,000 crore.

Realising that the production-linked incentive (PLI) schemes will not move forward if China-based ancillary firms and executives are not allowed seamless access to the country, the government has assured the industry that it will expedite approvals wherever required on a case-by-case basis.

Though the assurance has been given by the ministry of electronics and IT to the hardware industry executives, who had made a representation to the government in this regard, sources said that other administrative ministries will also take a similar approach.

This softening of approach towards China-based ancillary units would also help in finalising PLI guidelines for the auto and auto component sector, which has been hanging fire for long.
The IT hardware industry had recently represented to the government, issues relating to localisation in the PLI among others. It had said that since investments from China are technically not allowed, it will be difficult for the selected companies to set up manufacturing/assembly lines in India for the components like PCBA, battery packs, power adapters etc.

Since PLI is designed for export market, to set up a manufacturing hub in India, global IT players need to shift not only their base from external centres but also the base of their suppliers. The problem here is that Chinese suppliers are not being given permission to invest in the country in the aftermath of the border tension between the two countries.

Specific to the IT hardware industry such a hurdle was becoming more acute and threatening to derail the entire scheme. This was because the incentive structure in the PLI for this sector is low at an average of 2-2.5% over a four-year period, which does not justify relocating units from China or Vietnam. Just for comparison: the incentive structure for mobile phones PLI, which got operationalised in August 2020 is 4.5% over a five-year period.

Since import duties on hardware products are nil as they fall under Information Technology-I products, manufacturers do not see much reason to relocate their base from China to India. Further, for any relocation of units, Chinese technicians would require visas to travel to the country, where also the government had earlier hardened its position.

Due to such issues, coupled with the low incentive structure, the PLI for IT hardware — which comprises laptops, tablets, all-in-one personal computers (PCs) and servers –had to be pruned even before it got operationalised. When the government had announced the scheme on February 24, the outlay was fixed at Rs 7,350 crore over a four year period. During this period, the government had estimated a production of up to Rs 3.26 lakh crore, of which exports was expected to be of the order of Rs 2.45 lakh crore. But finally when the names of the selected companies were announced in May, the production target was slashed to Rs 1.60 lakh crore of which exports would be of the order of Rs 60,000 crore. This was because the manufacturers turned up with low bids.

Under the scheme, 14 companies have been selected – 4 global and 10 Indian.

Now with the industry bringing forth the issues related to supply chain and visa for Chinese nationals, the government apprehends that the targets may not get achieved even by the selected firms, therefore the rethink on the issues highlighted.

India’s import of laptops has increased by 42% – from $2.97 billion to $4.21 billion – in value terms, in the last five years. Around 87% of imports continues to come from China. In absolute terms, India’s dependency on China is very high – it has increased from $2.83 billion to $3.65 billion during the last five years. For the year ending March 2021, India’s import of laptops is estimated to have reached close to $5 billion out of which imports from China would be around $4.35 billion.

As per estimates, the global market for laptops, tablets and desktop computers has grown from $229.38 billion in 2018 to $ 240.99 billion in 2019 and is expected to stabilise around $220 billion by 2025. Only six global players comprise 89% of the market shipments for laptops and 81% for tablets. United States and European Union together represent more than 40% of the global market.

The global manufacturing hubs are limited to a handful of countries with China being the predominant supplier to the world (66% market share in 2019; $100 billion in value).

Highlights

Pragmatic approach

– Global firms relocating from China under the PLI scheme need to move their supply chain units also

– Govt’s policy does not encourage China-based supply chain units to relocate to India

– This acts as a major hurdle for firms as building new ancillary units takes a long time

– The issue was creating a major problem in the IT hardware sector where selected firms had approached the govt

– In IT hardware PLI incentive structure is low at 2-2.5%

– With nil import duties firms saw no benefit of relocating to India

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