Localisation Clause: Will laptop PLI run into trouble in WTO?

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March 1, 2021 5:15 AM

The government expects the scheme to reduce India's import dependence for IT hardware in a major way — currently, 80% of the country's laptop and tablet demand is met through imports.

Under the scheme, incentives of 4% to 1% on net incremental sales over the base year (2019-20) will be given to the beneficiary companies.Under the scheme, incentives of 4% to 1% on net incremental sales over the base year (2019-20) will be given to the beneficiary companies.

A clause relating to phased localisation in the production-linked incentive scheme for IT hardware, which includes laptops, tablets, all-in-one PCs, and servers, has divided the industry whether it is going to land the scheme in trouble with World Trade Organisation rules, which prohibit discrimination against imported products.

Some prominent global players who are into manufacture of such devices see it as not being compliant with the WTO as under the organisation’s rules imports have to be treated on par with domestically manufactured products and in the past India has lost cases whenever it has incorporated such clauses in any of its schemes. However, several other global players, who already have domestic production in India of certain scale, don’t find any problem with the localisation clause and seem to be ready to comply with it.

Government officials and some WTO experts also feel that though technically localisation clause is on the wrong side of the WTO norms, India would be able to get through it if a larger section of global players opt to participate in the scheme. These experts point out that in the worst case scenario if the scheme gets challenged in the WTO and the ruling is against India, by the time it comes, the scheme would have run its course of four years. Since WTO rulings are applicable prospectively, the government and industry should not fear such perceived adversities, is the common consensus. Such experts point out that most developed nations have followed this strategy when it has come to fine balancing line with regard to WTO matters.

The PLI for IT hardware apart from fixing incremental investment and production targets also has a localisation clause which kickstarts in the second year of the four-year cycle to avail the incentives given by the government. Under it, the selected companies need to do some localisation for components like printed circuit boards, battery packs, power adapters etc. This has been done to boost domestic manufacturing of electronics components.

The government expects domestic value addition for IT hardware to rise to 20-25% by 2025 from the current 5-10% due to the impetus provided by the scheme.

The scheme outlines that in the first year of production, no localisation is required, in the second year, printed circuit board (PCB) assembly should be done domestically, and in the third year, along with PCB assembly, battery packs should be assembled locally either by the applicant company or through one of its vendors. In the fourth year, along with PCB and battery packs, power adapters and cabinets should be made locally.

Currently, companies like HP, Lenovo, Dell, Acer etc are involved in domestic manufacturing of IT hardware on varying scales. The view of the government and WTO experts is that it is these companies who would scale up production as well localisation and avail of the incentives under the PLI. However, any company which does not have local production currently, would need to relocate and would not be comfortable with local assembly for quite sometime and may thus lose out on incentives. For such companies, therefore localisation content would act as a barrier or a non-level play field.

This is quite apparent in the PLI for the mobile phone manufacturing though there’s no localisation clause there. A company like Samsung which has been selected is quite comfortable in meeting its first year — FY21 — incremental investment and production target, but the contract manufacturers of Apple are unable to and are seeking some rollover of first year’s target. The reason is that Samsung already has substantial domestic production in India, whereas vendors of Apple need to relocate from China and set up fresh units and commission them.

The PLI scheme for manufacturing of IT hardware like laptops etc, has an outlay of Rs 7,350 crore over a four year period and a total of 15 companies, five global players and 10 domestic firms, are expected to benefit from it. The incentives are expected to generate additional investments of Rs 2,700 crore and result in incremental production of Rs 3.26 lakh crore, 75% of which would be exports.

The government expects the scheme to reduce India’s import dependence for IT hardware in a major way — currently, 80% of the country’s laptop and tablet demand is met through imports.

Under the scheme, incentives of 4% to 1% on net incremental sales over the base year (2019-20) will be given to the beneficiary companies. It is also expected that the scheme could generate over 1.8 lakh direct and indirect jobs over the four- year period.

Currently, India’s annual laptop imports are to the tune of Rs 29,500 crore and tablet imports are at Rs 2,870 crore. The market for IT hardware is dominated by 6-7 companies globally which account for about 70% of the world’s market share.

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