4 Questions On PLI Raghuram Rajan Wants the Government To Answer

While companies such as Apple have been reaching milestones such as $1 billion worth of export in December 2022, the job creation estimates are sorely languishing

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On the day a news report has claimed that Apple hit the $1-billion export mark from India in December, former Reserve Bank of India governor Raghuram Rajan has cast doubt on the efficacy of the production-linked incentive (PLI) scheme—the US-based phone maker being a beneficiary of the programme launched in April 2020.

Former RBI governor Raghuram Rajan

The report said Apple took over Samsung as the leading mobile phone exporter in November and achieved the monthly milestone of $1-billion export in December. Apple has three contract manufacturers in India—Foxconn Hon Hai and Pegatron operating from Tamil Nadu and Winstron located in Karnataka. All three are participants of the Indian government's smartphone PLI scheme which has an outlay of INR 40,995 crore, the largest among the 14 such schemes launched by the Narendra Modi-led government to expedite manufacturing in India and in turn creating jobs.

For the smartphone scheme alone, the government expects an incremental production worth INR 10.05 lakh crore, exports valued at INR 6.5 lakh crore and a total, direct or indirect, of 800,000 jobs being created by 2026.

Rajan, however, in a note posted on LinkedIn questioned the way in which the PLI schemes are evaluated and posed four broad questions. The note, titled The PLI Scheme: Sense and Nonsense In the Debate, said, "We need more sensible discussion of the merits and demerits of an important scheme in which lakhs of crores of taxpayer money are being promised."

Under the PLI scheme, the government pays manufacturers for a part of the price for each unit produced thus incentivizing them to ramp up production. In total, the government has committed an outlay of roughly around INR 3 lakh crore for the 14 schemes covering as many sectors including pharmaceuticals, textiles, steel, food products, auto and electronics, among others.

One of the questions asked in the note, which has been co-written by Rahul Chauhan and Rohit Lamba along with Rajan, is whether investment would have taken place even without the incentives.

"Apple using India for cell phone assembly is no proof that PLI is working. Apple is looking for alternatives to China. The growing Indian market is a big attraction. It may be that the PLI scheme tipped Apple over the edge. It may equally be that they came for another reason," said the note, adding that PLIs in sectors where large industrial houses were anyway going to make investments cannot be considered as 'success' of the scheme, rather these are "pure freebies".

The second question asked is that if the answer to the first question is no, how much are the schemes contributing in increasing country's external surplus. Rajan argues that one should not just look at exports but the value of mobile exports minus the value of mobile imports to get the real picture. "If I am a mobile manufacturer in Taiwan, and India is paying me PLI for every cell phone that leaves my factory in India, I simply ship all parts to India, assemble the phone there, and get a hefty reward from the India taxpayer for every cell phone I 'manufacture'."

India's overall exports of electronics goods went up to $16.67 billion in April-December 2022, up around 52 per compared with the year-ago period, as per data by the Department of Commerce. The other prime focus of the PLI schemes is to reduce dependence on imports for manufactured goods.

The other two questions are whether these companies will continue production at such levels after the scheme is over and if this is the best use of resources by the government.

However, the main issue that Rajan alludes to is the lack of job creation as was promised under the schemes. Citing data by the Department for Promotion of Industry and Internal Trade, he points out that, for instance, while 54 per cent of the expected investment under the PLI scheme has come in the food products space, only 49 per cent of the promised jobs has been created. For mobile phones, while 38 per cent of the expected income has come in, 4 per cent of the expected jobs have been created. For pharmaceuticals, 107 per cent of the estimated has come in creating only 13 per cent of the expected jobs.

Out of the 14 sectors covered under the scheme, mobile phones, pharmaceuticals and food products were estimated to create the highest number of jobs.

The writers of note go on to claim that pharmaceuticals is one industry which definitely did not require PLI support. India is a leading maker of generic drugs across the world.