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IT hardware PLI 2.0 scheme needs penalty clause to meet targets

The government seems to be quite bullish with around 40 companies applying for its modified production-linked incentive scheme for IT hardware comprising laptops, tablets, all-in-one personal computers, and servers. With the first version of the scheme, launched in April 2021, not yielding the desired results, the excitement this time round is understandable. But if policy-makers do not put in place a mechanism to sift the serious players from the non-serious while selecting the successful candidates, they risk witnessing failure once again.

The reason for the same is the large number of applications by contract manufacturers without any manufacturing contractual agreement with original equipment manufacturers. Of the 40 applicants, there are only seven branded players—HP, Dell, Lenovo, Acer, Asus, HPE, and Thomson. Of these seven brands, while Dell and HP are participating directly, HPE, Lenovo, Acer, Asus, and Thomson are participating through EMS (contract manufacturers) companies.

Marquee brands such as Apple and Samsung continue to shun domestic manufacturing of laptops as they see the market to be very small—just around 2.4% of the global market. With low domestic volumes, it does not make sense for them to make India an export hub by shifting their existing manufacturing base from China or Vietnam, especially since import duties on hardware products are nil as they fall under Information Technology-I agreement.

One cannot fault their strategy as producing everything in every country by every player does not make sense. The failure of the first PLI gives some insights into why unlike smartphones, India may not turn out to be a successful destination for manufacturing IT hardware. When the scheme was first announced on February 24, 2021, 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 trillion, of which exports was expected to be of the order of Rs 2.45 trillion. Later, when the applicants of the scheme were announced, the production target was slashed to Rs 1.60 trillion, of which exports was to be to the tune of Rs 60,000 crore. The incentive structure is based on achieving a minimum threshold of incremental sales over a base year going up to a maximum limit—with companies committing to lower production targets, the outlay of Rs 7,350 crore automatically got pruned by half.

Of the 14 companies—4 global and 10 local—which had participated, only Dell has been able to claim incentives under the first PLI scheme. IT hardware manufacturers had blamed this on the low incentive structure, which worked out to an average of 2-2.5% over a four-year period; it did not justify relocating units from China or Vietnam. In comparison, the incentive structure for mobile phones PLI, which got operationalised in August 2020 and saw companies committing up to the maximum limit, works out to around 4.5% over a five-year period.

Understanding the problem, the government has addressed the issues. In the modified PLI, the outlay has been raised by over two-fold to `17,000 crore and the duration of the scheme has been increased to six years. Companies can claim incentives in any of the six years. The incentive has been raised to 5% from 2%. Investment norms have also been made flexible, under which companies can now even include investments made by their suppliers or contract manufacturers. This way, companies can claim additional incentives of 3-4% if they use locally manufactured components.

All this seems to be fine, but may still not produce the desired results if the selection criteria adopted is not made foolproof. The government should ideally have negotiated with the brands, and, in the case of the contract manufacturers, should have made it mandatory for them to produce manufacturing agreements with the manufacturers. Not having done so, the applicants amongst the contract manufacturers, if selected, will now get into a bidding race for tying up with the manufacturers, which will see their commissions thinning. If this happens, will there be enough incentive to produce successfully in India? Many of the contract manufacturers like—Flextronics, Bharat FIH, Dixon, Bhagwati, etc—who have applied this time were there in the first round also, but could not avail incentives.

The government wants to repeat the success of smartphone PLI for IT hardware PLI but seems to have missed some of the key practices adopted for the former. It negotiated the terms of the PLI with Apple and not its contract manufacturers. Note, Wistron—Apple’s contract manufacturer for iPhones that claimed smartphone PLI incentives—could not do this in the first version of the IT hardware PLI. Wistron has, once again, applied for IT PLI 2.0.

Participating in the PLI is easy in the sense that there are no penalties in the case of not meeting the incremental sales and production targets. This way, the challenge before the government is how to go about selecting companies out of the 40 applicants, that is beyond the seven brands who will manufacture on their own or have a manufacturing tie-up.

If it is really serious about the outcome of the scheme and does not want it to fail this time round, it will be prudent to first ask the contract manufacturers to produce a manufacturing contract with the manufacturers or levy a token penalty on the ones who fail to meet the targets consecutively for two years or so. Weeding out the non-serious players should be the first task before the government as it goes about selecting the applicants. If not, it runs the risk of missing its targeted incremental production of Rs 3.35 trillion, expected incremental investment of Rs 2,430 crore and incremental direct employment of around 75,000. Financial Express

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