Introduction:
In a special interview on The Wire, Karan Thapar discusses India’s claim of becoming a major manufacturer of mobile phones and raises questions about the accuracy of this claim and the implications for the production-led incentive scheme.

Claim of Major Mobile Phone Manufacturer:
The Modi government asserts that India has become a major manufacturer of mobile phones, evidenced by the growth in net exports from minus 3.3 billion to 9.8 billion between 2017-18 and 2022-23, marking a turnaround of 13.1 billion.

Raghuram Rajan’s Questions:
Former Reserve Bank of India Governor and current University of Chicago finance professor Raghuram Rajan presents several questions regarding the government’s claim: Are the exported phones primarily assembled in India or manufactured using indigenous components? How much value addition is occurring in India compared to the imported components? Are the export numbers inflated by exports to neighboring countries that re-export the phones?

Scrutinizing the Claim:
Rajan emphasizes the need to examine whether the exported phones are assembled in India using imported components or if they incorporate significant indigenous value addition. He highlights the importance of assessing the actual value addition taking place in India versus the imported components used in the assembly process. Rajan raises concerns about potential export inflation due to neighboring countries importing phones from India and then re-exporting them, which could artificially inflate India’s export numbers.

Implications for Production-Led Incentive Scheme:
Rajan questions the effectiveness of the production-led incentive scheme in achieving its objectives. He expresses doubt about whether the scheme has led to the intended increase in domestic manufacturing or if it has merely resulted in wasteful expenditure or the diversion of funds that could be better utilized elsewhere.

Context:
Manufacturing jobs in India have not grown significantly in recent decades. The government introduced the Production Linked Incentive (PLI) scheme to attract manufacturing to India. The PLI scheme involves raising tariffs on imported goods and providing subsidies to domestic manufacturers.

Assembly-Based Manufacturing:
Many companies have set up assembly plants in India, importing components and assembling them into finished products. This assembly-based manufacturing qualifies as “production” under the PLI scheme. The government provides subsidies to these companies to compensate for the disabilities of manufacturing in India.

Export Subsidies:
The PLI scheme provides export subsidies to companies that assemble products in India. This has led to a surge in exports of assembled products from India.

Value Addition:
Assembly-based manufacturing contributes only a small fraction of the total value of a product. The majority of the value comes from intellectual property, design, and marketing. India is not capturing much of this high-value-added part of the manufacturing process.

Limited Growth Potential:
Assembly-based manufacturing is unlikely to lead to significant growth in manufacturing jobs or economic development. Global supply chains allow companies to easily move assembly operations to different countries based on costs. India needs to address its disabilities in infrastructure, worker skills, and R&D to attract higher-value-added manufacturing.

Subsidies vs. Value Addition:
India may be paying more in subsidies to mobile manufacturers than the value they add in India. This suggests that the PLI scheme is not achieving its desired goal of promoting manufacturing growth.

Conclusion:
India’s manufacturing sector is currently focused on assembly-based manufacturing, which has limited growth potential and does not capture much of the value added in the manufacturing process. The government needs to address the disabilities that hinder higher-value-added manufacturing in India and focus on attracting companies that can contribute to the entire manufacturing value chain.

Imports and Exports under the PLI Scheme:
The government’s strategy of attracting foreign companies to India through the PLI scheme is based on the assumption that these companies will stay in India even after the subsidies are stopped. However, there is no guarantee that this will happen. The government’s claim that India’s mobile phone exports have increased under the PLI scheme is misleading. While exports have increased, imports have increased even more, resulting in a net import of mobile phone components.

The Role of Imported Components in Mobile Phone Exports:
India’s mobile phone exports primarily involve assembling final devices in India using imported components. The value added in India is limited to the assembly process, and the majority of the value of the exported phones is due to imported components. The government’s focus on increasing mobile phone exports without addressing the high dependence on imported components raises concerns about the sustainability of this export-led growth.

Subsidies and the Cost of Job Creation:
The government’s PLI scheme provides substantial subsidies to foreign companies to attract them to India. However, it is important to consider the cost of these subsidies in terms of the number of jobs created. It is essential to evaluate the cost-effectiveness of the PLI scheme and ensure that the subsidies are used efficiently to create sustainable jobs in India.

Overall Assessment of the PLI Scheme:
The PLI scheme may not be as effective as the government claims in promoting domestic manufacturing and reducing India’s dependence on imports. The scheme’s focus on attracting foreign companies and providing them with subsidies may not be sufficient to ensure long-term sustainability and job creation in the Indian mobile phone industry.

Government Schemes and Employment Creation:
The effectiveness of government schemes in creating jobs is often unclear, and the cost per job is not always transparent. The Production-Linked Incentive (PLI) scheme, which aims to boost manufacturing jobs, has been implemented without clear evidence of its success.

PLI Scheme Evaluation:
The government needs to evaluate the PLI scheme’s performance in terms of job creation, job persistence, and cost-effectiveness. It is important to understand the rationale behind selecting specific sectors for PLI support, such as windmills and batteries. The government should assess whether manufacturers would invest even without the subsidies.

The “China Plus One” Strategy and India’s Opportunity:
Many global manufacturers are seeking alternatives to China, presenting an opportunity for India to attract investments. India should carefully consider whether incentives are necessary to attract companies like Apple, given its financial strength.

Determining Subsidy Amounts and Data Obscurity:
The method for determining subsidy amounts under the PLI scheme is unclear, leading to concerns about potential manipulation of data. The invoice price, which is used to calculate subsidies, may be inflated to increase the subsidy amount. The government’s oversight mechanisms may not be sufficient to prevent such manipulations.

Addressing Criticisms:
The author acknowledges that his initial assumption about net exports being negative was based on the assumption that all imports of certain components were used in mobile manufacturing. Even if only 60% of imports were used, net exports would still be negative, and they would only become positive if the figure was as low as 40%, which is unlikely. The author emphasizes the need for data transparency to make accurate assessments of the PLI scheme’s effectiveness.

Imports and Exports:
India imports significant components used in its exported mobile phones, resulting in minimal value addition in India.

Government’s Claims:
The government emphasizes mobile phone exports but overlooks the substantial imports involved. Net exports may be negative due to higher imports than exports.

Assembly vs. Manufacturing:
India primarily assembles mobile phones rather than manufacturing them. Assembly processes have not significantly changed despite government schemes and tariffs.

Challenges in Becoming a Manufacturing Giant:
India faces competition from countries with lower manufacturing costs, such as China and Vietnam. Temporary incentives, like the PLI scheme, may not be sufficient for long-term manufacturing success.

Underlying Disabilities:
India needs to address underlying issues hindering manufacturing, such as infrastructure and skilled labor availability.

Conclusion:
India’s mobile phone industry heavily relies on imports, and the government’s claims of manufacturing prowess may be exaggerated. Sustainable manufacturing growth requires addressing fundamental challenges rather than relying solely on temporary incentives.

Government Subsidies and Manufacturing:
India faces a shortage of skilled workers, hindering manufacturing growth. The effectiveness of the PLI scheme, offering 6% subsidies on finished mobile phones, is questionable. The scheme’s success is unproven, yet it’s being expanded to other sectors without proper evaluation. The criteria for selecting subsidized manufacturers, often favoring larger foreign companies, lack transparency. The government’s contingent liability from these subsidies is substantial and lacks transparency.

Alternative Investments:
Rajan suggests redirecting funds from the PLI scheme to create high-quality schools and universities. Investing in education would generate long-term benefits for the economy and society as a whole.

Manufacturing Growth:
Rajan challenges the assumption that India should aim to become the world’s largest manufacturer. Instead, he emphasizes the importance of creating jobs in sectors with growth potential, citing data from the ILO on job creation in manufacturing and services.

Challenges in Manufacturing:
India’s manufacturing sector has faced difficulties due to factors like high land costs, inflexible labor laws, and inadequate infrastructure. These challenges have hindered the sector’s growth, despite government efforts to promote it.

Conclusion:
Rajan calls for a shift in focus from subsidizing specific industries to addressing the underlying challenges in the manufacturing sector. He emphasizes the need for a more comprehensive approach to economic growth that includes investments in education, infrastructure, and policy reforms to create a more conducive environment for manufacturing and job creation.

India’s Job Creation:
Since 2021, India has created 3 million formal jobs, with a significant increase in service sector jobs (20 million) compared to manufacturing jobs.

Focus on Service Sector:
India excels in creating service jobs and has a strong presence in chip design, with an estimated 20% of the global market share. The service sector offers low-skilled jobs for moderately skilled individuals, such as security guards, retail workers, and tourism employees.

Capturing Value Chain:
India should focus on capturing the largest part of the value chain in export-oriented industries, focusing on intellectual property, marketing, and finance rather than low-skilled manufacturing.

Chip Manufacturing vs. Chip Design:
Chip manufacturing is expensive and requires significant investment in foundries, while chip design requires training and developing highly skilled engineers. India has a comparative advantage in chip design, with a strong presence in the global market, and should focus on expanding this sector rather than pursuing chip manufacturing.

Micron Plant Investment:
The agreement between India and Micron to manufacture chips in India raises questions about its wisdom, considering India’s limited resources. India is investing heavily in the Micron plant, with 70% of the investment coming from the government, while Micron’s investment is only 30%. The plant will only bring assembly and testing of chips to India, not making India independent in chip production.

Cost per Job:
The investment in the Micron plant will create only 5,000 jobs, at a cost of 3.2 crores per job, while the entire higher education budget of the government is 44,000 crores.

Logic vs. Memory Chips:
The Micron plant will produce memory chips, not logic chips, which are more complex and require a larger investment.

Rajiv Chandrasekhar’s Criticisms:
* Chandrasekhar argues that Rajan’s conclusion is not rocket science, stating that all electronics manufacturing begins with assembly, which is light on value addition.
* He emphasizes that as the component and sub-assembly ecosystem develops, driven by scale and exports, new jobs are created, value addition increases, and domestic companies join the global supply chain.

Raghuram Rajan’s Responses:
* Rajan acknowledges Chandrasekhar’s opinion but highlights that global supply chains have evolved due to high transportation costs, leading to the “flying geese” phenomenon, where low-scale manufacturing starts and moves up the value chain as workers become more expensive.
* He points out that India is starting after China and faces competition from countries like Vietnam, making it challenging to vacate higher-skilled parts of the supply chain.
* Rajan emphasizes that simply paying people to come and assemble products in India without investing in creating higher-skilled workers and conditions for moving up the value chain will not lead to the desired outcomes.
* He stresses that the government needs to take proactive steps to invest in creating higher-skilled workers and conditions for moving up the value chain, which is not evident in the current approach.

Manufacturing in India:
India has been assembling computers and mobile phones for several years. India’s manufacturing strengths lie in value-added manufacturing, where small improvements in technology and reliability are key. India struggles in fundamental research and commodity manufacturing.

Sector Selection:
Rajan questions the government’s selection of sectors for promotion, emphasizing the need to focus on areas where India has a competitive advantage. He criticizes the tendency to follow China’s lead without considering the changed global context.

Criticism of PLI Scheme:
Rajan argues that the PLI scheme, which provides incentives to manufacturers, is a temporary solution that does not address underlying cost disabilities. He emphasizes the need to directly address cost disabilities through upskilling workers, increasing R&D, and improving infrastructure. Rajan warns that manufacturers may leave India once the incentives end.

PLI Scheme’s Attractiveness:
The minister claims that the PLI scheme has addressed cost disabilities and attracted global supply chains. Rajan challenges this claim, arguing that manufacturers are only building sheds and assembling products in India, not making significant investments.

Addressing Disabilities:
Rajan asserts that bribing manufacturers through incentives is not the right approach to address cost disabilities. He emphasizes the need to improve the quality of skilled workers, invest in R&D, and focus on India’s strengths.

Positive Sentiment and FDI:
India has a positive image due to government public relations and China’s struggles, but this hasn’t led to a significant increase in FDI. Investors, such as Apple, focus on ground realities and business conditions, not just headlines.

Challenges to Manufacturing Growth:
India needs to address impediments to business and improve its ease of doing business to attract more FDI. Despite the government’s claims, data indicates that FDI has remained stagnant at 1.5% of GDP for years.

Reservations and Employment:
The lack of adequate private sector jobs has led to demands for reservations in government jobs, causing frustration among the populace. Rajan emphasizes the need for real, high-paying jobs, not low-paying ones that require moderate skills.

Chandrasekhar’s Personal Attacks:
Rajan doesn’t respond directly to Chandrasekhar’s personal attacks, but notes that Chandrasekhar used to be polite when meeting him at the RBI.

Background:
Raghuram Rajan, a renowned economist and former Governor of the Reserve Bank of India, engaged in a debate with Mr. Chandrasekhar, India’s Minister of State for Electronics and Information Technology, regarding the Production-Linked Incentive (PLI) scheme and proposed import restrictions.

PLI Scheme Evaluation:
Raghuram Rajan expressed concerns about the lack of independent evaluation of the PLI scheme, which aims to boost manufacturing in India. He highlighted the difficulty in obtaining accurate data and the potential for manipulation, emphasizing the need for an independent agency to assess the scheme’s effectiveness.

Job Creation and Economic Growth:
Rajan stressed the importance of job creation in India and questioned whether the PLI scheme, in its current form, would deliver the desired results. He called for a skeptical approach, citing the lack of substantial progress since the scheme’s inception in 2014. He emphasized the need to focus on evaluating the scheme’s impact on job creation, incremental growth, and the sustainability of employment once the scheme concludes.

Personal Attacks and Academic Discourse:
Rajan responded to personal attacks made against him by Mr. Chandrasekhar, suggesting that such attacks may indicate a lack of strong arguments. He pointed out that Mr. Chandrasekhar’s criticism largely agreed with the substance of Rajan’s arguments, albeit with differing expectations about future outcomes. Rajan emphasized the importance of academic discourse and respectful debate.

Import Restrictions on Electronics:
Rajan expressed concern about the government’s proposal to restrict imports of laptops, tablets, personal computers, and potentially other electronic devices, citing potential national security concerns. He argued that security issues are not solely related to hardware and that banning imports may not effectively address the underlying concerns. He also emphasized the importance of focusing on higher-value manufacturing, such as AI, rather than low-end assembly.

Economic Thinking and the License Permit Raj:
Rajan criticized the government’s approach to economic policy, particularly the reintroduction of elements of the License Permit Raj, a system of economic controls that stifled innovation and growth in India’s past. He warned against expanding the PLI scheme and other restrictive policies, arguing that they impede economic progress and fail to address the country’s fundamental economic challenges.

Conclusion:
Raghuram Rajan’s critique of the PLI scheme and proposed import restrictions highlights the need for rigorous evaluation, a focus on job creation and economic growth, and a broader perspective on India’s economic policies. He advocates for a shift away from protectionist measures and towards a more forward-looking approach that embraces innovation and higher-value manufacturing.

Economic Thinking Failure:
Raghuram Rajan criticized the government’s restrictive policies on imports, particularly in the technology sector, as a failure of economic thinking.

Consequences of Import Restrictions:
Imposing restrictions on computers and iPads would hinder India’s high-quality services industry, forcing them to seek government approvals frequently.

Lack of Vision for India’s Future:
Rajan expressed concern about the lack of a clear vision for India’s economic development in light of global pressures like on-shoring, near-shoring, automation, and competition from countries like China and Vietnam.

Urgent Need for a Broader Debate:
He called for a comprehensive discussion on India’s economic direction, considering the challenges and opportunities presented by the changing global landscape.

Appeal to Government Leaders:
Rajan emphasized the need for leaders like Commerce and Industry Minister Piyush Goyal, Finance Minister Nirmala Sitharaman, and Prime Minister Narendra Modi to reflect on the questions he raised.

Importance of Editorial Independence:
Karan Thapar highlighted the significance of editorial independence and the role of viewers in supporting bold, independent, and sometimes defiant journalism.

Call for Viewer Support:
Thapar encouraged viewers to consider supporting the program through the provided description link to ensure its continued existence as a forthright, outspoken, and engaging platform for interviews.