The mobile sector has lessons for the Indian economy

India and China had similar GDP per capita in 1983. However, China’s GDP per capita will be five times that of India in 2022. Manufacturing and exports have played an important role in the Chinese economy, moving it from a lower GDP per capita to a higher one.

The mobile phone and room air conditioner (RAC) sectors have recently shown us the formulas for expanding manufacturing and growing exports.

We were one of the biggest consumers of mobile phones in 2014. In 2014-2015, our mobile phone imports exceeded $8 billion. Our imports of electronics threatened to overtake our imports of oil. The government has taken many measures such as 100% automatic FDI, charging import duties to protect local manufacturers, Phased Manufacturing Plan (PMP), Manufacturing Clusters (EMC 2.0) and production-linked incentive program (PLI). Despite some difficulties of execution in the field, these steps have developed our mobile phone manufacturing base. They have attracted investment, created thousands of jobs and taken us from being a net importer to a net exporter.

Our mobile phone manufacturing value jumped more than eight times from 0.27 trillion rupees in 2013-14 to 2.2 trillion rupees in 2020-21. Samsung operates the world’s largest mobile handset manufacturing facility in Uttar Pradesh. We overtook the United States and South Korea to become the world’s second largest manufacturer.

Source: Jefferies, company data

The next frontier for us is to boost exports and increase added value. Our mobile phone exports are mainly limited to low-value feature phones and smartphones. India should aim for a significant increase in its exports from the current $4 billion. China exports $200 billion and Vietnam exports $60 billion worth of mobile phones. The PLI program aims to achieve the same goal by allocating incentives of Rs 410 billion for the mobile phone category over the next five years. Global giants like Foxconn, Samsung, Wistron and national companies like Dixon investing bode well.

Our added value in the manufacture of mobile phones is currently limited to 15-20% against more than 40% in China. The Semiconductor and Electronic Components Manufacturing Promotion Scheme (SPECS) is a step in the right direction. Many parts such as display panel assembly, camera modules, batteries, chargers, circuit board assembly, etc. are manufactured/offered to be manufactured in India. This will increase the added value at the Chinese level in the next few years. We need to focus on setting up a manufacturing plant to manufacture semiconductor chips to facilitate full vertical integration. We should leverage our common interests with Taiwan, a world leader in chip manufacturing, to get a head start.

The Room Air Conditioning (RAC) sector performed similarly. We imported RACs worth Rs 41 billion in 2017-18. The government has launched several measures such as the PMP program, banning the import of air conditioners filled with refrigerant, increasing import duties on RACs and critical components, and the PLI program. From 2017 to 2018, RAC imports decreased by 56% to reach Rs 18 billion in 2020-21. Our RAC import has moved from China to an FTA country like Thailand where import duties do not apply.

As the PLI regime explicitly incentivizes component manufacturing, several component manufacturing facilities, including for compressors, PCBs, motors, etc., are being established. From the import of 79% of the CARs, the added value will increase to 60-80% in the CARs in a few years.

A judicious combination of protection (import tax/ban on finished products) and incentives (PMP, PLI, 100% FDI) has developed local industry, created jobs and generated a trade surplus. Imagine the opportunity to replicate this success in industries such as specialty steel, automobiles, automotive components, toys, bulk drugs, technical textiles, food products, solar photovoltaic modules and medical devices.

We missed the manufacture/export bus in the 1980s. We excelled in services like software to become the back office of the world. With China+1 becoming a geopolitical imperative, now is the time for us to develop the manufacturing sector and improve our export market share. Many of our peers are ahead of us in the ease of doing business, but none of them have a large domestic market like ours. The automotive and generic pharmaceutical sectors in the past and the mobile/RAC sectors recently have shown that we know the formulas.

The journey will still be long and arduous to reach a stature close to that of Vietnam or China for export. To realize our true potential, we need close coordination and hard work between central, state and local governments, the rule of law, improvements in infrastructure, especially logistics and a flexible labor law. As India emerges as a credible alternative to China, China will react. From exploiting their financial might to cyber warfare, they will use saam, daam, dand and bhed to maintain their lead. We must be sufficiently prepared.

This column first appeared in the print edition of January 20, 2022 under the title “The Manufacturing Opportunity”. Shah and Tibrewal work at the Kotak Mutual Fund. Views are personal.

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