India has stepped into the global race to dominate the “industries of the future”. Its instrument, however, is the untested PLI programme. Starting today, CarbonCopy looks at the promises and perils that come with it.
Not once but twice, India had a chance to lead the world in solar technology.
Photovoltaics were first discussed in the country’s third five-year plan (1961-66), a time when the young republic wanted an indigenous solar sector to meet developmental imperatives like rural electrification.
That beginning, which could have seen India export solar technologies to the third world, went nowhere. India’s next two five-year plans (1969-78) ignored solar and focused on hydel, tidal and geothermal energy. Solar reappeared in the 6th five-year plan (1980-85). In the years that followed, the country created an indigenous solar manufacturing sector as well as developmental technologies like solar cookers, pumps and electrification.
The country was in step with the rest of world. Globally, attempts to commercialise solar photovoltaics had started in the 1950s and 1960s – and accelerated further during the 1970s’ oil crisis. By 1995, solar R&D was being driven by the US, Germany, Japan and Australia. India was one of the countries where manufacturing had started – courtesy firms like Premier Energies.
China lagged far behind. In 2006, when China’s first solar installation – a 1MW project atop six buildings in Shenzhen – came up, India had about 40 solar manufacturers and an installed manufacturing capacity of 4,000 MW.
That beginning too, however, went nowhere. China entered solar panel manufacturing. At a time when different firms made polysilicon, ingots, modules, wafers and cells, it set up integrated manufacturing complexes. Set up at large scale and subsidised by the government, these drove photovoltaic prices so low other countries couldn’t compete. European solar manufacturing died. So did Indian firms like Moser Baer.
Instead of supplying solar panels to the world, India became an importer.
In March, 2020, India unveiled a new government policy which seeks to make the country a global manufacturing powerhouse.
Among other things, the Production-Linked Incentive (PLI) scheme, as it’s called, wants to bring sunrise sectors like semiconductors and renewable energy manufacturing to the country.
It’s an ambitious undertaking. Take renewables. China’s position across these manufacturing supply chains seems unassailable. Its share in the global production of each manufacturing stage of solar panels – polysilicon, ingots, wafers, cells and modules – stands above 80%. The country exercises similar dominance in lithium-ion batteries and is gaining in wind.
Compounding matters, other countries are eyeing these sectors as well. Not only has Covid-19 exposed the risks of high geographical concentrations in supply chains, the global push for clean energy and decarbonisation has offered countries a fresh chance to carve out competitive advantages for themselves. Hitherto energy-importing countries can become exporters – of new technologies; the equipment used to produce renewable energy; or the energy itself – and dominate the emerging energy landscape.
For both reasons, countries are trying to decouple from China. The US has announced the Clean Energy Manufacturing Initiative and, now, the Inflation Reduction Act. As CarbonCopy reported last year, Germany has offered €700 million as research grants for firms working on offshore wind, hydrogen production, gigawatt-scale electrolyzer production, and hydrogen transport options. France has announced a $35 billion investment to build “the technological players of tomorrow” as a part of its drive to revive the country’s industrial sector.
In March 2020, India tossed its hat into the ring as well. With the PLI scheme, the country seeks to boost manufacturing competitiveness – to replace imports; to wrest some supply chains away from China; and to dominate some of the industries of the future.
An introduction to PLI
Over the last seventy years, India has waged a losing battle on manufacturing competitiveness.
In the years after independence, the country initially banked on the public sector for export competitiveness. For steel exports to take off, as the late Abhijit Sen, a former member of the erstwhile Planning Commission told CarbonCopy in July. PSUs were to make raw steel cheaply.
When that tact didn’t work, the country tried other approaches. To protect domestic industry, it hiked import tariffs. For exports, it launched capital subsidies like TUFS (Technology Upgradation Fund Scheme) and M-SIPS (Modified Special Incentive Package Scheme, for electronics design and manufacturing). When exporters complained about high taxes making them uncompetitive, the government offered tax refunds.
These didn’t work either. Capital grants did not always result in exports. Tax refunds failed as well. All taxes couldn’t be refunded (like the cost of energy). Also, taxes aren’t the only reason companies’ costs go up – other factors like poor infrastructure, weak investments into R&D, an untrained workforce, high input and energy costs and political rent-extraction contribute as well. Other attempts, like the SEZ policy, have not delivered per planners’ expectations either.
In essence, after 75 years of independence, not only have exports remained hamstrung, domestic manufacturers have struggled against imports as well.
For a number of reasons, the PLI scheme is a significant departure from these past attempts. Instead of addressing the root causes of uncompetitiveness, it pays a disability cost to chosen companies to compensate for the inefficiencies of manufacturing in India. It works with far fewer firms than its predecessors. In photovoltaic, the PLI programme chose just three companies. In batteries, four. The government also wants to use PLI to indigenise entire value chains.
As India’s previous misfires with solar manufacturing tell us, the costs of failure can be high – the loss of an economic engine; import dependence on another country. How do disability costs, the intensification of import tariffs, the focus on sectoral champions, and the drive to indigenise entire value chains fare against other nations’ attempts to capture the industries of the future?
The three things that set PLI apart
To understand these departures, CarbonCopy studied the very first PLI – for cellphone manufacturing.
By 2014, India needed to rebuild its cellphone manufacturing sector. Nokia had exited. High-end phones were coming, fully-assembled, into the country. As for cheaper phones, they were being assembled locally but most components came in from outside. By 2015, as a senior bureaucrat in the Ministry of Commerce, who did not want to be identified, told CarbonCopy, India was importing phones worth $13 billion from China every year.
The previous day, CarbonCopy had met RP Gupta. As additional secretary at Niti Aayog, the now-retired bureaucrat was a part of the team that developed the PLI Scheme. In that conversation, Gupta said: “No one in the government wants only assembly to be done in India. If more value is captured in India, you will create more jobs.”
CarbonCopy also met Subhash Chandra Garg. As finance secretary, the former bureaucrat was involved in the discussions that resulted in the cellphone PLI. In that conversation at his house, Garg, who has recently written The $10 Trillion Dream: The State of the Indian Economy and the Policy Reforms Agenda to offer reform options, described the underlying rationale of PLI. “In the world, 85-90% of phones are made by 4 or 5 companies,” he said. “It’s they who decide where to manufacture – and they will go wherever there is the biggest margin.” These include Samsung, Foxconn Hon Hai, Rising Star, Wistron and Pegatron. Of these, three companies – Foxconn, Wistron and Pegatron are contract manufacturers for Apple iPhones.
“We spoke to companies like Foxconn and Vistron,” said the Commerce Ministry mandarin. “Foxconn was making phones in Vietnam and Thailand. Those countries however are heavily influenced by China. In India, such investments would stay protected.”
To offset fears about the higher cost of manufacturing in India, disability costs came into the frame. “What is the iPhone’s cost of production in Taiwan or China? What is it in India?” explained Garg that afternoon. “If we can take care of that delta, companies will come.” In effective terms, if it costs Foxconn $200 to make an iPhone in China – but $210 in India – we will give the company $10 per iPhone as an incentive to expand to India. This incentive, however, will be linked to production – not front-loaded, as in the past.
Those were the first two building blocks – localising value chains, and compensating disability costs. The third? Like Korea did with the Chaebols, the Indian government wants to groom sectoral champions. Unlike previous schemes, PLI doesn’t favour all companies in a given sector. In Cellphones, it extended PLI support to 5 global companies and 5 local ones.
As the press reported: “These companies are expected to expand their manufacturing operations in a significant manner and grow into national champion companies in mobile phone production.” In sectors like polysilicon and batteries, the number of sectoral champions is even smaller – three and four respectively. This is to build scale, Gupta said. “Unless you create scale, you won’t get the benefits of economies of scale. A minimum scale has to be there. That way, you are also dealing with less number of companies.”
PLI: A look at the critical sectors in the bid to rebuild Indian manufacturing
Clean Energy: Solar Photovoltaic, Advanced Chemical Cell Batteries.
In the pipeline: Offshore wind turbines, electrolysers.
Others: Mobile manufacturing, Pharma, Medical devices, IT hardware, White goods, Specialty steels, Telecom, Food products, Automobiles and auto-components, Textiles, and Drones.
This design, created initially for cellphones, was first extended to sectors the government considered critical. “What are these new age industries where you want to create competitive advantage? Semi-conductors, Photovoltaic and Batteries are fundamental to our growth,” said Garg. Polysilicon has been on our agenda for long, he added. “Even in 2005-06, we had wanted to bring fabs to India.”
Then, a clutch of other sectors followed.
The bigger question about PLI
Each of these building blocks comes with large questions.
Take disability cost. For the first time, a government is, instead of addressing root causes of inefficiency, attaching a monetary value to it – and paying that to manufacturers. Can industries become globally competitive in the period – five years, as in the case of solar – they get PLI support?
Or take the insistence on grooming a few sectoral champions. At its best, like MITI did in Japan, this will dramatically alter the face of India Inc, creating Indian equivalents of Toshiba and Sony. And yet, as venture capitalists will tell you, finding the technological players of tomorrow isn’t easy. Can the government do it?
I posed that question to Gupta. He said the government was not making bets on technology. “We are technology-agnostic. There is no pressure that companies should use a particular technology.” Instead, he said, the government will track companies on outcomes. “In the battery sector, for instance, bidders shall be evaluated in terms of cost, domestic value addition, and the quality matrix (energy density and number of lifetime cycles).” A company which finds its technology turning obsolete and finds itself slipping behind is free to switch to another technology. The value chain question comes with its own complexity. India wants sectoral champions to straddle entire value chains. Is this practicable? Firms like China’s Daqo New Energy focus only on polysilicon – and build massive scale there. Can a vertically-integrated firm compete with more specialist players? China did that once – while displacing solar manufacturing from Europe. Can India do an encore?
To answer such questions, CarbonCopy took a closer look at the solar and battery PLIs, the details of which will be carried in Parts 2 and 3 of this three-part series.
Editor’s note: Renowned economist and member of the Planning Commission from 2004 to 2014, Abhijit Sen, passed away on August 29, 2022.