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The PLI program

The PLI scheme was launched in 2020 and covers 14 industries, with electronics and a parallel semiconductor investment plan accounting for half of the US$40 billion in subsidies over five years.

The scheme has been a tremendous success in boosting import substitution and manufacturing output. Data from the International Monetary Fund (IMF) highlights India manufacturing value added as a percentage of GDP was 13% in 2022.1

There is significant scope for this to rise given the surge in PLI-related investment, which rose from US$1.1 billion in FY 2022 to US$ 5.5 billion in FY 2023. ICRA credit ratings forecasts PLI-related investment could peak at US$20 billion in FY 2026, accounting for 40% of total investment.2

The China+1 manufacturing strategy

The China+1 manufacturing strategy, where companies maintain a base in China, but add additional bases to reduce supply chain risks has been a contributing factor to the success of the PLI scheme. South Korean manufacturers were among the first to build mobile manufacturing capacity in India.

Taiwanese manufacturers have followed and significantly increased investments in India to boost output of mobile phones for supply to the global market. India’s share of global handset output has increased 60% to 16% over the past five years.3

India Mobile Phone Production (Left); India Mobile Phone Exports (Right)

As of September 2023

Sources: Bank of America.

Developing the semiconductor industry

In 2022, the Indian government launched a five-year plan to support the development of the semiconductor sector and specifically attract semiconductor manufacturing to India. Since then, one of the world’s largest dynamic random-access memory (DRAM) producers4 has announced a US$3 billion test and assembly factory in Gujarat.

The company is planning to build 500,000 square feet (46,500 square meters) of cleanroom space and hire 5,000 employees.5 Companies planning to set up printed circuit board and specialized industrial gas factories will complement this.6

The world’s leading designer of artificial intelligence (AI) chips has announced plans to grow its existing headcount of 4,000 engineers in the country and in September 2023 announced an agreement with two of India’s largest conglomerates to establish AI computing and cloud infrastructure capabilities.7

Growth in India’s demand for semiconductors and the globalized nature of the industry has led to the desire to grow semiconductor design, manufacturing and assembly capabilities. Demand is expected to grow significantly following recent investment in mobile phone production and future investment in electronics manufacturing.

An added driver is the supply of skilled labor at a time of shortage in other economies. Around 1.4 million engineering students graduate from Indian universities annually with an average annual salary of US$6,600—a tenth of the average salary of a US engineer.8

Production of electronics

Exports of electronic products to the United States increased 90% between FY 2022 and FY 2023, reflecting a similarly large surge in mobile phone exports to US$11 billion.9 Industry forecasts indicate Indian mobile phone exports will rise tenfold to US$110 billion by FY 202610 as more production is located in India, attracted by low manufacturing wage costs, PLI grants and a China+1 strategy.

The Indian government has a plan to become self-sufficient in electronics demand by FY 2026. It estimates a US$300 billion total addressable market, divided between a domestic market of US$180 billion and an export market of US$120 billion.11

Priority industry groups for achieving these goals include: mobile phones, information technology hardware, lightemitting diodes (LEDs), printed circuit boards and industrial electronic components. Taken together, these sectors account for 75% of the US$130 billion in forecast exports by FY 2026.12 Foreign direct investment, which dipped following COVID-19, will be an important source of investment to drive this growth.

Foreign Direct Investment Flows into India

As of September 2023

Sources: Bloomberg.

Endnotes

  1. Source: World Bank, “Manufacturing, value added (% of GDP) — India,” 2022.
  2. Source: ICRA, “PLI CAPEX deployment expected to surge from FY24 for more than 80% of the projected investments,” November 23, 2022.
  3. Source: Counterpoint Research, “Global Handset Production Report,” July 22, 2020.
  4. Source: Micron, “Micron Announces New Semiconductor Assembly and Test Facility in India,” June 22, 2023.
  5. Ibid.
  6. Source: Cyrill, M. and Kapur, Y., “India’s Semiconductor Sector: Tracking Government Support and Investment Trends,” India Briefing, September 22, 2023
  7. Source: NVIDIA, “Tata Partners with NVIDIA to Build Large-Scale AI Infrastructure,” September 8, 2023.
  8. Source: All India survey of Higher Education.
  9. Source: Vaishnaw, A., “Smartphone Exports Over $11 Billion,” India Outlook, April 13, 2023
  10. Source: Sun, S., “India: mobile phones export 2026,” Statista, June 2020.
  11. Source: India Brand Equity Foundation, “India’s Electronics Manufacturing and Export Market,” January 2023.
  12. Ibid.

 

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