India Joins The Global Manufacturing Subsidy Race
The Indian Government is rolling out subsidies for semiconductor and mobiles phone manufacturing and light engineering goods, through Productivity Linked Incentives or PLI schemes
Our Top Reports For Today
- <00:55> India Joins The Global Maufacturing Subsidy Race.
- <07:31> Food inflation rockets up, beats expectations.
- <08:57> Newcomer Akasa now gains ground from struggling competitors
- <15:03> India sees record and unexpected box office turnouts
TRANSCRIPT
NOTE: This transcript contains only the host's monologue and does not include any interviews or discussions that might be within the podcast. Please refer to the episode audio if you wish to quote the people interviewed. Email [email protected] for any queries.
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India Joins The Great Global Subsidy Race
The key reason for Tata’s Jaguar Land Rover company to set up an EV battery facility in the United Kingdom is obviously because that is home ground.
The other reason for the Tatas to choose the UK for a $5.2 billion or 4 billion pound battery or gigafactory project, over Spain which was an option according to the Guardian, is subsidies.
The UK Government has committed subsidies worth 500 million pounds or around Rs 5,000 crore. And is obviously looking forward to the jobs this project will create, apart from maintaining a place in the new renewables space.
But this is not enough as Britain along with other countries are engaged in a desperate battle to grab outgoing China manufacturing, get a foot into the exploding renewables energy space including batteries and finally outbid the United States in bringing in manufacturing. We will come to that in a moment.
Back in India, the Government is in a similar global race, rolling out the red carpet with subsidies for semiconductor and mobiles phone manufacturing to a host of light engineering goods,through productivity linked incentives or PLI schemes.
At any point of time, more industries are pitching and the Government is debating whether to offer subsidies.
A recent one, for example, off the ground, would be PLIs for pharmaceuticals and medical devices. The amounts though are not that large, Rs 15,000 crore for this industry over 6 years.
And there are some areas where the amounts are jaw dropping.
The Foxconn-Vedanta joint venture for a $19.5 billion semiconductor project in Gujarat may have been called off, but both companies are set to come back with their own projects, possibly with different partners.
Now, the subsidy for this project, using the same numbers because this was on the table, can go upto 70% of which 50% is from the central Government and another 10-20% from the state.
Which means,hold your breath, over $10 billion or Rs 8,000 crore for a private project, likely foreign, paid for by taxpayers like you and me.
At one level it sounds utterly scandalous.
But there are two contexts which might change your mind. First as I alluded to a little earlier is that there is a massive global race to grab manufacturing moving out of China or manufacturers move their bases out of China.
It does appear that a country like India which also has one of the biggest domestic markets has no choice to stay in the race, even if it means that it has to take bets of a size that would make the most adventurous Silicon Venture capitalists watch with wide eyes.
Second, of course is that in areas like semiconductors and batteries, being the fuels of the future, there is strategic importance or imperative to have domestic manufacturing. Or put differently, supply chain anxiety.
Given both these cases, staying out of the race for whatever reason would reflect worse than losing after staying in it. Either way, the choice is limited and time is running out.
Back in the international arena, the Wall Street Journal reports that Intel has been offered $11 billion in subsidies from the German government to build two semiconductor plants, in what Prime Minister Olaf Scholz called the largest foreign direct investment in German history.
By the way, the pledged government financing is substantially more than the annual budget of Singapore’s Ministry of Trade and Industry.
The U.S is offering $369 billion in incentives and funding for clean energy as part of the Inflation Reduction Act. Not surprisingly, there is a massive flow of foreign investment.
German carmaker BMW is setting up a new battery plant in South Carolina. South Korean firms Hyundai and LG announced a $4.3 billion battery plant in Georgia. Panasonic of Japan is building a plant in Kansas.
By the way, in climate alone, there is some $1 trillion of federal subsidies floating in the United States and its already galvanising massive investment and projects across the country.
Not surprisingly, the U.S. saw about 22% of global foreign direct investment last year, making it the world’s top recipient, the WSJ says quoting United Nations data. That is slightly lower than the 26% it received in 2021 when global investment bounced back after a lull during the pandemic, but significantly higher than the 13% it got in 2019.
Spending on construction related to manufacturing rose 76% in May compared with a year earlier, to a seasonally-adjusted annual rate of $194 billion, Census Bureau data show.
Back in India, Bloomberg has added up Taiwanese’s investments in India to say that it now has 9 campuses across the equivalent of 500 football fields operating more than 30 factories with revenues already running around $10 billion annually.
In the case of Foxconn, it is as much of a pull as much of a push.
Foxconn is running for the exit gate like the house is on fire.
But the thing to remember is that Foxconn is surely investing in India but it is also equally scouring other markets, matching manufacturing competitiveness for exports like Vietnam versus local market size to optimise its investment.
As Bloomberg says, India will not replace China as the centre of global electronics manufacturing. No one will.
Vietnam, Mexico, Brazil, Thailand and even the Czech Republic could all lay claim to being a future production hub, with each offering their own unique mix of cheap and abundant labour, infrastructure, proximity to end markets, and logistical advantages.
To end on some positive news, for some, Foxconn is now believed to be starting production of Apple’s Air pods by the end of the year in Hyderabad. If no one else, this will surely music to the ears of Apple disciples.
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Meanwhile, India’s exports are slowing further.
India’s exports fell 16% year on year in July to $32.3bn on lacklustre demand from major trading partners.
This is in itself not surprising given that Chinese exports have been falling steadily as we have been reporting here and that the global environment for trade is visibly weakening.
China’s overseas shipments dropped 14.5% in dollar terms last month from a year earlier — the worst decline since February 2020.
Back home, the Ministry of Commerce said India’s trade performance, after witnessing very high growth in 2022-23 has continued to show declining trends in July compared to the high base of last year in the backdrop of global slowdown.”
Exports have now contracted for the eighth month from December 2022.
Inflation
We did see it coming though the absolute number in cold print is always a bigger shock than one thought.
India’s Consumer Price Index (CPI) inflation jumped to 7.4% in July 2023 as compared with 4.8% in June 2023. This is now a 15-month high.
By the way, a Reuters poll of 53 economists had estimated the consumer price index (CPI) inflation to rise up to 6.40 per cent on an annual basis on surging food prices.
Evidently they were off by quite a bit.
What caused this jump ?
Well, first, food inflation accounts for nearly half of the inflation basket.
And the big driver is a growth in inflation rate of vegetables (from -0.93 in June 2023 to 37.34 in July 2023), cereals (from 12.71 in June 2023 to 13.04 in July 2023),and pulses and products (from 10.53 in June 2023 to 13.27 in June 2023)
Overall food price inflation increased from 4.5% in June 2023 to 11.5% in July 2023.
Right now, it does not appear that this will trigger an interest rate hike as there is not much connection between interest rates and food inflation.
Rising From The Ashes, Of Others
In aviation news, the year old Akasa Air with 20 aircraft widened its gap with SpiceJet in July in terms of domestic passengers flown per month.
Spicejet just to remind you has over 90 aircraft to its name. Obviously most of these aircraft are not flying, for various reasons. GoAir, the other mid size airline one could compare Akasa with, had around 59 aircraft grounded since May after it filed for bankruptcy.
Are there any lessons in this, from the past and for the future ?
Let's look at some numbers first. Reports quoting Government data say Akasa carried 618,000 domestic passengers in June and 624,000 in July in comparison to SpiceJet which transported 555,000 in June.
Spice Jet in its present form was launched in 2005. Not that vintage makes much of a difference in a brutally competitive market and seems to work more against an enterprise than for it.
Back to Akasa, its share of the domestic passenger market climbed to 5.2 per cent in July from 4.9 per cent in June. Meanwhile, SpiceJet's domestic passenger market share dipped to 4.2 per cent in July from 4.4 per cent in June.
Other airlines like Indigo and Air India are holding strong, backed by strong finances either of their own or parent companies.
To come back to Akasa, it is gaining market share from two airlines, one struggling and the other grounded. Future challenges will of course be attracting talent and retaining them.
What does this tell us about the past and future in India’s domestic aviation industry?
To do that I am joined by well known aviation writer and TheCore Consulting Editor Anjuli Bhargava.
India’s Box Offices surprise
Like the stock markets, the Indian cinema exhibition industry has surprised, notably even as obituaries of it were being written all over the world, notably Bollywood.
Cinema halls are reported to have brought in Rs 390 crore in combined gross box office collections between August 11 and 13, making it the busiest single weekend for the industry post pandemic and likely in the industry’s history.
Some 21 million people flocked to the movies, said trade bodies, again apparently a record in the last decade.
The films were all homegrown, unlike earlier weekends last month where Hollywood ruled.
The box office collections were driven largely by films like Rajinikanth's Jailer, Sunny Deol’s Gadar 2, Akshay Kumar and Pankaj Tripathi's OMG 2 and Chiranjeevi’s Bhola Shankar.
Jailer and Gadar 2 alone took in over Rs 280 crore in this period.
Incidentally, this was not predicted, at least at these levels and the industry in general was gearing up for a slump after the three Hollywood hits, Mission Impossible, Oppenheimer and Barbie receded from the movie halls.
So what’s changed.
Multiplex Association of India president Kamal Gianchandani told the Economic Times that the long weekend, coupled with the aggressive push by the studios in marketing the films, has played a key role in increasing footfalls. “The cinema exhibition industry has benefited greatly in the last three days. Multiplexes and single screens have operated at 70% occupancy in the last few days, irrespective of which part of the country they are situated in,” Gianchandani said.
He also expressed confidence that the after-effects of the pandemic are over and admissions will grow further as filmmakers have lined up an aggressive content slate for the second half of the year.
Elsewhere, PVR Inox head Ajay Bijli said they were seeing month on month increase in collections, adding that Hindi film performance volatility has reduced.
This of course is just the Independence Day weekend and I will pick this up in a few days to see what trends sustained or not.
Meanwhile, it's a happy ending to the story, at least for now.
