However, if production has increased from the existing capacity after outsourcing, benefits will be given to firms if they meet the targets.

New Delhi: The government is unlikely to provide financial incentives to smartphone makers or contract manufacturers who get orders through outsourcing of production from some other maker in the country, officials said, pointing out that such a practice won't lead to additional manufacturing, which was at the heart of the production-linked incentive (PLI) scheme for smartphones.

"The financial benefits under the PLI scheme are given for incremental production. If the existing capacity is shifted from one company to another, it can't be termed incremental," said one of the officials, who did not wish to be identified. "Neither the overall production nor jobs increase due to such outsourcing within the country. Why should it be supported? Such kind of musical chairs should not be allowed."

However, if production has increased from the existing capacity after outsourcing, benefits will be given to firms if they meet the targets.

To be sure, there were no clear guidelines in the scheme for such kind of manufacturing, which fuelled the ambiguity, according to industry executives.

"A decision will be taken after the issue is deliberated at a broader level," said a second official.

But if the government decides against giving sops for smartphone production which was outsourced to some other supplier in the country, domestic firms such as Bhagwati Products (Micromax) and Karbonn Mobiles, and even Dixon Technologies to an extent, which are getting increased orders from Chinese firms such as Xiaomi and Vivo to manufacture their devices, could feel the pinch, said experts.

The PLI scheme for mobile phones, which has significantly contributed to making India the second largest manufacturer of handsets, was launched in 2020-21 and is set to conclude in 2025-26. Eligible manufacturers receive 4-6% direct incentive on incremental production, which helps offset the cost disadvantage they had against global peers.

In the past couple of years, domestic contract manufacturers such as Dixon Technologies, Bhagwati Products and Karbonn Mobiles have been competing vigorously in the high-volume smartphone assembly segment, hoping to capture more orders from Chinese brands amid geopolitical shifts.

While the majority of Chinese players used to manufacture their devices in India, they were not getting PLI benefits as none was a beneficiary of the scheme. But when these Chinese companies started to outsource their production to the Indian firms who were part of the PLI scheme, there was an opportunity to claim benefits.

Home-bred companies such as Karbonn Mobiles, Bhagwati Products and Lava International have been tapping into the opportunity provided by the shifting of production by Chinese firms.

According to an industry executive, Bhagwati Products is one of the fastest-growing electronics manufacturing services provider in India and the ramp-up has occurred in the past one year, primarily driven by orders from Oppo and Vivo under its partnership with Chinese original design manufacturer Huaqin.

As part of the PLI scheme, only Dixon Technologies has been consistently getting sops for meeting targets. "Even if the government decides not to give benefits for outsourced manufacturing, Dixon will still meet the targets due to production of Motorola and Google smartphones, which are all new," said an industry executive.

Contract handset makers may lose out on incentives for outsourcing