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The case for performance-linked incentives in toy manufacturing

Given that toy exports from India are projected to reach $3 billion by 2028, growing at a CAGR of 12% between 2022-28, one can imagine the huge potential of generating millions of direct jobs not to speak of the indirect employment generated by the sector.

In 2020, the Government of India initiated the Production Linked Incentive (PLI) Scheme to increase the thrust on the manufacturing sector to absorb surplus labour force from the agriculture sector. The Rs 1.96 lakh crore scheme aims to improve the cost competitiveness of local goods manufacturers and reduce dependence on imports. 

In recent months there has been criticism of the efficacy of the PLI incentives, currently available to 14 sectors, to enhance manufacturing in India. Holding the exponential growth in exports, for instance in mobile phones, a result of screwdriver assembly, the critique holds the PLI scheme responsible for encouraging this at the cost of genuine manufacturing and employment generation in the country.  

While the jury may be out on the success or otherwise of the scheme, the above conclusion may not apply to all the sectors in the list, or those under contemplation and expected to be announced for quite some time now. 

Toy manufacturing is one such sector which has been looking forward to inclusion in the list of industries eligible for PLI incentives, particularly after coming in for repeated praise by none other than the Prime Minister.  

In August 2020, the Prime Minister in his man-ki-baat address had highlighted the importance of being ‘’vocal for local’’ toys and the need to encourage the toy manufacturing sector to take on imports from countries like China. More recently in yet another man-ki-baat episode in July 2022, he praised the industry once again calling it an emerging powerhouse in exports and how toy imports had reduced by 70%. 

While it is true that toy exports have indeed increased significantly between 2018-19 and 2021-22, it is to be noted that India is still a minor player in the global toy industry. It accounts for a mere 1-2% of the global $120 billion market. 

Chinese juggernaut

Notwithstanding, the negative talk of the country, Chinese contract manufacturers still account for 70% of the global sourcing value of $30-40 billion. Vietnam accounts for the lion’s share of the balance. India is playing catch up even though it has the potential. 

China took 30 years to reach this commanding position in the toy industry. It was able to do so due to long-term policies formulated with a 20-30-year vision. Robust incentives including tax breaks, infrastructure support and export promotion measures – all with a focus on large-scale employment generation, were the reasons for the success.  

All these measures contributing scale which is the key to the Chinese juggernaut.  An ecosystem approach including low-wage labour, a deep and wide base of skilled workers, component manufacturers, assembly providers and logistical support.

Toy manufacturing is a force multiplier for socio-economic change

The reason why India should double focus on toy manufacturing is that it has the potential to be a force multiplier for employment generation in India, that too for sections of the society at the bottom of the pyramid, particularly women from the rural hinterland.  

It needs to be realised that toy manufacturing is labour-intensive. But it needs scale to keep the labour continuously employed. But it also enables a quicker employment ramp up than many other sectors.  Labour intensive sub-segments of the toy industry constitute 50-60% of the market.

For every $10 million revenue generated from toy making, there is potential for providing direct employment to 1000 workers. Given that toy exports from India are projected to reach $3 billion by 2028, growing at a CAGR of 12% between 2022-28, one can imagine the huge potential of generating millions of direct jobs not to speak of the indirect employment generated by the sector.

Having said that, the industry needs significant technology upgrade to meet changing customer demands as also the stringent quality and safety standards required for the global market.  

This calls for significant investments in R&D, technology and value chain components like tool making, die making, specialised paint etc.  

Cluster approach

The Indian toy industry is highly fragmented with over 80% of the estimated 4,000 units in the unorganised sector. This is a major hindrance to India becoming globally competitive in the toy market and renders manufacturers and brands incapable of taking on toy makers from countries like China and Vietnam are concerned.  

Using the example, once again, China has been able to build scale, capabilities, and global command in toy manufacturing because of the massive ecosystems it has built over the years. 

For instance, China’s Chenghai District in Shantou city, Guangdong Province, is one such ecosystem which alone accounts for well over 5,000 manufacturing units. Spread over 345 square kms, it is said to account for 30% of the world’s toys. Other major production centres or ecosystems in the Guangdong province include Shenzhen, Dongguan, Guangzhou, and Foshan cities.

If the Indian toy industry is to take over even a fraction of this market, it will have to build scale in quick time which is not possible in the conventional way of doing business. While the Government of India has initiated the Toy Cluster Programme to promote toy-making agglomerations, they are more traditional in approach and not geared for global competition as such. 

The need is for modern, global scale ecosystems that straddle the entire manufacturing value chain replete with all the capabilities needed to cater to global OEMs and markets. These clusters should have capabilities and domain JVs for packaging, tool making, paint making, electronics among a host of others, with co-located global scale assembly and pack out capacities. 

And to make these clusters sustainable, toy manufacturers also need to be incentivized to set up their units in these clusters. Therefore, what is needed is a special dispensation – the PLI scheme, not just for companies setting up clusters, but also for the manufacturing units being set up in them.

(The author is president, Aequs Consumer Verticals. Views expressed are personal and not necessarily that of financialexpress.com)

This article first appeared in The Financial Express https://bit.ly/45NgW1y

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