In today’s Finshots, we see why Paytm CEO Vijay Shekhar Sharma is requesting Production Linked Incentives for payment soundboxes.

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The Story

If you’re someone who wants to sell an electronic product in India, you have two options. You could choose to ‘Make in India’. Employ local labour. Use locally sourced materials and import some of the raw materials needed from elsewhere.

Or you could simply see if a similar product exists say in China and figure out the tariffs for importing it. If that works out cheaper, then you can just ship it and sell it in India.

And most folks choose to go down the second route because it’s more cost-effective. Plus, you get to sell it at a similar rate to domestic manufacturers and thus make more margins.

Now the Indian government is quite wary of this happening across all kinds of electronic items. And they want to promote Indian electronics manufacturing over imports. So they have a scheme called the Production Linked Incentive (PLI) program for this very reason. And this is how it works — if a company shows that it is making and exporting a certain number of electronic items — say mobiles or laptops — from within the country, it can get a nice payout (in the form of tax rebates and concessions) from the government. It’s some extra money for manufacturing domestically.

But here’s the thing. Apparently, the PLI scheme for electronics does not include payment devices  —  like credit and debit card scanners. Or even the ubiquitous soundboxes! Yup, we’re talking about those devices in kirana stores that loudly chime, “Payment received” after each UPI transaction.

And that’s what Paytm CEO Vijay Shekhar Sharma is asking for now. He claims that Paytm manufactures all its soundboxes in India. Even though importing it from China would be cheaper. So he’s asking for some support from the government.

But wait…do we really need a PLI for these soundboxes? Is it such an important device that it warrants special treatment?

Well, maybe looking at how the soundbox has revolutionized digital payments in India will give us an answer.

See, when demonetisation hit us hard in 2016, UPI was just about 7 months old. People were getting used to the idea of digital payments. But it gave a fillip to the idea of paying over the phone and UPI payments rose at a fast clip. By the end of 2019, over 1 billion UPI transactions were being processed every month.

Naturally, this helped merchants. They didn’t have to deal with cash so much. So they didn’t have to visit the bank often to deposit money or reconcile their books. But the proliferation of digital payments also led to a tiny problem. A bit of friction between the merchant and the customer.

The thing is even if a shopkeeper had to confirm receiving ₹10, they’d have to wait for an SMS. Or they’d have to open a banking app and check each time. Often, if the shopkeeper wasn't literate, they’d have to call people back home to check if their account was credited with the customer’s money. And this time gap meant that the relationship between a merchant and customer would get quite foggy.

Vijay Shekhar Sharma apparently experienced this friction first hand. And he wanted to solve it.

Thus emerged the Paytm soundbox. The first of its kind in the world.

This device cut the Gordian knot. The shopkeeper who had to wait for an SMS confirmation now instantly heard the soundbox announce “Received Paytm payment of 10 Rupees.” Customers would be relieved too. They could just pay and whiz away. Fraudsters could also no longer bluff vendors with fake payment screenshots generated via shady apps.

And when the pandemic struck in 2020, UPI payments soared to greater heights. No one wanted to deal with cash. And from 1 billion transactions a month, it soared to over 4 billion by the end of 2021.

Just like that, every other offline retailer began to notice the benefit of this humble soundbox. In fact, Paytm says that in 2022, one new soundbox was purchased by a merchant every 6 seconds. Merchants didn’t mind paying a monthly subscription fee to simplify their business and boost efficiency and sales.

Okay. It all does sound quite revolutionary. But do soundboxes really need a PLI?

Well, soundboxes are a very low-value product. It’s probably just a drop in the bucket of India’s imports. Even laptops and personal computers account for just 1.5% of India’s overall imports. So you can imagine just how inconsequential soundboxes will be.

And that doesn’t sound like something that needs a PLI.

So maybe Paytm wants the incentive just to make itself look better.

See, here’s the thing. Paytm says it is already manufacturing the soundbox in India (though components come from China). But it has a big competitor too. We’re talking about PhonePe.

Now while we couldn’t find any official statement, there are a lot of social media posts that allege PhonePe’s soundbox is made in China. If we assume that this is true, it does seem like Paytm probably wants the incentive to make itself look better. After all, the device accounts for about 8% of its overall revenues. And if PhonePe’s soundboxes are cheaper, Paytm will lose out.

Not to forget that the soundbox isn’t just a gimmick. It’s a customer retention tool that can be used to cross-sell other stuff to merchants. Paytm already says that it has been able to push loans to merchants with a soundbox at a much faster pace. Here’s how Paytm described the correlation ― “More than 85% of the value disbursed this quarter [Oct-Dec 2022] was to merchants using a Paytm payment device, indicating a strong correlation between device deployment and loan distribution.”

So yeah, maybe it’s the competition with an Indian peer that’s got Vijay Shekhar Sharma worried and rooting for a special PLI.

But wait…maybe there’s one thing that could flip this argument. And convince everyone that a PLI might be needed. And that’s the fact that the UPI is also going global. We’ve got the UAE, Singapore, France and a few others on board. We’re expanding this to the UK and other parts of Europe too. And maybe merchants there will prefer an audio announcement over poring through their phones and accounts for payment confirmations too.

So you could ask, “Would you rather have them use a soundbox made in China that’s then integrated with India’s UPI prowess or…would you rather export soundboxes made in India itself?” Because you might need a PLI to make those cost-effective.

What do you think about this matter? Do we need a PLI scheme for soundboxes?

Until then…

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