Is India’s PLI Scheme a Gamechanger or simply Overambitious?

Published by Ecosodes team on

In March 2020, in a major move to give impetus to domestic manufacturing and cut down on the nation’s import bills, the Indian Government rolled out the Production Linked Incentive Scheme for three targeted sectors: mobile phones and electronics manufacturing, pharmaceutical drugs, and medical devices. By incentivizing production in these sectors, the scheme not only aimed at enhancing industrial investments, boosting production, with the ultimate goal of making India self-reliant but, also looked forward to catering to the employment demands in the country.

As per initial estimates, the scheme was estimated to benefit up to 136 manufacturing units, generating incremental sales of Rs 46,400 crore and significant additional employment generation over the next eight years. So, basically, the mechanism would work as follows:

In the case of mobile and electronic equipment manufacturing, an incentive of 4-6% is planned for electronics companies that produce mobile phones and other equipment like transistors, diodes, thyristors, resistors, capacitors, and nano-electronic components. Along the same lines, in the case of pharma drugs and medical devices, the applicants shall commit a certain amount prescribed by the government as an investment to build capacities in these areas. The selected companies shall be paid a specific proportion of their turnover from the government as an incentive over the next few years, the amount of which shall keep on reducing as years go by.

Well, soon after the launch, as months progressed, the PLI scheme was positively welcomed by investors and producers, however, at the macro level, dynamics took an unfavorable turn- the coronavirus spread severely impaired many key sectors in the economy, and growth forecasts tumbled to the negative.

In response to the same, as the government actively rolled out several other fiscal measures to revive the economy, and recently, even the PLI scheme was further extended to cover 10 champion sectors: automobiles and auto components, pharmaceutical drugs, advanced chemistry cells (ACC), capital goods, technology products, textile products, white goods, food products, telecom, and specialty steel.

With an outlay of around Rs 1.46 lakh crore, the 5-year scheme primarily aims to provide a boost to the Indian manufacturing sector, promote exports in an effort to push India’s position up in the global supply chain. As per the government’s statement: “The PLI scheme across these 10 key specific sectors will make Indian manufacturers globally competitive, attract investment in the areas of core competency and cutting-edge technology; ensure efficiencies; create economies of scale; enhance exports and make India an integral part of the global supply chain”

An aid to the ‘Make in India’ and ‘Atmanirbhar Bharat’ missions, the PLI scheme focuses on incentivizing firms to grow fast. Apart from inviting foreign firms to set up shops in the country, the scheme would also push local firms to ramp up their capabilities. It also intends to make India compliant with its commitments to the World Trade Organization, as well as, makes trade non-discriminatory and neutral with respect to domestic sales and exports.

Some of the incentives are targeted at sectors wherein India already has a comparative advantage, for example: auto-components; others are those sectors wherein India possesses the potential to become one of the world leaders in the long haul, like food processing; while some identified sectors are those wherein India had a burgeoning dependence on Chinese imports.

As the scheme is based on incentivizing incremental output, it is more effective from the Government’s point of view than input-oriented grant-based schemes like Mega Food Parks. Moreover, the identified sectors are all capital intensive with operations entailing long gestation periods, which means that their returns take a long while to accrue after investments are made. While needing to manage other crucial socio-economic issues as well, it is hard for the government to spread itself out this thin and to ease the situation, this is exactly what the PLI scheme tackles- creating a promising and conducive environment to bigger anchor investors who are capable of assimilating capital for greenfield and brownfield investments in the domestic territory.

Calling it a ‘progressive move’, the decision has been applauded by Industrial chambers, as it would help boost net exports, reduce dependence on imports in various sectors and enable India to garner a larger share in the global trade. Global firms like Apple and Samsung are set to bring a fifth of their capacity installed in India over the next five years, which is the duration of the scheme. Similarly, many more global firms are expected to shift their supply chains to the country, at least partially, if not fully, which has raised expectations that with similar plans and policies in place, over the next 3-5 years, India might be able to ramp up its production to the levels where it can become a viable alternative to China.

However, the road doesn’t come without its own bottlenecks- there still remain a lot of challenges that need to be tackled like: congested ports, slow turnaround times, lack of availability of ready-to-move-in buildings, improved ease of doing business, international trans-shipment points, and so on. Though in itself, the PLI scheme is a major breakthrough but, in order to manufacture products in the country from start to end, and subsequently export them to other countries, even more incentives would be needed.

Just like Software Technology parks that facilitate the export of software, similar programs for other manufactured products can be undertaken. A few states like Andhra Pradesh, West Bengal that possess huge potential but not always parallel with the central government’s ideas would need to be roped in with better state engagement all across the country to aid successful implementation of the program. Once the Centre and State join hands and the right policies are further rolled out and implemented correctly by the industries, I’m sure ‘India being similar to what China was 30 years back’ would become a thing of the past and no force would stop us from being neck-to-neck in the global landscape.

 


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