Do PLI schemes for Manufacturing Work?

About the PLI Scheme

• Production Linked Incentive refers to a rebate given to producers. This rebate is calculated as a certain percentage of sales of the producer (sales referred to in it can be total sales or incremental sales). 
• The incentives, calculated on the basis of incremental sales, range from as low as 1 per cent for the electronics and technology products to as high as 20 per cent for the manufacturing of critical key starting drugs and certain drug intermediaries. 

Key Features of PLI Scheme

• The scheme is outcome-based, which means that incentives will be disbursed only after production has taken place.
• The calculation of incentives is based on incremental production at a high rate of growth. In some sectors such as advanced chemistry cell batteries, textile products and the drone industry, the incentive to be given will be calculated on the basis of sales, performance and local value addition done over the period of five years.
• The scheme focuses on size and scale by selecting those players who can deliver on volumes.
• The selection of sectors covering cutting-edge technology, sectors for integration with global value chains, job-creating sectors and sectors closely linked to the rural economy, is highly calibrated.
• Also, the design of the PLI scheme is such that it is compatible with World Trade Organization commitments as the quantum of support is not directly linked to exports or value-addition.

Significance of this Scheme

• Utilising the comparative advantage: In some sectors the domestic industry has comparative advantage over other countries, focusing on these sectors could generate higher returns. For instance The Indian pharmaceutical industry is the third largest in the world by volume and 14th largest in terms of value. It contributes 3.5% of the total drugs and medicines exported globally.
• Increased ability to tap the high global and domestic demand: This will help satisfy the growing domestic demand in the respective sectors and also give a fillip to exports.
• Attracts Global Manufacturers: The renewed scheme could attract big global IT hardware manufacturers to shift their production base to India and give a boost to local production of laptops, servers and personal computers among others.
• Generates Employment: The expected incremental production value could touch Rs 3.35 lakh crore, and the scheme could generate 75,000 direct jobs – in total, the employment figure could touch 2 lakh when accounted for indirect jobs. 
• Promotes Digital Economy: By deepening & broadening the electronics ecosystem in India, this scheme will play a key role in catalysing India’s Techade and in achieving the $1 trillion digital economy goal – including $300 billion of electronics manufacturing by 2025-26
• Increased Exports: The IT hardware industry is targeted to reach a production of $24 billion by 2025-26, with exports anticipated to be in the range of $12-17 billion during the same period.
• Promotes Private Investment: From the perspective of industry, the scheme indicates an attitudinal shift from ‘discouragement’ to ‘encouragement’ for large industries and simultaneously provides the much-needed fiscal space required during the Pandemic.

Potential Issues with the Scheme

• Absence of Common Parameters: DPIIT has raised concerns there were no common set of parameters to understand the value addition by companies that have received or are likely to receive incentives under the PLI scheme. At present, different ministries monitor the value addition of their respective PLI schemes. There is no way to compare two different schemes.
• Multiple Deliverables: Also, there are various deliverables such as the number of jobs created, the rise in exports and quality improvement. There is no centralised database to gauge all these.
• Steep Targets: Departments and ministries which interact with companies operating in their sector also face certain specific issues. For instance, at times, the target for companies to qualify for incentives are too steep. As for the Information Technology hardware sector, until last fiscal, only 3-4 companies managed to achieve the incremental sales targets to qualify for the PLI scheme out of the 14 companies that had been approved.
• Designing sector specific incentives: The implementation of PLI scheme in the Electronics sector and Pharmaceutical sector has highlighted that every sector has to have different eligibility thresholds. Given the large range of activities covered in the 10 sectors, effectively determining the thresholds for each could become a difficult task.
• Interfering with natural economic processes: In the long run, an economy can become competitive only when sectors can die and be born. Resources get reallocated to sectors that see higher productivity growth. External interference may hinder optimised allocation of resources. 
• Relative disadvantage for sectors with no incentives: The limited resources of the economy in the form of Capital and human resources will be nudged towards incentivized sectors thus indirectly disincentivizing other sectors.

Way Forward

• Pre-defined Sunset clause on scheme: It will not only be beneficial for the sector in the long-term, it will also encourage the individual players to see it as a one-time opportunity for capacity building.
• Improve technological competence: The breathing room created by these incentives could be used by the industry players to increase their technological competence and transition towards becoming globally competitive.
• Improve business environment: It can be done by improving transparency and predictability in the policy framework. For example, simplification of the taxation regime or easing the land acquisition process etc. This becomes even more important for industries which are outside the purview PLI Scheme.
• Managing the real exchange rate better to strengthen the export regime: The real exchange rate (adjusted for inflation) in India has appreciated 19% in the last decade on account of both Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI). This appreciation negatively affects the overall exports.
• Augment industrial infrastructure and connectivity by increasing expenditure on infra creation for improved competitiveness.
• Regular scheme review to keep track of progress and address concerns over raw materials, funds, skilled workforce, payments etc
• Increased investments in innovation, research and skill development is necessary to build talent for PLI success.

Conclusion

• The scheme and its associated ecosystem have ensured that India is well-positioned to develop resilient GVCs, which will continue to provide national security in the evolving global scenario. Indian manufacturers now feel emboldened to move out of their comfort zone with a clear vision of becoming global champions even as India marches towards its emergence as developed India.
• However, the incentives should be well-crafted and temporary so that the industries receiving support can mature and become economically viable without protection. Keeping them in place for too long may slow down, rather than accelerate growth in these sectors.