PLI 2.0: Push to Manufacturing

Context: With the Production-Linked Incentive (PLI) scheme gaining traction in its first phase, the government is considering the PLI 2.0 scheme. The PLI 2.0 scheme is exploring if incentives should be linked to metrics beyond incremental sales such as domestic value addition and incremental exports.

About PLI Scheme

• The PLI scheme was conceived to scale up domestic manufacturing capability, accompanied by higher import substitution and employment generation.
• Launched in March 2020, the scheme initially targeted three industries:

• Mobile and allied Component Manufacturing
• Electrical Component Manufacturing and
• Medical Devices.
• Later, it was extended to 14 sectors:
  1. Mobile Manufacturing and Specified Electronic Components
  2. Critical Key Starting Materials/Drug Intermediaries & Active Pharmaceutical Ingredients
  3. Manufacturing of Medical Devices 
  4. Automobiles and Auto Components
  5. Pharmaceuticals Drugs
  6. Specialty Steel
  7. Telecom & Networking Products
  8. Electronic/Technology Products
  9. White Goods (ACs and LEDs)
  10. Food Products
  11. Textile Products: MMF segment and technical textiles
  12. High efficiency solar PV modules
  13. Advanced Chemistry Cell (ACC) Battery
  14. Drones and Drone Components.

Key Features of the PLI Scheme

• Outcome-based Incentives: Incentives will be disbursed only after the production has taken place. 
• Incremental Production Focus:
  • 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 will be calculated on the basis of sales, performance and local value addition done over the period of five years.
• Emphasis on Scale: The scheme focuses on size and scale by selecting producers who can deliver high volumes.
• Strategic Sectors: Sectors chosen include, those with:
  • Cutting-edge technology
  • Potential for integration with global value chains
  • High job-creation capacity
  • Sectors closely linked to the rural economy. 
• WTO Compliance: The scheme is designed to align with World Trade Organisation (WTO) commitments, as the quantum of support is not directly linked to exports or value-addition.

Sector-wise performance in job creation

• High performance: Mobile phones, food processing, and pharmaceuticals.
• Moderate Performance: Auto, IT hardware, and specialty steel.
• Below Target: Textiles and advanced chemical cells.

Challenges with the current PLI framework

• Low value addition:
  • Value addition in key sectors remains in single digits, even in relatively successful sectors.
  • Need for deeper integration of domestic supply chains.
• Dependence on global supply chains:
  • India's small market size in telecom and electronics limits incentives for supply chain relocation.
  • Economies of scale are necessary to negotiate better rates for semiconductor chips and technology licensing.
• Lack of economies of scale:
  • Indian firms are generally smaller and less competitive compared to Chinese and Vietnamese firms.
  • Limited foreign market access reduces price competitiveness.

Read More: Production Linked Incentive 

Recommendations for PLI 2.0 scheme

• Focus on localisation:
  • Strengthen domestic manufacturing ecosystems to capture greater value addition.
  • Increase competitiveness against Chinese manufacturers.
• Exports as a key metric:
  • Larger production volumes require access to export markets.
  • Exports introduce competition and enhance market efficiency.
• Involvement of foreign Original Equipment Manufacturers (OEMs):
  • Large OEMs with established supply chains can catalyze domestic component manufacturing.
  • Can negotiate better deals with strategic vendors, benefiting Indian firms.
• Expanding the component manufacturing ecosystem:
  • Over time, domestic firms can grow by supplying to both local and international manufacturers.
  • Knowledge and productivity spillovers can strengthen the entire manufacturing base.
• Global success strategies:
  • Japan and South Korea: Leveraged foreign OEMs in early growth phases to build domestic capabilities.
  • China’s EV sector: Used Tesla’s entry to upgrade its domestic vendor base, leading to strong homegrown EV brands like BYD, Xpeng, Li Auto, and Nio.

Strategic interventions could enable Indian firms to move up the value chain and become global competitors in key industries.