TOPIC : PRODUCTION-LINKED INCENTIVE (PLI) SCHEME: UNLOCKING UNTOLD POTENTIAL

THE CONTEXT: The government has extended the ambit of the production-linked incentive (PLI) scheme to 10 more sectors to promote domestic manufacturing. These sectors are pharmaceuticals, automobiles and auto components, telecom and networking products, advanced chemistry cell batteries, textile, food products, solar modules, white goods, and specialty steel.

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.

Endowed with a potential of multiple benefits, the PLI scheme can be boon for turning the fortune of manufacturing sector in India.

ABOUT THE PLI SCHEME

India’s initial brush of PLI was on 1st of April,2020 when the government launched the scheme worth Rs 50,000 crore for large scale electronics manufacturing (in particular, mobile phones), medical devices and pharmaceutical ingredients. Now, the scheme has been extended for ten more sectors of the economy.

• The PLI will be available to all new manufacturing units and also to existing manufacturing units for their extra production, additional over baseline output. For example, existing mobiles and electronics manufacturers are entitled to PLI benefit for whatever they produce over and above the 2019-20 level production in the next five years.
• The manufacturing units will have to apply, register and go through a vetting process and enter into proper agreement with the Government so as to ensure that only eligible manufacturers get the incentive for actual local manufacturing.

Apart from incentivising foreign companies to set up shop, the scheme aims to encourage local manufacturing units to set up or expand manufacturing units. This scheme provides incentives on incremental sales to existing and new units.

EVIDENCES OF BENEFITS

Following the launch of PLI scheme for electronic manufacturing (in particular, mobile phones), medical devices and pharmaceutical ingredients, there has been now a positive response from global manufacturing giants.

They have been submitting their applications to set-up their plants in India. This is expected to boost production, export and foreign investment creating jobs in manufacturing sector of the economy. Since incentives would be provided on incremental sales, a boost is R& D and capacity creation is also expected.

• Ministry of Electronics and Information and Technology (MeitY) said it had approved 16 eligible applicants under the Production Linked Incentive (PLI) Scheme for large scale electronics manufacturing .
• The international mobile phone manufacturing companies that are approved under Mobile Phone (invoice value Rs.15,000 and above) segment are Samsung, Foxconn Hon Hai, Rising Star, Wistron and Pegatron.
• Out of these, three companies — Foxconn Hon Hai, Wistron and Pegatron are contract manufacturers for Apple iPhones. Apple (37 per cent) and Samsung (22 per cent) together account for nearly 60 per cent of global sales revenue of mobile phones and this Scheme is expected to increase their manufacturing base manifold in the country
• Anticipated to be a push for the government’s notion of Atmanirbhar Bharat (self-reliant India), 215 applications from 83 pharmaceutical manufacturers and 28 applications from 23 medical device manufacturers were sent in response to the government’s Production Linked Incentive (PLI) scheme for bulk drugs and medical devices.

AN EXTENSION

An extension of the scheme to 10 more sectors of the economy is expected to change the manufacturing landscape in India. A brief summary of these industrial along with their potential has been presented as below:

• ACC battery manufacturing represents one of the largest economic opportunities of the twenty-first century for several global growth sectors, such as consumer electronics, electric vehicles, and renewable energy. The PLI scheme for ACC battery will incentivize large domestic and international players in establishing a competitive ACC battery set-up in the country.
• India is expected to have a USD 1 trillion digital economy by 2025. Additionally, the Government’s push for data localization, Internet of Things market in India, projects such as Smart City and Digital India are expected to increase the demand for electronic products. The PLI scheme will boost the production of electronic products in India.
• The automotive industry is a major economic contributor in India. The PLI scheme will make the Indian automotive Industry more competitive and will enhance globalization of the Indian automotive sector.
• 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. India possesses the complete ecosystem for development and manufacturing of pharmaceuticals and a robust ecosystem of allied industries. The PLI scheme will incentivize the global and domestic players to engage in high value production.
• Telecom equipment forms a critical and strategic element of building a secured telecom infrastructure and India aspires to become a major original equipment manufacturer of telecom and networking products. The PLI scheme is expected to attract large investments from global players and help domestic companies seize the emerging opportunities and become big players in the export market.
• The Indian textile industry is one of the largest in the world and has a share of ~5% of global exports in textiles and apparel. But India’s share in the manmade fibre (MMF) segment is low in contrast to the global consumption pattern, which is majorly in this segment. The PLI scheme will attract large investment in the sector to further boost domestic manufacturing, especially in the MMF segment and technical textiles.
• The growth of the processed food industry leads to better price for farmers and reduces high levels of wastage. Specific product lines having high growth potential and capabilities to generate medium- to large-scale employment have been identified for providing support through PLI scheme.
• Large imports of solar PV panels pose risks in supply-chain resilience and have strategic security challenges considering the electronic (hackable) nature of the value chain. A focused PLI scheme for solar PV modules will incentivize domestic and global players to build large-scale solar PV capacity in India and help India leapfrog in capturing the global value chains for solar PV manufacturing.
• White goods (air conditioners and LEDs) have very high potential of domestic value addition and making these products globally competitive. A PLI scheme for the sector will lead to more domestic manufacturing, generation of jobs and increased exports.
• Steel is a strategically important industry and India is the world’s second largest steel producer in the world. It is a net exporter of finished steel and has the potential to become a champion in certain grades of steel. A PLI scheme in Specialty Steel will help in enhancing manufacturing capabilities for value added steel leading to increase in total exports.

FEATURES OF PLI THAT MAKE IT AN EXTRA-ORDINARY SCHEME

There are certain marked features of the PLI scheme that should make it effective in implementation and predictable in results.

• First, the scheme is outcome-based, which means that incentives will be disbursed only after production has taken place in the country. The scheme is thus purely result-oriented.
• Second, the calculation of incentives will be based on incremental production to be achieved at a high rate of growth. To achieve this incremental production, beneficiaries will be required to make additional investment in establishing green-field facilities or carrying out expansion of existing facilities.
• Third, the scheme focuses on size and scale by selecting those players who can deliver on volumes. The targeted nature of the scheme will make it highly effective and the beneficiaries are likely to become globally competitive. Fourth, 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. Overall, the scheme is designed to comprehensively cover not only sectors of strength but also sectors of opportunities where India can gain substantially in the coming years.
• Lastly, addressing fiscal disabilities of companies and helping them achieve size and scale would allow Indian products to become competitive in global markets and lead to an increase in exports.

CONCERNS:

• As the PLI benefit has been assured only for five years, the investor has to assess the financial viability of the project beyond the PLI period. Once a manufacturing unit has been set up with a lot of fixed investment, recovery may be difficult. So the five-year period has to be utilised to make life easy for all businesses and job creators. In other words, the “ease of doing business” has to improve substantially.
• The Government expects that it may be called upon to pay about Rs 2 lakh crore, which means a total sale/export of about Rs 40 lakh crore (assuming five per cent PLI rate) during the next five years. This PLI will increase local manufacturing of eligible goods by an output equal to about 20 per cent of the current GDP.
• Thus, the second concern is changing growth dynamics and the global demand scenario, especially in the post-pandemic world. To get free cash of Rs 2 lakh crore from the Government, specified goods worth about Rs 40 lakh crore would need to be produced in India and a matching demand would be needed in a world where the cut-throat competition is going to deepen.
• The third concern is about how much of the PLI benefit would boost the investor’s actual post-tax income. The percentage of PLI benefit may vary across beneficiaries and depending on the competition, the post-tax actual benefit could vary from investor to investor. The PLI scheme, therefore, needs supplementation by sustained investor facilitation and improvement in ease of doing business.

WORD OF CAUTIONS:

• Given the exit problem in India, these 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.
• Since such support is also meant to incentivise foreign players to set up manufacturing units in India, it is imperative that they are provided with a transparent and predictable policy. Policy incoherence and frequent changes in regulatory landscape deter foreign players from committing to large-scale investments in India.
• The sectors that don’t get an incentive are now at a comparative disadvantage, and the government should work doubly hard to improve the business, tax and policy environments in which all businesses can benefit.

CONCLUSION:

The PLI scheme focuses on incentivising firms to grow fast. Some of these incentives are meant to help industries where India already has a comparative advantage, like auto components; others for industries where India has the potential to become a world leader, like food; and most importantly, the PLI scheme is for sectors where India has an uncomfortable dependence on Chinese imports.

The PLI scheme reflects the government’s intent to improve the prospects of domestic manufacturing in India. It has elements of incentivising firms to grow big and increase investments and become part of the global supply chain. This is a welcome change from the kind of support that has been given in the past to MSMEs, which have incentivised them to remain small.

Traditionally, we have tried to attract investors with investment subsidies like giving land at concessional rates and subsidy on plant and machinery cost at a fixed percentage of say 15 per cent to 20 per cent of price. Thereafter, if the unit does not properly run, the subsidy goes waste. The PLI scheme is result-oriented. The cash incentives will be paid only if the manufacturers make the goods. It is a better alternative from the Government’s view point.