An analysis of PLI (production-linked incentive) scheme – Explained, pointwise

Introduction

The Production-Linked Incentive (PLI) scheme, a government initiative aimed at promoting domestic manufacturing and attracting investments, brings forth diverse perspectives. This includes criticism from renowned economist Raghuram Rajan.

Rajan has raised concerns regarding the potential risks associated with overreliance on fiscal subsidies and has emphasized the need for a comprehensive approach to address underlying structural issues in the manufacturing sector.

While the PLI scheme intends to spur job creation and boost investment, it is crucial to examine both the positive aspects and the challenges associated with its implementation to assess its overall effectiveness.  

About the PLI Scheme

The PLI scheme is a financial initiative launched by the Indian government to boost domestic manufacturing and make it globally competitive. It began in March 2020, covering mobile manufacturing and IT hardware initially, and has since expanded to include 14 sectors such as pharmaceuticals, telecom, food products, automobiles, textiles, and drones. The scheme offers subsidies based on additional investments, incremental sales, and value additions.

What are the achievements of the PLI Scheme so far?

Increased export growth: Under the PLI scheme, sectors such as electronics, automobiles, pharmaceuticals, white goods, and textiles have witnessed significant growth in exports. For example, exports of electronic goods increased by 57.36 percent during March 2023 at USD 2.86 Billion as compared to USD 1.82 Billion in March 2022.  

Attracting investments: The PLI scheme has successfully attracted both domestic and foreign investments in various sectors. Companies have shown interest in setting up manufacturing facilities in India to leverage the incentives provided by the scheme. For instance, The 20 automobile companies have proposed a total investment of around Rs. 45,000 crores (US$ 5.95 billion).  

Job creation: The PLI scheme has played a crucial role in generating employment opportunities across sectors. For example, the drone manufacturing sector alone is expected to create more than 10,000 direct jobs, while the textile sector is estimated to create over 7.5 lakh additional jobs 

Incremental production and investments: The PLI scheme has stimulated incremental production and investments in targeted sectors. It is expected to bring in incremental investment of INR 7,920 crore and incremental production worth INR 1,68,000 crore 

Improving India’s “Global Manufacturing Rankings”: India’s efforts towards manufacturing growth, including the PLI scheme, have been recognized globally. India secured second position after China in the Global Manufacturing Risk Index 2021, reflecting the progress made in the manufacturing sector.  

Contribution to GDP: The PLI scheme is expected to have a positive impact on India’s GDP. It is estimated to add 1.7% to the country’s GDP by 2027, generating significant economic growth and contributing to overall prosperity.  

What are the challenges faced during the implementation of the PLI Scheme?

Regulatory hurdles: Despite efforts to simplify the regulatory environment, Indian businesses often grapple with red tape, bureaucratic hold-ups, and complex regulatory requirements that can slow down or complicate the implementation of the PLI scheme. Achieving consistency and transparency in policy regulations across states and sectors is a challenge.  

Infrastructure bottlenecks: Infrastructure gaps, especially in terms of power, logistics, and connectivity, can pose significant challenges to companies looking to scale their operations under the PLI scheme. Inadequate infrastructure can increase operational costs and hamper competitiveness.  

Access to capital: Despite the financial incentives provided by the PLI scheme, businesses, especially small and medium-sized enterprises, often face difficulties in accessing affordable capital. This can limit their ability to invest in new technologies, expand capacity, or upgrade their infrastructure.  

Skills gap: While India boasts a large workforce, there’s a notable shortage of highly-skilled labour, particularly in advanced technology sectors targeted by the PLI scheme.  

Lack of advanced technology: The adoption of advanced technologies, which is essential for competitiveness in many of the targeted sectors, is still relatively low in India. The cost and complexity associated with technology adoption can pose challenges for companies looking to benefit from the PLI scheme.  

Geopolitical factors: Fluctuations in global trade dynamics and geopolitical tensions can impact the outcomes of the PLI scheme. For instance, trade restrictions, tariffs, or changes in the global supply chain can affect the export potential of companies benefiting from the scheme.  

Structural issues in the economy: Structural issues, such as small-scale operations, regulatory constraints, and fragmented supply chains, can hinder the effectiveness of incentive schemes like the PLI.  

What are the concerns against PLI Scheme?

While the PLI scheme has been lauded for its potential to boost India’s domestic manufacturing sector, there are several concerns that critics have raised:  

Selective sector focus: Critics argue that the PLI scheme’s focus on selected sectors may lead to a distortion in the allocation of resources. The scheme could create an uneven playing field where some sectors enjoy more benefits than others.  

Dependence on subsidies: There’s a concern that the PLI scheme may create industries that are dependent on government subsidies for their survival. This could potentially lead to long-term problems, as these industries may not be competitive without ongoing government support.  

Implementation challenges: Implementing the PLI scheme effectively across diverse sectors could be challenging. The administration needs to ensure that the benefits reach the intended recipients, which requires a robust infrastructure and a high level of administrative efficiency.  

Fiscal burden: The scheme involves substantial financial outlays by the government. Critics argue that this could increase the fiscal burden on the government, especially in a post-pandemic economy where resources are stretched thin.  

Regional Trade Agreements (RTA): Critics argue that by focusing on domestic manufacturing, the Indian government may be missing out on opportunities presented by regional trade agreements. They contend that participation in RTAs could expose India to larger markets and international supply chains.  

Attracting quality investments: While the scheme is designed to attract investments, there are concerns about whether it will attract high-quality investments that can lead to technology transfers and improvements in productivity.  

Environmental concerns: As industries scale up their manufacturing capabilities under the PLI scheme, there will be an increased need for sustainability and environmental conservation measures. Balancing growth with environmental responsibility could pose a challenge.  

What should be done to improve manufacturing?

Invest in infrastructure: Efficient logistics and infrastructure are vital for a robust manufacturing sector. This involves improving transportation networks (road, rail, air, and sea), streamlining port processes, improving power supply, and building efficient industrial clusters.  

Improve “Ease of Doing Business”: Reducing bureaucratic red tape, simplifying regulations, and providing a clear and stable policy environment can make it easier for businesses to operate, invest, and expand their manufacturing capabilities.  

Boost skills and innovation: Encourage and invest in technical and vocational education and training to build a skilled workforce. In addition, promoting research and development can foster innovation, which can drive productivity growth in the manufacturing sector.  

Promote digital transformation: Leveraging Industry 4.0 technologies such as AI, IoT, and automation can improve efficiency, reduce costs, and boost the competitiveness of the manufacturing sector.  

Enhance access to capital: Making it easier for manufacturers to access affordable capital can spur investment in new technologies and capacity expansion.  

Review trade policies: Evaluate existing free trade agreements (FTAs) to ensure they benefit the domestic manufacturing sector. Also, consider engaging in FTAs that provide Indian manufacturers with access to global markets.  

Sustainable manufacturing practices: Adopt and promote sustainable and green manufacturing practices. This not only helps in environment conservation but also opens up new markets for sustainable products. 

Sources: The Hindu, Invest India, The Hindu Businessline, Livemint, Hindustan Times, The New Indian Express, Business Standard, Economic Times, Fortune India and Indian Express. 

Syllabus: GS 3: Economic development: Changes in industrial policy and their effects on industrial growth.