Making In India. But How?

Source– The post is based on the article “Making In India. But How?” published in The Times of India on 12th September 2022.

Syllabus: GS3- Indian Economy

Relevance– About our Production Linked Incentive Scheme.

News- The article explains the Production Linked Incentive Scheme and its future scope.

Production Linked Incentive scheme (PLI), intended to create a sustainable manufacturing base in India.

What is the need for the PLI scheme?

It starts from the premise that India manufactures too little because it suffers from a competitive disadvantage of around 8. 5-11% on account of factors such as lack of adequate infrastructure, high cost of finance; inadequate availability of quality power; neglect of R&D; and the inadequate skills of Indian workers.

Since addressing these weaknesses will take time, the government wants a faster alternative.

GoI through PLIs  offer manufacturers a government payment of some percentage, provided they meet incremental investment and sales targets.

Who pays?

The Indian customer pays a higher price because of tariffs if parts are imported

The Indian taxpayer pays for subsidies, not just to Indian firms that are selected for PLI but also to international manufacturers.

How many jobs are being created?

There is no data available on that. We can have a look at imports and export data in the telecommunication sector.

In the last third of 2019 before PLI was introduced , exports were $1. 6 billion and imports $4. 4 billion. In the last third of 2021 after PLI was introduced, exports were $2. 7 billion and imports $5.

So exports have gone up substantially, but they were already trending up before PLI.

On the other hand, imports were trending down, and now are trending up, which is consistent with PLI encouraging manufacturers to import parts so long as the final assembly is done in India.

What are the main concerns related to the scheme?

1. The producers can shift their production to countries having better investment climates like Vietnam, when PLI ends and achieve scale economies without incurring disadvantages given the small investment required to meet PLI eligibility. There will be little incentive for them to continuously  operate in India.
2. Manufacturers could continue to produce, but will require continued tariff and subsidy protection.
3. If PLI-induced domestic production does not become globally cost-competitive, it will reduce exports in other sectors. For example, high cost domestically produced semiconductor through PLI incentives will reduce the competitiveness of two wheeler exports that rely on chips.

There is a need to enhance human capital investment, a feasible land acquisition process, strengthening infrastructure and a predictable tax regime.