Measuring success: Increasing PLI allocation will not be enough

Source: The post is based on the article “Measuring success: Increasing PLI allocation will not be enough” published in the Indian Express on 19th May 2023.

Syllabus: GS – 3: changes in industrial policy and their effects on industrial growth.

Relevance: About PLI Scheme 2.0 for IT Hardware.

News: The Union Cabinet has recently approved an updated Production Linked Incentive (PLI) scheme for IT hardware manufacturing with more fund allocation.

About the updated Production Linked Incentive (PLI) scheme for IT hardware manufacturing

What are the key changes in the PLI Scheme 2.0 for IT Hardware?

-The updated scheme now has a budgetary outlay of Rs. 17,000 crore, compared to the previous allocation of Rs. 7,325 crore.

-The tenure of the scheme has also been increased to six years from four years.

-The average incentive has been enhanced to 5% compared to 2% offered in the previous version.

-Companies using local components will now get additional incentives.

What are the expected benefits of PLI Scheme 2.0 for IT Hardware?

With the modified scheme, the government expects an investment of Rs. 2,430 crore in the sector during the given period.

India needs to create a large number of manufacturing jobs for its ever-rising workforce. Hence, with the updated scheme, the Centre expects to create 75,000 direct jobs and boost production by Rs. 3.35 trillion.

About the potential of Electronics manufacturing in India

Electronics manufacturing has been witnessing consistent expansion with a 17% compound annual growth rate (CAGR) over the past eight years. The annual production value is estimated to have crossed $105 billion, or about Rs. 9 trillion.

India has emerged as a trusted supply-chain partner for global players and large companies are willing to invest in India.

Why increasing allocation for PLI Scheme 2.0 for IT Hardware is not enough?

The earlier version did not yield results despite investment: Various reports have shown that the target for electronics manufacturing would be missed by a significant margin by 2025-26. Exports would be around only 53-55% of the stated target.

In the case of IT hardware, in particular, against the target of $25 billion, production is estimated to touch only about $6 billion.

The extension of financial support is not the correct way to attract investment: The financial support might cause a) the subdued performance of firms in different sectors, b) In the long run, they might develop heavy dependence on PLI, c) deviate focus from create enabling conditions for a large and diverse manufacturing base in the country and d) fiscal incentive can be only one of the many variables determining actual investment decisions.

What should be done?

The government should re-evaluate the scheme to help drive long-term investment and balance India’s aversion to large trade agreements.