PLI scheme with a return for the government

News: The government’s ambitious PLI scheme aims to overcome the disadvantage of high costs in the country and to encourage production on a very large scale in some selected industries. The scheme aims to reduce costs per unit of output, and help not just the economy but the country more generally.

However, there are concerns. More so, when there can be alternative policies to achieve the desired objectives without adversely impacting the budget of the government

What benefits have already been given to the corporate sector?

The corporate sector has been given several benefits already.

– The corporate tax rates have been cut substantially

– the real interest costs have been kept at very low levels,

– the customs duties have been raised significantly, and

– the price of dollar has been kept high through the excessive build-up of foreign exchange reserves over the years

All this is reflected in the high level of the BSE Sensex as well.

What are the concerns with the PLI Scheme?

As the corporate sector has already been provided with many benefits, so it’s not clear if the government should provide yet another financial incentive like the PLI.

Huge public spending: It is estimated that public spending on the scheme will be between Rs 1.93 trillion and Rs 3.47 trillion. Considering that, the govt is already fiscally constrained and is having to resort to a huge tax on oil, such a huge expense on PLI scheme is worrying.

Although the entire country can benefit in a general way, the main benefit is for the companies that receive the incentive; it is not for the Government of India (GoI), the taxpayers, and the public more generally.

What can be done to address the concerns?

The article lists two methods to ensure that the govt receives a return in exchange for the financial incentive that it is offering under the PLI Scheme.

Method I: The scheme can be modified to include a possible return for the government that is based on the performance of the company that receives the incentive.

The following indicators can be used to judge the performance of a company:

– One indicator can be that the time path of inflation-adjusted pay-outs (dividends plus share buybacks) by the company goes up above a pre-specified path.

– Another indicator can be that the real salaries and bonuses of the employees of the recipient company go above a given path.

– Yet another indicator can be that the real market value of the recipient company in the equity market, averaged over, say, three years, goes up above a predetermined path.

Method II: The government could be just given some shares of the recipient company “for free” at the time of providing the financial incentive.

How does the two methods differ?

In the second method, all, and not some, of the recipient companies will need to provide a return to the government, regardless of how successful they are. Furthermore, the recipient companies need to provide a return to the government in all, and not some, of the years in which they have a pay-out for the shareholders, regardless of whether the pay-out is big or small.

All this is not the case under the method I.

What is the way forward?

It is not clear if the Govt should run the very costly PLI scheme. But if a financial incentive is provided now, then there should be some possible return in future for the government.

Source: This post is based on the article “PLI scheme with a return for the government” published in The Indian Express on 18th Apr 22.