Production-Linked Incentive or PLI Schemes and its challenges – Explained, pointwise

Introduction

Recently the Ministry of Commerce & Industry submitted the Status of Production-Linked Incentive Schemes in India. PLI Scheme is a cornerstone of the Government’s push for achieving an Atmanirbhar Bharat. In the Union Budget 2021, the Finance Minister announced an outlay of INR 1.97 Lakh Crores for PLI Schemes in 13 key sectors.

So far 9 of the 13 PLI schemes are notified and another four Schemes are in process. Let’s have a look at the associated benefits and challenges with PLI schemes.

About the Production-Linked Incentive(PLI) Schemes

The PLI Scheme was launched as a part of the National Policy on Electronics 2019  to give incentives of 4-6% to electronic companies. Especially for the companies manufacturing electronic components like mobile phones, diodes, transistors, etc.

1. The major aim of the scheme was to invite foreign investors to set up their manufacturing units in India. Similarly, the PLI scheme aims to promote the local manufacturers to expand their manufacturing.
2. Features: Under the Scheme, companies will get incentives on incremental sales from products manufactured in domestic units.
3. Implementation: The scheme is implemented by the concerned ministries/departments.

Initially, the Scheme focussed on three sectors.

Expansion of the PLI Scheme to other sectors

In, 2020 the Cabinet gave its approval to introduce the Production-Linked Incentive(PLI) Scheme for another 10 key sectors. Of these, the government notified the PLI Scheme for 6 sectors so far. These are,

The government is actively pursuing along with the concerned ministry/department for PLI Scheme in the following sectors.

Need for PLI Scheme

The government expanded the PLI Scheme for fulfilling various needs in the manufacturing sector. Such as,

1. The PLI Scheme provides enough support to Sunrise industries at their initial stage.
   Sunrise Industry: These are relatively new industries but growing fast at present. Further, these are expected to become important in the future. For Example, Solar energy industries, Food Processing Industries, etc.
2. Further, India despite dominating the services sector, contributes very little to the global supply chain.  PLI scheme can help India to build an export base.
   For example, According to the Parliamentary report, the minimum production in India due to PLI Schemes is expected to be over US$ 500 billion in 5 years.
3. At present, there is a growing demand for diversification of supply chains. Especially to avoid the dominance of China. The PLI Scheme by increasing production can reduce Chinese demands.
4. Attract the global investment to India after the Covid-19 pandemic. India is a consumer-based economy. By providing incentives, the PLI scheme attracts more foreign investment to India.

Advantages of PLI Schemes

The Scheme provides various advantages to the Indian Manufacturing sector.

1. Firstly, Expansion of the present capacity: The PLI Scheme augments the present achievements of India. For example,
   • Indian Textile Industry is one of the largest in the world
   • India is the second-largest producer of steel
     Introducing the PLI Scheme in these sectors will further expand these sectors.
2. Secondly, India is expected to have a USD 1 trillion digital economy by 2025. The projects like Smart City Mission and Digital India require huge investments. India at present importing the equipment and raw materials. On the other hand, the PLI Scheme will provide low-cost indigenous products. So the cost associated with other projects will also come down.
3. Thirdly, the government can not make sustained investments in capital-intensive sectors. Because they have a longer gestation period. But the PLI Scheme based on incremental output is more effective than the other grant-based input subsidy schemes like Mega Food Parks, etc. This will reduce the Government expenditure.
4. Fourthly, Generate employment opportunities: The sectors such as textile, steel are labour-intensive in nature. By increasing manufacturing in these sectors, India can reduce the unemployment ratio and also create skilled manpower.
5. Fifthly, Encouraging local manufacturing units: The scheme aims to develop local industries. Further, the scheme also facilitates innovation and research, development and up-gradation of technology of Indian firms. Thus, the local manufacturing units can become globally competitive in the long run.

Challenges associated with the PLI Schemes

1. The scheme contains a financial cap on incentives. This makes an over-performing company not to reap the benefits of its over achievements.
2. In India for the majority of the PLI Scheme focussed sectors the effective cost of manufacturing is higher than the competitors. For example, Ernst & Young study shows that if the cost of production of one mobile is Rs.100. Then the effective cost of manufacturing the mobile is 79.55 in China, 89.05 in Vietnam, and 92.51 in India(including PLI). So, the investors will prefer other countries despite the PLI scheme.
3. Apart from that, the scheme did not address the core challenges faced by the Sunrise industry manufacturers. Such as,
   • First, less presence of domestic firms: The Scheme will benefit the international player more than the Domestic firms. As the international players can invest their revenues and produce in India and take domestic market share. Thus, the domestic manufacturer will be in a disadvantage position. For example, About 99% of Xiaomi phones sold in India were made in India. So, Indian firms might face challenges in getting market share.
   • Second, the problem of Cheap imported material: Domestic firms may also face competition from cheap imports. Especially from Chinese in Solar PV Modules, White Goods etc.
   • Third, lack of cutting edge technology and Foundries:  India so far not focussed on adequate R&D development and Raw machinery. This resulted in poor talent retention and eventually ‘brain drain’. So, the development of industries under the PLI Scheme is questionable.
4. The Challenge of WTO:  In September 2019, Chinese Taipei contested the raise in tariffs under the Phased Manufacturing Programme(PMP). If the PMP is found to be the WTO non-compliant, then the growth of domestic industries is limited.

Suggestions

To make India a global manufacturing hub along with the PLI Schemes, certain reforms are necessary. These include,

1. Focus on supply chain co-location: The government has to encourage the Foreign firms under the PLI policy to co-locate(placement of several entities in a single location) with their established industrial ecosystems. This will reduce government expenditure to invest and develop the ecosystems for the investor. This will bring the assemblers and component manufacturers together. So that, it reduces the effective cost of manufacturing.
2. Further, the government must also focus on the service industry also. As other countries like China focus on the development of both Manufacture and Service sectors simultaneously in the long run.
3. India also needs to focus on other key challenges of the manufacturing sector through initiatives such as,
   • Reduction in costs– India also needs to consider reducing its factor costs of power and logistics.
   • Encouraging states to be competitive and not indulge in trade-restrictive practices like Job reservation for locals, etc.
   • Further, Implementing structural reforms such as Land reforms, etc.
   • Also, India needs to improve human capital to meet the demands of the sunrise industries.
4. Profiting from Anti-Chinese Sentiments: The global players including the USA, Australia aims to diversify their supply chains and also raise allegations against China. India should utilize this golden opportunity to act fast to attract outgoing investment from China.

Conclusion

India’s PLI scheme was so far has been able to attract 22 top companies, including Apple and Samsung mobile phones in the electronics manufacturing segment. Apart from that, it is also expected that, over the next five years, a manufacturing capacity of over $150 billion and exports of $100 billion will be tied up through the PLI scheme. Further, the government needs to rectify the challenges faced by Indian firms in manufacturing. Else India can become a global manufacturing hub of International companies.