What critics of the govt miss: Not much is lost if the PLI scheme fails

Source: The post is based on the article “What critics of the govt miss: Not much is lost if the PLI scheme fails” published in Business Standard on 6^th May 2023.

Syllabus: GS 3 – Growth and Development

Relevance: issues with Production-linked Incentive (PLI) scheme and regional free trade arrangements.

News: The government is often criticized for staying away from regional free trade arrangements and for the introduction of a Production Linked Incentive Scheme (PLI) for the manufacturing sector.

What are the reasons behind these criticisms?

It is argued that staying away from regional free trade agreements will make India stay away from regional production and supply chain and PLI would make an uncompetitive manufacturing sector.

The manufacturing sector that thrives only with the help of subsidies is not good for long term industrial growth.

Furthermore, no economy has sustained rapid economic growth without a strong and growing export sector.

Therefore, India should get into those regional trade arrangements, and bring required changes to gain profit from becoming a part of international supply chains.

Moreover, India’s export sector has evolved with the time and critics usually miss this point.

How has India’s export sector evolved?

Merchandise exports, which is Asia’s regional trade agreements have been mostly about, are no longer the primary driver of India’s export growth.

The role has been taken over by services exports, which have grown more rapidly.

The critics want India to follow the East Asian model of export-led growth that focused on low-value, low-margin, labour-intensive exports of products like garments.

However, the operative conditions in India are different from those in East Asia and hard to change.

Labour-intensive exports can succeed in India only in those sectors where – a) the labour cost is a small part of the product price such as the assembly of products and b) the domestic market provides an incentive for localising such as mobile phones and other electronic goods.

However, the rest of manufactured goods exports is mostly capital-or knowledge-intensive such as refined petroleum products, engineering goods, etc.

How are service exports beneficial for India?

The more the services sector produces a trade surplus, the stronger the rupee will be. Hence, India’s biggest comparative advantage lies in its educated, low-cost, white-collar workforce.

Service exports accounted last year for 42 percent of total export earnings. If the similar trend continues, the figure could climb to 50 percent in a few years, and then overtake merchandise exports.

Why is the criticism over PLI not a big concern?

There is not much concern over PLI because if PLI fails, there is a little to lose. The incentives under PLI are very small in a macro-economic context.

For instance, the total PLI payout is to be under 2 trillion, over five years. This is one-tenth of 1 percent of expected GDP over that period, which is affordable.

However, if PLI succeeds, it will result in investments of 3 trillion in the five-year period, which is just 1 percent of the current year’s GDP.

The success of PLI is supposed to trigger a hike in the share of manufacturing in overall capex, achieve substantial import substitution, boost exports, and create six million jobs.

Therefore, in the case of PLI, there is much to gain and very little to lose.