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Wednesday, May 18, 2022

Only the initial fillip for manufacturing

Production-linked Incentive scheme is an attractive short-run measure but it needs to be complemented by creating a sustainable and attractive ecosystem for firms to operate in India.

Updated: March 30, 2021 8:23:56 pm
The scheme has received favourable traction from global investors in the mobile manufacturing segment and is now applicable to 13 champion sectors with a financial outlay of Rs 1.97 lakh crore over the next five years. (Representational)

Written by Aniruddha Ghosh and Prachi Priya

Last year, the Government of India introduced the Production Linked Incentive Scheme to raise India’s manufacturing capabilities and export competitiveness. The scheme, a part of the PM’s Atmanirbhar Bharat initiative, is an effort to not only encourage domestic players to make greenfield investments or expand existing facilities in the country but also encourage foreign players to set up a manufacturing base in India. Through this, the government aims to reduce India’s reliance on imports in champion sectors where we have the potential to compete at the global level. It comes at an opportune time as the manufacturing sector has witnessed de-growth for five straight quarters until 4Q2020 with only slightly positive growth in 4Q20 on a contracted base.

The scheme has received favourable traction from global investors in the mobile manufacturing segment and is now applicable to 13 champion sectors with a financial outlay of Rs 1.97 lakh crore over the next five years. The sectors include advance chemistry cell (ACC) battery, electric vehicles, pharmaceutical, renewable energy, electronic & technology products, auto & auto components, drugs, telecom & networking products, textile, food products, solar PV modules, air conditioners, LEDs, and speciality steel. The scheme extends an incentive in the range of 4 per cent to 6 per cent on incremental sales over a chosen base year on domestically produced goods in target segments for five years subject to certain eligibility criteria. Any domestic or foreign company is eligible to apply for the scheme based on certain thresholds of incremental investment and incremental sales of domestically produced goods. As per the Economic Survey 2021, the PLI scheme “will ensure efficiencies, create economies of scale, enhance exports, provide a conducive manufacturing ecosystem, and make India an integral part of the global supply chain.”

Going forward, however, several issues need to be addressed for the scheme to deliver the right outcomes.

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First, the scheme should not be considered a long-term solution for addressing manufacturing inefficiencies in India that are inherently structural. The real challenge for India’s manufacturing sector lies in high operational costs and the complexities of doing business. Competitiveness in India is impacted by a myriad of factors some of which include cost and quality of power, high logistics cost, unequal credit access for MSMEs, lower productivity of labour and low research & development expenditure. Linking the PLI scheme to India’s vast MSME sector by mandating progressively higher local value addition may turn out to be a real gamechanger.

Second, as the target segments have been expanded to 13 sectors operational and procedural difficulties will have to be taken care of. The scheme may be well-intended but how smoothly it is implemented will determine its success. Earlier targeted schemes such as the Merchandise Export from India Scheme (MEIS) and Services Export from India Scheme (SEIS) did not deliver the desired results because of untimely disbursal of benefits which hampered the working capital of local manufacturers. Learnings from the failure of such schemes should not be repeated when it comes to the PLI scheme.

Third, another difficulty that some of the sectors are currently facing is related to the way the scheme is designed. Take, for example, an industry that plans to set up greenfield capacity in the country and meets the eligibility requirement based on the threshold for investment. For the PLI scheme, effective from say April 1, 2021, the PLI incentive will start flowing based on the incremental sales of the company starting FY22. For greenfield investment in many sectors, this amount will be very low for the first 2-3 years. This is because a lead time of 18-24 months is required to set up the plant and start commercial production where heavy capital investment is required (arranging land, ordering machinery, arranging labour etc). This becomes a major deterrent for some companies as they can hardly avail any benefit in the first few years due to limited capacity build-up.

Fourth, the quality of products is paramount when one is looking at competition globally. In this regard, India massively lacks in terms of product and process standards. The endeavour should be to create a good standards ecosystem in the country led by BIS such that the quality of Indian products is at par with global parameters.

Fifth, state-wise industrial policies take centrestage when it comes to making actual investments in the country: Labor and land acquisition laws, availability and quality of power, availability and quality of the workforce, red-tapism in various states are factors that will outweigh any financial subsidy or incentive provided by the government when an investment decision is being made. India has witnessed enough examples of this in the past where the private sector has pulled out investment from states despite getting substantial benefits due to such issues. Mexico is a great example where state governments have been providing strong incentives to attract global manufacturers and suppliers to their respective cities. In essence, the percolation of PLIs at the state level is crucial for its success.

Ultimately, if India wants to position itself as a manufacturing and export hub, PLI should only be seen as a temporary solution to counter the myriad of factors that are inhibiting the manufacturing sector’s competitiveness. In the five years until the scheme is operational, both the government and private sector should work jointly to address all the issues that are impacting the cost competitiveness of the manufacturing sector. The private sector should also not look at this scheme as a measure to counter their operational efficiencies and look for unlimited benefits under this scheme. PLI isn’t a permanent solution for India’s manufacturing woes.

It should be remembered that PLI is an attractive short-run measure but it needs to be complemented by creating a sustainable and attractive ecosystem for firms to operate in India. Subsidies and incentives can be a game-changer only when the business environment is conducive enough for investment and that is the only solution to India’s manufacturing sector woes.

Ghosh is a PhD student at Johns Hopkins University and Priya is a Mumbai-based economist

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