PRODUCTION LINKED INCENTIVE SCHEMES

PRODUCTION LINKED INCENTIVE SCHEMES

A Production-Linked Incentive, or PLI scheme, provides incentives to companies in order to boost domestic manufacturing. This is done by the government in an effort to make products more competitively priced, reduce a country’s dependence on imports and generate employment. Production Linked Incentive Scheme was introduced in March last year and is expected to result in a minimum production worth more than $500 billion in five years.

Importance of PLI Schemes

• Less burden on State funds: PLI is important as the government has limited resources, and cannot continue making investments in these capital intensive sectors, which requires longer times for start and giving the returns.
• Capacity Development: To invite global companies with adequate capital to set up capacities in India they will also come with advanced technology which is very much essential for the sunrise industry.
• Various Manufacturing sectors: Due to its limitations, the government can focus on 2-3 major manufacturing sectors that require across the board indicators. PLI would help to give equal emphasis on listed sectors.
• Export Base: India, despite dominating the services sector, contributes very little to the global supply chain. The PLI scheme can help India to build an export base.
• FDI Attraction: After the Covid-19 pandemic, India is a consumer-based economy. By providing incentives, the PLI scheme attracts more foreign investment to India.
• Sustainable: PLI has brought hope to climate action, by incentivizing companies to produce goods that would replace the most polluting technologies. The government approved a PLI scheme for high-efficiency solar photovoltaic modules.
• Employment generation: Unemployment is ballooning due to post-COVID impact. PLI would help to give oxygen to MSMEs which are labour intensive sectors.
• Lower Project costs: The PLI Scheme will provide low-cost indigenous products. So the cost associated with other projects like Digital India will also come down.
• Local Impetus: The scheme aims to develop local industries. Further, the scheme also facilitates innovation and research, development and up-gradation of technology of Indian firms.
• 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.

Impact of PLI schemes on various sectors

1. Automobile and its components: Incentive (PLI) Scheme in the Automobile and Auto Components sectors for Enhancing India’s Manufacturing Capabilities and Enhancing Exports – Atmanirbhar Bharat.
   • It is estimated that over a period of five years, the PLI Scheme for Automobile and Auto Components Industry will lead to fresh investments of over Rs 42,500 crores, incremental production of over Rs 2.3 lakh crore, and will create additional employment opportunities of over 7.5 lakh jobs.
2. Aviation:
   • The PLI scheme and new drone rules are intended to catalyse supernormal growth in the upcoming drone sector.
   • It is estimated that investment worth Rs 5,000 Crore for manufacturing sector drones will be created, which in turn will bring a turnover of Rs 900 crore, and 10,000 job opportunities will be created.

1. Chemicals: The Production-Linked Incentive (PLI) Scheme is going to help in Advanced Chemistry Cell Battery for Enhancing India’s Manufacturing Capabilities and Enhancing Exports – Atmanirbhar Bharat.
   • The scheme envisages setting up of a cumulative ACC manufacturing capacity of 50 GWh of ACCs and an additional cumulative capacity of 5 GWh for niche ACC technologies.
2. Electronics system: The PLI Schemes for Large Scale Electronics Manufacturing and Hardware for Enhancing India’s Manufacturing Capabilities and Enhancing Exports – Atmanirbhar Bharat.
   • Over the next 4 years, the PLI Scheme for IT Hardware is expected to lead to total incremental production of up to INR 3,26,000 crore, out of which more than 75% is expected to be exported. Also, it is expected that Domestic Value Addition for IT Hardware will rise to 25% by 2025 from the current 5% – 10%, due to the impetus provided by the scheme.
3. Food Processing: The PLI Scheme in Food Products for Enhancing India’s Manufacturing Capabilities and Enhancing Exports.
   • The expected outcomes from the scheme are – Expansion of food processing capacity; Exports: Rs 27,816 crore; Generation of employment: 2.5 lakh persons.
4. Medical Devices: The PLI scheme Promoting Domestic Manufacturing of Medical Devices. Production Linked Incentive Scheme for Pharmaceuticals has been introduced to provide an impetus to India’s vision of becoming a global manufacturing hub for medical devices.
   • A total Committed Investment of Rs. 873.93 crore.
5. Metals and Mining: The PLI Scheme in Specialty Steel for Enhancing India’s Manufacturing Capabilities and Enhancing Exports.
   • The PLI scheme shall boost the production of identified specialty steel grades from the current 16 MTPA to over 37 MTPA in 5 years, while attracting investments of over Rs 35,000 crore.
6. Pharmaceuticals: The Production Linked Incentive Schemes for Key Starting Materials (KSMs)/Drug Intermediates (DIs) and Active Pharmaceutical Ingredients (APIs) is going to boost domestic manufacturing capacity, including high-value products across the global supply chain.
   • A total Committed Investment of Rs. 5,366.35 crore; Maximum Incentive proposed for disbursement: Rs. 6,000 crore and Expected Employment Generation of about 20,000.
7. Renewable energy: The PLI Scheme in High Efficiency Solar PV Modules for Enhancing India’s Manufacturing Capabilities and Enhancing Exports.
   • Over the next five years, the Scheme is expected to lead to a total production of about INR 10.5 lakh crore. More than 60% of production is expected to be exported. The scheme is also expected to bring in additional investment of INR 11,000 crore.
8. Telecom: The PLI scheme is expected to attract large investments from global players and help domestic companies seize the emerging opportunities and become big players in the export market.
   • It is estimated that the scheme is going to give incremental production of around Rs 2.4 lakh crore with exports of around Rs 2 lakh crore over 5 years. It is also expected that the Scheme will bring investment of around Rs 3,000 crore and generate huge direct and indirect employment.
9. Textile and apparel: The PLI Scheme in Textiles Products for Enhancing India’s Manufacturing Capabilities and Enhancing Exports – Atmanirbhar Bharat.
   • It is expected that this scheme will result in fresh investment of above Rs 19,000 crore and additional production turnover of over Rs 3 lakh crore in five years. Higher priority for investment in Aspirational Districts & Tier 3/4 towns. The Scheme will positively impact especially states like Gujarat, UP, Maharashtra, Tamil Nadu, Punjab, AP, Telangana, Odisha etc.
10. White goods: Its prime objectives include removing sectoral disabilities, creating economies of scale, enhancing exports, creating a robust component ecosystem and employment generation.
    • For companies in white goods, the PLI Scheme is expected to see an incremental investment of Rs 7,920 crore over five years along with incremental production worth Rs 1.68 lakh crore, exports worth Rs 64,400 crore, and direct and indirect revenues of Rs 49,300 crore.

Issues associated with PLI Schemes

• Obsolete Approach: India’s PLI scheme resembles the ‘piece rate’ method, which has actually been in decline worldwide. As manufacturing grew more complex, incentives grew in complexity as well and generally focused more on productivity and quality rather than quantity.
• Financial limitations: The scheme contains a financial cap on incentives. This makes an over-performing company not to reap the benefits of its over achievements.
• High manufacturing Cost: According to a study by Ernst & Young, 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).
• Market share of Domestic companies: The market share of domestic companies is not promising. In such cases, this scheme could benefit international companies more than domestic companies.
• Issues related to WTO: The various sectors supported under PLI schemes might be challenged in WTO. It is important to note that there is a thin line between protectionism and making the domestic industry strong through incentives.
• Issues related to raising import duties: Budget FY22 provided import duty protection to several products. To make our industrial products globally competitive, what is needed is sequencing of the required reforms.
• China sees the PLI scheme as a threat: China is one of the major importers. The prices of components are going up, which means China is anticipating a threat from this policy and so is trying to hold back supplies to India.
• Manufacturing issues: Manufacturing inefficiencies are inherently structural. The main challenge lies in controlling high operational costs, including compliance costs, simplifying the cumbersome taxation policy, and reducing complexities in business.

Way Forward

• Incorporation of Service sector: India has an upper edge in the IT-related service sector. The PLI schemes should focus on both the service and manufacturing sectors, and both the sectors must not be seen as a trade-off.
• Focus on Global supply chain: Focus on supply chain co-location should be promoted under these schemes by encouraging the foreign firms with their established industrial ecosystems.
• 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.
• Reduction in costs: India also needs to consider reducing its factor costs of utilities.
• China Issue: In issues related to China’s opposition, the Indian government should come out more forcefully on this policy.
• Competitive: Encouraging states to be competitive and not indulge in trade-restrictive practices like job reservation for locals, etc.
• Logistic Cost: Government has already launched many freight corridors, and water transport should also be promoted for reducing logistic costs.
• India as design Hub: India’s industry should be emerged as a design-led hub. Top companies need to be nudged to develop an electronic hardware startup ecosystem.