Impact of Production Linked Incentive Scheme on the manufacturing sector By Pankaj Yadav India is fifth largest global economy in nominal terms and third largest in purchasing power parity. However, our manufacturing sector has long performed below its potential. For a developing nation like India we should have transitioned from agriculture economy to manufacturing economy but we moved to a service economy. This has led to massive unemployment challenges in our country. It is significantly hampering growth of our nation because even after having the largest demographic dividend, we have high rates of underemployment, with 90% of our jobs in the informal sector. Even after renewed efforts by different governments, manufacturing sector contribution to GDP has been stagnant at 16% since 1990.
In contrast, manufacturing contributes about 40% to Chinese GDP and it has emerged as a global hub for manufacturing. Even after the ongoing trade war between US-China, India failed to capture the manufacturing sector that moved out of China. Instead, it was captured by smaller countries like Vietnam and Bangladesh. To corroborate it further, in the decade preceding 2019, Vietnam’s merchandise export grew at an annualised average rate of 18% as against only 5% for India. The reasons for India’s poor performance are inadequate infrastructure, inefficient supply chain and logistics, high cost of finance, erratic power supply, limited innovation capabilities and lack of skilled workforce.
These inadequacies result in an additional cost of 9% to 11% for the companies thereby acting as a big disincentive even after India being a large market. Hence the government decided to come up with the Production Linked Incentive (PLI) Scheme to make India a more favourable manufacturing destination for companies across the world.
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