Chetan Singh, IIFT

Impact of Production Linked Incentive Scheme on the Manufacturing Sector

By Chetan Singh, IIFT

Production-Linked Incentive or PLI scheme is a scheme that aims to give companies incentives on sale of products manufactured in domestic units i.e., manufactured in India itself. Launched in April 2020, the scheme was initially launched in correspondence to National Electronics Policy with the aim to boost manufacturing of electronic items like mobiles, laptops, semiconductor chips and related accessories related to Electronic Products Industry. The scheme was launched to reduce the import bills, dependency on countries like China and boost domestic manufacturing sector in compliance with Atmanirbhar Bharat policy to generate employment, self-reliance and overall, the Indian Economy. As of March 2021, the PLI scheme has been expanded to medical instruments, pharmaceutical, chemical, telecom, food processing and automobile sectors.

The Government holds the vision to make India a 5 Trillion Dollar economy in next 4-5 years. The growth lessons learnt from China during Post-Mao period can be easily interpreted that it was the manufacturing sector boost of China in 1980s to the start of 21st century which helped it to become the Economic Powerhouse it is today. Looking further back into the history, rise of Europe and US can be primarily attributed to their respective Manufacturing Sectors. The absence of policy and long term vision for domestic manufacturing sector post independence is the primary reason that despite home to the largest youth population and enough skilled labour, meagre 17% contribution is their of Manufacturing sector to Indian GDP as compare to 40% in China.

Government expects PLI scheme to boost India’s manufacturing by $520 billion in next 5 years. As

“Make in India, make for the World” -PM Modi on PLI Scheme

in every sector major firms needs supplies from different vendor companies, PLI scheme will act as a support base for these MSME industries by helping them establish entire value chain. PLI scheme will also enhance the FDI flow into the covered sectors and will drive research and innovation along with manufacturing.

In order to be eligible for PLI scheme, an applicant must commit to investing Rs. 10 cr (MSME) / Rs. 100 cr. ( others) to Rs. 1000 cr. for considered years. MSME sector holds share of 28.77% of country GDP (2016) whereas the contribution of manufacturing MSMEs stands at 33% in country’s total manufacturing Gross Value of Output (GVO) (2016). Also, almost 60% of MSMEs are operational in rural areas. Hence, through this scheme, government can ensure targeted development of rural economy and the investments will directly into the specific regions and belts. Manufacturing MSMEs contribute of 33% of employment across also MSME industries.

The sectors covered under the scheme includes telecom, electronics, chemical, automobile. The following the import cost of these sectors and their proportion of total

imports:

Electronics – $44.1 Billion (9.2%)

Heavy Machinery – $50.4 Billion (10.5%)

Chemicals including fertilizers – $27.8 Billion (5.8%)

Medical Apparatus – 9.5 Billion $ (2%)

Apart from fuels and precious metal (50%), it is clear that abovementioned sectors are the ones contributing to import bills and this can be reduced. Also it is worth noting that above sectors are projected to at a CAGR of double digits in next 4-5 years annually –

Electronics - 15-19%

Machinery – 10%

Chemicals – 12-15%

Medical Devices – 15-20%

India like China is home to a big domestic market for these sectors being top 20 global market and is projected to become top 5 global market at current growth rate. Hence, in order to ensure that the benefits of large consumption market in the form of inflow of huge investments gets distributed to Indian economy and public in general, PLI scheme is well suited.

Changing geopolitical landscapes with respect to economic powerhouse, growing tensions between US- China, onset of pandemic and rise of protectionism among economies has given further push to PLI scheme. With the future in mind and focus on sustainability, climate change and new technology like EV, Renewable sources of energy, sustainable healthcare and transport system and digital technology adaptation, it is important that Indian economy is already in position to cater to sudden shift in global as well as domestic demand. Pandemic has resulted in contraction of various sectors. Indian economy expected to be contracted by 7-8% this fiscal and grow by 11 per cent in next fiscal year. This growth is not possible until the capital expenditure is not undertaken in industrial sector. As government has earmarked Rs. 2 lakh crore for PLI scheme in this year, the private sector and foreign investment combined will only be able to help recover the reeling economy. PLI scheme has the potential to give access to domestic companies to latest technology and opportunity to become global champion of global supply chains and integrate MSME sector also.

The other two parameters which PLI targets is making India export hub and generate skilled employment opportunities. Government expects generation of 7 million employment opportunity and expects exports to the tune of Rs. 13 trillion from targeted sectors.

PLI scheme needs to be expanded to hospitality and aviation sectors also as these are the worst sectors to be hit due to lockdowns and travel restriction as well as recovery is also the slowest in these sectors till now. As pointed out by NITI Aayog CEO, Amitabh Kant PLI scheme will repeal fruits in long term only and with the passage of time the scheme should be expanded to other sectors also.

It is widely pointed out that PLI is a import substitution scheme and not the one that encourages export. The access to basic resources holds the key to manufacturing of basic components in all these sectors. China holds the advantage here, even today accounts for largest mines and reserves for precious

metals like iron,

semiconductors. lithium and various

Despite world blaming China for pandemic, China recorded highest ever exports figure in decades to 2 Trillion Dollars. This shows the economic influence it has on the world. China became the largest trade partner of European Union and India overtaking US in 2020. Hence, there is need for extra incentives to push domestic products to global trade market even after PLI scheme. The government should also be ready to face adverse conditions as already fiscal deficit is expected to be 9.5% this year. Indian economy cannot afford another slowdown in near future else the fruits of PLI scheme cannot be enjoyed. The PLI scheme should also include agriculture sector and rural India as the real potential is still trapped in countryside.

Apart from PLI, the ease of doing should be the focus of government. Reforms in farm laws, land laws and labor laws will boost industry sentiments. The implementation also holds the key with smooth co-ordination of state governments. Hence, it can be concluded that PLI scheme is need of the hour and couldn’t have been introduced at a better time when the world is looking toward India for the opportunities of future.