Amrit Mohapatra, JNU

By Amrit Mohapatra, ABVSME, JNU

The Hon’ble Finance Minister Ms.

Nirmala Sitharaman, in her budget speech on 1st February 2020, announced the allocation of ₹ 1.97 lakh crores for the Aatmanirbhar BharatProduction Linked Incentive Scheme over a 5year period. To get the full picture of this announcement, we must look at the macroeconomic scenario with a historical analysis and the potential the manufacturing sector holds for future performance. Manufacturing Sector- Overview

The manufacturing sector contributes around 14.5% to the total Gross Value Added (Figure I). The contribution of manufacturing to total GVA has been declining in the past few years, as its rate of growth is less as compared to services and agriculture. In the past few years, the services sector saw tremendous growth in augmenting India to become a major leader of IT services exports. However, the direct transition of India from an agriculture-based economy to a services-based economy somehow neglected the growth of industry and manufacturing. The lack of entrepreneurship mindset, difficult business environment in India, complexity in regulatory process and anti-capitalism politics played a key role in suppressing the growth of the manufacturing sector. The problems due to overdependence on the services sector saw greater visibility after the outbreak of COVID-19.

In terms of sectoral growth analysis,

the services sector had been performing extremely well before the outbreak of COVID19 and was responsible for driving the economy forward. Although the pandemic disrupted the economy to a large extent, the agricultural sector somewhat arrested the contraction (Figure II), as it maintained a growth rate of 3.4% vis a vis contraction of economy by 7.2%.

Figure II: Sectoral Growth Rate Trends (2017-18 to 2020-21)

Source: Economic Survey 2021

Decomposing the industrial sector, we see that the manufacturing sector’s performance has been average, with construction and electricity contributing more to the industry’s share to GVA (Figure III). In 2019, manufacturing saw a growth of 5.7% while electricity and construction grew by 8.2% and 6.1% respectively but mining contracted by 5.8%.

Figure III: Rate of Growth of GVA in Industry and Its Components (%)

Figure IV: Rate of Growth of Export and Imports of India vis a vis World, Advanced Economies, EMDEs and SE Asia (2016-2020 Q3)

Source: Economic Survey 2021

The correlation between India’s exports and imports vis a vis world has remained positive. Prior to 2020, imports saw greater volatility vis a vis rest of the world while India’s export performance remained fairly stable. The decline in exports as well as imports during the pandemic period was much more profound in comparison with the rest of the world (Figure IV).

Lack of domestic manufacturing of products, the disruption of global supply chains due to stringent lockdowns and geopolitical factors played major roles in dampening India’s trade activity. This highlighted the urgent requirement to facilitate domestic production and come up with a performance-based incentive scheme that spurs economic revival and pushes economy to respectable levels of growth again.

Salient Features of the PLI Scheme

The PLI scheme is based on four

fundamentals to ensure transmission of

policy to effective action.

Performance Oriented Approach: The producers shall be able to avail benefits of the incentives only after they have achieved production in the country.

Benefits on incremental production: As the firms will grow by taking advantage of economies of scale, the amount of incentives received on an incremental basis will be proportional to the marginal increase production. Another rider to this is that the growth rate should be high. It is expected that to achieve this rate of growth, firms should either invest more in green-field assets or expand their existing facilities.

Emphasis on Scalability: The scheme selects players who can produce and deliver products in large volumes.

Focus on Integration: The PLI scheme also aims to select the sectors that can be integrated with global value chains, rural economy, as well as the job creating sectors. Technology is also expected to play a key role in this integration and its promotion is encouraged.

The production linked incentive scheme so far has been announced for 13 sectors (See Figure V). It is worth mentioning here that mobile manufacturing & specified electronic components, as well as the automotive industry received the largest share of the PLI scheme allocation, suggesting the government’s priorities for the next five years.

Figure V: Production Linked Incentive Scheme: Decomposition of the Total Outlay (₹ Crores)

Source: PIB In order to understand the potential effects of the scheme, we need to study each segment separately:

ACC battery manufacturing: It holds the potential to boost consumer electronics, electric vehicles and renewable energy. The growth of ACC battery manufacturing through domestic and international players will help in innovation and technology transfer through competition.

Electronic Products: The Government of India is promoting Digital India and Smart Cities. Innovation and domestic production of electronic products is necessary to create smart citizens for the future. Accordingly, this will also help create deep-tech based products, e.g. Internet of Things (IoT). Additionally, deep-tech start-ups will also get support to link demand with supply. Automobiles: The scheme will facilitate the Indian Automotive Industry to become more globalized with enhanced competition. Some of the focus is also expected to be on manufacturing vehicles with less carbon footprint, designing and manufacturing electric vehicles (two-wheelers, four wheelers) and their ancillaries.

Pharmaceuticals: India plays a major role in the global pharmaceutical sector by contributing 3.5% to the total share of drugs and medicine exports. PLI will not only help pharmaceuticals grow, but also enable the growth of the Chemical Industry.

Telecom: The PLI scheme will enable India to take a major leap towards becoming a major original equipment of telecom and networking products. Combined with deeptech and consumer electronics, it will accelerate the process of digitization.

Textiles: Although India enjoys global leadership in the textile industry with a global export share of 5%, it still lags behind in the manmade fibre segment (MMF). PLI scheme can help address this bottleneck and enable development of smart tools to aid textile manufacturers. Here, the focus would be more on quality.

Food Processing: This industry is one of the key players in the global value chain of agricultural produce that serves as the penultimate point of contact for consumers. The scheme is expected to improve operational efficiencies, international marketing and generate employment. This can also enable farmers to receive a better price for their produce, subject to other factors.

Solar Energy: India’s import dependence on Solar PV panels can expose it to foreign exchange risk and security challenges, the latter because these panels are hackable due to their electronic value chain. The PLI scheme can boost domestic production of solar PV panels, reduce import dependence and also create huge export value. Additionally, it will also offer cheaper options for MSMEs who look for solar rooftop adoption.

Steel Industry: India is the 2nd largest steel producer in the world and is a net exporter of steel products. The PLI scheme can enable India to focus on manufacturing and exporting improved grades of steel and create an even more robust steel sector. White Goods: Air Conditioners and LEDs have a high domestic as well as export value potential. Domestic manufacturing of white goods (ACs and LEDs) will enable access of these products at lower prices. Greater domestic manufacturing and increased exports will also augment more jobs.

Mobile

Manufacturing Electronic Components: and This

Specified sector has been given much emphasis due to the problems plaguing it and the potential it holds. Some of these problems include inadequate infrastructure, fragmented domestic supply chain and logistics, high cost of capital, lack of quality power, limited design capabilities and little R&D expenditure by the industry. This scheme will enable India to develop core competency in mobile manufacturing and enable a competitive environment.

Drug Manufacturing and API: The growth of the latter is very essential to reduce the dependence of Active Pharmaceutical Ingredients (APIs) imports from China. India is already a major player in exporting generics to the world and through the scheme of PLI, It can also venture into specialized medicines generation.

Medical Devices: The setting up of medical devices plants will play a key role in generating self-sufficiency in producing specified medical devices.

In my opinion, the Aatmanirbhar Bharat Production Linked Incentive Scheme covers the key driving sectors, as well as the sectors showing growth potential. I wouldn’t be surprised if railways, transportation and toys manufacturing see inclusion in this list in the future, as they have high potential for growth and employment generation. In order to ensure sustained growth, it becomes essential to provide relief to companies through monetary policies. Here, there could be some friction due to the rising NPA issues in the past which can deter banks from extending credit, which can deter smaller players from participating. However, with appropriate government backing, firms should be able to manage their working capital and financial metrics well.

Through the PLI scheme, both forward and backward integration can be facilitated. This will help in linking to the MSME sector and the global supply chains. In terms of foreign investment, many capital-rich global firms are willing to set-up facilities in India. Competition with foreign companies will push domestic firms to innovate and spend a greater portion of their revenues into research and development. The cumulative impact of these developments will ultimately make India “Aatmanirbhar” to a good extent and lead to job creation as well as export promotion, thereby improving its balance of payments.