Pankaj Yadav

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.

Taking inspiration from National Policy on Electronics 2019, which aims to make India a global hub for Electronics System Design and Manufacturing (ESDM), the Ministry of Electronics and Information Technology (MeitY) announced a PLI scheme for large scale electronics manufacturing on April 01, 2020. Its objective is to boost domestic manufacturing and bring large investments in mobile phone and other electronic components manufacturing, including assembly, testing, marketing and packaging (ATMP) units. The scheme will provide 4% to 6% incentive on the incremental sales above the base year for a period of five years subsequent to base year 2019-20. The total incentive over the five year term was pegged at Rs 40,950 crores. It seeks to make domestic manufacturing competitive and efficient, create economies of scale, make India part of the global supply chain, attract investment in core manufacturing and cutting edge technologies and in turn lift up exports.

Impact of PLI on manufacturing sector By Pankaj Yadav

This scheme was a big success in its first year of launch with a total of 22 companies registered under this scheme. These included global companies like Samsung, Foxconn, Pegatron and Winstron as well as domestic companies like Lava, Bhagwati (Micromax) and Padget electronics. The project received commitments of electronics manufacturing worth Rs 11.5 lakh crore. Seeing a big success of the PLI scheme in the electronics sector, the central government announced extension of the scheme to pharmaceutical ingredients and medical devices in July 2020 and later 10 more sectors including food processing and IT hardware with an estimated outlay of Rs 1.46 lakh crore over next five years.

To continue the PLI scheme this year as well, a financial outlay of Rs 2 lakh crore was provided in budget 2021-22 for the 13 sectors under the ambit of this scheme.

The Government of India should work towards a holistic environment to boost the manufacturing sector. Otherwise, as in earlier schemes like Make in India, we will not be able to attract any significant investment into the manufacturing sector. The PLI is a short-term measure and will be largely used by companies already having a base in India. To attract new businesses, we need to make the overall ecosystem more business friendly and financially competitive to our peer nations.

We have a significant advantage of demographic dividend but lack skilled labor, e.g.,less than 5% of India’s labor force is skilled as against 96% in South Korea or 25% in China. Likewise, the infrastructure is largely inadequate in our country to support large businesses. We are also absent from global value chains. On top of this, we are not part of any major multilateral grouping and further avoided being part of RCEP, this reduces the attractiveness of India as an investment destination.

In conclusion, we can say that the government has taken a very pragmatic initiative in form of PLI which will certainly incentivise companies to expand their production base in India. Even within a year of its implementation in the electronics sector, we have seen many positive developments in terms of increased investments in expanding manufacturing bases in India. Thereafter, the government has extended it to thirteen sectors and with an allocation of Rs 2 lakh crore. Thus, PLI is an effective short-term strategy to incentivise existing businesses to invest more in India. But to make India the next global centre for manufacturing, we need to make the overall ecosystem competitive.

We need to rise to be the best in Ease of Doing Business and improve on all aspects of making India a favourable manufacturing destination. We need to reduce tariffs and other barriers on trade and be a part of more multilateral free trade agreements to incentivise global businesses to set up bases in India. Thereby India can truly become the factory of the world.