Production-Linked Incentives for Manufacturing

Context: Recently, former Reserve Bank of India (RBI) Governor Raghuram Rajan questioned the success of the production-linked incentive (PLI) scheme in boosting India’s domestic manufacturing and exports. About Production Linked Investment (PLI) Scheme:

• It is an incentive based scheme introduced by the Government of India for enhancing India’s manufacturing capabilities under its Atmanirbhar Bharat (Self Reliant India) initiative. 
• The mission is to boost the manufacturing sector, create jobs while providing companies with an incentive on incremental sales on products manufactured in domestic units.
• Aim of the Scheme:
  • Enhance global competitiveness of Indian manufacturers.
  • Attract investments in core competency areas and cutting-edge technology.
  • Improve efficiencies and create economies of scale.
  • Promote exports and integrate India into the global supply chain.
  • Make India an attractive destination for investment.
• Working of the PLI Scheme: Under the PLI scheme, eligible companies are required to:
  • Establish large-scale manufacturing units.
  • Implement improvements in logistics and infrastructure.
  • Meet specific eligibility criteria based on investment scale and sector.
  • Differentiate eligibility criteria for larger companies, Foreign companies and Micro, Small and Medium Enterprises (MSMEs).

PLI Scheme in India:

• The PLI scheme was introduced by the Centre in 2020. Initially, there were only three targeted industries – Mobile and allied Component Manufacturing, Electrical Component Manufacturing and Medical Devices.
• So far, the government has announced PLI schemes for 14 sectors including automobile and auto components, electronics and IT hardware, telecom, pharmaceuticals, solar modules, metals and mining, textiles and apparel, white goods, drones, and advanced chemistry cell batteries.

Benefits of the PLI Scheme: The PLI scheme in India offers significant benefits to eligible manufacturers, including financial incentives:

• Enhanced competitiveness
• Reduced import dependence
• Increase job opportunities
• Identify the target product and increase its manufacturing units
• Development of domestic industries
• Forming of a stable economy
• Technology upgradation

Concerns:

• Structural Problem: Less demand and inadequacy of research and development (R&D).
• Market Capturing: Globally, nations are trying to capture the markets of others by exporting more than what they import.
• Shifting of Demand: In India, the demand is shifting from the unorganized to the organized sector, and consequently leading to further marginalization.
• Cronyism: The process of doling out subsidies involves discretion and is prone to cronyism.
• No Common Set of Parameters: There is no common set of parameters to understand the value added by companies that have received or are likely to receive incentives under the scheme.
• Lacking in Monitoring the Progress: India is lacking in creating a centralized database to monitor progress.
• Target Missing: As per a report, out of the 14 eligible sectors, only two or three were likely to meet their first-year targets under the PLI scheme.

Points should be kept in the mind:

• Micro Sector: Rather than protect large-scale industries, we need to boost the micro sector, which is where the bulk of the employment is, so that we can generate enough demand in the economy.
• Core Sector: Need to focus on the sector as a core sector (sectors that have high externalities or multipliers for other economic activity), which will help in fostering industrialiasation.
• Targeting: It is very important to incentivise certain industries. Governments typically target certain strategic sectors which have huge potential like nowadays emphasis is on green industries.
• Eye on learning from the World: Industrialisation and manufacturing don’t happen in a vacuum in this globally integrated world. So, we need to be watchful of what other governments are doing and develop our own strategies accordingly.
• Structural Updation: Infrastructure has to be fixed, the quality of education has to be improved at all levels, R&D investments have to be enhanced.
  • The conditions should be created to lower the risk of investment in R&D and rather to import technology needed to build internal strength. 
• Demand Rise: Need to boost the demand by reducing inequalities, so that demand for mass consumption items will give a boost to the economy as a whole.
• Investment: Need to put in efforts towards promotion, facilitation and incentivisation of investment.
• Incremental Output: PLI is not a handout. It is a post-facto incentive given when you have delivered the incremental output. So, once you have delivered the incremental output, only then do these incentives come to you.
• Political Accountability: Need to strengthen the political accountability in our system.
• Regressive Indirect Taxes: Subsidies need to be distinguished as it necessitates high indirect taxes, which results in high costs and prices rise. Indirect taxes tend to be regressive, so those at the bottom need to be supported by subsidies.

Conclusion: 

• The PLI Schemes are set to make India a hub for manufacturing by reducing reliance on imports in the short term and enhancing exports over the long term.
• Since, the focus is on key employment generating sectors, it is expected that the PLI Scheme would lead to an exponential rise in employment for India’s vast and able workforce.

Additional Information: About General Subsidy: A general subsidy is one that is necessitated by the macro situation of the economy, whereas a specific subsidy is given to sectors or to companies and are based on micro-level decisions that are taken by the government. In the case of the latter, cronyism can play an important role there, which is not necessarily an efficient thing to happen. In the case of the former, the bigger issues become employment, living conditions, etc.

 Source: The Hindu