PLI Scheme promises to recharge India’s stagnating manufacturing sector.
- Shrivatsa Joshi
- Mar 02, 2021
Yet another scheme promises to revive the country’s manufacturing sector. After Make In India, another three-worded scheme of the Narendra Modi government – Production-Linked Incentive (PLI) Scheme – is looking to change the landscape of manufacturing in the country.
Last year, the Centre announced the PLI Scheme for 13 industries in two tranches. It first launched the ambitious scheme for three sectors – mobile and certain electronic components; active pharmaceutical ingredients (APIs); and medical devices. Later last year, ten more sectors were added to the scheme – advance chemistry cell (ACC) battery; electronics and technology products; automobiles and auto components; pharmaceuticals and drugs; telecom and networking products; textile products; food products; high-efficiency solar photovoltaic (PV) modules; white goods; and speciality steel – with an aim to turn India into a global manufacturing hub.
The PLI Scheme was basically designed to wean India away from imports of electronics and bulk drugs and make the country self-reliant in these products. The outbreak of COVID-19 and worldwide lockdowns exposed India’s vulnerability to Chinese imports of APIs and electronic components. Moreover, India’s geopolitical tension with China in Ladakh gave a further push to the scheme. As India began returning to normal life, the PLI Scheme doubled up as a project to improve the manufacturing and export capabilities of the country in the 13 identified sectors.
Going beyond mere import substitution, the PLI Scheme, spanning across several Union ministries, seems to envision India as a robust, global manufacturing hub. With a combined financial outlay of Rs 2,01,291 crore for the 13 sectors, the PLI is aimed at putting India on the manufacturing map of the world.
A good start
The PLI Scheme across the 13 key specific sectors will make Indian manufacturers globally competitive, attract investment in the areas of core competency and cutting-edge technology, ensure efficiencies, create economies of scale, enhance exports and make India an integral part of the global supply chain, notes a government statement.
The statement further adds that the final proposals of PLI for individual sectors will be appraised by the Expenditure Finance Committee (EFC) and approved by the Union Cabinet. Savings, if any, from one PLI Scheme of an approved sector can be utilised to fund another approved sector by the Empowered Group of Secretaries. Any new sector for PLI will require fresh approval of the Union Cabinet.
“The PLI scheme will be a game-changer in the country where the focus is not only on manufacturing locally but also for the world. So, India can manufacture products of certain quality and scale, which will make it a global champion,” notes DPIIT (Department for Promotion of Industry and Internal Trade) Secretary Guruprasad Mohapatra. He further adds: “We are actively monitoring about 1,000 companies globally, which are either already in India and trying to expand or are thinking of entering. We will hand-hold them through the investment promotion division of this ministry (Union Ministry of Commerce and Industry), Invest India, and project development cells of ministries.”
Under the PLI Scheme, the government will pay the companies it selects for the scheme an incentive of 4 to 6 per cent of their incremental turnover each year for the next five years. However, unlike the previous schemes brought to boost domestic manufacturing, the PLI aims at giving all the benefits only if the companies are able to prove that they had incremental sales every year for the next five years. Besides, the amount of the incentive would decrease as years go by.
Meanwhile, the PLI Scheme has got off to a promising start with the government selecting a set of companies in API and mobile and electronics sectors. Three pharmaceutical companies – Aurobindo Pharma, Karnataka Antibiotics & Pharmaceuticals and Kinvan – have been selected under the scheme in the first batch to manufacture four APIs or bulk drugs – such as penicillin G, 7-ACA, erythromycin thiocyanate and clavulanic acid. The second batch of selection of PLI for the APIs is likely to take place soon.
With no local production of these four bulk drugs, drug-makers in the country have been entirely dependent on imports for them. The first batch of the PLI for APIs is thus aimed at making the country self-reliant in these bulk drugs. The three companies were selected after the government had received 215 applications from 83 companies, with many applying for multiple products.
The PLI for bulk drugs or APIs has been drawn up with a financial outlay of Rs 6,940 crore covering 53 bulk drugs. India has largely been depending on imports of the 53 APIs, especially from China. When fully implemented, the scheme for bulk drugs is expected to benefit up to 136 manufacturing units, generating incremental sales of Rs 46,400 crore and significant additional employment generation over the next eight years.
The PLI for mobile and certain electronic components has also received a big boost, with the government approving 16 companies under the scheme. Accordingly, Samsung, Foxconn Hon Hai, Rising Star, Wistron and Pegatron are among international companies approved under the mobile phone segment. Foxconn Hon Hai, Wistron and Pegatron are contract manufacturers for Apple iPhones. Apple and Samsung together account for nearly 60 per cent of global sales revenue of mobile phones, and this scheme is expected to increase their manufacturing base in India manifold, notes a press release by the Union Ministry of Electronics and IT (MEITY).
Lava, Micromax, Padget Electronics, UTL Neolyncs and Optiemus Electronics are among the Indian companies approved under the scheme for the mobile phone segment. These companies are expected to expand their manufacturing operations in a significant manner and grow into national champion companies in mobile phone production. Besides, six more companies – T&S, Ascent Circuits, Visicon, Walsin, Sahasra and Neolync – have been approved under the scheme for the specified electronic components segment.
All these mobile and electronics companies are expected to promote exports significantly. Of the total production of Rs 10,50,000 crore in the next five years, around 60 per cent will be contributed by exports to the order of around Rs 6,50,000 crore. Moreover, the companies will generate more than 2,00,000 direct employment opportunities in five years along with creation of additional indirect employment, notes a statement of the MEITY.
India’s renewed attempt to revive the manufacturing sector through the PLI Scheme is noteworthy. In fact, the country has time and again missed the bus for a full-fledged manufacturing revolution, unlike China, South Korea and other emerging markets. In the past decades, India’s manufacturing sector has underperformed compared to its overall GDP growth. As a result, the share of manufacturing in India’s GDP has stagnated at around 15 per cent in the past two decades. Comparatively, manufacturing accounts for 29 per cent of GDP in China and South Korea and 27 per cent in Thailand.
Many governments in the past have tried to push up the manufacturing sector with limited success. During the Modi government’s first term, the prime minister had unveiled the Make In India programme to turn the country into a global factory. However, the country is still quite far away from that ambitious goal. Last year, as the country began emerging from the shadows of COVID-19 lockdowns, the government turned its focus back to manufacturing with a catchy slogan of Aatmanirbhar Bharat (self-reliant India).
There is understandably excitement over the PLI Scheme that has potential to change the dynamics of manufacturing in the country. However, the reality sinks in when the scheme is juxtaposed with the deficiencies afflicting Indian manufacturing.
Going by the capital-centric PLI Scheme, many analysts point out that capital incentives alone cannot make India a manufacturing hub. The Indian manufacturing sector is saddled with many more drawbacks, going beyond the need for capital. A whole lot of issues related to the entire manufacturing ecosystem – including supportive infrastructure, lower cost of operations and real ease of doing business – is in dire shape, and it needs to be urgently fixed to make the country a robust manufacturing hub. “Despite the advantages of PLI, India will continue to face congested ports, slow turnaround times and other bureaucratic hurdles. Ease of doing business in India is only on paper right now,” points out Nitin Kunkolienker, the president of Manufacturers’ Association of Information Technology (MAIT).
There is also a concern that a cash-strapped government may end up being a major hurdle in the PLI Scheme taking off on the right note. Successive past quarters of economic slowdown and debilitating effects of COVID-19 have put severe pressure on the government’s resources. Hence, the government has been delaying on refunding costs in many of the schemes, severely affecting industries, especially in the MSME segments. Many industries are hence worried about how to do business in such an environment where there is no certainty over how much of their costs will be compensated under the PLI Scheme and how soon.
There seem to be some inherent contradictions between the objectives of the scheme and the manner in which some incentives are designed. The PLI Scheme makes it amply clear that it is designed both for domestic as well as export markets. But take, for instance, the way in which incentives are designed for the mobile phone sector. Accordingly, the PLI incentives are eligible only for phones that cost more than $200 ex-factory. This makes the phones especially cater to the export market since few phones that cost so much can be sold in the country. It is to be seen how the remaining sectors will come up with their respective eligibility guidelines, and whether they will be free from such contradictions.
A major drawback with Indian policymaking is the
piecemeal approach to solving problems rather than coming out with comprehensive
solutions, point out analysts. Similarly, with respect to manufacturing, the
government keeps coming up with patchwork solutions – such as raising Customs Duties
on select products, incentivising a few sectors or unveiling catchy slogans,
like Make In India and Aatmanirbhar Bharat. But little is done to eradicate underlying
problems, like high electricity tariffs or labour and logistics costs and
red-tapism, among others. An efficient manufacturing ecosystem can, in fact,
deliver better than many of the ad hoc
schemes, like PLI and others.