Production Linked Incentive Scheme was launched in March 2020 for 14 key sectors with an outlay of Rs. 1.97 lakh crore (over US$26 billion) to enhance India’s Manufacturing capabilities and Exports. The PLI scheme was expected to attract investments in key sectors and cutting-edge technology; ensure efficiency and bring economies of size and scale in the manufacturing sector and make Indian companies and manufacturers globally competitive.[1]

The 14 sectors are: (i) Mobile Manufacturing and Specified Electronic Components, (ii) Critical Key Starting Materials/Drug Intermediaries & Active Pharmaceutical Ingredients, (iii) Manufacturing of Medical Devices (iv) Automobiles and Auto Components, (v) Pharmaceuticals Drugs, (vi) Specialty Steel, (vii) Telecom & Networking Products, (viii) Electronic/Technology Products, (ix) White Goods (ACs and LEDs), (x) Food Products, (xi) Textile Products: MMF segment and technical textiles, (xii) High efficiency solar PV modules, (xiii) Advanced Chemistry Cell (ACC) Battery, and (xiv) Drones and Drone Components.1

The PLI scheme is designed with four objectives: 1) target specific product areas; 2) introduce non-tariff measures in order to compete more effectively with cheap imports; 3) blend domestic and export sales to make manufacturing competitive and sustainable; and 4) promote manufacturing at home while encouraging investment from within and outside India.[2] The scheme was also expected to generate more jobs.

Following the National Manufacturing Policy of 2011 and Make in India initiative of 2014, government launched PLI scheme to further promote domestic manufacturing industry. On one hand the government expects the anchor units setup under this scheme to result in growth of new suppliers and vendors across the entire supply chain thereby having a cascading effect. On the other hand, the PLI scheme is also expected to make India an integral part of the global value chain.  PLI scheme was also expected to create 60 lakh jobs over a period of 5 years.[3]

The scheme can be evaluated based on the data available over the past 4 years. In the union budget 2021-22 government announced an outlay of 1.97 lakh crores for PIL. The officially stated “expected outcomes” is reproduced below[4]:
Over the next five years, the Scheme is expected to lead to a total production of about INR 10.5 lakh crore. More than 60% of production is expected to be exported. The scheme is also expected to bring in additional investment of INR 11,000 crore. Value addition is expected to go up from 20-25% presently to 35-40% by 2025. The scheme will generate approximately 2 lakh direct employment opportunities in next 5 years along with creation of additional indirect employment of nearly 3 times the direct employment.
The expected outcomes (approx.) under the scheme (cumulative over a period of 6 years) are as follows-
Incremental sales – Rs 2,94,000 crore
Exports – Rs 1,96,000 crore
Investments – Rs 15,000 crore
Employment – 1,00,000 jobs  

The first PLI scheme was approved in March 2020. More than half of the target period has passed.  As per latest data[5], FDI increased by ~254% since the inception of the PLI scheme. (The equity FDI data as per RBI, Ministry of Commerce and DPIIT do not match with each other making it difficult to measure the increase in FDI and evaluate the performance). The total incentive of Rs.4,415 crore has been disbursed for 8 sectors viz. Large-Scale Electronics Manufacturing (LSEM), IT Hardware, Bulk Drugs, Medical Devices, Pharmaceuticals, Telecom & Networking Products, Food Processing and Drones & Drone Components till date. The scheme led to generation of direct and indirect employment of 6.78 lakh. Progress has been slow in the case of the remaining six sectors — steel, textiles, battery, white goods, solar PV and automobiles. The PLI scheme, which aimed to provide an average subsidy of 5%, was expected to have a significant impact on production, projected to boost it by Rs 38 lakh crore. However, the current official figures indicate a much lower boost of around Rs 60,000 crore. The incentive outgo for the ambitious production-linked incentive (PLI) scheme during 2023-24 (FY24) is likely to fall behind the government’s estimate of over Rs 11,000 crore at about 1,000 to 2,000 crore.[6]

Analysis of these figures indicate that when over half of the target period is over, only about 2% of the total incentive outlay has been distributed. The production has reached only about 22% of the targeted output. Job generation has reached about only 11% of the target.

The dismal performance of the flagship scheme of the government with huge financial outlay and future commitment raises number of questions on this scheme and its premise. The PLI scheme notifications mention that India is not competitive due to high cost of finance and power; unavailability of quality power; inadequacies of infrastructure, domestic supply chain and logistics; and limited capabilities in design, skills, and Research and Development (R&D). Government acknowledges that the cost of production in India is high & there are deficiencies and is trying to bridge the gap by providing cash incentives. However, this does not undo the challenges faced by the manufacturers in setting up factories here. The underlying deficiencies must be addressed instead of subsidising companies to face the deficiencies. In this context, it might be better for the government to spend the money allocated to improve the fundamental infrastructure permanently instead of providing temporary cash solutions.

The government must also avoid using a single policy instrument to achieve multiple goals. Using PLI for multiple objectives is resulting in conflicting unintended consequences. On one hand India wants to promote domestic manufacture and is imposing high customs duty on import of goods. But on the other hand, government is promoting setting up of units that are part of a global value chain. When a part of global manufacturing cycle happens in India, there will be significant imports, value add and export. Imposing high customs duty will reduce the competitiveness of India in the global supply chain system.

Generally in order to promote manufacturing sector, government undertakes measures like Special Economic Zones: providing easier bureaucratic clearance, simple and lower tax structure etc and  Tax waiver: central and state governments provide tax incentives to set up manufacturing facilities. PLI is a new approach that incentivises with respect to quantum of incremental production. Such measures that involve individual measurement of each manufacturer and the elongated approval process create potential for rent seeking activities. Such policies when the state capacity is low will not produce adequate results. A fisher bone diagram of the PLI scheme is provided below.

The government must instead focus on removing market imperfections and build institutions for skilling the work force. The country must focus on reducing cost of production to make the product economically competitive or create high quality products that employ high skilled labour and command a premium.

Fundamental changes to promote ease of business could come in the form of GST reforms. The huge amount of money used for this scheme can be used to offset losses arising from unifying GST rates. Multiple slabs prevent the GST regime from reaping the benefits of unifying multiple taxes. Harmonised GST rates would make production easier.

Further, two major problems companies face while setting up factories here in India relate to land acquisition and availability of stable and quality power. Fair and transparent land acquisition laws can help accelerate setup of new manufacturing facilities. The funds can be used to offset cost of initial land acquisition and the cost can be recovered by the government once the facility is operational. Power sector reforms in the form of privatisation of power generation has not resulted in any significant changes since the losses involved in power distribution offsets the productivity increase in the manufacturing segment. Industries ask for extension of the initial 5 year term stating various reasons. Along with difficulty in land acquisition the companies also highlight the lack of skilled workforce. Widespread skilling of labour force requires a concentrated national effort with last mile delivery managed at the local level.

To promote specialised industries where the country can establish leadership and command premium, government must support specialized research into frontier technologies. Technological innovation must be encouraged at university level and also R&D investment by the corporate sector can be incentivised.

Government must adapt policies that is independent not make industries directly dependent on state or cause regulatory capture. PLIs are given to select manufacturers selected by the government such measure must be avoided and incentives must be made available to everyone in a given industry. The government must focus on addressing inadequacy of generic state policies, create public goods, improve state capacity, and build institutions for skilling the work force.

Reference:

Lok Sabha Unstarred Question No. 2074, August 2, 2023

Production Linked Incentive (PLI) Scheme: Evaluation and The Way Forward – Pune International Centre

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[1] “Production Linked Incentive Schemes for 14 Key Sectors Aim to Enhance India’s Manufacturing Capabilities and Exports,” accessed January 18, 2024, https://pib.gov.in/pib.gov.in/Pressreleaseshare.aspx?PRID=1945155.

[2] Narayan Ramachandran, “Production-Linked Incentives: A Well-Designed Scheme,” mint, April 12, 2021, https://www.livemint.com/opinion/columns/productionlinked-incentives-a-well-designed-scheme-11618245189412.html.

[3] “Production Linked Incentive (PLI) Schemes Have Potential for Creating 60 Lakh New Jobs for Period of 5 Years Starting from 2021-22,” accessed January 18, 2024, https://pib.gov.in/Pressreleaseshare.aspx?PRID=1910034.

[4] “Status of Production-Linked Incentive Schemes;,” accessed January 18, 2024, https://www.pib.gov.in/www.pib.gov.in/Pressreleaseshare.aspx?PRID=1710134.

[5] “Production Linked Incentive Schemes Witness over Rs. 1.03 Lakh Crore of Investment till Nov 2023,” accessed January 18, 2024, https://pib.gov.in/pib.gov.in/Pressreleaseshare.aspx?PRID=1996964.

[6] Business Standard, “PLI Payout for FY24 May Lag behind Govt’s Estimate of over Rs 11,000 Crore,” January 16, 2024, https://www.business-standard.com/economy/news/pli-payout-for-fy24-may-lag-behind-govt-s-estimate-of-over-rs-11-000-crore-124011600665_1.html.