The Production-Linked Incentive or PLI is an Indian government scheme that has been under the spotlight recently. Launched in March 2020, it is an initiative aimed at improving the country’s domestic manufacturing capabilities. The intention of this initiative is to boost local production and achieve self-sufficiency in several industries, consequently generating employment opportunities.
About the PLI Scheme
The PLI Scheme was designed to augment domestic manufacturing capacity, with a focus on enhancing import substitution and generating jobs. It was initially focused on three industrial sectors – mobile and allied component manufacturing, electrical component manufacturing, and medical devices production. However, the scheme’s reach was later broadened to encompass 14 sectors.
In this system, both domestic and foreign companies that manufacture in India receive financial rewards. These incentives are based on a percentage of their revenue spanning up to five years. Today, the sectors targeted by this scheme include mobile manufacturing, manufacturing of medical devices, automotives and auto parts, pharmaceuticals, drugs, specialty steel, telecom products, electronic goods, white goods like ACs and LEDs, food products, textile items, solar PV modules, advanced chemistry cell (ACC) battery, and drones and drone components.
Incentives Under the PLI Scheme
The incentives provided under the PLI scheme are calculated based on incremental sales. For some sectors, like the advanced chemistry cell batteries, textile products, and drone industry, the offered incentives are calculated on the grounds of sales, performance, and local value addition over a duration of five years. The emphasis on R&D investment is also a part of the strategy devised to help industries stay competitive in the global market by staying in sync with global trends.
For instance, the success of the scheme can be evidenced in the smartphone manufacturing sector. In the financial year 2017-18, mobile phone imports stood at USD 3.6 billion, while exports were only a small fraction of that amount at USD 334 million, leading to a trade deficit of -USD 3.3 billion. However, by FY 2022-23, imports decreased to USD 1.6 billion, while exports soared to almost USD 11 billion, resulting in a positive net export of USD 9.8 billion.
Issues with the PLI Scheme
However, the PLI scheme has not been without its set of challenges. One key issue pertains to the subsidy offered in the scheme for mobile and allied component manufacturing. The subsidy is provided only for finishing the phone in India and not on the basis of the value added by manufacturing within the country. This has resulted in a scenario where much of the components going into the mobile phones are still imported.
Additionally, constraints imposed by the World Trade Organisation (WTO) prevent India from connecting PLI subsidies to domestic value addition. Finally, there is a lack of clarity regarding the disbursement of incentives, and standards for determining the allocation of these incentives are absent, creating concerns about the fairness and effectiveness of the scheme.
Lack of Centralized Database
Another issue emerges due to the absence of a centralised database capturing essential information such as increase in production or exports, number of new jobs created, etc. This leads to administrative complexities, impacts transparency, and potentially enables malfeasance, further weakening the policy’s structure.
Way Forward
To address these issues and maximize the PLI scheme’s potential, the government needs to assess its effectiveness, paying particular attention to aspects such as job creation, cost per job, and reasons for limited success. The process of extending the scheme to new sectors should be informed by an understanding of its limitations and strategies to address the underlying issues. Understanding India’s current position in global exports and effectively leveraging policies such as the PLI scheme could significantly impact the country’s manufacturing capabilities. Specific attention needs to be given to the application and effectiveness of such initiatives to enhance the prospects of domestic and foreign companies operating in India.