• The government has been attempting to spruce up the manufacturing sector for a long time.
• Production Linked Incentives (PLI) scheme is one such initiative under the flagship Atmanirbhar Bharat Abhiyaan.
• However, the real picture is different than expected. There are several problems in this scheme that raises serious concerns about its ability to deliver the results.

       Production Linked Incentive (PLI) scheme Production Linked Incentive or PLI scheme is a scheme that aims to give companies incentives on incremental sales from products manufactured in domestic units. The scheme invites foreign companies to set up units in India, however, it also aims to encourage local companies to set up or expand existing manufacturing units and also to generate more employment and cut down the country’s reliance on imports from other countries.  It was launched in April 2020, for the Large Scale Electronics Manufacturing sector, but later towards the end of 2020 was introduced for 10 other sectors. This scheme was introduced in line with India’s Atmanirbhar Bharat campaign. 

Flaws in the design of the Production Linked Incentives (PLI) scheme

1. No criteria for incentives

• An Empowered Committee has been constituted by the government for overseeing the scheme’s implementation. It is additionally responsible for fund disbursement under each sector.
• How these funds are to be awarded remains ambiguous.
• There are no set criteria or common parameters for consideration by the ministries and departments for giving these incentives.
• The lack of a centralized database that captures information like an increase in production or exports, the number of new jobs created, etc. makes the evaluation process harder.
• It impacts transparency and can lead to malfeasance, further widening the fault lines and weakening the policy structure.

2. Predisposed to larger firms

• Fund disbursement in some of the PLI sectors alludes to a bias towards bigger players.
• Beneficiary sectors under the scheme such as automobiles, electronics, and technical textiles are largely constituted by big firms.
• Indian industrial structure is largely composed of Micro, Small & Medium Enterprises (MSMEs). These MSMEs not just contribute to a bulk of the manufacturing output and exports but generate much of the employment in the manufacturing sector.
• However, the next phase of the PLI scheme will incorporate labor-intensive sectors such as toys, furniture, leather, and bicycle manufacturing in its fold.
• Such unqualified expansion of this list may potentially risk the creation of a subsidies-dependent manufacturing industry.

3. Efficacy of production subsidies

• The efficacy of production subsidies depends on a combination of factors like a steady stock of raw materials available at competitive prices, the size of the domestic market, and the relationship between upstream and downstream manufacturers, among others.

                 Examples:

                 Container manufacturing industry:

• PLI’s extension to the container manufacturing industry is unmindful of an understanding of the prevailing dynamics in India and that of the global container manufacturing business.
• Around 80 percent of the total cost of production of these containers is composed of a single raw material called Corten steel, the price of which is ₹120-130 per kg in India, as compared to ₹80-90 in China.
• India has limited capacity to manufacture A-grade Corten steel. Domestic manufacturers source it from China, Japan, and South Korea. So, the high cost of primary input makes the sector uncompetitive, limiting its ability to compete in the global market.

                Shipping industry

• The demand in the sector is driven by the global shipping industry controlled by a few developed countries and China, which creates significant barriers.
• Since the domestic market for containers is driven only by a handful of shipping companies involved in port-to-port shipment mostly in the neighborhood, it is quite small to support large-scale production with an assured demand.

4. The same treatment in all sectors

• The scheme treats manufacturing with a broad brush as if all sectors are at the same stage of development and technological advancement, and, have the same requirements.

                Example

                  Pharmaceuticals

• A technology-intensive sector such as pharmaceuticals requires more resources for Research and Development (R&D), and, innovation infrastructure to sustain manufacturing at the optimum level.

                Textile

• The needs and nature of incentives required for a sector like textile are different. The PLI for textiles rightly underpins the importance of boosting the production of man-made fibers (MMF) and technical textiles.
• However, cover fabric which remains a highly imported category in the country.
• It further excludes from its scope synthetic fabrics such as viscose, polyester, and nylon, which are major inputs for apparel.

The PLI scheme is a classic case of ‘good intentions but bad approach’. the structural problems within the policy design and economic system need to first be addressed. Understanding the need of every sector is key. Only then will India fulfill its dream of becoming a global manufacturing hub.