PM Modi bets big on PLI schemes

The Prime Minister addressed a webinar on the Production Linked Incentive (PLI) Scheme on March 5, as part of a series on the implementation of specific aspects of the Union Budget 2021.

It was a follow up to the announcement in the Budget about the PLI schemes introduced for 13 sectors with an aim for “our manufacturing companies to become part of an integral part of global supply chains, possess core competence and cutting-edge technology”

The Budget announced the government’s commitment of nearly Rs. 1.97 lakh crores over 5 years starting FY 2021-22. The Prime Minister’s participation in the webinar is an indication of the importance the government has placed on the PLI as the way forward for Atma Nirbarta, for “Make in India, Make for the World”

PLI as the name suggests proposes to extend incentives on incremental sales over the base year of FY 2019-20 for goods manufactured (as distinct from traded goods) in India. The incentive proposed ranges from 4-6 percent on such sales for a period of 5 years subsequent to the base year. The scheme is open to both Indian companies and foreign companies. Eligibility is subject to “achievement of a minimum threshold of cumulative incremental investment over a period of 4 years “

The scheme runs across key familiar sectors like electronic manufacturing, pharmaceuticals, telecom manufacturing, textiles and automobile manufacturing. It also extends to sectors in which India sees great potential, advanced chemistry cell (ACC) battery manufacturing, touted as representing “one of the great economic opportunities of the twenty-first century for several global growth sectors, such as consumer electronics, electric vehicles and renewable energy,” to, food products, white goods, high-efficiency solar PV modules, speciality steel, manufacturing medical devices to name a few.

Further within each one of these sectors, specific product lines have been identified. The range of these products shows keen thought going into identifying products so as to move away from the present “uncomfortable dependence” on China. Thus, products ranging from semiconductor Fab, laptop/notebooks, automobile components, active pharma ingredients, 4G,5G next-generation radio access network, technical textiles, ready to eat products, to air conditioners, LED, high strength steel, among others, have been identified. Each of these identified sectors has enormous domestic and export potential and more importantly, as the PM has stated in his speech, should have a “cascading effect on the country’s MSME ecosystem”.

The potential employment generation over the next few years from the PLI scheme would be an additional benefit. The PLI scheme is to be implemented by ministries/departments concerned within the prescribed financial limits. Final approvals for individual sectors are to be given by the Expenditure Finance Committee.

There is a lot that is good in the PLI scheme. Its emphasis on incentivising incremental manufacture should boost investment, spur exports, increase employment, generate more GST revenue which should set off the financial incentives being offered. Department for Promotion of Industry and Internal Trade (DPIIT) for instance has in the case of just white goods (AC’s & LED’s) projected the incentive to generate additional exports of Rs 64,000 crore, extra direct tax collection of Rs 11,300 crore and GST mop-up of Rs.38,000 crore over 5 years. These are impressive numbers. The PLI scheme has evinced global interest. Thus, major players like Samsung, Flex, Pegatron and Foxconn are all in touch with MeitY.

Having said that it is important that the incentives are temporary. As economists Ila Patnaik and Radhika Pandey have stated, the incentives should not slow down long-term growth. Further, they have pointed that sectors not covered under the PLI would be at a comparative disadvantage and that it is incumbent that the Government ensure that the overall business, policy and tax environments are made investment-friendly. It is imperative that the PLI incentives are accompanied by a stable tax regime and tax rates are rationalised. In this background, the proposal in the latest Budget to have a clear sunset clause for any increase in Customs duties is a step in the right direction. The PLI scheme with its emphasis on incentivising growth is a welcome step, unlike schemes that promote the industry to be small.

A grouse aired by the auto sector is that there is no incentive offered for investment perse. This is misplaced. There is nothing to bar an investment being made in specific areas identified under the New Manufacturing Policy (NMP)where infrastructure support is being made available by the State Governments. As the FAQ on PLI for large scale electronics manufacturing makes it clear, an investor will be eligible for more than one government scheme provided the criteria for each scheme are satisfied.

The performance parameters are undoubtedly stiff. As has been pointed out in the case of mobile phones (above Rs 15000 value) companies are expected to invest Rs 250 crore in the first year and show an incremental output of Rs 4000 crore to claim a benefit of 6%. It should however be noted that the benefit being on the incremental output is also substantial.  The PLI scheme expects companies to begin localisation within a certain timeframe to avail the incentives. Thus, in the IT sector, certain electronic components such as printed circuit boards (PCB’s) should be assembled locally in the second year either by the applicant company or through one of its vendors.

The PLI scheme is ambitious. Its success will depend entirely on the departments concerned nurturing the scheme, guiding the companies. sorting out red tape and being nimble to respond to industry concerns. Only then can the vision laid out by the PM in his speech of “every country importing from India and from each and every corner of the country” be realised.