Dissecting Production Linked Incentive (PLI) Scheme

A few months back I had written two notes, a) Incentivizing Electronic Manufacturing - Opportunities & Challenges; b) Is "Make-in-India Working? These two notes are closely linked with each other. The former explains the background of the new PLI scheme (notified on 1st April 2020), and the latter explains the urgency of such a scheme. For easy reference, I am reproducing portions of the conclusions of the above-mentioned notes here.

Incentivizing Electronic Manufacturing - Opportunities & Challenges

There is no doubt that India had been spending a lot of money on incentivizing local manufacturing. But it is also a fact that the same hasn't been able to motivate the companies on the ground to make sufficient investments in brick and mortar, i.e to develop R&D, design capabilities, and development of the component ecosystem in India. The reasons - most of these existing schemes allowed the companies to take the incentives without having to make such commitments. Now, it is a different matter that some of these commitments would have got challenged in the WTO, thereby forcing us to unwind them later.

Is "Make-in-India Working?

From the above, it is clear that "Make-in-India" hasn't been successful in containing imports of electronics into India. This is contributing to an increasing deficit. Also, the component ecosystem in India hasn't evolved yet - making India's manufacturing largely ineffective - low investments - poor quality jobs. Since imports are constantly increasing, one cannot even conclude that "Make-in-India" is feeding to the local demand. Rasing duties had no effect on expanding exports, as typically duties and taxes do not get exported. Rather than relying on only increasing duties, India should have focussed more on crafting policies to nurture "Design-in-India", and expanding local component ecosystems as Brazil has done.

The Purpose of the Current Note

The purpose of this note is to analyze how India (while drafting the new PLI scheme) overcame the challenges posed by its loss at the WTO so that its objective of increasing investments and expanding exports is not compromised. Please note that the WTO agreement prevents member nations from linking subsidies to mandatory exports and local content. Those interested to know further can read my article "Incentivizing Electronic Manufacturing - Opportunities & Challenges" to get the details of the exact provisions of the WTO agreements.

PLI Scheme General Guidelines

The detailed guidelines of the PLI scheme were unfolded before us on 1st June 2020. The scheme covers two segments, a) Mobile phones (general & domestic); b) Specified Electronic Components. Under the general scheme, the mobile phones with an invoice value of Rs 15,000 and above are only eligible, whereas for the domestic companies no such restrictions are imposed. Companies making an application under the general scheme must have a global revenue of Rs 10,000 Cr in the base year (2019-20), and under domestic this number is just Rs 100 Cr in the base year. For the latter scheme (Specified Electronic Components), the applicant's revenue should be more than Rs 50 Cr. Also, for a company to qualify for the "notified subsidy", it has to commit on certain incremental investment, and incremental sales (above the base year), as defined in the scheme.

PLI Scheme Exports & Local Value Add

Please note that for a company to qualify for the "notified subsidy" it doesn't have to directly commit to Exports and Local Value Add targets, but it does so indirectly. This makes the PLI scheme a WTO complaint. As already explained in my earlier note (manufacturing - opportunities, and challenges), most of the earlier Indian schemes had this linkage, and therefore India was forced to withdraw them after having lost in the WTO. But how the PLI scheme ensures that the companies export most of what it produces, and does real manufacturing than just trading? Let me explain.

Section II clause 3.2 of Annexure 3 (page 33) of the PLI guidelines, which describes the application form format is reproduced below.

Projection (self-certified) - a) Forecasted Revenue - Total and Target Segment - Manufacturing split by Exports, Domestic Sale (next 5 years); b) Proposed Plan for Domestic Value Addition (next 5 years); Proposed Plan for Employment Generation in India (next 5 years).

Clause 9.5 of page 18 provides the structure of the letter to be issued by the competent authority. Under this section, there are two clauses reproduced under.

Clause 9.5.6 - Plan for Domestic Value Addition during the tenure of the Scheme.

Clause 9.5.7 - Plan for Employment Generation in India during the tenure of the scheme.

Section 8 of pages 15 and 16 describes the functions of the Empowered Committee (EC), under which clause 8.7 is reproduced below.

The EC will conduct a periodic review of eligible companies with respect to their investments, employment generation, production, and value addition under the scheme.

Also, as explained above, these hooks may not be needed to push companies to export and add local value due to the reason explained below.

PLI Scheme WTO Compliance

Please note that the PLI scheme neither links the quantum or the eligibility of subsidy to exports and local value addition, thereby making the scheme WTO compliant. But it indirectly exercises a lot of hooks to force the companies to commit to both exports and local value addition targets, thereby making the companies morally obliged to meet their stated commitments (at the time of making the application). However, there is one more hook too - this is quantum of incremental revenue for phones above Rs 15000 (above USD 200 or more) that the companies have to commit in order for them to fully utilize the "notified subsidy" amount. Since the demand for phones sold in India is much lower than that value, the only way for the companies to meet their revenue target is by exporting most of their produce. This shows the ingenuity of our policymakers.

PLI Scheme's Compatibility

PLI Scheme's compatibility rests only on attracting big companies with a large commitment to incremental revenues and investments. The reason is for the same is - for the subsidy to be efficiently used both revenue and investment to subsidy ratio have to be the highest. Currently, it is 10.65 and 0.42 respectively. Since the small company's ability to push revenue and make investments is much less compared to large companies, the government will have to spend a much larger amount of money to get similar benefits.

Conclusion

The current PLI scheme is well thought through to overcome the WTO challenges that India had faced in its earlier schemes and is a right step towards "Atma Nirbhar Bharat" - driving India into a hub for manufacturing. Now India is offering subsidies to only those companies who commit to making investments, expanding exports, local value addition, and employment creation - rather than dolling them to all. This is great. I sincerely believe that the PLI scheme will motivate companies to make investments and increase the intensity of manufacturing, thereby acting as a magnet for attracting foreign ancillary units also to set up shops in India.

(Views expressed are of my own and do not reflect that of my employer)

PS: Find the list of other relevant articles in the embedded link.