Expert Thoughts on PLI Scheme.

We thank Mr. Chandramowli Srinivasan for sharing his views on PLI scheme. Here is what he has said about the scheme.

Production Linked Incentives announced by Government of India as part of its Atmanirbhar Policy.

Over the last many years, successive Indian Governments have tried to improve India’s Balance of Trade and protect domestic industry by incentivizing exports and restricting imports. These have taken the form of

1. Export incentives to try and boost exports through measures such as Cash assistance, Export subsidies, EOUs and SEZ, Duty drawbacks, Advance Licensing and Advance Authorization, Duty Entitlement Pass Book (DEPB), Merchandise Exports from India Scheme (MEIS), Service Exports from India Scheme (SEIS) to name a few and

2. Import disincentives ranging from Import Licensing, Banned and Restricted Imports List, High Import duty rates, Antidumping duty, Safeguards Duty, Protective Duty to name a few

The above measures have had only limited success in achieving the intended objectives besides also leading to hiding of cost inefficiencies of domestic industry that ultimately got passed on to consumers; in addition, they risked Indian companies remaining uncompetitive globally and also, from time to time, seen as being protectionist and not fully WTO compliant.

The newly announced Production Linked Incentives are a much wider initiative to incentivize a higher level of manufacturing capacity being set up in India, not just for meeting the big and growing Indian market but also for making India an export hub and garnering a larger share in global supply chains. Unlike export incentives which are available only for export volumes, production linked incentives will be available for the manufacturing capacities setup for both, domestic and export sales and thus will encourage both, increasing exports and import substitution by enabling large scale economies of scale to be built in India and thus will go far towards India’s goal of becoming Atmanirbhar (self-reliant).

1. These production linked incentives were initially announced in March 2020 for 3 sectors – viz mobiles and specified electronics, drug intermediates and active pharmaceutical ingredients and medical devices

2. Encouraged by the response to this as evidenced by investments made in manufacturing capacity being set up in these sectors, the Government has now announced the extension of the same scheme of incentives to 10 more sectors covering auto and auto components, drug manufacturing, telecom, textiles, food, white goods, solar cells and advanced chemistry cell batteries, speciality steel and electronics.

3. Under this scheme, cash subsidies will be provided to companies as a certain percentage of the value of incremental sales over the base year sales. The percentages themselves are yet to be notified and will vary from sector to sector but are expected to “compensate” the disadvantage faced by each sector in domestic manufacturing

4. The total Government outlay is expected to be around 2 lakh crores over 5 years.

If well implemented, these production linked incentives should help

1. India’s manufacturing industry to grow considerably and increase its share in the GDP

2. Help reduce our dependence on imports (especially critical and sensitive areas ),

3. Grow our exports as more and more countries look to diversify their supply chains to reduce dependence on any one country ),

4. Increase employment in India

5. Reduce costs and improve our competitiveness by achieving economies of scale ( as we start producing for global requirements and not just domestic demand )

6. Give a fillip to increased research and development,

7. Boost the SME sector by including them more in the supply chain,

8. Improve return on capital for fresh investments coming into India.

9. Help the Indian economy grow and achieve its target of becoming a 5 trillion dollar economy

Ultimately of course, other factors like ease of business, availability of good infrastructure, a favourable business and tax environment, a low cost of capital, availability of skilled manpower, etc will all be needed in order to make India a favourable destination for global companies to source from India; Production linked incentives will however definitely help to improve the attractiveness of India as a manufacturing destination for the world by directly boosting the return on investments in India.

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