Jury’s out on production-linked incentive scheme

Senior Economic Analyst

The Central government has launched a major programme to prop up the sector that has lagged behind — manufacturing — with the slogan and exhortation of Make in India. For this, it has adopted the older model of upping domestic manufacturing by giving “production-linked incentives” (PLI) to raise capacity, sales and exports, while curbing imports.

Globally, since the nineties, countries have moved away from the wartime structure of trade barriers and conservation of hard currency resources under the banner of the World Trade Organisation (WTO) set up in 1995 and embarked on a process of trade liberalisation to promote growth. India has been a part of this process. Without seeing to pick winners, it has nevertheless grown globally in competitive sectors like the manufacture of generic drugs and the creation of IT software without offering financial incentives.

The former was enabled by Indira Gandhi changing India’s intellectual property laws so that India could manufacture drugs by devising alternative processes. The latter was substantially enabled by Manmohan Singh in his second Budget, taking operations in software technology parks out of the purview of income tax.

But all countries have not moved forward at the same pace in achieving higher incomes and lowering poverty levels, with China forging ahead and emerging as a new economic superpower, unafraid of challenging even the United States. India’s emerging tensions with China and excessive dependence on imports from it have prompted the government to come up with PLI.

The scheme, launched last year for electronics manufacturing, has been extended to cover over a dozen sectors like automobiles, auto components, pharmaceuticals (active ingredients till now heavily imported from China), special steels, white goods, food products, textiles and telecom.

The scheme is for a five-year period beginning 2019-20 and aims to boost manufacturing output, investment to enable it, and exports. Additionally, it seeks to integrate India more into global supply chains. The scheme offers cash incentives totalling Rs 1.97 lakh crore on incremental sales from the base year of 2020. Focus is on sectors where India already has an advantage (generic formulations in pharmaceuticals), a potential (food) or is seriously dependent on China (for virtually every kind of component as also active pharmaceutical ingredients).

Whether PLI will work or not time will tell, but economists have highlighted a list of dos and don’ts which have to be kept in mind so as to ensure that the scheme moves along the right lines. Foremost is the need to speed up a range of reforms which improve the ease of doing business so as to create an enabling environment for PLI. For this, the Central government needs to be in active and continuous dialogue with state governments.

Rajiv Bajaj, chief of Bajaj Auto, the world’s fourth largest two and three- wheeler manufacturer, has given an indication of what needs doing in this regard as a result of the findings gleaned from a study his firm has undertaken. It is seeking to chalk out a strategy to enter three or four ASEAN markets like Vietnam, Malaysia, the Philippines and Thailand. Its studies have discovered that on issues like land, labour, electricity, logistics and legal systems, the ASEAN countries fare better than India. So, PLI is unlikely to succeed unless these issues are also addressed.

A global MNC, seeking to de-risk its business by shifting a part of its capacity out of China to India, will be successful if its entry into India is facilitated by there being the necessary ease of doing business. A key aim of PLI is to attract such investment to both serve the domestic market (thereby reducing imports) and raise exports out of India.

A key issue to keep in mind is that PLI, as also the import restrictions imposed to facilitate it, should have a sunset. There is the danger that industry will get used to the subventions which will become a crutch and lobby for their continuance under one pretext or another. So the idea that there will be a sunset has to be communicated loud and clear to the various beneficiary sectors.

Another issue which has not been built into the scheme but should be an integral part of it is that the overall rapid economic growth which a pickup in manufacturing will facilitate should be sustainable. For example, it needs asking whether India, which is seriously water-deficient, should at all have on its agenda the goal of promoting food exports, which particularly in the case of an item like sugar, really amounts to exporting water. So PLI should be harmonised with India’s own set goals in seeking to rein in global warming and raising the output of renewable energy.

Finally, there is a degree of scepticism among players in the targeted sectors over the various declared goals and aims. For example, a global PC maker which has been examining the prospects of setting up capacity in India for exports is coming round to not participating in PLI as it considers the scheme to be actually aimed at raising domestic production to reduce imports and not promote exports. It is an import substitution programme by another name (the export targets will be beyond reach), being a successor to the Merchandise Export from India scheme which was wound up last year as it was breaking WTO rules.

On the other hand, a global player in mobile phones like Apple is betting big on the scheme. Around 10 per cent of its global production capacity can shift to India through its manufacturing partners like Foxconn. So, the response is mixed and the jury is still out on the scheme.