PLI schemes: More misses than hits, but there is still time for a rejig

The Production Linked Incentive (PLI) schemes, a cornerstone of the Narendra Modi government introduced to support industrialisation, boost manufacturing, expand exports and increase employment, have encountered several challenges that have limited its effectiveness.

The 2024-25 Union Budget, expected to be presented during the last week of July, should address these issues. With a fresh mandate for a third tenure, the Modi 3.0 government could also consider a complete overhaul of the schemes to make them more impactful.

Scheme specifics

According to the Press Information Bureau (PIB), 14 key sectors are eligible for PLI schemes, which will cost Rs 1.97 lakh-crore and increase the country's manufacturing capabilities and exports.

The PLI schemes aim to attract investments in key sectors and cutting-edge technology, ensure efficiency, bring economies of size and scale in the manufacturing sector, and make Indian companies and manufacturers globally competitive.

According to the Union government, the schemes are designed to have a cascading effect on the country's MSME ecosystem. The anchor units built in every sector will likely set a new supplier/vendor base in the entire value chain. Most of these ancillary units are expected to be built in the MSME sector.

Beneficiary sectors

Of the 733 applications selected under various PLI schemes, 176 MSMEs are among the beneficiaries in sectors such as bulk drugs, medical devices, pharmaceuticals, telecom, white goods, food processing, textiles, and drones.

With regard to incentives, the PLI Scheme for Large Scale Electronics Manufacturing provides incentives ranging from 4 per cent to 6 per cent on incremental sales for five years in its first round and from 3 per cent to 5 per cent for four years in its second round.

This scheme aims to strengthen domestic industries, enhance global competitiveness, and promote investment, employment, and technological advancement.

Falling short

Four years after launch, the PLI schemes have not fully achieved their goals. They have had limited success – for instance, they have benefited the mobile phone and pharmaceutical sectors.

Investment and job creation targets still need to be met in these sectors. For example, there has been no incentive disbursal in six sectors of the PLI so far – textile, battery, automotive, white goods and solar panels. Overall, out of the Rs 1.97 lakh-crore allocation, only Rs 2,900 crore was disbursed, which is only 1.5 per cent of the allocated funds, according to a 2023 report by the Foundation for Economic Development.

Politicians advocate extending the scheme to additional sectors, such as toys, hoping it will transform India into a major manufacturing hub. However, such expansion may yield the desired outcomes only if the underlying issues are addressed.

High import duties

The PLI scheme could be more effective if import duties are lowered. For instance, in the case of solar PV modules, a high import duty, particularly on essential components like solar cells and modules, leads to cost inefficiencies and uncompetitive output. These tariffs increase prices, subdue demand, and undermine renewable energy goals.

Additionally, high tariff walls discourage R&D investments, leading to higher prices for lower-quality products.

Regulatory concerns

A stable and predictable regulatory regime is crucial for promoting investment. India should also re-examine some of the bilateral investment protection treaties that have either been cancelled or have not progressed, even as constant policy shifts have raised concerns among foreign investors.

This unpredictability deters long-term investments and hampers industrial growth. For example, the subsidy is paid only for the finished products for mobile and allied component manufacturing, not for any value addition.

This results in lower value addition, as most processes beyond assembly are conducted outside India. This means that companies are incentivised to focus on assembly rather than adding significant value to the products, which can limit the scheme's potential to promote domestic manufacturing and innovation.

Incentive disbursement

Awarding incentives needs more clarity due to the absence of well-defined criteria and standardised parameters. This lack of transparency raises concerns about the fairness and effectiveness of the incentive distribution.

A centralised database capturing information like production increases, exports, and job creation is necessary for the evaluation process. This administrative inefficiency can lead to malfeasance and misallocation of funds.

Critics say the scheme appears predisposed to larger firms, with evidence suggesting a bias in fund disbursement. This orientation limits the benefits for small and medium-sized enterprises (SMEs), which are crucial for job creation and economic growth.

Scheme drawbacks

Despite ambitious goals, the PLI scheme has faced a tepid response from companies in some sectors, leading to unspent funds. This under-utilisation indicates a need for adjustments to make the scheme more attractive and practical.

Increased competition among eligible companies could result in price wars or market distortions, potentially undermining the scheme's objectives.

Critics argue that the PLI scheme may foster industries that rely heavily on government subsidies rather than becoming self-sufficient. Former RBI Governor Raghuram Rajan highlighted that the scheme has resulted in more assembly rather than significant value addition in sectors like smartphone manufacturing, leading to a higher dependence on imported components.

Participating companies face additional administrative burdens to comply with reporting and documentation requirements, which can deter participation and reduce the scheme's effectiveness. Disparities in the benefits received by different sectors can lead to imbalances in the economy, with some industries growing at the expense of others.

Multiple challenges

The PLI scheme may divert investments from existing projects or sectors not covered under it, affecting their growth prospects and leading to an uneven industrial landscape.

Scheme implementation across sectors has faced delays due to bureaucratic processes, administrative challenges, or policy changes, reducing its impact.

The eligibility criteria for participation might be perceived as too stringent or restrictive, hindering the ability of some companies to participate and benefit from the scheme.

Adequate funding and timely incentive disbursement are crucial for the scheme's success. Challenges in these areas can impact the overall effectiveness of the PLI programme.

Subsidy dependence

There is a concern that companies might become excessively dependent on subsidies, which could result in insufficient investment in enhancing their competitiveness or innovation capabilities, leading to long-term inefficiencies.

Various sectors within the manufacturing industry face distinct challenges, such as technological barriers, supply chain issues, skill shortages, and global market fluctuations, all of which must be considered when implementing the PLI scheme.

Effective administration and execution of the PLI scheme are crucial. This includes prompt disbursement of incentives and ensuring compliance by beneficiary companies. Administrative inefficiencies can hinder the scheme's objectives.

There are concerns about potential environmental impacts and market distortions due to the selective focus of the PLI scheme. Critics argue that emphasising certain sectors might lead to uneven resource allocation and long-term economic imbalances.

Recommendations

To address the challenges and enhance the effectiveness of the PLI scheme, several policy recommendations can be considered:

Allow PLI beneficiaries to decide on sourcing strategies: Flexibility can help companies optimise their production processes and increase value addition within India. Simplify and expediting the application and approval processes to reduce bureaucratic hurdles and ensure timely disbursement of incentives.

Consider export incentives in exchange rate policies: Aligning export incentives with favourable exchange rate policies can boost export competitiveness and attract more investments.

Focus on future-facing industries: Targeting industries like semiconductors can help India build a strong foundation for advanced manufacturing and technology development. Expand the scope of the PLI scheme to encompass more industries, including sunrise sectors and technology-driven fields, to boost domestic manufacturing and innovation further boost domestic manufacturing and innovation.

Address systemic issues: Tackling systemic issues affecting all industries, such as regulatory unpredictability and high import duties, is crucial for creating a conducive environment for industrial growth. Address the complexity and bureaucracy associated with the scheme by simplifying processes and ensuring fair distribution of incentives to prevent unhealthy competition and compliance issues.

Support SMEs and service industries: Since more than 80 per cent of the Indian economy is supported by SMEs and labour-intensive service industries, policies should focus on these sectors to address jobless growth and ensure broad-based economic development.

By adopting recommended policy reforms and focusing on future-facing industries, India can enhance the effectiveness of the PLI scheme, promote industrial growth, and support economic development.

The Centre still has time to reform the scheme and adopt policies supporting manufacturing investment and economic growth.