Unmaking of a gamechanger: Why India’s PLI scheme fell short

With the Centre set to wind down the much-hyped showpiece Production-Linked Incentive (PLI) scheme, it underscores deeper fault lines in the country’s industrial policy framework.

Once hailed as a "game-changer" by Prime Minister Narendra Modi, the PLI scheme was the focal point of the Atmanirbhar Bharat strategy, aimed at turning India into a global manufacturing hub and reducing its dependence on imports.

Yet, four years since its launch in 2020, the premature unwinding of the PLI scheme – much like the earlier phasing out of the FAME-II programme – has thrown India’s manufacturing ambitions into sharp relief.

Hefty allocation

Launched in March 2020, the PLI scheme came with a hefty purse of Rs 1.97 lakh crore spread across 15 key sectors. It promised performance-linked incentives to domestic and foreign companies to scale up manufacturing. This was done to boost India’s manufacturing share in GDP from 15 per cent to 25 per cent by 2025.

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The sectors identified for the scheme were electronics, pharmaceuticals, telecom equipment, solar modules, and speciality steel and auto components. Global names such as Foxconn, Pegatron, Wistron (now part of the Tata Group) and Indian giants like Reliance and Dixon Technologies signed up.

Mixed results

The timing seemed perfect. Global corporations were recalibrating supply chains amid a turbulent geopolitical climate, and the pandemic-driven ‘China Plus One’ strategy was gaining momentum. With its large youth population and cost advantage, India appeared well-positioned to fill the gap. But the results have been mixed at best.

As of early 2024, only Rs 4,415 crore – just 2.25 per cent of the total PLI outlay – had been disbursed. According to a Reuters report, PLI-participating firms produced goods worth $151.93 billion by October 2024, just 37 per cent of the government’s cumulative target. The total incentive payout reached only $1.73 billion, under 8 per cent of the budgeted figure.

Lack of job creation

One of the biggest disappointments of the scheme was job creation – or the lack thereof. Despite early government claims of significant employment generation, additional secretary Rajeev Singh Thakur of the DPIIT admitted in January 2024 that the tech-heavy nature of the selected sectors resulted in fewer direct jobs.

“The nature of these product lines is such that they are highly technology-driven and have limited manpower requirements,” he said. This reality could become even starker as Industry 4.0 technologies reduce labour dependence further.

TN, Karnataka clear leaders

Among the states, Tamil Nadu and Karnataka emerged as clear leaders. Tamil Nadu, buoyed by electronics and advanced chemistry cell (ACC) battery manufacturing, attracted over Rs 42,000 crore of investments. The state saw a four-fold increase in mobile phone exports between FY21 and FY23.

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With IT hardware and telecom manufacturing strengths, Karnataka secured Rs 14,000 crore, riding on the back of Wistron's (now Tata-owned) facility in Kolar and telecom supply chain integration.

Yet, with the central government planning to let the scheme lapse, both states face uncertainty.

Worries for TN, Karnataka

Tamil Nadu’s leadership in ACC batteries -- where PLI was crucial for capital-intensive projects -- is particularly vulnerable. Expansion plans may be shelved, affecting MSMEs and logistics networks in the ecosystem.

Karnataka, too, may find it harder to absorb rising costs in electronics and telecom due to the continuing reliance on imported components.

This abrupt policy reversal threatens to stall long-term investment pipelines, and firms like Tata Electronics, Foxconn and Pegatron will now need to redraw their business strategy if they want to sustain their operations in the country.

MSMEs to bear brunt

The ones that will be impacted the most will be the MSME sector and the new entrants who are unlikely to survive the uncertainty, which will be a blow to India’s overall manufacturing capacity-building.

Despite lofty goals, the PLI scheme suffered from systemic shortcomings. Its uniform incentive structure didn’t account for sector-specific needs.

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Systemic issues

For instance, while it worked well for mobile phone manufacturing, the same framework was misaligned for textiles, where most players were too small to meet the high investment thresholds. Over 60 per cent of India’s textile exporters are small, family-run units that were effectively locked out of the scheme.

Similar misalignment plagued capital-intensive sectors like solar modules and speciality steel. Most of the 12 approved firms under solar PLI were deemed unlikely to meet targets. One government review warned that at least one firm hadn’t even ordered key equipment by December 2024.

Rigid verification processes and bureaucratic hesitancy further delayed disbursals. Companies often faced months-long delays in receiving their incentives, even after meeting production targets. The cumbersome audit trail, driven by a fear of misuse, ended up hampering the businesses the scheme sought to promote.

Successes, missed opportunities

Despite its faults, the PLI scheme wasn’t without success stories. Mobile phone production surged to $49 billion in 2023-24, up 63 per cent from 2020-21. Pharmaceutical exports hit $27.85 billion, doubling over a decade. These two sectors accounted for 94 per cent of the PLI disbursements between April and October 2024, underscoring their effectiveness in leveraging the scheme.

But these are exceptions, not the rule. A broader internal review found that several sectors – steel, solar, textiles and electronics hardware – were significantly behind on performance targets. Of 58 steel projects, 14 were withdrawn or scrapped. Only two or three of the 14 approved companies in IT hardware met their Year-1 targets.

Critics have long argued for a more flexible, transparent and sector-specific design.

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New scheme in offing?

Ajay Srivastava of the Global Trade Research Initiative noted that the conditions under PLI – spanning investment, production, sales and localisation thresholds – were too cumbersome. A more straightforward system with milestone-based payouts tied to verifiable production data could have accelerated outcomes and improved compliance.

The government is reportedly considering a new model where capital expenditure could be partially reimbursed at plant commissioning. This “investment-linked” model, unlike PLI’s output-based approach, could ease liquidity constraints and be especially beneficial for high-gestation sectors like semiconductors and green hydrogen.

Raghuram Ranjan’s critique

Economist and former RBI governor Raghuram Rajan has been among the most vocal critics of the PLI scheme. In his book Breaking the Mould, co-authored with economist Rohit Lamba, Rajan questions the logic of doling out large subsidies to big firms without meaningful employment returns.

Their core argument – that India must focus more on broad-based industrial policy reform than on handing out production-linked sops – has gained fresh relevance amid the scheme’s winding down.

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While being wary of Rajan’s criticism of the scheme, industry leaders concede that the scheme’s one-size-fits-all nature and bureaucratic rigidity diluted its potential. Many had hoped for a mid-course correction. Instead, the sudden halt has sparked disillusionment.

FAME parallels

The PLI scheme’s closure is more or less similar to the government’s earlier decision to wind down the FAME-II (Faster Adoption and Manufacturing of Electric Vehicles) scheme.

Launched in 2019 with an initial outlay of Rs 10,000 crore (later topped up), FAME-II aimed to subsidise 10 lakh e-two-wheelers, 5 lakh e-three-wheelers and 7,000 electric buses by March 2024.

While FAME II was able to meet its targets, it was marred by allegations of subsidy misuse. Several e-two-wheeler makers, including Hero Electric and Okinawa, were accused of flouting local value-addition norms by misreporting imports as indigenous. The government responded by freezing over Rs 1,100 crore in subsidies, creating a cash crunch that hurt the sunrise industry.

Blow to Indian ambitions

Many start-ups were left in the lurch, having already passed on the subsidy to consumers. A March 2024 deadline came and went with no clear successor in place. The Society of Manufacturers of Electric Vehicles (SMEV) has warned that abrupt subsidy withdrawals could cause EV sales to plateau or even decline.

The back-to-back closure of two high-profile industrial schemes – PLI and FAME – raises uncomfortable questions. Both were part of a more significant “Make in India” thrust and launched when global supply chains shifted. Their early end could signal India’s failure to seize a once-in-a-decade opportunity to become the world’s next manufacturing powerhouse.

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Future prospects

Meanwhile, manufacturing’s share of GDP has declined – from 15.4 per cent in 2020 to 14.3 per cent in 2023, nowhere near the PLI scheme’s stated target of 25 per cent by 2025.

Analysts say that if there is one lesson from PLI and FAME, it is this: vision alone is not enough. Execution, flexibility and sectoral intelligence must form the backbone of India’s next wave of industrial policy. Only then can India truly earn its place as the world’s next factory floor.