Production-Linked Incentives for 10 sectors show Modi govt’s intent, but need to be temporary

PLI scheme focuses on incentivising firms to grow fast, boosting India’s manufacturing & export prospects. But in the long run, sectors need to die and be born.

Illustration: Soham Sen | ThePrint

Production-Linked Incentives (PLI) worth up to Rs 1.46 lakh crore have been announced for 10 manufacturing sectors. The sectors include automobiles and auto components, pharmaceutical drugs, advanced chemistry cells (ACC), capital goods, technology products, textile products, white goods, food products, telecom and speciality steel.

Financial outlays have been allocated over a five-year period for the 10 sectors, and the aim of the scheme is to provide a boost to the Indian manufacturing sector, promote exports and make India an integral part of the global supply chain.

The PLI scheme focuses on incentivising firms to grow fast. Some of these incentives are meant to help industries where India already has a comparative advantage, like auto components; others for industries where India has the potential to become a world leader, like food; and most importantly, the PLI scheme is for sectors where India has an uncomfortable dependence on Chinese imports.

A scheme for a few sectors is at best a short- or medium-term fix. In the long run, an economy can become competitive only when sectors can die and be born. Resources get reallocated to sectors that see higher productivity growth. New sunrise sectors that grew in India, such as pharma or IT, did so without any special sectoral support from the government. If the PLI scheme works and helps in incentivising production, then this would be quite an achievement.

Two things should be kept in mind. For even these sectors to be competitive, the incentives should be temporary, lest they slow down long-term growth in the sector, instead of accelerating it. Second, the sectors that don’t get an incentive are now at a comparative disadvantage, and the government should work doubly hard to improve the business, tax and policy environments in which all businesses can benefit.

Boosting export prospects

The government had earlier launched a PLI scheme worth Rs 50,000 crore for large scale electronics manufacturing (in particular, mobile phones), medical devices and pharmaceutical ingredients. Apart from incentivising foreign companies to set up shop, the scheme aims to encourage local manufacturing units to set up or expand manufacturing units. This scheme provides sops on incremental sales to existing and new units.

While the new PLI scheme aims to help the industries that have been crippled by the outbreak of the Covid-19 pandemic, the measures are also aimed at reducing the dependence on Chinese imports. In the telecom sector, the scheme aims to support the manufacturing of 4G, 5G, and wireless equipment. India has been partnering with the UK, Japan and other countries in the field of telecommunication to prevent Chinese telecom companies from building 5G infrastructure in their jurisdiction, which could pose security concerns.

Keeping in view India’s export prospects, the scheme covers textile products which have export potential but are struggling due to expensive raw materials and cheap imports from neighbouring countries. Some sunrise sectors like solar photo-voltaic panels are also included in the list of 10 sectors that are part of the PLI scheme.

The government has been taking steps to attract investments in the manufacturing sector and push exports. The reduction in the corporate tax rate was a step in this direction. However, that was the same for all sectors.

The PLI scheme is another step in the direction of encouraging investments in manufacturing and promoting exports. Though the details of the scheme for each of the 10 sectors are not known, the design of the earlier PLI scheme for electronics is such that it is compatible with World Trade Organization commitments as the quantum of support is not directly linked to exports or value-addition. This is unlike some of the earlier schemes like the Merchandise Exports from India Scheme (MEIS), which were challenged at the WTO.

The PLI scheme provides benefits to companies who make commitments to incremental revenues over the base year, rather than doling out benefits to all entities. The GST that the government will collect on domestic sales on the back of higher production could cover the value of the incentive being offered.

Why govt support needs to be temporary

Government support for some sectors could be justified on the grounds of the infant industry argument. Nascent industries do not have economies of scale that their older, established competitors in other countries may have, and thus, they may need to be provided some incentives to attain economies of scale.

However, these incentives should be well-crafted and temporary so that the industries receiving support can mature and become economically viable without protection. Keeping them in place for too long may slow down, rather than accelerate growth in these sectors.

These measures need to be adopted in tandem with rationalisation of tariffs on imports. Even if they are levied, there should be a clear sunset clause. In recent years, the government has raised customs duties on electronic items, including mobile phones. The hike in customs duty has led many countries dragging India into the dispute settlement mechanism of the WTO.

Moreover, in the absence of technological competence, such moves do not help domestic industries become competitive. Rather, they act as a tax on domestic exports. In that context, the PLI scheme could potentially help in improving technological competence as it provides incentives to companies who commit to a threshold level of investment and incremental sales.

Since such support is also meant to incentivise foreign players to set up manufacturing units in India, it is imperative that they are provided with a transparent and predictable policy. Policy incoherence and frequent changes in regulatory landscape deter foreign players from committing to large-scale investments in India.

The PLI scheme reflects the government’s intent to improve the prospects of domestic manufacturing in India. It has elements of incentivising firms to grow big and increase investments and become part of the global supply chain. This is a welcome change from the kind of support that has been given in the past to MSMEs, which have incentivised them to remain small.

In addition to being temporary, the PLI scheme should be followed by measures to further improve the business environment in the country through a transparent and predictable policy framework.

Ila Patnaik is an economist and a professor at National Institute of Public Finance and Policy.

Radhika Pandey is a consultant at NIPFP.

Views are personal.