 "AatmaNirbhar Bharat PLI scheme: Can the budget see any other big reforms further?")
The Production Linked Incentives (PLI) scheme was introduced by the government in the early days of the COVID-19 pandemic to boost domestic manufacturing in the country and position it as a global manufacturing hub, taking advantage of the global disruptions in supply chains and shifts towards China Plus One strategies.
In the aftermath of the pandemic, countries were forced to look for alternatives to China to diversify their supply chains and minimize risk. The Production Linked Incentives (PLI) scheme and the cut in corporate tax rates form an essential component of the Indian government’s strategy to attract foreign companies and capital to the domestic manufacturing sector.
A common criticism frequently directed towards the PLI scheme is the government’s intention to return to an import substitution policy. While the scheme aims to replace imports and help the country become self-sufficient, it looks at export-led growth rather than import substitution to power domestic manufacturing.
• The PLI scheme has successfully boosted Indian exports, especially in electronics, helping India become the world’s second-biggest mobile phone producer after China. The scheme for large-scale electronics has led to more than Rs. 1,67,770 crore of total production, including exports of Rs 65,240 crore, generating employment for 28,636 people.
• Driven by the government’s Rs 41,000-crore PLI scheme, India is likely to export mobile phones worth about $9 billion in FY23, up from $5.8 billion in FY22 and emerge as a significant hub for iPhone manufacturing, expected to account for 20% of total production in the next three to four years from the current 5%.
Building on this momentum in the electronics manufacturing segment, the government extended the scheme to a total of 14 sectors with an outlay of 1.97 lakh crores. As per DPIIT, more than 600 applications have been shortlisted in the 14 sectors, with investments worth Rs 30,000 crores being grounded against an estimated investment of Rs 2.5 lakh crores.
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View AllAs many sectors, such as ACC battery storage and semiconductor production, require heavy capital expenditure and requisite infrastructure to be in place to begin production, the actual benefits of the scheme are likely to be seen only in the medium term as developing industries from scratch will take time to materialise.
It is also worth noting that the extent of private investment in a sector is also heavily dependent on prevailing business conditions and geopolitical tensions. With the staggering impact of the pandemic and the Russia-Ukraine war on the global and domestic economy, the full potential of the scheme has not been realised.
Despite the significant success of the PLI scheme in electronics manufacturing and increased capex in the pharma and telecom sectors, all PLI schemes have not been a universal success. Sectors such as Textiles, Solar PV, IT, and air conditioner (AC) manufacturing have seen incremental improvements but have not had a major impact on domestic manufacturing or exports thus far. The government has also noted and sought feedback from relevant stakeholders on any required changes to improve the PLI scheme’s attractiveness for investors.
Indeed, the PLI schemes are a work in progress and may take a few more years to show results. There is a need for increased transparency and regular monitoring of investments to truly judge the scheme’s success. Further, efforts to expedite the creation of the PLI dashboard, as mentioned by NITI Aayog, and a centralised database to determine deliverables like the number of jobs created, rise in investment, and increase in exports will be required.
While the PLI schemes cannot act as a one-stop solution to the country’s manufacturing woes on their own, if accompanied by reforms to boost land and labour laws, along with measures to increase the ease of doing business, the schemes have the potential to transform Indian manufacturing.
Budget 2023-24
The Union Budget for 2023–24 will be presented during a critical period with an uncertain geopolitical climate and with global economies going through periods of slowing growth. The government is also likely to continue with its push to boost economic growth through domestic manufacturing and creating jobs.
To boost manufacturing in the country, the revival of the MSME sector in manufacturing should be of priority. Despite significant measures from the government to aid the MSME sector, it has borne the brunt of the pandemic and the supply disruptions caused by the Russia-Ukraine war.
Over the past few years, the two big steps to encourage manufacturing include cutting corporate tax rates and introducing the PLI scheme. However, the reduction in corporate tax rates has mainly benefited bigger firms. MSME partnerships engaged in manufacturing are still paying a higher tax rate.
• The reduced rate must also be extended to all MSMEs to incentivize manufacturing. For PLI, certain tweaks to make the scheme more attractive for the MSME sector will also help boost investments from MSMEs in manufacturing units.
• As per a study by the Observer Research Foundation, of the 69,233 compliances that businesses must follow, 37.8 per cent (or almost two out of every five) carry imprisonment clauses. Reduction in compliance burden for MSMEs will also go a long way in boosting their participation in the manufacturing segment.
If India hopes to become the world’s manufacturing hub, the cost of compliance should not be more than those that exist in some of the top manufacturing economies of the world.
The passing of the Electricity (Amendment) Bill 2022 in the upcoming budget session will also go a long way in helping the finances of India’s power DISCOMS, boosting investor confidence and providing a push to the manufacturing sector.
The resilience of the Indian economy and the government’s continued emphasis on economic liberalisation, along with a young and highly skilled demographic profile, make India an attractive manufacturing hub.
The author is the Managing Director of Primus Partners. Views expressed are personal.
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