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What is the Indian Government's Production-Linked Incentive (PLI) Scheme?

Editor, TRANSFIN.
Sep 23, 2021 1:29 PM 5 min read
Editorial

Last week, the Union Government cleared the Production-Linked Incentive (PLI) scheme for the auto, auto component and drone industries.

The ₹26,058cr ($3.53bn) allocation involves incentives of up to 18% and a push to encourage the manufacturing of EVs, hydrogen fuel vehicles and Advanced Automotive Technology (AAT) products in India.

The auto PLI scheme alone is expected to garner fresh investments of over ₹42,500cr ($5.76bn),  incremental production of over ₹2.3Lcr ($31.2bn), and over 7.5 lakh new jobs.

PLI for Dummies

The PLI scheme was introduced in March 2020. Initially, it was meant for only mobile phone manufacturing, medical devices and pharmaceutical devices. But in November, it was expanded to 10 more "sunrise" sectors, as part of the Atmanirbhar Bharat 3.0 Stimulus Package with an overall allocation of ₹1.97Lcr ($26.7bn) spread across five years.

These schemes were envisioned with the intention of making domestic manufacturers globally competitive and attracting investments so as to make India an integral part of the global supply chain.

How do they work? With simple, direct incentives. The guiding principle is a straightforward one: provide sops and financial stimulants on incremental sales of products (over the base year) that are manufactured domestically. This is done both by inviting foreign players to invest in India as well as by propelling local manufacturers to expand their footprint within the country. Both greenfield (new ventures) and brownfield (expansion of existing ventures) projects are covered.

The 13 key sectors covered under this programme have different eligibility requirements, threshold criteria and outlays. Each is supervised by a separate Ministry or Department. The extent of incentives also varies by industry. For instance, electronic components attract a 4-6% reward rate while for food processing it is 10%.

 

What’s Special About PLIs Anyway?

These schemes are unique in that they are output-oriented i.e. They reward success. Other state incentives work differently and come with caveats. For instance, tax incentives only kick in when a company turns profitable, SEZs are costly, and credit incentives run the risk of turning into NPAs.

Instead, by simply encouraging domestic manufacturers to expand their businesses and attracting foreign investors to “make in India” via relevant sops, the PLI schemes aim to simplify the entire process. Think of them as a “subsidy for sales”, if you will.

Essentially, these schemes strive towards four objectives:

  1. Target specific product areas.
  2. Aim to effectively compete with cheap imports.
  3. Blend domestic and export sales to make manufacturing sustainable and competitive.
  4. Promote manufacturing at home while encouraging foreign investment.

Moreover, by targeting output rather than exports, PLI schemes are non-tariff measures, so they won’t raise any eyebrows at the WTO. (The fact that they irritate Beijing is no doubt an added benefit.)

 

Are PLIs Working Though?

Let’s look at how the earliest PLI scheme - the one for mobile phone manufacturing - is doing. This stipulates that eligible companies making mobile phones that sell for ₹15,000 ($203.5) or more will receive an incentive of up to 6% on incremental sales of all such mobile phones made in the country (details here).

The numbers so far are quite impressive. According to the India Cellular and Electronics Association, mobile exports in Q1FY22 jumped to ₹4,600cr ($624m), up 250% YoY. This was also accompanied by a sharp 80% decline in the import of mobile phones to ₹600cr ($81.4m).

During the first five months of the mobile PLI scheme, manufacturers produced goods worth c. ₹35,000cr ($4.75bn) and invested around ₹1,300cr ($176.4m) under the scheme. In fact, it was the success of the first scheme that encouraged GoI to expand the programme to other sectors.

Samsung, Foxconn, Hon Hai, Rising Star, Wistron and Pegatron are some of the big names that have availed this undertaking. This international rush to make mobile phones in India can partly be attributed to geopolitical factors (read “the flight from China”, which was at first sparked by the trade war with the US but now is also due to Beijing’s hostile regulatory crackdown on its private sector). However, the PLI attraction cannot be discounted. 

 

Replicating Success

The first PLI scheme’s success has inspired New Delhi to aim to make India the world’s largest mobile phone manufacturer in the near-term. The big question is - can this model be replicated for other sectors?

Take the recently-unveiled programme for AATs. It’s not only restricted to EVs, but also encompasses automotive electronics, sensors, green technologies, safety technologies etc. And it will work alongside the FAME Phase II scheme and PLI scheme for advanced cells.

Hyundai, Tata Motors and Maruti Suzuki have already begun factoring in PLI considerations. Startups and smaller players, especially the ones focused on the EV sector, are likely to apply too.

Now, the mobile manufacturing model, while largely a triumph, also has valuable lessons. Despite the surge in exports, the value-addition was minimal as of Q1FY22. This is because India still doesn’t have significant original equipment/component manufacturing capabilities. So most of the “manufacturing” actually entails final assembly. “This means that the mobile phone is already 80% made by the time Indian manufacturers commence working on it.” Ergo, despite the PLI factor, the electronics trade deficit remains high - over $41bn in FY21. 

 

The Bottom Line

It can be argued that the single core motivation behind the PLI schemes isn’t necessarily the dream of making India a manufacturing powerhouse and a $5trn economy - although those are critical targets. But the biggest driver is probably New Delhi’s new-found obsession with self-reliance aka Atmanirbhar Bharat.

The 13 sectors covered under PLI are strategically important ones - and also ones in which Indian manufacturers are grossly dependent on external supplies. The supply chain disruptions and economic nationalism that the past year brought out across countries buoyed GoI to dedicate resources to make India more self-sufficient. In this way, the PLI schemes are more than just about growing the economy or helping Indian businesses boost their turnover - they are also about safeguarding sovereignty.

And therein lies the amusing paradox - of pursuing economic independence by using the tools of globalisation!

Regardless, after a series of big-bang economic reforms that were plagued with missed targets (demonetisation) and faulty rollouts (GST), it’s refreshing to see a big-bang reform that’s actually working well.

FIN.
 

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