(Co-authored with Radhika Pandey)
Production-Linked Incentives (PLI) worth upto Rs 1.46 lakh crore have been announed for 10 manufacturing sectors. The sectors include automobile and auto components, pharmaceuticals drugs, advanced chemistry cell (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.
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 pharmacutical 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. These schemes 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 is struggling due to expensive raw materials and cheap imports from neighbouring countries. Some of the 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 announced for the 10 sectors is not known, the deisgn of the earlier version of the scheme for electronics is such that it is compatible with WTO 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) that were challenged at the WTO.
The scheme provides benefits to companies who make commitments to incremental revenues over the base year rather than doling put 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.
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, thus they may need to be provided some incentives to attain economies of scale.
However, these incentives should be well-crafted and should be 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, 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 a 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 regime. The recent instances of policy incoherence and frequent changes in regulatory landscape deter foreign players to commit 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 the right elements of incentivising firms to grow big and increase investments and beome part of the global supply chain. They are a welcome change from the kind of support that have 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 Professor at the National Institute of Public Finance and Policy (NIPFP), New Delhi, and a former principal economic advisor to the Government of India, Radhika Pandey is a fellow at NIPFP.
This was originally published in The Print on 13th November, 2020.
The views expressed in the post are those of the authors only. No responsibility for them should be attributed to NIPFP.