Production Linked Incentive Scheme - All You Need To Know

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The Production Linked Incentive Scheme announced recently by the Indian government under the Atmanirbhar Bharat Abhiyan is an important initiative needed for achieving the ambitious goal of becoming a $5-trillion economy. It covers various sectors that already have a considerable advantage but without realising the full potential.

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What is Production Linked Incentive (PLI) scheme?

On March 2020, Centre had announced the Production Linked Incentive (PLI) scheme for three sectors – mobile manufacturing and specified electronics components, drug intermediates and active pharmaceutical ingredients and medical devices.
These schemes are worth 51,355 crore.
Later, on 11^th November, the government has added 10 other sectors and has committed 1.46 lakh crore of funding.
These sectors include pharmaceuticals, automobiles and auto components, telecom and networking products, advanced chemistry cell (ACC) batteries, textile, food products, solar modules, white goods and speciality steel.
Financial outlays have been allocated over five years for these sectors.

PLI scheme provides incentives in the form of direct cash benefit.
Incentives are provided after the companies fulfil their minimum threshold of incremental investments and incremental sales revenue.

The objectives of this scheme are:

Promote self-reliance
Attract foreign investments
Increase domestic manufacturing
Generate employment
Increase exports
Increase government revenue
Expose Indian industry to foreign competition and ideas
Promote innovation via foreign exposure
Create a conductive manufacturing ecosystem for the integration with the global supply chain and MSME growth
Create economies of scale

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Who will implement these schemes?

Concerned ministries/departments will implement this scheme.
The final proposals of PLI for individual sectors will be appraised by the Expenditure Finance Committee (EFC) and approved by the Cabinet.
Savings occurring from one PLI scheme of an approved sector can be utilised to fund another approved sector by the Empowered Group of Secretaries headed by the NITI Aayog CEO.
This group is the Force Majeure authority for PLI scheme and will be responsible for reviewing the performance of the scheme
It has significant power with regards to the approval and examination of applications and scheme mechanics.
The percentage of the incentive will depend on the “disadvantage” faced by each sector in domestic manufacturing and will vary from sector to sector.
Inclusion of a new sector for the PLI would require fresh approval from the Cabinet.

Why were specific sectors chosen for the implementation of the PLI scheme?

The PLI scheme for large-scale electronics manufacturing offers production linked incentives to boost domestic manufacturing of mobile phones and specified electronic components like assembly, testing, marking and packaging units. This is to establish India at the global level in the electronics sector.
Promotion of mobile manufacturing and electronic components is vital to support the demands caused by the government’s push for data localisation, Internet of Things market, projects like Smart Cities and Digital India. It is also necessary as India is expected to have a USD 1 trillion digital economy by 2025.

The Indian pharmaceutical industry is the third-largest in the world by volume. However, this achievement relies on imports of basic raw materials used for producing medicines. The PLI focuses on Active Pharmaceutical Ingredients (APIs), key starting materials (KSM), Drug Intermediaries (DIs) and the Scheme for Promotion of Bulk Parks. The aim here is to incentivise bulk production of critical bulk drugs and build supportive infrastructure for developing manufacturing clusters across India. The PLI scheme for this sector intends to incentivise global and domestic players to indulge in high-value production and utilise the full potential of the ecosystem for the development and manufacturing of pharmaceuticals and allied industries.

The PLI scheme for medical devices seeks to provide financial incentives to boost domestic manufacturing and attract large investments in the sector. The target segments in this sector include cancer care/radiotherapy medical devices, radiology and imaging medical devices and nuclear imaging devices, anaesthetics and cardio-respiratory medical devices and all implants including implantable electronic devices.
ACC battery manufacturing represents one of the largest economic opportunities of the twenty-first century. It contributes to the growth of several vital sectors like consumer electronics, electric vehicles and renewable energy.
The automotive industry is a major contributor to economic growth. The PLI scheme is necessary to make the Indian automotive industry globally competitive.
Telecom equipment is a critical and strategic element necessary for the development of secured telecom infrastructure. Also, India aspires to become a major original equipment manufacturer of telecom and networking products. The PLI scheme is implemented to boost investments and help domestic players make use of the opportunities to be a part of the export market.
The Indian textile industry is one of the largest in the world and has around 5% of the global export shares in textiles and apparel. However, its share in the manmade fibre segment, which has the majority of global consumption, is very low. The PLI scheme addresses this aspect while also focusing on technical textiles. This sector has a high potential as it generates second-largest employment and accounts for 12% of the country’s exports.
Food industry’s growth creates better prices for farmers while also reducing high levels of food wastages. Specific product lines having growth potential and capabilities to generate medium and large-scale employment have been identified for providing assistance via PLI scheme.
The PLI scheme for solar PV modules seeks to reduce India’s import dependence as there are risks regarding supply-chain resilience and cybersecurity. Incentives will be provided for domestic and global players to build large-scale solar PV capacity within the country and integrate with the global value chains.
White goods like air conditioners and LEDs have a high potential of domestic value addition. The PLI scheme for this sector could result in more domestic manufacturing, large-scale employment and increased exports.
Currently, India is the second-largest steel producer in the world. It is the net exporter of finished steel and has the potential to become a champion in certain grades of steel. Steel is a strategically important industry. The PLI scheme will help improve manufacturing capabilities for value-added steel to increase exports.

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What are the benefits of the PLI scheme?

The PLI scheme is capable of reviving economic growth by providing financial assistance to those industries crippled by the COVID-19 crisis.
It can also help reduce dependence on Chinese imports, an issue that has hindered India from making any decisive steps to counter the current border aggression.

The PLI scheme for the telecom sector seeks to support the manufacturing of the 4G, 5G and wireless equipment. India is partnering with Japan, the UK and other countries in this area for curtailing the Chinese dominance in the field of telecommunication, which poses considerable security concerns.
Sectors included in this scheme are labour-intensive and have a very high potential in boosting the employment rate.
The scheme is compatible with the WTO commitments as the quantum of support is not directly linked to exports or value-addition.
This is unlike other earlier schemes like the Merchandise Exports from India Scheme (MEIS), which were challenged at the WTO.
Thus, there is a higher probability of this scheme attracting more foreign participation.

What are the concerns?

An incentive under this scheme is a factor of incremental production.
This means that higher the production, higher the incentives.
However, the fine print reveals that the incentives cannot be claimed beyond the financial outlay proposed by the government.
If the total quantum of incentives exceeds the annual financial outlay, the incentive will be disbursed to all companies based on their net incremental sales.
Therefore, over-performing companies will not be able to reap the benefits under this scheme in absolute terms.
However, if one company under-performs but another company over-performs in terms of its net incremental sales, than any unappropriated incentive amount will be transferred proportionally to the over-performing companies.
The Empowered Committee has the power to review and revise rates of incentives, ceilings, eligibility criteria etc.
As the companies investing in the scheme will expect incentives to be granted at the promised rates, any unfavourable future changes in these said aspects by the EC will make this scheme unattractive.
Under the current circumstances, progress towards self-reliance is fraught with challenges.
India currently depends on China for critical components in various industries. This is not something that a country can address over a short period of time.
Very few MSMEs benefit from the PLI scheme due to the lack of awareness.

What can be the way forward?

While next few years will reveal whether the PLI scheme will hit any roadblocks, they have all the necessary requirements to increase investments, employment generation, domestic value addition, capacity building and innovation required for promoting Atmanirbhar Bharat.
The scheme focuses on incentivising firms to grow fast.
Some of these incentives are meant to assist industries that have a comparative advantage.
As these industries are already competitive, incentives must be temporary in order to prevent slowing down of the long-term growth of these sectors.
The scheme must be supplemented with the promotion of ease of doing business and favourable tax and policy environments.
Since the scheme intends to incentivise foreign players to set up manufacturing units in India, the government must provide transparent and predictive policies.
Policy incoherence and frequent changes deter foreign players from committing long-term and large-scale investments within the country.
The success of the PLI scheme depends on the implementation.
The government must make good of its promised incentives in a timely manner to gain the trust of the foreign players.
India has a long history of delays and arrears. With the government’s finances suffering, the focus should be on clearing overdue payments as much as on unveiling fresh spending programmes.

Conclusion:

Production Linked Incentives have high potential in boosting India’s manufacturing sector and employment rate. Its success relies on the implementation and favourable business environment that supports long-term business interests of those availing this scheme.