Incentivising Indian Manufacturing for Growth

1. India’s Manufacturing Post-Independence

Before getting into PLI scheme, let us look briefly into India’s manufacturing sector, its contribution to GDP, employment, exports. In 1951, manufacturing sector’s GDP contribution was 11% while its employment contribution also stood at 11%. Contrast this to agricultural sector which employed more than half the population & contributed 53% to GDP. In stark difference to most developed economies, growth trajectory of GDP in India has favoured the services sector. The decline of agriculture in its GDP contribution was taken over by the services sector. In 2019,

Over time the service sector has gained substantially as a contributor to GDP at the cost of ground lost by agriculture sector. However, as evident above, service sector is not been able to garner surplus labour from agriculture. Despite the export contribution from labour intensive sectors close to 60%, India’s share in global merchandise exports hovers around 2%. Investment in manufacturing sector and increasing its share in GDP can help absorb the excess labour from agriculture and increase India’s share in global merchandise exports.

There is a situation of near stagnation of manufacturing which can be attributed to cost of capital, land, labour productivity, low investment in R&D, lack of size and scale, etc., As a result, it became economical for our industries to import than engage in domestic manufacturing. Governments have tried to offset the imbalance in domestic manufacturing vis-à-vis importing through developing industrial infrastructure, relaxing FDI norms to facilitate foreign inflows, skill development schemes, improving metrics in ease of doing business, make in India, etc. However a needs to be done on ground. India’s Asian counterparts such as Bangladesh, Vietnam have been able to develop more manufacturing facilities that have been shifting from China even before the pandemic (as China’s per capita wages is on the rise – this has led some companies to move out and tap more cost effective markets), while India could not reap the benefits of the same. The Indian economy had signalled a slowdown since second half of 2019 & the pandemic has accelerated the process of slowdown.

To counter these and project itself as a viable alternative in the Global supply chain, reduce dependency on China and mark a new lease of life to Indian manufacturing, PLI has been envisioned by the government.

2. Production Linked Incentive (PLI)

Production Linked Incentive scheme is an outcome based program to boost domestic manufacturing and attract investments at scale. The scheme provides for an incentive of 4% to 6% to eligible companies on incremental sales (Over base year 2019-20) of manufactured goods for a period of 5 years subsequent to base year (i.e. till 2024-25).

2.1 Eligible Companies

• A company registered in India, proposing to manufacture goods covered under target segments in India, and making an application for seeking approval under the scheme.
• Applicant can operate new/existing manufacturing facilities to manufacture goods covered under target segments.
• Manufacturing to be carried at one/more locations in India.
• The scheme for Large scale electronics is available to all companies registered in India which meet the threshold of specified investment (₹ 100 to ₹ 1000 crore) in the next four years as well as incremental sales of manufactured goods.
• Eligibility also subject to criteria under different target segments in the same scheme. Threshold of incremental investment and sales also to be considered for eligibility.

2.2 Incremental Sales & Investment

An applicant must meet the threshold of incremental investment and incremental sales of manufactured goods for eligibility of incentive.

• For incremental investment for any year, cumulative investment done till such year (including year under consideration) over base year shall be considered.
• For incremental sales, the total sales of manufactured goods under target segments for such year over base year shall be considered.

In any given year if the applicant fails to meet the criteria, the applicant shall not be eligible for incentive in that particular year. However, no restrictions are in place for claiming incentive in subsequent years upon the applicant satisfying the criteria.

2.3 Incremental Investment over base year

For example, in case of mobile phones (with invoice value of ₹ 15,000 & above) the applicant must have invested ₹ 250 crores or more by 31.03.2021 to satisfy incremental investment in that year. Likewise, Cumulative investment of ₹ 500 crores by 31.03.2022, ₹ 750 crores by 31.03.2023, ₹ 1000 crores by 31.03.2024 needs to made to avail the incentive.

2.4 Some inclusions & exclusion in Incremental Investments

• All non-creditable taxes and duties would be included.
• Expenditure on land and building (including factory building/under construction) not to be included.
• Expenditure on used/refurbished plant, machinery and equipment are included subject to satisfying conditions like minimum residual life of at least 5 years, valuation by a Chartered Engineer assessing value and residual life. With respect to imports, valuation to be in accordance with Customs Valuation rules and circulars.
• Manpower cost for R&D not to be included.

2.5 Sectors included under PLI scheme

Table (A) represents announcements made in February’ 2020 and based on its response and further work carried by ministries, departments, NITI Aayog, more sectors were included in November’2020 as indicated in Table (B). The final proposals of PLI for individual sectors will be appraised by the Expenditure Finance Committee and approved by the cabinet. Any new sector for PLI will require fresh approval of the cabinet.

3. Positives of the Scheme

There are certain features that could make the scheme effective in implementation and are enlisted below:

• To begin with PLI scheme has been announced after intense stakeholder consultations and deliberations.
• It is an outcome based scheme, meaning, incentives will be disbursed only after production takes place in the country.
• Calculation of incentives are based on incremental production and to achieve this additional investments are also expected to either establish green-field or expanding existing facilities.
• Scheme focuses on size and scale by selecting players who can deliver volumes.
• Selection of sectors are wide ranging from technology, integration with global value chains, labour intensive to sectors linked with rural economy.
• Scheme also addresses the financial constraints of companies and helping them achieve scale and size that can enable Indian products to be globally competitive.

4. Immediate Impact of the Scheme

The scheme has started to a positive response with names from both global and domestic mobile phone and electronic component makers getting approvals from the government. Of the total production, major companies under Mobile phone segment have proposed more than 10 lakh crore and those under specified electronic components have proposed production of over 15,000 crore. The government has till date approved 16 of the 22 applications that it received under this sector.

This segment is alone expected to bring in 3 lakh direct employment in next 5years and thrice the number in indirect employment.

Recently TATA Sons has decided to invest $1 billion for a new mobile phone manufacturing facility (for Apple’s sourcing needs) in Tamil Nadu using the benefits under PLI scheme. Add to that this facility is set to employ 18,000 of which 90% shall be women.

Other sector which has seen light of the Scheme (Feb’2020 announcement) – visible through the 215 applications under bulk drugs and 28 applications received from 23 Medical devices manufacturers under Medical devices. A maximum of 136 applications in bulk drugs and 28 for medical devices are likely to be approved.

5. Potential of Other Sectors

The above (4.) sheds light on the effects of Feb’2020 measures. Similar announcement was made in Nov’2020 enlarging the scope of the scheme to include 10 more sectors. Let us look briefly into the potential of some of those sectors (Reference Table (B)):

6. Challenges with PLI

Despite the prospects visible through more applications and potential of different sectors there are some areas which can hinder optimum realisation of the scheme some of which are listed below:

• Fine Print Availability: Guidelines in the form of fine print for the sectors announced are not available in public domain and available currently only for Mobile phones & Specified electronic component manufacturers (refer 2.1 to 2.4).
• Private Investment in Labour Intensive Sectors: Despite consistently improving in ease of doing business ranking released by World Bank, the private investment in labour intensive sectors has not increased proportionally.
• Past Initiative Precedents: Similar initiatives in the past have not yielded desired results showing implementation issues and tight regulations making businesses investment options averse.
• Strict Commitments & Documentation: Requirements of strict commitments from companies, loads of documentation as seen with EV batteries, the scheme may make it tough for India’s EV industry which is at its infancy and also where business visibility is low.
• Fitch Solutions Assessment on Automotive Sector: According to Fitch Solutions (rating agency), in case of automobile industry (highest recipient of incentives – refer Table (B)), it reiterated that PLI could bring in significant benefits to the sector over next 5 years. However, the sector will continue to face operational challenges in the form of legal risks, excessive bureaucracy, patchy utility infrastructure that increases the cost of doing business in India. This could minimise the impact of PLI in realising its potential.
• Land Acquisition Challenges: The land acquisition challenge in India is another averse factor for investors both global and domestic with land policies different in many states (as land is a state subject) and often has led to investors exit/shift to nearby Asian countries.
• Multiplicity of Labour Regulations: Another area of concern for investors is the compliance with numerous labour laws (different in different states as labour is a concurrent list item) and the number of returns associated with it.
• Commercial Dispute Resolution Delays: Resolution of disputes in commercial cases in India takes longer time to be redressed adding to negative Investor sentiment towards Indian markets.
• Domestic Capabilities & Long-Term Sustainability: Presence of challenges for domestic players as to whether they can build core design and brand capabilities and also scale up to become globally competitive by optimising PLI incentive and be sustainable in future once the scheme settles down.

7. Conclusion

Any scheme will have its own share of challenges and the success or failure depends on how well the ecosystem surrounding it behaves and government’s efforts in streamlining policies to meet the logical conclusions.

The government on its part had initiated changes to the functioning of business in India in the form of IBC for insolvency resolution proceedings, GST to create a unified tax and one market, New Delhi International arbitration centre to function as a dispute resolution centre with a vision to make India an international arbitration hub, reduction in income tax rates for manufacturing entities, Codifying more than 40 labour laws into 4 codes, more relaxations in FDI, various government programs among others.

The government is also planning to have a dedicated single window clearance portal for facilitating easy access to investors to policy makers at Central and State levels, faceless assessment and appeals (at different stages of implementation), creation of land pools for Industrial activity across the country (one estimate says the identified area – 4,61,589 hectares is twice the size of Luxembourg, a European country) among other measures being considered by respective state governments.

PLI scheme has come at a most crucial juncture in Indian economy having potential to improve India’s manufacturing sector’s GDP to much higher levels over the next five years in addition to creating more employment opportunities. With the scheme unlocking its true potential, more sectors could be on the anvil and can lead India to transform into a higher-middle income economy, be an integral part of global supply chain and also achieve Aatmanirbhar Bharat. Finally to answer whether PLI can be a game changer in Indian Manufacturing – that time will tell. However, efforts are in right direction and it is hoped that it will Indian manufacturing to the forefront and make India Aatmanirbhar.