The Production Linked Incentive (PLI) scheme offers financial incentives on incremental sales and capital investment (over a base year) to identified industrial sectors. The scheme was introduced in phases for different sectors with the objective of supporting the ‘Make in India’ initiative and achieving a host of growth and welfare objectives. The industrial sectors qualifying for these incentives are largely identified through their potential for job creation, enhanced production, tax collection and social welfare. The scheme may generate 6 million jobs in the next 5 years according to Finance Minister Sitharaman.
A sound policy attaches measurable outcomes to its objectives. The PLI scheme is expected to boost domestic production worth USD 500 billion within 5 years of its implementation. It specifies the sectoral expenditure outlay along with expected annual production, investment and employment outcomes. Without these quantifiable reference figures, it would be difficult to assess the ongoing and ex-post progress made by the scheme.
The PLI scheme deserves credit for its simple process of application and a straightforward qualifying criterion for claiming incentives. Conventional tax and credit incentives face challenges in the form of limited relevance (linked with profitability) and the possibility of getting turned into NPAs, respectively. Innovatively designed, the quantity-based PLI scheme directly incentivizes sales and pushes production figures. Moreover, it adheres to Occam’s razor, a problem-solving principle that promotes simplicity in approach over complicated policy design mechanisms.
The parameters for determining industrial sectors, which have a dedicated PLI scheme have improved over time. However, the scheme still suffers from poor sectoral targeting. Out of the 14 sectors covered under the scheme, only the textile and apparel sector falls under the category of labour-intensive production. A 2020 study indicated that India’s share of global low-skill exports is about 15 percentage points less than its share of the labour force. For instance, according to the study, India should be making an additional $140 billion (5% of GDP) in the textile and clothing sector alone. This is a tremendous loss.
The inclusion of textiles within the PLI scheme is expected to create over 7.5 lakh jobs. It is also likely to increase the participation of women in the formal economy since the sector predominantly employs a female labour force. These statistics are telling of the need to consider India’s labour endowment and include more labour-intensive sectors such as gems and jewellery within the realm of the PLI scheme. This is especially important given that low-skilled production in India is usually associated with labour-intensive industries.
The PLI scheme is especially rewarding for firms engaged in high-tech production, which have the ability to scale up substantially. Emphasis has been laid on boosting production and investments to foster India’s integration into global value chains. A spurt in India’s export sector and reduction of import dependence are viewed as the positive externalities resulting from improved domestic manufacturing capacities. Further, regionally diversified foreign investments under the PLI Scheme are expected to provide a cushion to the domestic manufacturing industry during times of instability in a given international market.
Though the scheme has been designed to adhere with WTO norms, some PLI schemes (such as those for textile products, ACC batteries and solar PV modules) specify local value addition norms, which necessitate a percentage of domestic value addition for firms to be eligible for availing incentives. Such specifications may be challenged at the WTO for violating the Agreement on Subsidies and Countervailing Measures. While the scheme is not directly linked to exports, a reasonable share of goods produced by manufacturers eligible for the PLI scheme could be exported. There is a need to address this possibility and implement corrective measures.
Any government-led manufacturing scheme requires a comprehensively framed sunset-clause. The PLI scheme has an inbuilt sunset clause. Depending on the sector, incentives are applicable on incremental sales of products for a duration of four to six years. However, once the scheme is implemented it will be difficult to withdraw governmental support and incentives due to reluctance on part of the domestic beneficiaries. This is a popular argument against protectionism and relevant in the case of PLI given the involvement of non-market financial incentives. While massive improvements are expected in India’s manufacturing capacity as a direct consequence of the scheme, long-term impacts should also be considered while there is time.
Moving forward, regular and rigorous impact evaluations will be essential to monitor the progress of the scheme and introduce provisions to enhance the efficacy and reach of the production-linked incentives.
The opinions expressed in this essay are those of the authors. They do not purport to reflect the opinions or views of CCS.