A return to pre-reforms era?

Gagan Deep Sharma |Surendar Singh | Updated on: Jul 10, 2022
The PLI scheme could widen the gulf between MSMEs and big firms

The PLI scheme could widen the gulf between MSMEs and big firms | Photo Credit: PERIASAMY M

The PLI scheme picks winners among industries and is unsuited for a system of global value chains 

The government introduced the Production-linked incentive (PLI) scheme to transform the capacity and capabilities of the manufacturing sector. The PLI scheme focusses on 13 sectors with a total budget expenditure of ₹1,972.91 billion.

The primary objective of the scheme is to mobilise local and foreign investments to increase the manufacturing capacity of domestic enterprises, hence allowing their integration with global value chains (GVCs).

Several economists, policy analysts, and trade specialists have argued that the PLI scheme will be a game-changer for the revitalisation of India’s manufacturing sector. Given India’s impressive export performance in 2021, this notion has gained some more traction.

It is widely believed that the exceptional export performance reflects the early impact of the PLI scheme. This enthusiasm largely ignores the inherent and systemic issues of the PLI scheme with respect to its design, nature, and coverage that may have far-reaching effects on manufacturing, exports, and economic growth.

These concerns call for a complete assessment to comprehend the prospective effects of the PLI scheme on the industrial and economic growth.

The faultlines

Four issues deserve prominent attention in the context of the discourse of PLI — import protectionism, greater focus to capital-intensive industries, heterogeneity of firms within and across sector (s), and incompatibility with GVC led trade.to

First, the sectoral breadth of the PLI programme reveals that the government is pursuing import-substituting industrialisation (ISI) by rewarding import-dependent industries. This clearly demonstrates the relationship between the PLI scheme and the import tariff policy, indicating that the PLI scheme is coordinated with trade policy so that the manufacturing sector enjoys a degree of protection from foreign competition.

The adopted measures include extending the protection of specified tariff lines, introducing non-tariff barriers to curb imports, the relevance of exports in the overall growth strategy, and incentivising domestic manufacturing by extending production incentives and promoting investments both domestically and internationally. This strategy is similar to the “infant industry argument” where the government provides protection to domestic industry, critical in the national political economy.

Due to the domestic political economy considerations, it is difficult to withdraw the financial assistance provided to the business or sector during its infancy. Gradually, it becomes a norm, and companies in other industries begin to demand comparable subsidies and financial incentives.

Capital-intensive bias

Second, the PLI system is intrinsically biased towards capital-intensive industries as opposed to employment-generating labour-intensive industries in which India holds a comparative cost advantage. This will inevitably push job creation to the back-burner, resulting in increasing socio-economic disparities.

In selecting certain industries under the PLI scheme, the government appears to be “picking winners” rather than allowing market forces to distribute resources. This squarely falls under the ISI strategy. The government’s capacity to “select winners” may be limited by administrative competencies and information processing to make evidence-based policy interventions, leading to misallocation of resources and promotion of oligarchies.

Thirdly, the PLI plan extends financial incentives to firms rather than the industry as a whole in order to scale up production, disregarding the capacity and heterogeneity of firms operating in each sector, thus creating deeper structural concerns within the given sector.

A one-size-fits-all strategy may not be appropriate for certain industries when the level of corporate heterogeneity is significant. The extensive coverage of industries under the PLI plan is difficult to implement and may prove to be an impediment in achieving the scheme’s objectives.

The need for subsidies in each area vary considerably and depends on its level of growth and technological expertise. To maintain optimal levels of production, sectors with a high reliance on technology, such as the pharmaceutical industry, need more funding for research and development and innovation infrastructure. The PLI system scarcely captures these intricacies.

Fourth, the efforts to stimulate domestic manufacturing through ISI policies are untenable in the context of global value chains, in which India is an active participant in a number of industries. The present global trade framework is incompatible with the policy to enhance domestic output through subsidies and other means, such as import restrictions.

Liberal order needed

The world of value-chains requires a liberal trade system in order to provide firms access to competitive and high-quality raw materials and intermediate inputs in the global market. A free and stable trading environment encourages firms to engage in export-focussed assembly operations.

Above all, the implementation of the PLI plan is complicated by India’s industrial architecture, which is hampered by a highly fragmented production structure and generates a particular “missing middle” problem. The manufacturing sector is composed of a concentration of Micro, Small, and Medium-Sized Enterprises (MSMEs) on one end of the spectrum and a few giant enterprises on the other.

In this context, this policy may end up expanding the gap between small and large businesses, compounding the existing “missing middle” problem.

Recognising these concerns with the PLI scheme, it is crucial to realign the PLI scheme in the light of globalised commerce, which requires open, liberal, and transparent policies; otherwise, the country is doomed to return to the pre-liberalisation age of 1991.

Sharma is with the Guru Gobind Singh Indraprastha University, New Delhi, and Singh is with the FORE School of Management, New Delhi. Views expressed are personal

Published on June 28, 2022
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