A steady transformation of the global production map is underway, triggered by the Covid pandemic. India with its massive domestic market and a mature industrial eco-system, presents a very attractive option. And despite significant skill constraints, India still has one of the largest pool of workers in absolute numbers across all skill categories.
In that context the Production Linked Investment (PLI) scheme has the potential to be a transformational force multiplier, helping create champions that firmly embed India’s position in the global value-chains in the identified 13 sectors for such PLI.
But PLI is an industrial policy instrument that picks winners, and this is never easy. To be successful the PLI scheme has to be well designed, and contextualised to the needs of each of these 13 sectors. An important part of that would be to make sure that the sectoral programmes are not designed to prioritise the administrative comfort of the bureaucracy, an approach that has hobbled industrial policy in the past.
Things to avoid
Expert opinion has highlighted the list of “must avoids” for PLI schemes. This includes not having overly complicated incentive reward criteria that allows too much discretion to officers in disbursement of incentive, and long-term tariff protection from foreign competition. Any tariff protection to these sectors needs to have an explicit end date which is non-negotiable.
But there is far greater need to focus on what the PLI needs to do to achieve genuine industrial transformation and provide long-term competitiveness to Indian manufacturing. The basics for this are easy to establish. PLI should lead to embedding India into the global value-chains in these industries through the transfer of skill and technology. This in turn means that the manufacturing activities PLI promotes involves genuine value-addition, leads to creation of a critical number of jobs that require skills beyond mere generic assembling of components, and leads to successful penetration of export markets.
If one goes by the PLI scheme adopted by MeITY for mobile phones and electronic components, none of these goals are explicitly being achieved. The criteria for incentive are a threshold level of capital investment, and achieving a certain level of sales. One can easily set up a basic assembly plant and import most of the parts and components to assemble a high-end phone or electronic component in that factory.
Since the unit price of the final product would be relatively high, achieving the required level of sales revenue, especially if supported by tariff protection from foreign competition in a large domestic market like India, would not be difficult. Since workers would be undertaking simple assembling work, there would be minimal skill development, and very little genuine transfer of technology or production process know-how.
There have been many instances where entire ‘factories’ were transported from one country to another. Thus, showing high plant and machinery investment, i.e., achieving the threshold level of capital is not difficult in this day and age of modular factories. An investor might rent or lease a factory, effectively cook the books and set up operations in India and once the incentive period is over, quietly shift away somewhere else.
Tariff protection increases the incentive for such temporary location of assembly type production in India. For e.g., a multinational mobile phone manufacturer could locate just the assembly of final product in India to bypass the tariff on the final product, but continue genuine production in say China.
The levels of scrutiny to verify that investment is genuine and not just on paper requires skills far beyond our bureaucrats. Even the dependence on third party, i.e., certified engineers and chartered accountants is equally self-defeating. There are just too many examples where such third-party scrutiny failed to be effective.
In any case, having such complicated scrutiny requirements would be counter-intuitive to the idea that such schemes be simple to avail and easy to administer, and open it up to bureaucratic discretion with all its associated fallouts.
There are two bits of good news here. First, nothing stops making our PLI schemes from having a smarter design that require the manufacturer to meet objective criteria related to value-addition, skilled employment generation, and achieving international competitiveness over time.
WTO’s Anti-Subsidies and Countervailing Measures Agreement does not prohibit government support to industry based on objective criteria related to value-addition, skill development or employment generation, including an indirect link to exports, i.e., exports acting as just one of the criteria for grant of incentive, that too as a proxy for international competitiveness.
Second, given the digitalisation of government databases related to value-added calculation of tax that maps invoiced price of final product vis-à-vis intermediates used (GST), customs and DGFT databases (export and import data), payments to labour (Employment Provident Fund Database or EPFO) among others, administering such an objective criterion based incentive programme will be much less cumbersome than subjective assessments of investment and other such criteria.
In fact, smart algorithms that uses the data available in these databases would be adequate to asses whether a firm is deserving of incentive or not without the need for a single file having to be reviewed by a Ministry based official.
Finally, a scheme focused on scale and quality of production outcomes, such as value-addition and employment generation would not end up rewarding investment in temporary facilities and jobs or revenue earned from sale of a final product with very little value actually added in India.
It would instead incentivise efforts that lead to improved competitiveness. Such efforts might not need huge capital infusion, but simply the appetite to take the risk of developing a new production line. Nothing stops an existing factory to re-orient itself to produce a new range of products that captures a niche for itself in the global market with minimal new investment.
Such a genuine transformation of production needs to be supported and encouraged and would lead to huge expansion of new jobs, skills, and innovation. After all a production linked incentive should be attuned to criteria related to the scale and more importantly the quality of that production rather than investment.
The writer is an independent trade and logistics expert