Measured incentives

| Updated on March 09, 2021

The Centre must assess the performance of the initial set of PLI beneficiaries before expanding the list

The government is promoting Production Linked Incentives (PLIs) in a big way to meet multiple policy objectives such as increasing export competitiveness, plugging local industry into the global supply chain and encouraging import substitution. The Prime Minister has expressed the hope that the scheme would contribute $520 billion in incremental output in five years. Having drawn greenfield investments into electronics last year, the Centre appears keen to extend PLI schemes to ten new sectors. The PLI route is clearly superior to income tax holidays or investment allowances that were in vogue earlier. The turnover-linked subsidy of 4-6 per cent is restricted to a chosen few manufacturers in defined product segments who commit to meeting specific capital, turnover and value-added targets. But the Centre must iron out teething troubles and evaluate promises-versus-performance for the first set of PLI recipients in sectors such as electronics, mobile phones and bulk drugs, before extending it to other sectors. With an outlay of ₹1.97 lakh crore, the Centre is after all introducing a new category of subsidy into the Budget. It must also be circumspect about various interest groups keen to benefit from the subsidy.

From the limited experience so far, three aspects may need addressing. One, the government must not shift the goalposts after it has set targets. The PLI scheme for electronics and mobile phone manufacturing for instance, was touted as a success after attracting investments of over ₹11,000 crore last year. But its beneficiaries are already knocking at the Ministry’s doors for a rollover of their first-year turnover targets citing land acquisition delays, lack of skilled workforce and demand issues post Covid. Given that only the last of the three is unanticipated, the Centre must be cautious about accepting such requests. If it finds that new units do take time to get off the ground, incentives must perhaps be paid after an initial gestation period. Two, in sectors such as textiles and pharmaceuticals, there is clamour for the scheme to be extended to MSMEs. The PLI scheme for telecom equipment in February included MSMEs with a lower ₹10 crore investment threshold. As the overarching objective of the scheme is to encourage globally competitive manufacturing in India, such dilution is counter-productive. MSMEs would automatically benefit from the trickle-down effect, should PLIs succeed in incubating world-scale firms with a large supplier ecosystem.

Earlier experiences with regulated-return projects in fertilisers and power also suggest that firms may not be above gold-plating their project costs or over-promising on delivery to gain incentives. Ministries must be vigilant on these aspects. Overall, the objective of the PLI scheme should be to ensure that India is home to globally competitive players who can be self-sustaining, once the crutches of government support are removed.

Published on March 09, 2021

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