The Production Linked Incentive (PLI) scheme is not easy to assess. Three years after its inception, manufacturing remains stagnant and the picture that emerges is mixed and complex.
Under the PLI scheme, the government, with an outlay for ₹2-lakh crore over a period of five years, gives an incentive in the form of a payback to the extent of 4-6 per cent (modified at different points of time). It covers 14 sectors and includes ones like food processing, electronics, specialty steel, pharma, textiles, auto, solar panels, drones, and so on. There has to be a certain incremental output for the company to claim the same. If the average incentive is, say, 5 per cent and the total subsidy of ₹2-lakh crore is used, there has to be incremental output of at least ₹40-lakh crore over five years in these sectors.
The thought process behind the PLI has been manifold. First, the idea was to provide a stimulus to the manufacturing sector. Second, there is a pressing call for becoming Atmanirbhar in the sense of lowering imports. The old dogma of import substitution has been remodelled through the PLI. This approach is now common in several countries where there is emphasis on development of local industry and a tilt towards making economies more self-sufficient — the resurrection of protectionism through the back door. Third, the PLI also aims to combine import substitution with export promotion. Hence the sectors chosen satisfy one or more of these three objectives.
A multitude of companies have applied for PLI and received approval. The incremental investment and output have to be with respect to a base year which can be FY21 or FY22, depending on when the window was opened. The question is how one measures the same as there have been targets set for investment as well as sales.
Electronics has been quoted as being one of the success stories of late. There has been an increase in exports of electronics from $15.6 billion in FY22 to $23.6 billion in FY23. Prima facie this sounds good. However, imports increased from $73.7 billion to $77.3 billion. How can this be interpreted? One way is to look at the growth in exports, which was impressive at 50 per cent. But is this due to the PLI or is it under the normal course? Imports growth was around 4 per cent which is lower than that in exports. Besides, it has been seen that India is the hub for assembling.
Going by IIP data, production of computer, electronics and optical products fell by 6.5 per cent last year. So, has the sector done well or not?
These are precisely the ambiguities that come in when evaluating the companies or sectors which qualify for PLI. Companies in the normal course would be increasing their investment as part of the long-term plans and hence it will be hard to distinguish between those which have done so on account of the PLI.
Further, the scheme may be biased towards larger companies which can put in the level of investment that the scheme is talking about. While thresholds have been placed at lower levels to enable not-so-large companies to compete, there is no specific scheme for SMEs and hence they would get left out. At the broader level, some issues remain. First, can such protectionism be sustained for long given that at some stage countries which support local industry will face retaliatory measures.
Second, Indian industry will once again slip into somnolence and lose out on efficiency. It has been seen that once subsidies are given and the recipient gets used to the same, it becomes hard to withdraw the incentive. It can come in the way of innovation.
Third, while giving such incentives is a good supply side measure from the point of view of the government, the real problem for India is on the demand side. Hence producing more will help provided there is growing demand, which can happen only if income is generated through more job creation. In the present environment of a global slowdown, pushing exports will always be a challenge.
Fourth, sectors left out may find this policy discriminatory as presently it is only a fixed set of industries that have been included, although there is a sunset clause. Will this lead to accelerated growth in industry? Incentives can work both ways. Beneficiaries can use it to improve efficiency or alternatively may fall back on the same knowing that there is a return coming from the government. In some sectors the larger companies will be more nimble footed and take advantage of the same, which include foreign companies as well, many of which are anyway planning to shift to India as part of the China Plus One policy. This will accelerate allocation of resources and FDI can improve.
Therefore, on the whole, there will be a mixed effect. It would be useful if the government provides detailed progress reports on which companies have been allotted the benefit and the incremental investment and output generated on this count.
Often, companies produce a variety of products and the balance sheets do not give the details, and hence there have to be separate submissions made to the government. The crux hence is to ensure continuous monitoring to ensure targeting of benefits, and evaluating the impact.
The writer is Chief Economist, Bank of Baroda, and author of ‘Corporate Quirks: The Darker Side of the Sun’. Views are personal