Is the Production Linked Incentive Scheme a step towards ‘Atmanirbhar Bharat’?

A significant increase in global demand for consumer electronics has given India an opportunity to attract foreign investments as well as encourage domestic manufacturers to focus on manufacturing consumer electronics in India under the flagship ‘Make in India’ initiative of the Government.

To achieve this objective, the Government has been increasing customs duty on consumer electronics and their components, so as to deter imports. However, in the absence on technological capabilities, mere deterrence to imports hasn’t had the desired impact on domestic manufacturing.

Under the National Policy on Electronics 2019, introduced to position India as a global hub for electronics system design and manufacturing, the Ministry of Electronics and Information Technology (MeitY) has introduced a Production Linked Incentive Scheme for Large Scale Electronics Manufacturing (Scheme) with effect from April 1, 2020.

The scheme provides for an incentive of 4-6 per cent on incremental sales (as compared to the base year, i.e., 2019-20) of mobile phones and specified electronic components (such as semiconductors, diodes, printed circuit boards, etc) manufactured in India, to eligible companies, for a period of five years in the following three categories: (a) mobile phones manufactured and sold by domestic companies; (b) mobile phones manufactured and sold by other companies (invoice value of ₹15,000 and above); and (c) specified electronic components.

The scheme is available to all companies registered in India which meet the threshold requirement of a specified incremental investment (between ₹100 crore and ₹1,000 crore) in the next four years as well as incremental sales of manufactured goods. However, it is notable that a maximum of five domestic and five global mobile manufacturing companies and 10 electronic component manufacturers will be selected from the applications received by the Government.

In case more applications are received, then companies having the highest consolidated global manufacturing revenues will be considered. Accordingly, the scheme is designed to select only the few top companies as the Government has limited funds to disburse.

It has been reported that large international mobile manufacturing companies such as Samsung and contract manufacturers of Apple such as Foxconn, Wistron and Pegatron along with Indian domestic companies such as Lava and Micromax have applied under the scheme. Further, while expenditure on land and building are not eligible, the investment on research and development and technology transfer agreements has been made eligible under the scheme, with a view to increase innovation.

Potential concerns

The quantum of incentives is to be calculated by a simple formula — that is, net incremental sales x rate of incentive (4-6 per cent). This implies that the incentive is a factor of the incremental production rate, that is, greater the production, the higher the incentives. However, the fine print reveals that the incentives cannot be claimed beyond the financial outlay proposed by the Government, which is ₹40,951 crore.

If the total quantum of incentives exceeds the annual financial outlay, the incentives will be disbursed to all companies on the basis of their net incremental sales. Therefore, an over-performing company may not be reap the benefits under the scheme in absolute terms.

On the flip-side, if one company under-performs but another company over-performs in terms of its net incremental sales, then any unappropriated incentive amount will be transferred proportionately to the over-performing companies.

The scheme also provides that an Empowered Committee (EC) will be constituted which has the power to review and revise rate of incentives, ceilings, eligibility criteria, etc. Considering that companies investing under the scheme will expect that incentives are granted to them at the promised rates, any unfavourable change in the rates by the EC in future is likely to become a bone of contention with the Government.

Subsidy issues

Subsidies granted by the Indian Government have been a matter of international disputes and are therefore to be examined closely. For instance, in 2019, India lost a case before the World Trade Organisation (WTO) where several incentive schemes such as MEIS, EPCG, and SEZ were challenged on the ground that such export linked schemes violate international trade agreements between member countries. While India’s appeal is pending, it is imperative to note that while the schemes challenged before the WTO were export linked, the present scheme is investment and production linked and may not fall foul of international trade agreements.

In addition to the scheme for electronic sector, the Government could also look to implement similar incentive schemes for other sectors such as automobile, pharmaceuticals, FMCG, etc. Further, the government must also not lose sight of the service industry which has historically been India’s strong point, as far as revenue and employment generation is concerned, but which has rarely been privy to any incentive from the Government.

While the next few years will reveal whether the PLI scheme hits any roadblocks, it does contain all the ingredients required to increase investments, employment generation, domestic value addition, capacity building and innovation to make India ‘Atmanirbhar’ as far as mobile phone manufacturing is concerned.

The writers are Partner and Senior Associate, respectively, at Shardul Amarchand Mangaldas & Co.