If there remains a sore spot in India’s growth story, it is manufacturing. The government has been attempting to spruce up the sector for a long time now. Production Linked Incentives (PLI) scheme is one such initiative under the flagship Atmanirbhar Bharat Abhiyaan.

With the objective of transforming domestic manufacturing by augmenting its capacity and competence, the scheme aims at creating more jobs, attracting greater investments, reducing imports and making India a global manufacturing hub. In fact, PLI is often touted as the panacea to India’s manufacturing problems.

A number of scholars and experts feel that the PLI can significantly restructure India’s domestic manufacturing, push its share in the GDP to 25 per cent and foster seamless upgradation of domestic firms into the regional and global production networks.

Ambiguities galore

The real picture, however, is not all that rosy. A closer scrutiny unfolds several chinks in the armour of the scheme and raises serious concerns on its ability to deliver. Forget implementation, the design of the scheme too is riddled with flaws.

Firstly, an Empowered Committee has been constituted by the government for overseeing the scheme’s implementation; it is additionally responsible for fund disbursement under each sector. But the manner in which these incentives are to be awarded remain ambiguous. There are no set criteria or common parameters for consideration by the ministries and departments for giving these incentives.

Further, the lack of a centralised database that captures information like increase in production or exports, number of new jobs created etc. make the evaluation process an administrative nightmare. This information ambiguity impacts transparency and can lead to malfeasance, further widening the fault lines and weakening the policy structure.

Secondly, unlike what was promised, the scheme’s orientation appears to be greatly predisposed to larger firms. Evidence from fund disbursement in some of the PLI sectors alludes to a bias towards bigger players.

Unintended effects

Further, beneficiary sectors under the scheme such as automobiles, electronics and technical textiles are largely constituted by big firms. Obviously, this is not representative of the actual configuration of the Indian industrial structure, which is largely composed of Micro, Small & Medium Enterprises (MSMEs). These MSMEs not just contribute to a bulk of the manufacturing output and exports but generate much of the employment in the manufacturing sector.

It is worth mentioning that the next phase of PLI scheme will incorporate labour-intensive sectors such as toys, furniture, leather, bicycle manufacturing in its fold. While the intention is to stimulate the growth of labour-intensive manufacturing, it is important to understand that an unqualified expansion of this list may potentially risk the creation of a subsidies-dependent manufacturing industry.

Withdrawing of these benefits at a later stage may be onerous on account of political economy considerations. This would ultimately lead to industrial inefficiencies and engender a decline in productivity both at sectoral and firm-level thus adversely impacting the aggregate manufacturing output. In other words, an imprudent expansion of PLI sectors may be a retrograde move.

Thirdly, the efficacy of production subsidies to galvanise sector-specific manufacturing depend on a combination of factors like a steady stock of raw materials available at competitive prices, size of the domestic market, relationship between upstream and downstream manufacturers, among others.

For instance, PLI extension to the container manufacturing industry is unmindful of an understanding of the prevailing dynamics in India and that of the global container manufacturing business. Around 80 per cent of the total cost of production of these containers is composed of a single raw material called Corten steel, the price of which is ₹120-130 per kg in India, as compared to ₹80-90 in China.

In fact, India has limited capacity to manufacture A-grade Corten steel. Domestic manufacturers source it from China, Japan and South Korea. Thus, the high cost of primary input makes the sector uncompetitive, limiting its ability to compete in the global market.

To complicate things further, the demand in the sector is driven by the global shipping industry controlled by a few developed countries and China, thus creating significant entry barriers. Since the domestic market for containers is driven only by a handful of shipping companies involved in port-to-port shipment mostly in the neighbourhood, it is quite small to support large-scale production with an assured demand.

The bottomline is that production subsidies to scale container manufacturing will not work until other critical factors shaping the ecosystem are understood and factored in. More importantly, this holds true for other sectors as well.

Finally, the scheme paints manufacturing with a broad brush as if all sectors are at the same stage of development and technological advancement, and, have the same requirements. Consider this — a technology-intensive sector such as pharmaceuticals requires more resources for Research and Development (R&D), and, innovation infrastructure so as to sustain manufacturing at the optimum level.

The needs and nature of incentives required for a sector like textile are totally different. The PLI for textiles rightly underpins the importance of boosting the production of man-made fibres (MMF) and technical textiles. It does not, however, cover fabric which remains a highly imported category in the country.

It further excludes from its scope synthetic fabrics such as viscose, polyester and nylon, that are major inputs for apparels. The complexities and nuances that characterise particular sectors are, thus, hardly taken into consideration in the design of the PLI scheme.

The PLI scheme is a classic case of ‘ good intentions but bad approach’. For the scheme to deliver positive results, the structural problems within the policy design and economic system need to first be addressed. Only then will India fulfil its dream of becoming a global manufacturing hub.

Singh is an Associate Professor at FORE School of Management; and Abrol is a Doctoral Researcher at Centre for Development Research, University of Bonn, Germany