Nuts and bolts of PLI in manufacturing

Ajay Srivastava | Updated on April 11, 2021

Enabling export thrust   -  UGURHAN

Production-linked incentive should promote core, high-tech value addition rather than mere assembling of imported parts

Export data brought cheer, with exports for March exceeding $34 billion, showing an 58 per cent year-on-year rise. This growth came with a rise in exports of 28 of a total 30 product groups. If this trend sustains the annual merchandise exports can cross $400 billion next year. To achieve this we must focus on three critical issues.

First, promote manufacturing of products the world buys most. India’s share in global merchandise trade is 1.7 per cent. But our share in products like electronics, computers, telecom, white goods, and machinery, is a low 0.7 per cent. Since these products account for 70 per cent of world trade, we need to focus on manufacturing these for increasing exports. Fortunately, the Production Linked Incentive (PLI) Scheme focusses on these products. Here are few suggestions for getting the best output from the scheme.

One, the PLI scheme should incentivise products that require use of deep manufacturing. Enhancing India’s manufacturing capabilities and attracting investments in cutting-edge technologies are critical objectives of the PLI scheme. This means no incentive for superficial processing or assembly operations.

Deep manufacturing

Consider, electric vehicle battery manufacturing. It is a two-step process. (a) Making lithium-ion cells and (b) arranging a few hundred such cells in a box to make a battery. Cells account for over 85 per cent of the output value. Cell-to-battery is a low-end job. If the PLI incentivises manufacture of an EV battery, a firm may use imported lithium-ion cells and make the battery. The scheme must rather consider incentivising the manufacture of lithium-ion cells.

The same logic applies to incentivising solar cells and not solar panels. And Printed Circuit Board Assembly (PCBA) and not laptops or servers. PCB, the green colour motherboard, is a vital part of all electronic devices. If we allow PCBA (PCB with all components fitted into it) as the input, production of an end-product would be just a superficial assembly. The significant value addition happens during the assembly of components like processors, memory, etc., on the PCB, which results in the making of PCBA. Hence, incentivising manufacturing of PCBA and not the finished products like laptops, etc., would be the better option.

The PLI scheme would not need to prescribe criteria like minimum value-addition or domestic content, which makes the scheme WTO incompatible. In addition, we will attract investment in high technology and have lower imports bill.

Two, do not use incremental sales as the criteria for calculating incentives. Higher sales figures are possible even with lower production. Higher sales can come by inflating profits or using third-party manufactured products. A firm may get the incentive without any increase in net output or exports.

Three, do not allow incentive to non-manufacturers. If an incentive is available based on increased sourcing of a product from India, a firm may get the incentive without any increase in net production or exports at the country level. Such firms would buy goods from existing manufacturers. At the ground level, these manufacturers are already producing what is exported. They will now export through the applicant firms in exchange for some profit.

Lower import duties

Lower import duties on raw materials and intermediates. Currently, about 30 per cent of world trade is among the FTA partners. The remaining 70 per cent of trade happens outside of FTAs. Of this, 50 per cent of world trade happens duty-free. The remaining 20 per cent of trade happens at some import duties.

Most developed countries have eliminated or reduced import duties on fuel, raw materials, and intermediates. Duties are low on most industrial products. Exceptions are labour-intensive products like shirts and shoes where duties in developed countries are zero for poorest countries but high (10-25 per cent) for developing countries.

In India, the share of raw materials and intermediates in the import basket is 35 per cent and 30 per cent, respectively. While an exporter may import anything needed for making a product for exports at zero duty, others have to pay import duty. High duty on raw materials and intermediates results in expensive finished products, preventing domestic firms from becoming competitive.

Lower duties make indirect exporters competitive, set them on the path to become exporters and enhance the overall efficiency of the economy. Gradually, with stronger forward and backward linkages, jobs increase as both exporting and importing sectors grow.

Check unfair imports. We need to protect the industry from unfair imports.

Anti-dumping duties check such unfairly priced imports. High tariffs on key starting materials make thousands of products made from these expensive, but there is no easy way out.

Focussing on deep manufacturing; lowering duty on raw material and intermediates, and checking unfair imports will lay the foundation for a resilient and low-cost economy. This will result in high manufacturing and exports.

The writer is an Indian Trade Service officer. Views are personal

Published on April 11, 2021

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