It’s an empirical truism that since incentives have an out-sized impact on shaping economic behaviour, they must be designed for public good. To recover from the lockdown due to the pandemic, the government announced a series of incentives for the manufacturing sector. The objective of the production-linked incentive (PLI) scheme — ₹1.46 lakh crore for 10 key manufacturing sectors — is to give a supply-side boost to the economy.

The lion’s share has gone to the automotive and auto-component industries — ₹57,042 crore over five years. Initial deliberations hint at the government targeting only a handful of large companies to boost the automotive sector. But selecting a few ‘champions’ may not fully serve the purpose of the policy.

According to the draft of the Global Champion Scheme for the automotive sector, the eligibility criteria for support are: turnover of ₹10,000 crore, exports of ₹2,000 crore, and fixed assets of ₹3,500 crore as of March 21, 2020. For auto-component manufacturers, they are: turnover of ₹1,000 crore, exports of ₹200 crore, fixed assets of ₹350 crore, and at least 80 per cent local content in the exported products.

The incentive under global sourcing is put in ascending order from 2 per cent to 12 per cent. The higher the incremental revenue, the better the percentage of cash-back. For the lowest 2 per cent cash-back, a company must have a minimum incremental domestic sales revenue of ₹75 crore. The maximum 12 per cent cash-back will be given to companies that have more than ₹1,000 crore of incremental sales revenue.

This can create a situation where the big ones will become bigger, and the smaller ones will become more dependent on them. The smaller ones have been on the edge for the last three-four years. Under the above criteria, the eligibility to get the benefit of ₹57,000 crore is limited to 8-10 OEMs and 30-40 component manufacturers.

Nearly 90 per cent of the companies owned by Indian promoters fall below the proposed revenue cut-off of ₹1,000 crore: these own nearly 64 per cent of the total component manufacturing units in the country but contribute only 32 per cent to total revenues. The remaining 36 per cent of the companies were either JVs or foreign-owned and accounted for 68 per cent of the revenue. If the draft policy is implemented, the divide will widen further, resulting in a ‘K’-shaped recovery where the small will become weaker and smaller, and the big will get bigger through incentives.

The incentive scheme also does not include the tractor industry, which is the largest in the world. India’s tractor companies have been growing their export volumes not only to underdeveloped countries but also to Europe and the US. This sector offers huge growth opportunities and may be included under the incentive policy for automobiles.

The policymakers should consider relaxing the basic eligibility criteria for incentives to accommodate a large number of small and medium units in line with the Prime Minister’s Sab Ka Vikas (holistic development) policy. Large units are anyway in a better shape than the smaller ones.

Under the telecom sector policy, the government has taken care of smaller players, particularly Indian industrialists. Under the mobile manufacturing policy, a foreign player’s eligibility criteria are ₹10,000 crore of turnover and minimum new investment of ₹1,000 crore and for a local manufacturer, it is pegged lower at an investment of ₹200 crore and a turnover of ₹100 crore. This encouraged many new players to invest in mobile phone and electronics manufacturing .

The government has made the PLI for telecom equipment manufacturer more inclusive. For MSMEs in the sector, a 1 per cent higher incentive is proposed in the first three years and the minimum investment threshold for them has been fixed at just ₹10 crore. For other players, also the eligibility criteria have been kept at just ₹100 crore.

There should not be such a large variance in the eligibility criteria for manufacturers of telecom equipment and automobiles.

For the automotive sector, the objective should be for maximum number of players to benefit from the scheme. Even tractor manufacturers should be included in the scheme so that they can scale up capacities to global levels.

The writer is Vice-Chairman, Sonalika Group, and Vice-Chairman of Punjab State Planning Board