The government has provided updates on the Production-Linked Incentive (PLI) scheme’s achievements until November 2023. This covers more than 70 per cent of the scheme’s duration considering the scheme was launched in March 2020. The specific start and end dates may vary for each sector under the scheme.

Until November 2023, the PLI scheme has achieved significant milestones, including investments of ₹1.03-lakh crore, production and sales valued at ₹8.61-lakh crore, the creation of over 6.78 lakh jobs, and exports totalling ₹3.20-lakh crore.

Starting with this data, we delve deeper into the performance and challenges of the scheme, and highlight the need for adjustments to ensure its long-term success and sustainability.

Wide participation

The government has approved 746 applications, featuring a diverse mix of global and local firms. Multinational corporations (MNCs) participating in the scheme are expected to accelerate development in areas where India currently lacks technology. The mix of international and local firms underlines the scheme’s comprehensive approach to fostering industrial growth and technological advancement in India. Table 1 lists the leading firms participating in the PLI scheme.

The mobile phone sector is the top PLI performer which has seen a fourfold increase in exports since 2021. In telecommunications, high self-reliance is achieved in producing telecom antennas, gigabit passive optical networks, and customer premises equipment. The bulk drug and pharmaceuticals sectors have seen a decrease in the import of raw materials.

Additionally, 39 units will soon start production of medical devices like CT scans, MRI machines, cath labs, dialysis machines, heart valves, and stents. Local manufacturers are now producing previously imported components such as compressors and copper tubes for air conditioners. In the food sector, Nestle and Hindustan Unilever (HUL) have started sourcing tomatoes from India, and there’s an increase in the procurement of millets. Overall, production advancements have been made in 7 out of 14 sectors.

The PLI scheme encompasses 14 different sectors, but the availability and clarity of data on production, investment, employment, and exports vary. For bulk drugs, medical devices and pharmaceuticals, only combined data is available covering all these aspects. Clear and specific data is accessible for four sectors: white goods, telecom, mobile phones and food processing. Seven sectors — auto and auto component, advanced chemistry cell battery, textiles, drones, solar PV modules, specialty steel and IT hardware — lack precise data on production, investment, or exports.

The challenges

Low fund use: So far only ₹4,415 crore or 2.25 per cent of the total announced incentives of ₹1.97-lakh crore over five years has been disbursed. This slow fund spend is unsurprising, considering that setting up Greenfield manufacturing operations takes time. Smartphone assembly firms and companies in the food processing and pharmaceutical sectors, most of which already have running production facilities, have claimed most of the incentives disbursed so far. As production begins in other sectors, the incentive figures are expected to rise.

Low use of Indian inputs: About 15 per cent of the cost to make a smartphone in India comes from parts sourced locally, and 85 per cent comes from imported parts. Indian manufacturers make basic parts like printed circuit boards, simple camera modules, touch panels, displays, chargers, phone covers, casings, and basic battery packs. However, we import the high-end processors from Taiwan and South Korea, memory chips, advanced camera sensors and lenses from Japan and Germany and connectivity parts like 5G modems and complex radio frequency components from many countries.

Weak investment-production link: So far, smartphone makers’ investment of ₹7,400 crore has resulted in production valued at ₹4.12-lakh crore. This translates to every rupee invested, yielding ₹55 in production value. This ratio is expected to exceed ₹100 by the end of the PLI scheme. Consequently, the PLI incentives might surpass the investments by the end of the scheme.

This raises a concern that many manufacturers might cease production once the incentives end. Historically, the introduction of GST in 2017, which abolished tax arbitrage, led to the disappearance of many local smartphone makers. Similarly, in 2018, an increase in the Merchandise Exports from India Scheme (MEIS) rate from 2 per cent to 4 per cent resulted in a significant rise in mobile phone exports in a single year, but most firms vanished with the abolition of MEIS.

Possible misuse of the incremental sales criteria: The PLI scheme offers incentives based on annual incremental production/sales of two consecutive years. This criteria is prone to misuse as the firms may get higher incentives by tweaking the production levels of their supporting/contract manufacturers. Two or more manufacturers may tweak their turnover to show a lower base year or higher application year exports. Production/sales of one firm can happen through the other’s premises/invoices. Table 3 illustrates how firms A and B may adjust production to get a higher PLI incentive of ₹30, where the rightful incentive could be ₹4.

The government suffered a revenue loss of hundreds of crores of rupees when the Target Plus scheme using the same criteria during 2003-06 was misused. Departments implementing PLI schemes may study the Target Plus scheme misuse and be vigilant. The risk compounds when the incentive is granted for quarterly production.

The active involvement of leading domestic and international companies shows that the PLI scheme started off in the right direction. However, considering the limited disbursement of incentives, most of which went to assembly or already existing operations, it’s necessary to reset the focus of the scheme.

The government should prioritise and support companies committed to extensive manufacturing and continuation of their operations in India even after the PLI benefits are phased out. Additional support needed may be provided to such firms.

The write is the founder of Global Trade Research Initiative