Sunset looms for PLIs with fading interest


The government is mulling restructuring the production-linked incentive (PLI) scheme in sectors with slow progress, and even scrap it in sectors where investor interest is dim and not much progress has been made, According to two people aware of the matter.

“While PLI scheme will work in some sectors, it may not work in others. The ones that don’t work could be restructured or replaced,” the first person mentioned above said on condition of anonymity.

“However, whether the scheme is working in certain sectors can only be established over time and after thorough reviews. The focus, for now, is to strengthen and support the existing PLI schemes across 14 key sectors,” the person added.

 

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So far, the progress of the scheme has been slow in sectors like IT hardware, textile products and specialty steel, medical devices, automobile and auto components, ACC batteries, and white goods.

On the other hand, the PLI schemes in sectors like electronics, mobile phones, bulk drugs, pharmaceuticals, telecom, drones, and food processing have been doing well.

A commerce ministry spokesperson didn’t respond to emailed queries.

The Centre announced the PLI scheme in 2020 under the aegis of the commerce ministry with an outlay of 1.97 trillion (over $26 billion) to support manufacturing growth in 14 sectors, especially those that help in import substitution such as specialty steel and drone components. The outlay was for a period of five years starting 2022.

The scheme provides for an incentive of 4-6% to manufacturers on incremental sales of products manufactured in India over a five-year period.

The idea behind the incentive scheme was to attract investments in manufacturing capacity, especially from foreign companies, and cutting-edge technology across these sectors, ensure efficiency, and bring economies of size and scale to make Indian manufacturing companies globally competitive.

So far, investments to the tune of 1.03 trillion (till November 2023) is estimated to have come in since the scheme’s inception, according to the commerce ministry.

The 14 sectors covered in the scheme were mobile manufacturing and specified electronic components; critical key starting materials/drug intermediaries and active pharmaceutical ingredients; manufacturing of medical devices; automobiles and auto components; pharmaceuticals drugs; speciality steel; telecom and networking products; electronic/technology products; white goods (ACs and LEDs); food products; textile products: MMF segment and technical textiles; high-efficiency solar PV modules; advanced chemistry cell (ACC) battery; and drones and drone components.

“Competitiveness is all about taking advantage of the economy of scale. However, my reading is that the capacities have been fragmented, with too many companies under certain sectors,” said Biswajit Dhar, Professor at the Centre for Economic Studies and Planning, Jawaharlal Nehru University.

“In sectors like pharma, which have been traditionally strong in exports, the main aim – to reduce dependence on Chinese APIs (active pharmaceutical ingredients) – hasn’t really worked out,” he added.

So far, businesses have pledged about 1.07 trillion of investments under the PLI scheme to scale up domestic manufacturing, helping create job opportunities for over 700,000 people, according to the commerce ministry.

Finance and corporate affairs minister Nirmala Sitharaman said in February that the PLI scheme has led to 3.4 trillion in exports and 8.7 trillion in production and sales, and 176 small businesses have been selected as direct beneficiaries of the scheme.

According to industry estimates, while the Centre was hoping to see investments worth 49,682 crore in FY24 across sectors under the PLI scheme, the first nine months of the fiscal saw just over 30,695 crore (61.8% of the target) investments come in.

Economist Sanjeev Sanyal, a member of the Prime Minister’s Economic Advisory Council (PM-EAC), recently told Mint that the purpose of the PLI scheme is to get Indian companies to scale up rapidly.

“One of the major problems Indian manufacturing had, historically, was that it was always sub-scale. This meant that we couldn’t take advantage of big economies of scale and compete internationally,” he said.

“The purpose of the PLI scheme is to allow India to get around its midget problem, which we had written about in the economic survey a few years ago,” he added.

As things stand, the Department for Promotion of Industry and Internal Trade (DPIIT), under the ministry of commerce and industry, has undertaken a third-party assessment of the PLI scheme in white goods (AC and LED lights) with the study being commissioned to the Arun Jaitley National Institute of Financial Management (AJNIFM).

The PLI scheme is expected to drive industrial capital expenditure (capex) of 3-3.5 trillion over its duration, rating agency CRISIL said in a recent report.

“It will constitute 8-10% of total capex in key industrial sectors over the next 3-4 years. The scheme will also offer incentives amounting to 1.8-1.9 lakh crore (trillion) and generate incremental revenue of about 30 lakh crore (trillion) over its lifespan,” it added.



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