The right incentive

PLI scheme alone would not be enough

The Union government’s idea to provide fiscal incentives for increasing manufacturing and strengthening the industrial base seems to have run into problems, as many commentators had feared. As reported by this newspaper on Monday, the government is planning to hold a first-of-its-kind meeting later this month to address implementation issues being faced by producers under the production-linked incentive (PLI) scheme. The meeting is expected to be attended by all 14 ministries involved in the implementation of the scheme, along with key beneficiaries. The scheme seems to have multiple issues. Already, a senior government official has indicated that a course correction is likely in a few sectors covered by the scheme. In the case of the auto industry, for example, firms are looking for clarity on the incentives they are supposed to get. It has been reported that incentives could not be disbursed in 2022-23 because no auto company presented the required documents.

It is likely that variance in understanding between the government and manufacturers is affecting disbursements in other sectors as well. For instance, in 2022-23, the government paid Rs 2,874 crore to beneficiaries against a claim of Rs 3,420 crore. The outgo thus was about 1.4 per cent of the Rs 1.97 trillion allocated for the scheme over a period of five years. The outgo is expected to increase to about Rs 13,000 crore this fiscal year. Aside from the documentation issues, the outgo has been low because the scheme has possibly not resulted in the kind of investment that was envisaged. The government, for instance, recently revised the scheme for the production of information technology hardware with an increase in allocation from Rs 7,325 crore to Rs 17,000 crore. The average incentive in this segment, which is aimed at boosting the production of devices such as tablets, laptops, and personal computers, has also been enhanced.

The government cleared the first three PLI schemes in March 2020, while another 10 were approved in November that year. The allocation for the scheme was announced in Union Budget 2021-22, with the idea of creating national manufacturing champions, which would generate employment opportunities. However, changes in the scheme, issues related to documentation, and low disbursement suggest things are not moving as desired. According to the latest numbers, the gross value added in manufacturing went up by just 1.3 per cent at constant prices in 2022-23. Although the government is working on the scheme, it is worth reiterating that it’s not easy for the bureaucracy to pick winners or national champions. Investment and production in different sectors depend on a variety of factors. In fact, the state’s decision to select champions and provide fiscal incentives could affect competition.

Issues could also emerge at a later date in terms of verifying the actual level of investment and other conditions. As witnessed in the Faster Adoption and Manufacturing of (Hybrid &) Electric Vehicles scheme, manufacturers were found using different ploys to take advantage of subsidies, some of which are now being investigated. Consequently, the government has reduced the level of subsidies. It is thus important that government interventions are well-designed. If the idea is to increase manufacturing output, the government will have to work on improving the overall industrial environment. Modern manufacturing depends on complex supply chains and giving fiscal incentives to one set of producers may not work. To be sure, given the level of outgo, the fiscal implication may not be a big worry. Policymakers, however, should not excessively depend on the PLI scheme. It is not a way out of the inadequacies in the manufacturing sector.