Transforming manufacturing

Dependence on PLI should be contained

Intending to formulate a production-linked incentive (PLI) scheme for electronics-component manufacturing, the Ministry of Electronics and Information Technology, as reported by this newspaper, has asked various stakeholders to share information related to India’s disabilities against competing countries, export potential, major buyers of components and sub-assemblies, and foreign and domestic firms planning to set up manufacturing plants in the country. The government aims to increase capacity, enhance cost-effectiveness, and create a component ecosystem worth $75 billion over the next five years. Past evidence, however, begs the question of whether PLI can help transform India’s manufacturing ecosystem.

Amid increased US-China tensions, India aims to become part of the China-plus-One strategy of large multinational corporations. In this context, PLI, essentially a production-subsidy scheme, seeks to expand domestic production capacities in different sectors. While the PLI scheme is the closest India has to an industrial policy, evidence so far suggests that its success is limited. Except for the PLI scheme for manufacturing mobile phones in India, multinationals seem reluctant to establish a significant manufacturing base in the country. Even in the case of iPhones being manufactured in India, which has done reasonably well, most of the components are being produced elsewhere. Notably, two of Apple’s vendors, Wistron and Pegatron, have withdrawn from India.

Overall investment remains far from what was initially expected in other sectors where PLI schemes were launched, including high-efficiency solar photovoltaic modules, automobiles, and textiles, which were expected to gain scale. Unfortunately, India’s industrial strategy, instead of being harnessed to generate productive employment and boost export potential, is tilting towards import substitution. The PLI scheme shortlists firms and provides subsidies of 4-6 per cent, based on conditions like investment and production. It can be argued that PLI-induced investment has been unable to create the scale of employment needed, especially in low-skill manufacturing. PLI for textiles is a case in point. Textile is a labour-intensive sector with a tremendous scope for job creation. However, the growth of investment in this sector remains slower than anticipated. As 16th Finance Commission Chairman Arvind Panagariya also noted recently, PLI is not a tool for overall industrialisation. It can expand export potential and bring in benefits perhaps in a few sectors and should not be used to subsidise every industry.

The idea of import substitution and creating a few national champions has also led to increased tariff protection, an impediment for firms aiming to be part of global value chains. Integrating with global value chains is critical for industrial production and exports. Since inception, expenditure on the PLI scheme has been a fraction of the planned outlay. Also, in principle, it interferes with market functioning and increases bureaucratic control. Therefore, before including new sectors in the PLI scheme, the government would do well to study how the scheme has worked thus far. Giving large firms production subsidies and tariff protection will not be enough to push industrial production and exports in the long run. What India needs are deeper reforms. Strong and resilient infrastructure, which has improved significantly in recent years, a reliable trade policy with low tariff rates, a skilled and employable workforce, and an investor-friendly business environment remain the key to industrial development.