Nissy Solomon and Dr D Dhanuraj
Ahead of the festival season, the Union Finance Minister announced the Production Linked Incentive (PLI) Scheme worth Rs 1.45 lakh-crore to 10 key sectors with the objective to attract investments, drive domestic manufacturing, create economies of scale and facilitate their integration to the global supply chain. The scheme comes at a critical juncture when global manufacturing companies are looking to establish manufacturing bases in countries outside China.
The sectors for the incentives include the automobile sector with the highest outlay of Rs 57,000 crore, followed by Advanced Chemistry Cell (Rs 18,000 crore), pharmaceuticals and drugs (Rs 15,000 crore), telecom and networking products (Rs 12,195 crore), food products (Rs 10,900 crore), textiles products (Rs 10,683 crore), white goods (Rs 6,238 crore), steel (Rs 6,322 crore), electronics and technology products (Rs 5,000 crore), solar PV modules (Rs 4,500 crore).
The scheme is strategically directed towards those sectors that have shown either global competence, the potential to growth or high import dependency. It provides incentives to companies committing incremental sales for products manufactured in domestic units. When read in conjunction with the government’s earlier announcement on reducing corporate tax, it offers an attractive proposition for capital-rich companies to invest and set up capacities in India.
The scheme is, however, not a long term solution to raise global competitiveness. It would be unrealistic to assume that India will be able to produce everything domestically. The high custom duties placed on many products, if continued for a longer duration, will prove detrimental and defeat the purpose of making India globally competitive. Import tariffs must be phased out or rationalised.
In 2002, then Finance Minister Yashwant Sinha initiated a time-bound customs duty reforms process in Budget 2002-03, to reduce the peak rate of 35 percent to 20 percent by 2005, a five percent cut in tariffs every year. This was done to ensure certainty and prepare the domestic industry to global competitive pressures, by giving reasonable time to the economic agents to adjust. It is crucial that any protection and incentives for import substitution, such as the PLI scheme, be limited to both scope and time lest complacency would set-in induced by the absence of import threats.
Challenges That Remain
Although the intent of the scheme can be appreciated, the outcomes need to be overseen. Past trends in similar lines such as the three-decades-old Special Economic Zones (SEZ) experience and more than a-decade-old industrial parks dedicated to improving the value additions to the products and services, have not yielded the desired results.
In the same vein, export incentive schemes such as Merchandise Export from India Scheme (MEIS) were mired in procedural delays and failed to deliver its intended results. In fact, it created more confusions and islands of own rules and regulations, creating indifference to the competing interests unevenly.
Although the PLI is different in its design, one cannot discount the possibility of operational inefficiencies and the challenges it entails. The success example of a PLI scheme in the mobile and manufacturing sector cannot be expected in other sectors since the very nature and the input elements for mobile manufacturing is different from others. These schemes offer only a band aid solution since the real issue is the presence of high operational costs and the complexities involved in doing business in India.
Only by addressing these can India be a favourable destination for establishing new businesses. Though the fine print of the PLI is yet to be published, past experiences remind us of such a legacy challenge that will stifle intended outcomes.
The potential investors of a heavy capital base would be looking at the right ecosystems in different states, where there are provisions in labour laws and land acquisition laws, availability and accessibility of electricity and quality manpower, etc. The question is whether India offers this business-conducive climate to support manufacturing at various levels.
Unless these necessary conditions are met, the PLI schemes would appear as a hope for some time, but won’t sustain for a long time. The sunset clauses are important for such incentives/ subsidy schemes, otherwise, the clamour for the continuation of these schemes would continue, especially when the market fluctuates.
Consistent policy making from the government looks difficult every time the support from the government takes the form of subsidies and incentives linked to a number threshold. The choice of 10 champion industries could be attributed to the COVID-19 slowdown, but the dynamic nature of the market and export economies could make it subjective in the long run.
The problem emanating from such incentive structures, especially in times of adverse market conditions, is that the industries would expect a continuous reinforcement of incentives from the government. It offers leeway to the industrial bodies to lobby with the government to lower threshold limits citing adverse conditions, thus repeating the same old mistake of the government being the provider and custodian instead of playing the role of regulator and facilitator.
This article was published in Money Control on November 17, 2020. Click here to read
Nissy Solomon is Senior Research Associate and Dr D Dhanuraj is Chairman at Centre for Public Policy Research. Views expressed by the author are personal and need not reflect or represent the views of Centre for Public Policy Research.