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Can PLI Scheme Revive the Indian Economy?

Can PLI Scheme Revive the Indian Economy

Consulting | May, 2021

The unprecedented global economic crisis brought upon by the COVID-19 pandemic made the world realize that globalization is essential but being self-reliant is also important. Championing the call for “Made in India, Made for the world”, the government is taking steps in the right direction to create a self-sufficient nation. Addressing the insufficiencies and challenges associated with the manufacturing hubs such as disrupted supply chains, inadequate logistics, and lack of infrastructure, the government plans to boost the sector, providing financial aid through incentives and introducing favourable policy reforms. Amidst the economic slowdown, the government instituted a Production Linked Incentive (PLI) scheme in April 2020, with an aim to revive the Indian economy, get rid of India’s unemployment plague, bridge the demand and supply gap, and increase export of Indian products in the global market.

 

The PLI scheme has been designed to create a conducive environment for the manufacturing sector and attract large investments both from within and outside the country, which could help India’s pandemic-ridden economy to get back on track. Besides, the PLI scheme presents lucrative opportunities for foreign companies looking to set up or expand their existing units in India. For the PLI scheme, the government has planned to outlay INR1.97 lakh crore covering different sectors to make Indian manufacturers globally competitive and India a significant part of the global supply chain. The thirteen sectors covered under the PLI scheme include

  • Mobile Manufacturing and Specified Electronic Components
  • Critical Key Starting Materials/Drug Intermediaries & Active Pharmaceutical Ingredients
  • Manufacturing of Medical Devices
  • Automobiles and Auto Components 
  • Pharmaceuticals Drugs
  • Specialty Steel
  • Telecom & Networking Products
  • Electronics/Technology Products
  • White Goods 
  • Food Processing 
  • Textile Products (MMF segment and technical textiles)
  • High-Efficiency Solar PV modules
  • Advanced Chemistry Cell (ACC) Battery 

 

Let us discuss the implementation of the PLI scheme for the various sectors in brief. 

 

Mobile Manufacturing and Specified Electronic Components Sector 

On April 1, 2020, the IT ministry notified incentives of 4-6% to electronic companies manufacturing electronic as well as nano-electronic components and mobile phones on their incremental sales under the PLI scheme. According to the scheme, companies making mobile phones in India priced at INR15,000 or more are eligible for an incentive of up to 6% on incremental sales of all mobile phones. Besides, an incentive of INR200 crores has been kept for the Indian-owned companies or foreign companies registered in India making such mobile phones within the course of the next four years. The scheme is expected to attract foreign investment in the sector and boost the production of mobile units in India to a large scale. If any electronic manufacturing company in India plans to expand their existing single or multiple units at one or more locations, the additional expenditure incurred by the organization for the transfer of technology, R&D, machinery, or equipment will be eligible for the incentive scheme. However, the scheme does not cover investments made by the electronic company on land and buildings for the project. 

 

Incentives under the PLI scheme for the electronics sector have been availed by organizations such as Samsung, Foxconn, Apple iPhones, Lava, Micromax, Wistron, Pegatron, Rising Star, Paget, Optiemus, and many others. India is projected to cross USD1 trillion digital economy by 2025. With the government taking initiatives to boost digitalization in the country by launching projects such as Smart City and Digital India, the demand for electronic components is likely to grow significantly. Therefore, the PLI scheme would help to fulfill the expanding demand for electronic products in India. 

 

Critical Key Starting Materials/Drug Intermediaries & Active Pharmaceutical Ingredients 

The government plans to localize the manufacturing of 53 critical Active Pharmaceutical Ingredients and Key Starting Materials to create bulk drug parks for a self-sufficient health care ecosystem in India. Currently, India relies on a limited number of suppliers clustered in one part of the world for the raw materials, but effective implementation of the PLI scheme would lead to reduced dependency on their imports. Additionally, the scheme on the promotion of bulk drug parks is expected to increase competitiveness and provide easy access to standard testing and infrastructural facilities. Properly managed bulk drug parks are expected to enhance the affordability of pharma drugs and contribute to the export of Indian products in the global market.  

 

The PLI scheme covers the setting up of greenfield plants with minimum domestic value addition in four different target segments, with two in chemical synthesis and two in fermentation based. The move comes as the first sustained step towards growing API industries in the country. The much-needed financial investment of INR15,000 crores can be the catalyst to accelerate the growth of the pharmaceuticals sector. Increasing focus on building R&D infrastructure and encouraging innovation, the domestic manufacturing companies can increase the quality of their products and compete with international products. 

 

On May 20, 2021, the government approved four companies to produce raw material, and each company is responsible for the production of more than 20 products. This move would make drug manufacturers dependent on one company for their raw materials and make them eligible for a 10-20% incentive from the government for incremental sales while others get no benefit from the scheme.

 

Manufacturing of Medical Devices

The Cabinet has approved the application of various medical device manufacturers in India to incentivize them under the PLI scheme, owing to the rapidly expanding healthcare ecosystem in India. Companies that had filed for the application included Siemens Healthcare, Sahajanand Medical Technologies, Nipro India Corporation, and Wipro GE Healthcare. To promote the domestic manufacturing of medical devices, the government has approved a disbursal of INR121 crore per applicant per target segment for setting up manufacturing plants. The scheme aims to generate employment for about 2,304 persons and make the country self-reliant to a large extent. In addition, the Department of Pharmaceuticals has launched the PLI scheme with an outlay of INR3420 crores for the promotion of domestic manufacturing of medical devices. 

 

Advanced Chemistry Cell (ACC) Battery 

On May 13, 2021, the Cabinet approved to provide financial aid worth INR18,100 crore to increase the manufacturing capacity of Advanced Chemistry Cell (ACC) Battery Storage up to 50-GWh and ‘Niche’ ACC up to 5-GWh. Boosting the production of the new-gen advanced storage technologies is likely to encourage e-mobility in the country, making e-vehicles affordable and accessible. The batteries are widely used in electrical vehicles, advanced electric grids, solar rooftops, and other battery-consuming sectors, so the PLI scheme for expediting battery production could reduce import dependence and revive the battery manufacturing industries in the country. To be eligible for the incentive, the beneficiary firms will need to achieve a domestic value addition of at least 25% and incur an investment of INR225 crores. 

 

The creation of ACC batteries can reduce environmental pollution by reducing the dependence of industries on fossil fuels for power. With the implementation of the PLI scheme, the government is also expecting the net savings of INR2 lakh-2.5 lakh on account of a lesser amount of oil imports due to more adoption of electric vehicles in the country. 

 

Automobile manufacturers 

Under the PLI scheme for automakers, the Centre has planned to roll out INR57,042 crores over five years. Automotive manufacturers with a turnover of INR10,000 crore, exports of INR2,000 crores, and fixed assets of INR3,500 crores are eligible for the PLI scheme. Auto component manufacturers with a turnover of INR1,000 crore, export of INR200 crore, and fixed assets of INR350 crore. The scheme favors companies with greater global sourcing and delivers incentives in ascending order from 2% to 12%. Companies with minimum incremental domestic sales revenue of INR75 crore will get the lowest 2% cashback whereas companies with more than INR1000 crore of incremental sales revenue will get the maximum 12% cashback. 

 

The eligibility criteria are likely to favor only the 10% of big players in the automotive sector and leave the 90% of companies who are responsible for at least 64% of the total component manufacturing units and contribute to 32% of revenues. The incentive scheme does not include India’s tractor industries that have been growing their export volumes in the past few years. The government’s decision to incentivize only “champion companies” seems like a way for improving exports and limiting subsidies, owing to the tight fiscal situation from the economic slowdown. However, the policymakers are yet to finalize the plan and it could probably ease the eligibility criteria in the coming months for the incentive program due to growing disappointment among Indian-based automakers.  

 

Speciality Steel 

With the growing demand for steel across various sectors such as railways, roadways, petroleum, and natural gas, the steel ministry has planned to develop intellectual property and technology in areas of steel to fulfill the requirements of the essential metal in India. The outlay for specialty steel industry has been marked at INR6,322 crore for the next five years to promote the domestic manufacturing of steel grades, that are currently imported for oil and gas industrial purposes. Companies engaged in end-to-end manufacturing of specialty steel production are eligible for the fiscal incentives based on achieving predetermined benchmarks in terms of technological up-gradation, import-substitution, and employment generation. The PLI scheme is likely to increase the supply of specialty steel by existing producers and encourage other steelmakers to take up the production of such steel grades so that India does not have to rely entirely upon imports for domestic electrical equipment manufacturing. However, manufacturers of stainless steel, TMT, and alloy steel are also looking for a share in the PLI scheme, but the ministry has yet to consider their demands. 

 

Telecom and Networking products

On February 24, 2021, the Department of Telecommunications (DoT) has notified a PLI scheme for telecom and networking products with a financial outlay of INR12,195 crores. The PLI scheme offers a minimum threshold of INR10 crore for MSMEs with incentives ranging between 7% to 4% whereas, for others, the threshold extends to INR100 crores with incentives ranging between 6% to 4% of incremental sales. Launching the scheme, the government expects an incremental production of INR2 lakh crores over the five years, which makes India a significant contributor in the 100 billion telecom and network products market. 

 

Telecom has remained a top growth factor for India’s economy and contributed significantly in ensuring the economy continues moving forward. With 5G on the anvil, the telecom industry is expected to grow tremendously. Therefore, the government might consider increasing the outlay by at least 50% to cater to the potential boom that awaits the telecom sector. 

 

Electronics/Technology products

To reduce dependency on Chinese electronic products, the new PLI scheme for large-scale electronics manufacturing and IT hardware has been instituted. Promoting the domestic manufacturing of electronic components, the government is aiming to broad-base sourcing of electronic components and raw materials and position India as a global hub for electronic system design and manufacturing. Creating an environment for the industries to compete, the scheme encourages the capabilities of indigenous manufacturers to develop core electronic components, for which the government is providing an incentive of 4-6% to eligible companies on incremental sales. The companies involved in testing, assembling, marking, and packaging are entitled to incentives under the PLI scheme. 

 

The scheme also provides a financial incentive of 25% on capital expenditure for the pre-identified list of electronic goods comprising products such as semiconductor, display fabrication units, specialized sub-assemblies, and capital goods to produce aforesaid goods. 

 

White Goods

On April 7, 2020, the government rolled out the PLI scheme for White Goods (Air Conditioners and LED Lights) with a budgetary outlay of INR6,238 crore to boost domestic manufacturing and attract investments in the White goods manufacturing value chain, offering an incentive of 4 to 6% on incremental sales of goods made in India for five years. The PLI scheme for white goods offers an incentive of four to six percent on incremental sales of AC and LED lights for five years. Companies that manufacture components or engage in sub-assembly of white goods are eligible for the incentives provided under the PLI scheme. The primary objective PLI scheme for white goods is to eliminate sectoral disabilities, ensure efficiencies, and create large-scale economies to make India an integral part of the global supply chain. Besides, the scheme is likely to create more than 4 lakh jobs while leading to production worth INR1.68 lakh crore. 

 

High-efficiency Photo Voltaic (PV) Cells 

The Cabinet approved a proposal of the Ministry of New and Renewable Energy for a PLI scheme to create an additional indigenous manufacturing capacity of 10,000 MW solar power. Currently, India’s solar power generation depends on PV cells, which are currently imported due to limited domestic capacity. The government has planned to roll out INR172 billion in solar PV manufacturing projects, which is likely to substitute imports of INR175 million every year and generate about 30,000 direct employment and 120,000 indirect employment. While solar manufacturing is still in nascent stages, the Centre plans to reduce import dependence as close to 75% of India’s solar power capacity is built on Chinese solar cells and modules. 

 

Food Processing Industry

The food processing industry in India has a competitive advantage due to the country’s natural resource endowment and large domestic market. To achieve the full potential and strengthen the presence of Indian food products in the international markets, the government has planned to roll out INR10900 crore under the PLI scheme. The scheme has been formulated in NITI Aayog under “AtmaNirbhar Bharat Abhiyaan for Enhancing India’s Manufacturing Capabilities and Enhancing Exports” to improve their competitive strength advancing in terms of output productivity and value addition in the global value chain, ensure remunerative prices to farm produce, increase employment opportunities, and provide higher income to farmers.

 

Four major food product segments covered under the PLI scheme include cook/eat foods, processed fruits and vegetables, marine products, and mozzarella cheese. Besides, innovative, and organic products introduced by SMEs such as poultry meat, egg products are also included under the scheme. The implementation of the scheme is anticipated to facilitate the expansion of the processed food industry with an output of INR33,494 crore along with creating an employment opportunity for 2.5 lakh people. 

 

Textile Products

Indian Textile & Clothing industry is one of the largest in the world, which contributes to 12% of export earnings to India’s export basket. Majorly driven by labor sources, the textile sector provides over 100 million direct and indirect employments. However, the export of Indian textiles has been stagnant in the range of USD34-39 billion since 2013. To push the industry to its full potential, the textile industry has been covered under the PLI scheme with a budgeted outlay of INR10,863 crore. With the implementation of the PLI scheme, the government plans to build large-scale production of downstream products and enhance India’s manufacturing capabilities. The scheme may cover 40 product categories in man-made fiber and 10 products in the technical textile segment. The benefits would be beneficial for both greenfield as well as brownfield investments, but the rate of incentives would range between 11% to 3% over the five years. 

 

The proposed scheme does not cover the fabrics such as viscose, polyester, and nylon which are used to manufacture apparel. Currently, the government is discussing with various industry spokespersons and considering challenges to make the scheme a hit for India’s textile industry success. 

 

Conclusion 

The simplification of procedures, financial investments, minimizing bureaucratic hassles, and favorable reforms are likely to ramp up domestic production and complement the government’s efforts of being “Atmanirbhar”. However, the sectors that do not get incentives are at a comparative disadvantage, and the government needs to work double hard for businesses to flourish on another side of the spectrum. 

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