PRODUCTION LINKED INCENTIVE SCHEMES AND THE ROAD AHEAD FOR MANUFACTURING IN INDIA

This article has been authored by Ayushi Awasthi, a third year student at WBNUJS, Kolkata.

Introduction

Introduced in April 2020, the Production linked incentive (PLI) scheme has undergone further expansion in order to provide incentives for creating self-sufficient production units in India. It was launched in the Electronics sector and from thereon, in November 2020 it was extended to 10 other sectors including automobiles, pharmaceuticals, and food products. The target of the scheme is to provide incentives of 4 percent to 6 percent on sale increment from manufactured products in domestic units over the base year. The targets of the scheme are both domestic and foreign companies. This scheme aims to encourage domestic companies in expanding their manufacturing units thereby leading to less dependence on imports from foreign countries. Further, such an expansion is expected to open up avenues for the creation of more employment.

Benefits of the Scheme

The legislative intent behind the scheme is a factor of appreciation based on a harsh reality of the country which is growing on the weak pillar of manufacturing sector. India, no doubt, faces an unfavourable position when it comes to the expansion of its manufacturing sector which relies heavily on the goods manufactured elsewhere. As of 2019, manufacturing sector accounted for 14 percent of total GDP, which was further worsened by the hit of coronavirus and subsequent lockdowns.

The scheme has various advantages estimated in the long run. A USD 520 billion increase in the production is estimated in the upcoming five years. In the telecom department itself, there is an expected creation of around 40,000 employment opportunities in the next five years. A budget of 1.97 lakh crore rupees has been allocated to the scheme for five years from the FY 2021-22. The scheme gives incentives on incremental sales, thereby providing a great venture for foreign investors to pool in their investments in domestic units. The scheme provides a subsidy to companies based on their performance and not on the promises they make. Till now, several foreign companies including Samsung, Lava, and Pegatron have shown interest in the scheme.

The scheme accompanies the Make in India and Aatmanirbhar Bharat schemes. It is important to note that the measures will directly impact the amount of employment generation in the country for low and medium-skilled workers. With further expansions as proposed, later on, it can be expected that high skilled labour force can also be enhanced.

Ease of Doing Business in India

It might well be said that a lot more than “self regulation, self attestation, self certification” is needed if India wishes to become a future manufacturing hub like China. India is ranked 63rd on the Ease of Doing Business Index released in 2020 by the World Bank. The index is considered as a significant factor for foreign companies to settle their businesses in the country and provides a flow of Foreign Direct Investment (FDI). The long line of documents and registration required for starting up a business is a cause of concern for business expansion.

Registration of property, which is a factor in the index, continues to remain a hassle where India saw a reduction in ease as compared to 2019. Acquisition of land in India takes considerably longer with a substantial amount of clearances required which intimidates foreign investors in expanding their businesses. Combined together, these requirements cause red tape-ism as e-documentation is unavailable for many of the processes.

Prime Minister Narendra Modi had mentioned, while addressing a webinar in March 2021, about the PLI scheme that the Government is aiming towards reducing compliance burden and improving the ease of doing business in the country. The union government has taken several steps for improving the ease of doing business in India like the Goods and Services Tax law and the Insolvency and Bankruptcy Code, 2016.

Proposed Additions and Improvements

There is a rising need for improvement in innovation through research and technology. The government has recently highlighted its concern in this regard in the Economic Survey 2020-21. The scheme should consider adding research and development (R&D) within its purview, as per the suggestions of NASSCOM on incentivising investments in R&D. This will lead to more investment in the sector, in turn, creating more employment opportunities for the highly skilled workers. Such an investment holds the potential to provide a more holistic approach towards development.

According to the R&D Statistics and Indicators report 2019-20, the Gross Expenditure on R&D (GERD) has undergone a threefold growth going from 39,437.77 crore rupees in 2007- 08 to 1,13,825.03 crore rupees in 2017-18. There has been a significant amount of funding on the government-backed research whereas the same has not been the trend in the private sector contributing only 36.8 percent in 2017-18. Despite being one of the top R&D spenders in the world, only 29 companies from India were featured in the list of top 2500 R&D investors released by the European Commission in 2020.

Another cause of concern is the increasing trend of protectionism for the domestic market. Firstly, such a practice goes against the principles enshrined in the treaties having ratified by India. Secondly, such a safeguard might seem beneficial in the short run while the same can severely affect India’s position in the world of globalisation. If imports from other countries are being made difficult such countries will not tolerate the practice and will retaliate. Thirdly, this can, in turn, affect the consumers who have fewer options to choose from, paying more for the goods earlier available cheaply, part of which they could have spent elsewhere. Moreover, this will also impact the manufacturers in their expansion process outside India.

Conclusion

The production process in India still relies heavily on imported goods as a result of which the final product is a combination of various imported and domestic components. Further, Covid-19 has impeded not only the actual growth but also the potential growth of India’s economy and its manufacturing sector. PLI has the capacity to provide Indian manufacturers a competitive position globally, attracting substantial investments in the sectors of core competency.

Foreign companies are retracting themselves from China, realising the risk of investing in one supply chain in the pandemic. They understand the need of investing in multiple supply chains and this provides India with a chance to show its mettle. Further, domestically, there has been an increasing demand for goods like air conditioners, mobile phones, and TVs. There are great future prospects of luring in foreign investment considering the demographic advantage of India. Already a few foreign investors have showcased their interest in the scheme. If India wishes to become a major economy, it has to strengthen its local manufacturing units and the scheme provides the right impetus. However, providing incentives alone would not be sufficient and ease of doing business has to be further strengthened.