Production Linked Incentive (PLI) Schemes

Production Linked Incentive (PLI) Schemes

About

  • The Production Linked Incentive (PLI) schemes are a set of initiatives launched by the Government of India to boost domestic manufacturing and exports in various sectors.
  • The schemes aim to provide financial incentives to eligible manufacturers based on their incremental production and sales over a base year.
  • The schemes also seek to attract foreign direct investment (FDI) and enhance the competitiveness of Indian products in the global market.

Background

  • The PLI schemes were first announced in April 2020 as part of the Atmanirbhar Bharat Abhiyan (Self-Reliant India Movement), a comprehensive economic package to revive the economy amid the COVID-19 pandemic.
  • The schemes were initially introduced for three sectors: mobile phones and specified electronic components, active pharmaceutical ingredients (APIs) and medical devices, critical key starting materials (KSMs), drug intermediates, and APIs. Later, the schemes were extended to more sectors.
  • Currently, the schemes offer incentives to companies for incremental sales of products manufactured in India across 14 key sectors:
  1.  Mobile Manufacturing and Specified Electronic Components
  2. Critical Key Starting Materials/Drug Intermediaries & Active Pharmaceutical Ingredients
  3. Manufacturing of Medical Devices
  4. Automobiles and Auto Components
  5. Pharmaceuticals Drugs
  6. Specialty Steel
  7. Telecom & Networking Products
  8. Electronic/Technology Products
  9. White Goods (ACs and LEDs)
  10. Food Products
  11. Textile Products: MMF segment and technical textiles
  12. High-efficiency solar PV modules
  13. Advanced Chemistry Cell (ACC) Battery
  14. Drones and Drone Components

Features of scheme:

  • Output-oriented: The schemes are output-oriented rather than input-based. They reward manufacturers for increasing their production and sales rather than for investing in capital or infrastructure.
  • Time-bound: The schemes are time-bound and have a sunset clause. They are valid for a period of five to six years depending on the sector.
  • Performance-based: The schemes operate on performance-based principles and feature a graded incentive structure. The incentive rate varies according to the category of the manufacturer (domestic or foreign), the level of value addition, the type of product, and the year of operation.
  • Flexible: The schemes are flexible and allow manufacturers to choose their own base year, investment plan, and production targets within the prescribed guidelines.
  • Aligned with the national priorities: The schemes align with the national priorities and strategic sectors. They aim to reduce import dependence, promote innovation and R&D, create employment opportunities, and enhance India’s share in the global value chain.

Significance of PLI schemes:

  • Boost Manufacturing: The schemes can boost India’s manufacturing output and exports by creating a conducive environment for domestic and foreign investors. According to government estimates, the PLI schemes can generate additional production worth Rs 37.5 lakh crore ($500 billion) and additional exports worth Rs 20 lakh crore ($267 billion) over five years.
  • Enhance self-reliance and resilience: The schemes can enhance India’s self-reliance and resilience in critical sectors such as electronics, pharmaceuticals, telecom, and renewable energy. These sectors have high import dependence and strategic importance for India’s development and security.
  • Foster innovation: The schemes can foster innovation and R&D in emerging technologies such as electric vehicles, 5G, artificial intelligence, and biotechnology. These technologies have immense potential for transforming various sectors and improving the quality of life of people.
  • Employment opportunities: The schemes can create employment opportunities for millions of people across various skill levels. According to government estimates, the PLI schemes can create direct employment for 1.8 million people and indirect employment for several more over five years.

Challenges faced during the implementation of the PLI Scheme.

  • Regulatory hurdles: Despite efforts to simplify the regulatory environment, Indian businesses often grapple with red tape, bureaucratic hold-ups, and complex regulatory requirements that can slow down or complicate the implementation of the PLI scheme. Achieving consistency and transparency in policy regulations across states and sectors is a challenge.  
  • Infrastructure bottlenecks: Infrastructure gaps, especially in terms of power, logistics, and connectivity, can pose significant challenges to companies looking to scale their operations under the PLI scheme. Inadequate infrastructure can increase operational costs and hamper competitiveness.  
  • Access to capital: Despite the financial incentives provided by the PLI scheme, businesses, especially small and medium-sized enterprises, often face difficulties in accessing affordable capital. This can limit their ability to invest in new technologies, expand capacity, or upgrade their infrastructure.  
  • Skills gap: While India boasts a large workforce, there’s a notable shortage of highly skilled labor, particularly in advanced technology sectors targeted by the PLI scheme.  
  • Lack of advanced technology: The adoption of advanced technologies, which is essential for competitiveness in many of the targeted sectors, is still relatively low in India. The cost and complexity associated with technology adoption can pose challenges for companies looking to benefit from the PLI scheme.  
  • Geopolitical factors: Fluctuations in global trade dynamics and geopolitical tensions can impact the outcomes of the PLI scheme. For instance, trade restrictions, tariffs, or changes in the global supply chain can affect the export potential of companies benefiting from the scheme.  
  • Structural issues in the economy: Structural issues, such as small-scale operations, regulatory constraints, and fragmented supply chains, can hinder the effectiveness of incentive schemes like the PLI. 

Concerns against the PLI Scheme:

While the PLI scheme has been lauded for its potential to boost India’s domestic manufacturing sector, there are several concerns that critics have raised:  

  • Selective sector focus: Critics argue that the PLI scheme’s focus on selected sectors may lead to a distortion in the allocation of resources. The scheme could create an uneven playing field where some sectors enjoy more benefits than others.  
  • Dependence on subsidies: There’s a concern that the PLI scheme may create industries that are dependent on government subsidies for their survival. This could potentially lead to long-term problems, as these industries may not be competitive without ongoing government support.  
  • Implementation challenges: Implementing the PLI scheme effectively across diverse sectors could be challenging. The administration needs to ensure that the benefits reach the intended recipients, which requires a robust infrastructure and a high level of administrative efficiency.  
  • Fiscal burden: The scheme involves substantial financial outlays by the government. Critics argue that, especially in a post-pandemic economy where resources are stretched thin, this could increase the fiscal burden on the government.
  • Regional Trade Agreements (RTA): Critics argue that by focusing on domestic manufacturing, the Indian government may be missing out on opportunities presented by regional trade agreements. They contend that participation in RTAs could expose India to larger markets and international supply chains.  
  • Attracting quality investments: While the scheme is designed to attract investments, there are concerns about whether it will attract high-quality investments that can lead to technology transfers and improvements in productivity.  
  • Environmental concerns: As industries scale up their manufacturing capabilities under the PLI scheme, there will be an increased need for sustainability and environmental conservation measures. Balancing growth with environmental responsibility could pose a challenge

Production Linked Incentive Scheme 2.0:

  • The scheme proposes a financial incentive to boost domestic manufacturing and attract large investments in the value chain.
  • The target segments under the PLI 2.0 Scheme shall include Laptops, Tablets, All-in-One PCs and Servers, and Ultra Small Form Factor.
  • Implementation: Companies, both global and domestic, that meet the eligibility criteria specified in the PLI 2.0 Scheme guidelines will receive support for manufacturing goods in India within the specified target segment.
    • The classification of applicants into the Hybrid (Global/Domestic) category will be determined by whether the company is domestic or global.
    • They will maintain a comprehensive ranking of all applicants according to the eligibility criteria outlined in the scheme guidelines.
    • Subsequently, the selection of applicants in each category—global, hybrid, and domestic—will be based on their ranking and overall PLI projection, subject to the availability of the budget.
  • Tenure: The incentives provided under the PLI 2.0 Scheme will be applicable for 6 years
  • Base year: For the calculation of net incremental sales of manufactured goods, the base year will be the financial year 2022-23.

Incentives payout:

  • The incentive granted to each company will be based on the net incremental sales of manufactured goods in the target segment, compared to the base year.
  • The maximum incentive amounts will be capped at INR 45 billion for global companies, INR 22.50 billion for hybrid (global/domestic) companies, and INR 5 billion for domestic companies.

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