The great hope of the Indian government’s much-celebrated Production Linked Incentive (PLI) schemes is to build powerful, globally competitive businesses across Indian industries Launched as part of the Atmanirbhar Bharat campaign, the PLI scheme hopes to make India a manufacturing powerhouse, through incentives for sales of domestically manufactured products. It encourages both domestic and foreign producers to expand or establish their manufacturing units in India. Generating employment, and reducing the country’s dependence on imports are core goals of the PLI effort.
Government claims 3.3 lakh jobs have been created
The first Production-Linked Incentive (PLI) scheme was introduced in April 2020 by the IT Ministry. It offers a 4-6% incentive based on increased sales for manufacturing electronic components such as mobile phones, transistors, and diodes. By the end of 2020, the scheme had expanded to include 10 more sectors like food processing, telecom, auto components, and white goods. As of now, PLI schemes have been announced for 14 key sectors with an outlay of around Rs 2 lakh crore. The government also plans to extend the scheme to other sectors like toys, leather, railways, and footwear.
Sectors where the PLI scheme is implemented
According to the Ministry of Commerce & Industry, 733 applications have been approved across 14 sectors as of June 2023, with an expected investment of Rs 3.7 lakh crore. Actual investment realised till FY23 is Rs 62,500 crore, which has led to an incremental production/sales of over Rs 6.8 lakh crore and the creation of around 3.3 lakh jobs. Exports have increased by Rs 2.6 lakh crore during the same period.
PLI scheme aims to transform India into a manufacturing powerhouse
The PLI scheme operates on what seems like a straightforward approach: reward companies for increased production.
So beneficiaries earn incentives based on their incremental sales, which encourages them to expand their manufacturing capabilities. This, in turn, boosts local production and improves sectoral competitiveness as players boost production and vie for incentives. The resulting productivity gains reduce dependency on imports and drive export growth.
The scheme serves a broader purpose: fostering self-sufficiency and reducing reliance on imports. Many of the targeted manufacturing sectors are labour-intensive, where gains would boost employment opportunities. Each PLI scheme is tailor-made to its respective sector, ensuring benefits such as higher foreign investment and stronger industrial infrastructure.
Government allocates Rs 2 lakh crore across sectors
The government has sanctioned a financial outlay of approximately Rs 2 lakh crore over five years for various sectors under the PLI scheme. The automobile and auto components sector gets the highest share of Rs 57,042 crore, followed by mobile and specified electronic components (Rs 40,951 crore), and advanced chemistry cell (ACC) battery (Rs 18,100 crore).
Rs 1,97,411 crore approved in total PLI outlay
Sectors like pharmaceutical drugs, telecom, textile and food products each have been allocated Rs 10,000-15,000 crore. Electronic products, solar PV modules, white goods, specialty steel, and drug intermediaries and Active Pharmaceutical Ingredients (API) will get Rs 4,000-7,000 crore. Medical device manufacturing has been earmarked Rs 3,420 crore, while the drone and drone components sector will receive Rs 120 crore.
PLI disbursements to reach Rs 13,000 crore in FY24
In FY23, the government disbursed around Rs 2,900 crore across eight sectors, which include large-scale electronics, IT hardware, bulk drugs, medical devices, pharmaceuticals, telecom & networking products, food processing and drones & drone components.
According to the Department for Promotion of Industry and Internal Trade (DPIIT), as of April 2023, the PLI scheme has been most successful in the large-scale electronics sector, attracting investments of Rs 5,100 crore. This sector was the primary beneficiary with the highest PLI disbursement of Rs 1,649 crore. Padget Electronics, an arm of Dixon Technologies (India), received the first-ever disbursement of Rs 53.3 crore in September 2022.
It was followed by the pharmaceutical sector with an investment of Rs 1,900 crore. It received Rs 652 crore in the form of disbursement. While investments worth Rs 1,600 crore were made in the telecom sector, it received a disbursement of Rs 35 crore. The food processing sector got Rs 486 crore.
Total disbursement in March 2023 stood at Rs 2,857 crore
Rajesh Kumar Singh, the Secretary of DPIIT, expects PLI disbursals of Rs 13,000 crore by FY24. He added that this figure could significantly grow going forward and may vary as the government considers adjusting the PLI scheme in sectors that are not performing up to expectations.
The success of PLI scheme has varied across sectors
The effectiveness of PLI schemes varies significantly across sectors. From FY22 to FY23, sectors benefitting from the scheme saw a boost in foreign direct investment (FDI) inflows. Specifically, FDI inflows in drugs and pharmaceuticals increased by 46%, in food processing industries by 26%, and in medical appliances by 91%. Rajesh Kumar Singh says, “Due to PLI schemes, there was a significant increase of 76% in FDI in the manufacturing sector in FY22 ($21.3 billion) compared to FY21 ($12.1 billion).”
PLI boosts foreign direct investment inflow
The scheme is also transforming India’s export portfolio from traditional commodities to high-value-added products such as electronics & telecommunication goods, and processed food products.
The PLI scheme has led companies to increasingly shift their suppliers to India. Foxconn and Wistron have products being manufactured in the country. In mobile manufacturing, India has achieved a 20% increase in value addition in just three years. For comparison, Vietnam took 15 years to see an 18% increase, while China reached a 49% increase but only after 25 years. Value addition in electronics manufacturing has increased by 23% from a negligible base in 2014-15.
India has become almost self–reliant in antennae, gigabit passive optical networks and customer premises equipment, thanks to a 60% rate of import substitution in the telecom sector under the PLI scheme. The drone sector has seen a 7x jump in turnover after the implementation of PLI scheme, benefitting largely MSME startups. In the food processing sector, the sourcing of raw materials from India has jumped. Similarly, the pharma sector has reduced its dependency on imported raw materials.
Not a level playing field: smaller companies miss out on incentives
The PLI scheme offers benefits based on increased investments from businesses, which favours companies with strong financing capabilities. This limits participation from small and micro sectors, and primarily benefits large-scale industries. The scheme also increases the fiscal burden on the government as it was launched after the pandemic when resources were already limited.
While the PLI effort has boosted some sectors, it has struggled to deliver results in areas like solar PV modules, ACC batteries, textile products, and specialty steel. These sectors have underperformed, failing to attract investments. The scheme’s sector-specific nature can also create distortion in the allocation of resources, and create an uneven playing field, providing opportunities for some sectors and not others.
The success of the PLI scheme also depends on various external factors. It requires rapid infrastructure development, improvements in the quality of education, and skill development. There are also potential environmental concerns due to increased production.
Is PLI turning India into a base for cheap labour?
The effectiveness of the PLI scheme in creating high-level jobs and establishing India as a manufacturing hub remains a topic of debate. For instance, speaking about import substitution, Raghuram Rajan argues that while the scheme has led to an increase in mobile phone exports, many parts used in these phones are imported. He claims that the manufacturing process involves the assembling of mostly imported goods. According to him, this has led not to high-paying jobs but to low-level assembly positions.
Another point of contention is the lack of a concrete method to analyse the success of the scheme. This raises the question: could the resources allocated to PLI have been more effectively utilised to improve other sectors, such as education, which could also provide long-term, skill-based benefits to the Indian economy?
PLI scheme: Dawn of a bigger dream or falling short of expectations?
While it may be too early to declare the PLI scheme a success or failure, it has undoubtedly garnered global attention towards India’s manufacturing capabilities. The scheme serves as an initial step towards the goal of making India a global manufacturing hub. Although there has been a noticeable increase in production, the pace of growth and disbursement has been slower than expected.