By Adil Zaidi
It has been observed over the years that the major Asian powerhouses such as China, Korea, among others, focussed on the manufacturing-based industry and became a critical part of the global value chain in various sectors. This focus helped them bring in more investments, generate employment and become export-oriented economies.
However, India, which was more focused on the agriculture and services sectors, could not match its peer countries’ scale of manufacturing and employment. With growing urbanisation, investment in the manufacturing sector and by increasing contribution to GDP growth would certainly provide more job opportunities for the rural people in India. Acknowledging this fact, India aims to become a USD5 trillion economy by 2025. Value-added manufacturing is expected to be the key contributor.
The pressure to revive the Indian economy post the disruptions caused by the COVID-19 pandemic and global lockdowns, has further emphasised the need for manufacturing-based industrialisation. The pandemic splits open the gaps showing the overdependence on imports of some products in the supply chain across sectors.
Moving swiftly and learning from other countries’ industrial success models, the Government of India introduced ‘Production Linked Incentive (PLI)’ scheme to boost cost competitiveness in sectors facing stiff competition from other manufacturing economies.
In April 2020, PLI schemes were announced for mobile manufacturing and for starting materials/ bulk drugs and medical devices production with a total financial outlay of INR 51,311 crore for five years. Further, in November 2020, PLI schemes were announced for ten new sectors with an outlay of INR 1,45,980 crore. The incentives are now extended from 4% to 6% on incremental sales (over the base year) of goods, for five years.
The scheme has the potential to create nearly 1.40 crore man-months’ worth of jobs directly from 2021-22.~
It is a very strategic and timely announced step by the government to enhance India’s manufacturing competitiveness vis-à-vis its peers globally. Sectors like textiles, mobiles, white goods and food processing will offer huge employment opportunities, while others will provide adoption of high technology like battery cells, technology products, solar PV modules, and automotive. All these sectors are expected to contribute significantly in achieving domestic self-sufficiency.PLI impact on economy
The PLI scheme aims to achieve import substitution, export promotion, cost-competitive and efficient manufacturing, economies of scale, increased contribution in global value chains and higher market share in the given sectors. Moreover, it will incentivise global leaders to set up capacities in India, boosting FDIs and provide gainful employment to the youth.
The scheme is expected to yield greater results as it has “milestone-based incentivisation” and is output-oriented, unlike previous schemes that were more focused on various input parameters. Based on its output-oriented nature, it would attract large sector players, advanced technologies and develop an integrated ecosystem with production efficiency and economies of scale.
PLI scheme needs to be adequately supported by an integrated approach where the entire manufacturing ecosystem corresponds to it.~
As per NITI Aayog, the minimum production in the country as an outcome of the PLI schemes stands to be around INR 3.92 lakh crore in the next five years. The scheme has the potential to create nearly 1.40 crore man-months’ worth of jobs directly from 2021-22, which translates to effectively doubling the existing workforce across sectors. This would further stimulate the MSME sector of our country.
How PLI benefitted other countries
India’s competing manufacturing economies like China, Vietnam, Korea, etc. had strong trade-oriented industrial policies. They were coupled with lower-wage workers, flexibility in labour laws, lower compliances, excellent ecosystem and support on various taxes and duties to promote export.
India can attribute its stagnated manufacturing to factors such as complex and time-consuming compliances, availability of land and power, high cost of capital, lack of skilled labour, lack of focus on R&D, fractured supply chain with heavy dependence on imports.
Way forward to achieve desired results
While India is positioning itself as an investment destination, other countries are also becoming more attractive and establishing themselves as per the changing paradigms. In the current scenario, the PLI scheme will provide a huge impetus to global companies looking for options to set up facilities beyond China.
This scheme needs to be adequately supported by an integrated approach where the entire manufacturing ecosystem corresponds to it. The bigger challenge would be to ensure that investors who come to India under this scheme should be able to set up their industries successfully, without delays, and cost overruns of capital. This will ensure effective scheme implementation and business sustainability in the long run.
Some additional steps are essential to further power the ambition of USD5 trillion economy. They include the actual realisation of ease of doing business, strong skilled resources base, simplification of labour laws, promotion of R&D initiatives, and check on the import duty of some of the key products in the initial years so as not to disrupt the current supply chains. The government should incentivise large players to set up research and innovation infrastructure in all these sectors to compete with global leaders.
In the current situation, one may say that such a policy and focus on export-oriented measures may seem far-fetched. However, as the global trade scenario revives, India would be well equipped to benefit from the opportunities these industrialisation measures will bring in, in terms of large companies, more production, technology upgradation and employment opportunities.
(The author is partner and leader, economic development advisory at EY India)
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