The PLI principle – Progressive approach to providing incentives to industry.

Providing incentives will work well and ensure that the focus is on being fair to labour. (Representative image)

For the government, giving conditional incentives seems clearly the way to make money work. A performance yardstick helps in sift through players. The first sense of such an approach was when conditional cash transfers were made to households in Latin American countries; these ensured that children went to school or had regular medical check-ups. In India, the mid-day meal scheme is an example as the free meal ensures that parents send children to school. This worked well for girls, especially from the lower income groups, who otherwise would not be allowed to go to school.

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The PLI is hence a very progressive approach to providing incentives to industry. How it is interpreted by the global community remains it to be seen, because it directly gives cash to companies that meet certain performance parameters. It can be defended as not being a subsidy, such as those in agriculture where inputs are given virtually free to farmers. The PLI has been crafted to encourage domestic production, against importing the product from other countries. It doesn’t distort prices but makes industry more competitive.

This should help to pass the barrier. This can be pursued in other areas too to make government expenditure more effective. The government had offered alternative corporate tax rate schemes to companies (22% against 30%), and the observation was that, while they did make use of the benefit, there was little evidence that it enhanced efficiency or led to higher investment. In this context, the government can make tax benefits conditional where companies that are able to generate investment of a certain minimum amount along with production and employment performance (PLI talks of the first two components) can get a tax refund.

This will ensure companies invest more instead of using the benefit of lower taxes for paying higher dividend or piling up reserves. Indeed, there was a time when the tax laws had the concept of investment reserve that could be deducted from profits before tax. The compensation through a refund will ensure that the companies contribute to capital formation, which is a challenge today.

A similar idea can be pursued on job creation where units, from SMEs to large corporates, can be given an employment-generation-based incentive with firm targets set. Employment is the critical factor that spurs economies because, in the absence of new jobs being created, demand can’t be sustained. Jobs have been a problem even before the pandemic, where GDP growth didn’t translate into commensurate job creation. With the greater reliance on technology post the pandemic, job creation is rarely on the radar of large corporates. Providing incentives will work well and ensure that the focus is on being fair to labour.

The important part of this story will be how well the PLI works out in the next 4-5 years, the average time framework that has been set for the 13 industries identified in November 2020. Overall, the government has targeted around `2 lakh crore of incentive spread over five years or so. There will be spillovers to the exports sector, especially in pharma, textiles, etc, though the initial focus was more on import substitution through higher domestic production.
As the idea catches on, the government could also use the PLI scheme to change the cropping pattern in India which is heavily skewed towards rice and wheat as they have MSP-based procurement. This can help farmers to migrate to crops like oilseeds and pulses where we are more vulnerable and help in conserving water. If this is accepted conceptually, the details can be worked with the panchayats for implementation.

Chief economist, CARE Ratings
Views are personal